Project Portfolio Management

Project Portfolio Management

Projects have a described start point and an end point based on the deliverables created. While projects are executing, they are part of the organization's project portfolio. A project portfolio is a group of projects carried out under the sponsorship and/or management of an organization. They are grouped together for these reasons:

●  They are part of the same product family.

●  They compete for scarce resources.

●  Project deliverables and interim development artifacts are interdependent.

●  There are multiple and conflicting organization objectives in making selection.

●  Selection criteria are qualitative or quantitative, based on specific organization objectives.

●  Political objectives play a role.

Different models can be used for portfolio selection. The models must be linked to corporate strategy, as opposed to simple profit maximization or furthering of a single product. By grouping projects into portfolios, the development process is aided in its conversion from chaotic to manageable by strategic concentration of product focus. There ends up being fewer projects in focused areas that can capitalize on research and development investments, strategic alliances and partnerships, and potential technology breakthroughs.

Portfolio models describe a strategic domain process within an organization. This differs from company to company, absolutely must include executive management, and determines direction, focus, and budget allotments for the projects that will build the organization's products. The criteria development for a portfolio model must be reviewed at regular intervals to ensure that the adopted strategy is updated to suit the current business and economic environment.

Portfolio models consider relative value of projects and resource interactions. They can be ad hoc in response to market conditions - market-driven portfolios. They can be rule based and prescriptive - drop any project with an internal rate of return below 15%. Portfolio models can take a broad definition of projects and contain large numbers of optional projects for comparison. This type of portfolio model may involve pair-wise comparison of project attributes using a method such as analytic hierarchy process.

There are three classes of portfolio models to understand. The first is a pure economic return model that uses financial measures of internal rate of return, net present value, marginal cost of capital, return on investment and assets and invested capital, and weighted average cost of capital (WACC). Figure (a) shows how this model is applied in its simplest fashion. Over time, the line that tracks the cost of asset deployment rises and falls with respect to the WACC. Projects that have a return above this moving line are earning a return above the WACC. Those that are below the line need to be estimated for termination. This model can be used to both track historic trends and predict the future cost of asset deployment.

Economic Return Model Project Selection

In the economic model, a project is in or out of the portfolio based on how it performs relative to a financial "hurdle rate". This rate could be any of the internal rates of return used in the evaluating organization. For the figure, WACC is used. Over time, the WACC per project is calculated and plotted. Because WACC is a percentage, another line over time may be plotted, and that could be cost of assets deployed. There can be a return on investment (ROI) line plotted based on WACC. At any point in time, a project that falls below the ROI could be canceled. In the case of Figure (a), projects 2, 3, and 5 would be canceled for being below the ROI. Project 3 might be evaluated because it is still above the cost of assets deployed.

Cost-benefit models are the second class of portfolio evaluation models. Employing benefit/cost analysis techniques, these models compare project substitutes when some benefits are not tangible (e.g. internal projects or public projects). Relative benefits are determined for each project and are factored by cost or relative cost. Projects are then ranked according to the benefit-to-cost ratio, where a higher ratio is better.

Market research models are the third class and are used almost exclusively for new products. Inadequate market analysis has been determined to be the number-one cause of product failure. Some techniques for the market research approach are focus groups, market surveys, consumer panels, and test marketing.

When the class of portfolio model to implement has been decided upon, the method for scoring the results of the model must be determined. A weighted scoring technique measures the amount of model conformance described based on the class of the portfolio model selected. Importance weights are developed for each measure, and the portfolio team scores each project on all measures. The average of the sum of weighted scores for each project is calculated, and projects are ranked according to result. Portfolio matrices display project portfolio decision data in two or three dimensions of risk, length of project, cost, and other factors critical to the selection model.

The Delphi scoring model is an outstanding method to be used along with weighted scoring to take benefit of experts decisions for validation of the organization's unique portfolio model. An efficient strategy for aggregating information from the expertise of decision makers, this technique employs interaction among group members who are isolated from each other to prevent forceful group members from dominating the discussion and stifling contributions of other group members. The experts are separated and given questionnaires soliciting their opinions and reasons for them. These questionnaires are then circulated anonymously to each other group member. After each round of questionnaires, information is consolidated and again circulated anonymously among group members. This is a strategy to maximize decision-making benefits of a group while limiting some of its weaknesses.

For mature and experienced development and marketing organizations, optimization models are employed to combine the selection, scoring, validation, and presentation techniques. Optimization handles resource constraints and interdependence due to mutual exclusivity or precedence. Maximizing return on particular objectives and preparing an optimum product and project schedule are outputs of optimization. This fits into a portfolio selection framework in which the process is:

●  Simple (logical series of steps)

●  Flexible (users can select their favorite models)

●  Repeatable (different analysts can get "close" to the same result)

●  Documented (how did we make that decision?)

●  Extendable (environment constraints will change)


project portfolio, portfolio model, attributes, project deliverables
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