Clearing Up Some Misconceptions About Portfolio Management

Many people confuse Project Management with Project Portfolio Management and with Strategic Portfolio Management, as though they were virtually interchangeable terms. They are not.

Project Management is concerned with achieving scope, budget and schedule objectives defined on a project-by-project basis, whereas Project Portfolio Management aims to maximize the collective value of multiple projects by achieving an optimum balance of cost, return and risk within the organization’s resource constraints. An optimum project portfolio is not simply a bundle of related projects. It is a consciously-designed collection of projects that, as a whole, achieve a higher value to the organization than the sum of their individual contributions; the interplay between the projects balances risk, return and resources so as to create greater value to the organization than an arbitrary – or at worst random – collection of projects would. The concepts and techniques are similar to those used by financial managers to optimize investment portfolios.

The main focus of Strategic Portfolio Management is to determine which initiatives to accept, postpone, reject or kill. These initiatives may be non-financial such as customer service, deliveries, market positioning or a whole range of others combined with financial ones. These are all evaluated by a scoring algorithm to keep choices as objective as possible.

The Portfolio Management Challenge

An organisation’s asset portfolio consists of layers of sub-portfolios by business unit, asset type, etc. in a hierarchy which rolls up to the master portfolio. Companies aim to design portfolios for maximum value, and many struggle to achieve this. All-too-common issues include:

• Inadequate or non-existent metrics for establishing what constitutes strategic success

  Many organizations are unable to measure objectively what “strategic alignment” looks like, beyond purely financial indicators (a study by the Meta Group suggests that 89% of companies are flying blind, with virtually no metrics in place except for finance). Moreover, it is one thing to derive mathematical scores for non-financial indicators, but too often there is a tendency to fudge an NPV or IRR number to convey value. The end result is that people become sceptical of these measures and discount them (either partly or entirely) when making their decisions. The decision therefore becomes a subjective one – and achieving true strategic alignment is more a matter of intuition, than the result of a rational, objective process.

• No defined process for reviewing/evaluating project proposals

  Initiatives are pretty much recommended by Senior VPs in each business area – with the “squeakiest” VP winning. The end result is too often:

• a plethora of “break-in” or “pet projects”, with bad projects ending up squeezing out good ones

• many more initiatives get approved than the company has the capacity to do

• No visibility of what is being done throughout the organization

Can you answer these questions convincingly?

• Do you have a full picture of what initiatives/projects are underway across the organization?

• Are the organisation’s projects really contributing collectively to the overall strategic objectives?

• Do you understand the interdependencies between the initiatives that you are undertaking – are you sure you know which initiatives/projects are truly interdependent and how?

• Can you say with any certainty that there aren’t redundancies between the initiatives/projects?

• Are you really creating the most value you can with the resources you are employing and can you model alternatives with any confidence?

• Inadequate tracking of portfolio performance over its full life cycle; insufficient information to make the tough calls

  Once projects are approved, are they held accountable for realizing their advertised benefits over their full life cycle?.

• Does management have the right calibre of information to make tough decisions? No one wants to be the one to kill a questionable project – and particularly not if they don’t have a firm basis for doing so – that’s like drowning puppies! As a result, failing initiatives don’t get terminated soon enough.

All of these issues contribute to an inefficient allocation of resources, dissipated organizational focus and above all, lower than possible creation of value. In management circles, this is sometimes known as the “60% solution”: organizations achieve only 60% of the value that they could because of errors in decision-making, weaknesses in business systems and an inability to align their initiatives with their business strategy.