Project portfolio management

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Project Portfolio Management (PPM) is a term used by project managers and project management (PM) organizations to describe methods for analyzing and collectively managing a group of current or proposed projects based on numerous key characteristics. The fundamental objective of the PPM process is to determine the optimal mix and sequencing of proposed projects to best achieve the organization's overall goals - typically expressed in terms of hard economic measures, business strategy goals, or technical strategy goals - while honoring constraints imposed by management or external real-world factors. Typical attributes of projects being analyzed in a PPM process include each project's total expected cost, consumption of scarce resources (human or otherwise) expected timeline and schedule of investment, expected nature, magnitude and timing of benefits to be realized, and relationship or inter-dependencies with other projects in the portfolio.

The key challenge to implementing an effective PPM process is typically securing the mandate to do so. Many organizations are culturally inured to an informal method of making project investment decisions, which can be compared to political processes observable in the U.S. legislature.[citation needed] However this approach to making project investment decisions has led many organizations to unsatisfactory results, and created demand for a more methodical and transparent decision making process. That demand has in turn created a commercial marketplace for tools and systems which facilitate such a process.

Some commercial vendors of PPM software emphasize their products' ability to treat projects as part of an overall investment portfolio. PPM advocates see it as a shift away from one-off, ad hoc approaches to project investment decision making. Most PPM tools and methods attempt to establish a set of values, techniques and technologies that enable visibility, standardization, measurement and process improvement. PPM tools attempt to enable organizations to manage the continuous flow of projects from concept to completion.

Treating a set of projects as a portfolio would be, in most cases, an improvement on the ad hoc, one-off analysis of individual project proposals. The relationship between PPM techniques and existing investment analysis methods is a matter of debate. While many are represented as "rigorous" and "quantitative", few PPM tools attempt to incorporate established financial portfolio optimization methods like modern portfolio theory or Applied Information Economics, which have been applied to project portfolios, including even non-financial issues.[1][2][3][4]


[edit] Controversy over the "investment discipline" of PPM

Developers of PPM tools see their solutions as borrowing from the financial investment world. However, other than using the word "portfolio", few can point to any specific portfolio optimization methods implemented in their tools.

A project can be viewed as a composite of resource investments such as skilled labour and associated salaries, IT hardware and software, and the opportunity cost of deferring other project work. As project resources are constrained, business management can derive greatest value by allocating these resources towards project work that is objectively and relatively determined to meet business objectives more so than other project opportunities. Thus, the decision to invest in a project can be made based upon criteria that measures the relative benefits (eg. supporting business objectives) and its relative costs and risks to the organization.

In principle, PPM attempts to address issues of resource allocation, e.g., money, time, people, capacity, etc. In order for it to truly borrow concepts from the financial investment world, the portfolio of projects and hence the PPM movement should be grounded in some financial objective such as increasing shareholder value, top line growth, etc. Equally important, risks must be computed in a statistically, actuarially meaningful sense. Optimizing resources and projects without these in mind fails to consider the most important resource any organization has and which is easily understood by people throughout the organization whether they be IT, finance, marketing, etc and that resource is money.

While being tied largely to IT and fairly synonymous with IT portfolio management, PPM is ultimately a subset of corporate portfolio management and should be exportable/utilized by any group selecting and managing discretionary projects.[citation needed] However, most PPM methods and tools opt for various subjective weighted scoring methods, not quantitatively rigorous methods based on options theory, modern portfolio theory, Applied Information Economics or operations research.

Beyond the project investment decision, PPM aims to support ongoing measurement of the project portfolio so each project can be monitored for its relative contribution to business goals. If a project is either performing below expectations (cost overruns, benefit erosion) or is no longer highly aligned to business objectives (which change with natural market and statutory evolution), management can choose to decommit from a project and redirect its resources elsewhere. This analysis, done periodically, will "refresh" the portfolio to better align with current states and needs.

Historically, many organizations were criticized for focusing on "doing the wrong things well." PPM attempts to focus on a fundamental question: "Should we be doing this project or this portfolio of projects at all?" One litmus test for PPM success is to ask "Have you ever canceled a project that was on time and on budget?" With a true PPM approach in place, it is much more likely that the answer is "yes." As goals change so should the portfolio mix of what projects are funded or not funded no matter where they are in their individual lifecycles. Making these portfolio level business investment decisions allows the organization to free up resources, even those on what were before considered "successful" projects, to then work on what is really important to the organization.

[edit] Optimizing for payoff

One method PPM tools or consultants might use is the use of decision trees with decision nodes that allow for multiple options and optimize against a constraint. The organization in the following example has options for 7 projects but the portfolio budget is limited to $10,000,000. The selection made are the projects 1, 3, 6 and 7 with a total investment of $7,740,000 - the optimum under these conditions. The portfolio's payoff is $2,710,000.

Image:Project Investment Portfolio Occam s Tree.gif

Presumably, all other combinations of projects would either exceed the budget or yield a lower payoff. However, this is an extremely simplified representation of risk and is unlikely to be realistic. Risk is usually a major differentiator among projects but it is difficult to quantify risk in a statistically and actuarially meaningful manner (with probability theory, Monte Carlo Method, statistical analysis, etc.). This places limits on the deterministic nature of the results of a tool such as a decision tree (as predicted by modern portfolio theory).

[edit] Resource allocation

Resource allocation is a critical component of PPM. Once it is determined that one or many projects meet defined objectives, the available resources of an organization must be evaluated for its ability to meet this project demand (aka as a demand "pipeline" discussed below). Effective resource allocation typically requires an understanding of existing labor or funding resource commitments (in either business operations or other projects) as well as the skills available in the resource pool. Project investment should only be made in projects where the necessary resources are available during a specified period of time.

Resources may be subject to physical constraints. For example, IT hardware may not be readily available to support technology changes associated with ideal implementation timeframe for a project. Thus, a holistic understanding of all project resources and their availability must be conjoined with the decision to make initial investment or else projects may encounter substantial risk during their lifecycle when unplanned resource constraints arise to delay achieving project objectives.

Beyond the project investment decision, PPM involves ongoing analysis of the project portfolio so each investment can be monitored for its relative contribution to business goals versus other portfolio investments. If a project is either performing below expectations (cost overruns, benefit erosion) or is no longer aligned to business objectives (which change with natural market and statutory evolution), management can choose to decommit from a project to stem further investment and redirect resources towards other projects that better fit business objectives. This analysis can typically be performed on a periodic basis (eg. quarterly or semi-annually) to "refresh" the portfolio for optimal business performance. In this way both new and existing projects are continually monitored for their contributions to overall portfolio health. If PPM is applied in this manner, management can more clearly and transparently demonstrate its effectiveness to its shareholders or owners.

Implementing PPM at the enterprise level faces a challenge in gaining enterprise support because investment decision criteria and weights must be agreed to by the key stakeholders of the organization, each of whom may be incentivised to meet specific goals that may not necessarily align with those of the entire organization. But if enterprise business objectives can be manifested in and aligned with the objectives of its distinct business unit sub-organizations, portfolio criteria agreement can be achieved more easily. (Assadourian 2005)

From a requirements management perspective Project Portfolio Management can be viewed as the upper-most level of business requirements management in the company, seeking to understand the business requirements of the company and what portfolio of projects should be undertaken to achieve them. It is through portfolio management that each individual project should receive its allotted business requirements (Denney 2005).

[edit] Pipeline management

In addition to managing the mix of projects in a company, Project Portfolio Management must also determine whether (and how) a set of projects in the portfolio can be executed by a company in a specified time, given finite development resources in the company. This is called pipeline management. Fundamental to pipeline management is the ability to measure the planned allocation of development resources according to some strategic plan. To do this, a company must be able to estimate the effort planned for each project in the portfolio, and then roll the results up by one or more strategic project types e.g., effort planned for research projects. (Cooper 1998); (Denney 2005) discusses project portfolio and pipeline management in the context of use case driven development.

[edit] Organizational applicability

The complexity of PPM and other approaches to IT projects (e.g., treating them as a capital investment) may render them not suitable for smaller or younger organizations. An obvious reason for this is that a few IT projects doesn't make for much of a portfolio selection. Other reasons include the cost of doing PPM -- the data collection, the analysis, the documentation, the education, and the change to decision-making processes.

[edit] References

  1. ^ Douglas Hubbard "How to Measure Anything: Finding the Value of Intangibles in Business" John Wiley & Sons, 2007.
  2. ^ US Government Study on AIE [1]
  3. ^ Federal CIO Council comparison of AIE and balanced scorecard[2]
  4. ^ Environmental Protection Agency AIE study about optimizing desktop replacement [3]
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