2.4
60 PROJECT PORTFOLIO MANAGEMENT
An Overview of the Project Portfolio Management Processes
PPM is more than an extension of project management to deal with multiple projects. Although it addresses different needs, it is very important to have full integration with traditional project manage- ment capabilities.
As more and more firms adopt project management office (PMO) methods, it would not surprise us to see responsibility for PPM thrust fully into the hands of the chief project officer. This, too, would be a mistake.PPM requires governance at the executive level.And the tools need to be optimized to support these changing roles.
The core mistake is to think that PPM is fundamentally the management of multiple projects. This definitely is not so. PPM is the management of the project portfolio so as to maximize the con- tribution of projects to the overall welfare and success of the enter- prise. What this means is:
• Projects must be aligned with the firm’s strategy and goals.
• Projects must be consistent with the firm’s values and culture.
• Projects must contribute to a positive cash flow for the enterprise.
• Projects must effectively use the firm’s resources—both people and other resources.
• Projects must not only provide for current contributions to the firm’s health but must help to position the firm for future success.
We repeat this list here so that we can think about the impact of these attributes of PPM on tool support for the process. Our ap- plication of traditional project management processes and tools has focused on managing projects. Now we need to extend our practices and tools to support project prioritization and selection. We also
Levine.c02.4 6/9/05 11:43 AM Page 60
have to integrate the project management tools with the portfolio management tools.
Extending Management Processes to Include PPM There are two primary components of the PPM process. Although they are intertwined, each has its specific objectives and practices:
• Prioritization and selection of candidate projects for the portfolio
• Maintaining the pipeline: continuing, delaying, or termi- nating approved projects
Both of these segments of PPM compel us to apply structured, repeatable, proactive practices to the selection and continuance of projects:
• PPM extends traditional project management practices and tools to situations beyond the planning and control of approved projects.
• PPM requires the development and application of new prac- tices and tools.
If you already have processes and tools to support planning and scheduling, earned value management, risk management, and com- munication, you are well on your way to having a PPM capability. But you will need additional capabilities to complete your PPM arsenal.
Defining the New PPM Processes
This chapter reviews the workings of the PPM processes, to describe the tools that are available to support these processes and to explain the interrelationships between the core planning and control com- ponents and newer facilities needed for PPM.
TOOLS FOR PROJECT PORTFOLIO MANAGEMENT 61 Levine.c02.4 6/9/05 11:43 AM Page 61
62 PROJECT PORTFOLIO MANAGEMENT
Phase One: Prioritization and Selection of Candidate Projects
In this phase, we identify and evaluate candidate projects. The eval- uation requires us to consider the opportunity (value and benefits) as well as the risks (which modify the expected benefits). We also have to consider our ability to handle the project loads, much of which is dependent on resource availability.
Evaluating Candidate Projects. We’ll assume that the objective of the PPM process is to prioritize work that brings the most value to the firm. The definition of valuewill certainly differ in accor- dance with the firm’s focus, strategies, and types of projects. Re- gardless of these differences, a project portfolio management process will have to address the following:
• A ranking of value and benefits
• An estimate of the total costs
• An appraisal of risk (in achieving these benefits)
• An inventory of resource availability and allocation (capacity planning)
• An idea of an optimum or acceptable size of the project pipeline While we will have a defined process specifically designed to guide and support the evaluation of candidate projects, we may rely on established tools to aid in some of these steps—for instance:
• Your standard planning and control tool would be a conve- nient source of the resource availability and allocation data.
• Your risk management tool would be used to address the risk component of the evaluation.
• Your enterprise resource planning (ERP) tools would cover financial and human resources (HR) functions, and possibly opportunity management.
Levine.c02.4 6/9/05 11:43 AM Page 62
• Using an integrated collection of project management tools, where available, minimizes redundancy (and conflicting data) and provides efficient, seamless flow of information.
However, most PM tools were not designed to hold the ranking data or to display it in ways that facilitate portfolio decisions by the governance team (although such capabilities are being added to some). For this, you will need a specifically designed PPM tool. In addition, some recognized decision support tools have been opti- mized for application to PPM.
Ranking Value and Benefits. Assuming that the number of po- tential projects exceeds the number that can be effectively executed in a reasonable time, there must be a means of prioritizing each project. Conceptually, this ranking process is simple, although the individual parameters will vary according to strategies, resources, profit motive, and other categories. Earlier, we noted that the process is not unlike that used in selecting items for an investment portfolio. In fact, this isan investment portfolio: you are investing in projects with the objective of maximizing the return.
One of the primary ranking factors will be expected return on investment (ROI) or net present value (NPV), or some variation of these traditional financial measurements. However, there are qualifiers associated with this process. You can’t prioritize projects using ROI or NPV alone. You also need to consider:
• Alignment with strategic and tactical plans
• Balance between maintenance projects and investment projects
• Allocation balance of R&D or marketing expenditures and resources
• Effective use of resources
• Probability of delivering the project on time, within budget, and with the designed work scope
TOOLS FOR PROJECT PORTFOLIO MANAGEMENT 63 Levine.c02.4 6/9/05 11:43 AM Page 63
• Ancillary benefits (nonfinancial)
• Impact of potential risk
• Cost of performing the project
The last two items are often considered in a formula such as:
Value = NPV ×probability of technical success/costs. (See Chapter 4.2 for an illustration of a typical formula for value. See Chapter 7.2 for additional examples.) There are almost endless approaches toward developing a value figure. Your software should support your prefer- ences in this area.
Risk. Risk is a modifier of opportunity. (See Chapter 3.3 for de- tailed discussion of risk.) Any estimate of the benefits of a project must be adjusted for the consideration of risk. There is always the issue of technical risk. What is the probability that the technical objectives won’t be met? What are the consequences of that hap- pening? Can anything be done to mitigate or otherwise contain the risk? If so, what is the impact of the mitigation action on benefits and costs? If the project is intended to generate income, what is the probability that the commercial objectives won’t be met? If the project deliverables are targeted for a specific window of opportu- nity, what is the probability that the time objective will be missed?
Again, there are the questions of mitigation and effect on benefits and costs.
This is a lot of information and data to keep in one’s head or on the back of an envelope. As with any other project management and PPM processes, it is best to have a standardized, repeatable process for evaluating and managing risk, supported by appropriate software. And it is preferable to integrate the risk software with the other PPM tools.
Balanced and Weighted Ranking. The ranking practice should use a balanced scorecard approach, where each of the factors is listed and weighted. As each factor is rated, an aggregate score for
64 PROJECT PORTFOLIO MANAGEMENT Levine.c02.4 6/9/05 11:43 AM Page 64
each project is obtained. The rating of each factor can be prompted by a series of questions, with the answers noted in a narrative for- mat and then converted to a numerical score based on the level of the answer against a guideline.
A common practice is to evaluate the value/benefit ranking and the risk ranking on a grid. Preference would be given to projects that appear in the high-value/low-risk quartile.
Analytic Hierarchy Process. The issue of ranking has brought an established, mathematics-based, decision-making process called an- alytic hierarchy process (AHP) to the PPM tool market. AHP in- volves the use of voting groups using paired comparisons to create weighted rankings for multiple objectives. For instance, the group may compare the importance of short-range income to long-range income, and then long-range income to technical standing, and so on. AHP software tallies all of the results to derive weight factors for each objective. Then the group may use the pairwise compar- isons to judge how well each project matches up with the objec- tives. The result is a fairly weighted prioritization of the projects.
While the AHP method might appear (to some) to be overkill, it allows everyone to have an equal and complete voice in the rank- ing and selection process and minimizes the effect of personal bi- ases. (See Chapter 4.3 for a detailed discussion of AHP.)
In addition to the formal application of AHP, other vendors have adopted similar capabilities aimed at optimizing the decision- making process. These include the use of pairwise comparison ma- trices, efficient frontier, and other structured decision analysis methodologies. (See Chapter 4.4 for a detailed discussion of the ef- ficient frontier concept.)
Displaying the Ranking and Selection Data. Regardless of the techniques employed to weigh the selection criteria and prioritize the candidate projects, you will eventually have to display and com- municate these data to the decision makers. This capability is sup- ported by almost all PPM software solutions. In some cases, it is the
TOOLS FOR PROJECT PORTFOLIO MANAGEMENT 65 Levine.c02.4 6/9/05 11:43 AM Page 65
primary PPM-specific feature in products that were developed with a PPM focus.
Common display mechanisms are bubble charts, spreadsheets, four-quadrant grids, X-Y charts, bar charts, matrix comparison charts, executive dashboards (see Figure 2.4-1), and an interesting graph called the Efficient Frontier, a portfolio optimization tool.
They all support multidimensional analysis of data to provide multi- dimensional presentations. Through the use of axes, variable bub- ble size, colors, and shapes, some bubble charts can display as many as six different variables on one chart. Many products allow you to display multiple charts on a single page or screen.
66 PROJECT PORTFOLIO MANAGEMENT
FIGURE2.4-1 An Executive Dashboard
Note: The figure displays summary information about the projects in a portfo- lio. Typically, colored “traffic lights” (green, yellow, red) call attention to the health (schedule and cost) of the projects. Thresholds for yellow and red are es- tablished by the user.
Levine.c02.4 6/9/05 11:43 AM Page 66
Most of these display methods support “what-if” analysis to test various scenarios. There is tremendous power and utility in these display methods. But a little caution is called for. The quality of the display is not a direct indication of the quality of the data. Without a meticulous, structured approach toward developing the data, you might be manipulating and displaying only junk.
One way to reduce the likelihood of bad data is to have a seam- less connection from the data generators to the data displays. That is, the data is developed using accepted practices that provide an audit trail back to the source. You can be assured that the selection committee will frequently look at the data in a display and say,
“Where did that come from?” Will you be able to answer?
Phase Two: Maintaining the Pipeline
The old conventional wisdom was that once a project has been ini- tiated, it is active until completion (or failure). The new conven- tional wisdom is that a project is active as long as it continues to support the criteria that were established for its selection and ac- ceptable performance. In this respect, projects are periodically eval- uated against these criteria.
The evaluation considers two basic aspects of the project:
project performance and an updating of the project critical para- meters. Some of the things that we want to know are:
• Is the project still aligned with the strategies?
• What is the current probability that the project will be tech- nically successful?
• What is the current probability that the project will be com- mercially successful?
• How is the project performing against the target criteria?
• What are the performance trends? Improving or worsening?
• Does the project still represent effective use of the firm’s resources?
TOOLS FOR PROJECT PORTFOLIO MANAGEMENT 67 Levine.c02.4 6/9/05 11:43 AM Page 67
Measuring Project Performance. If you are directly involved with project management, you have been working with most of the project tracking practices. If we have a critical path (CPM) sched- ule, we maintain the project progress in the CPM software and monitor schedule milestones and float. Diminishing float is an in- dication of schedule slippage, but that value doesn’t always reveal how much the work is falling behind. It focuses on the most critical schedule items.
A better way to look at performance is with earned value analy- sis (EVA), a process for evaluating schedule and cost performance on a project. It produces schedule variance data by comparing ac- tual accomplishment to planned accomplishment. It produces cost variance data by comparing the actual cost for the work that has ac- tually been accomplished to the budgeted cost for that quantity of work. EVA usually generates these values at a detailed level and then rolls the data up to summary levels for evaluation.
EVA provides an early warning system for schedule and cost overruns. When the EVA data indicates that certain work is not keeping up with the schedule target or is running over budget, the project team is expected to investigate the problem and, if possible, recommend corrective action. When the data (after considering corrective action) indicates that schedule or cost overruns jeopar- dize achievement of the project objectives, the PMO will commu- nicate this to the portfolio governance council.
EVA capabilities are available in almost all conventional proj- ect management software. If you have planned a project using such software, the core data for EVA is already in place. If you use this software for project tracking, entering percent complete values will provide the data needed for automatic calculation of schedule vari- ance (SV). If you track actual costs, you’ll have what you need for calculation of cost variance (CV). (For a more detailed discussion of EVA, see Chapter 3.6.)
Updating Critical Parameters. The EVA data provides informa- tion about project performance against the plan. When the results
68 PROJECT PORTFOLIO MANAGEMENT Levine.c02.4 6/9/05 11:43 AM Page 68
show that project performance is deficient, the team should con- duct an evaluation to consider terminating the project prior to completion, changing the priority of the project, or reallocating re- sources to other work.
There are generally additional factors to consider. Has there been any change in the need for this project? Is the window of op- portunity still open? Has critical technology changed? Have the firm’s strategies changed? On a periodic basis, all of the criteria that were examined when putting a value on the project should be val- idated and updated.
The PMO publishes reports indicating where defined targets, limits, and thresholds have been violated. As part of the periodic project selection cycle, it makes recommendations regarding rescheduling or terminating projects with deteriorating performance or that no longer rank well against the selection criteria. The PMO, as part of these recommendations, identifies funding and resources that could be freed up for new, more beneficial projects. The PPM software must be able to process and publish all of these data.
The PPM governance council considers this information, to- gether with the updated critical parameters, to evaluate all projects for continuation or termination.
Defining PPM and the Tools for PPM
Getting a clear, unified definition of PPM and PPM tools is virtu- ally impossible. Consider this statement from a leading consulting firm (one of many on this topic):
We define PPM as software that streamlines outward func- tions and inward processes of project-intensive departments, industries and organizations. Integrating multiple business processes and point solutions into one application suite, PPM features integrated management of pipeline, scope, time, re- source, skills, cost, procurement, communication, reporting and forecasting, and risk management functions.
TOOLS FOR PROJECT PORTFOLIO MANAGEMENT 69 Levine.c02.4 6/9/05 11:43 AM Page 69
I propose a different definition:
PPM is a set of processes,supported by people and tools, to guide the enterprise in selecting the right projects and the right number of projects, and in maintaining a portfolio of projects that will maximize the enterprise’s strategic goals, efficient use of resources, stakeholder satisfaction, and the bottom line.
Although PPM does not directly encompass the traditional PM processes and tools mentioned in the first statement, they are part of the process flow. PPM is integrated with these processes and tools and relies on inputs from them for its success.
First, we note that PPM is a set of processes, supported by tools, rather than being the tools themselves. Second, the PPM tool set (in my definition) includes software that helps us to automate spe- cific PPM processes. There are many other tools used in the process of managing projects or the business operations of the enterprise that would also be used in conjunction with PPM tools to serve the entire operations and projects needs. That these various tools work together is a major objective of implementing a PPM capability.
In discussing the software for PPM, we describe several config- urations of tool sets. Although each category contains powerful and valuable capabilities, none of them offers every capability that could be used to support PPM. Yet most of these are being adver- tised as PPM solutions.
Software for Project Management and PPM. Tools for PPM are being offered in many varieties and from various vendors who have focused on different needs. Among the traditional offerings (before adding support for PPM) are the following:
• Critical Path Scheduling (CPM) programs.These are the basic tools for scheduling and tracking projects. They allow you to define the project work items, define task relationships, assign task dura-
70 PROJECT PORTFOLIO MANAGEMENT Levine.c02.4 6/9/05 11:43 AM Page 70
tions, assign resources, and calculate base critical path schedules and resource-constrained schedules. These programs also usually have excellent support for work breakdown structures (WBS) and simple applications of EVA. All offer multiple means of reporting plans and status. Additional features may include simplified risk planning and tracking, issue tracking, and time keeping.
• Critical chain project management (CCPM).This is a variation on traditional CPM methods, focusing on methods for sharing con- tingency. CCPM has created almost a cult following of adopters who praise its benefits. As with the traditional CPM advocates, CCPM supporters are also moving to embrace PPM. (See Chapter 8.1.)
• Earned value method (EVM) programs. These support ad- vanced EVA applications, especially for defense system projects and other programs where EVM is mandated. These EVM programs have a strong focus on cost control and strong support for multiple WBS’s (used for directed cost buckets).
• Risk management programs.These usually go well beyond the skeleton risk capabilities in traditional CPM programs. These are valu- able where a highly structured, proactive risk-management culture is required. There are two quite different foci to risk management. One is often called the PERT approach. It addresses only schedule risk and uses three time estimates per task and Monte Carlo simulation to de- termine project durations and probability of meeting specified com- pletion dates. Currently more in vogue is the risk assessment and management approach. This calls for identification of potential risk events, an assessment of the probability that the event will occur, and the probable impact of the event if it does occur. The user is then ex- pected to consider mitigation options to contain the risks.
• Slice-and-dice software. Originally created as separate soft- ware, these capabilities are commonly found in most project man- agement tools. The objective is to access and present large volumes of data in meaningful ways. Many of these use online analytical pro- cessing techniques.
• Enterprise resource planning (ERP) tools.ERP software com- bines integrated support for project management and many business
TOOLS FOR PROJECT PORTFOLIO MANAGEMENT 71 Levine.c02.4 6/9/05 11:43 AM Page 71