The business rationale of project portfolio management Several project management studies in the last five years have suggested that, the efficient and effective use of project management is critical to achieve the business goals and to achieve sustainable business benefits. Corporate projects are essential for achieving the company s strategic goals and performance targets. However, many projects fail to deliver the expected results or to meet the expectation of stakeholders. The Hungarian Project and Program Management Survey conducted by Ernst & Young Hungary in 2006 showed that only 51% of the projects are completed on time and within budget. On average, 34% of projects are finished late, and 25% exceed the originally planned budget. This tendency is reflected in the results of several international surveys as well. In addition to the variable project outcomes, due to the impact of the accelerated market environment, many projects are created in various levels of the organizations, often unnoticed by the senior management. This results in a complex multi-project environment, where the management often faces difficulties in overviewing and controlling the vast number of projects. An effective working project portfolio management provides a useful management toolset to help organizations, especially senior management, in planning and the efficient controlling the corporate project portfolio. The business rationale of project portfolio management The term project portfolio management does not have a standard definition. According to the Project Management Institute (PMI), the project portfolio is a collection of projects or programs and other work that is grouped together to facilitate effective management of that work to meet strategic business objectives. The projects or programs of the portfolio are not necessarily interdependent or directly related. Portfolio management is the centralized management of one or more portfolios, and involves identifying, prioritizing, authorizing, managing, and controlling projects, programs and other related work to achieve strategic business objectives. [PMI (2006)] Some other important aspects are outlined in related definitions Clifford F. Gray and Erik W. Larson are using the term Enterprise Project Management for the centralized management of a portfolio of projects to ensure the allocation of resources to projects is directed and balanced toward the strategic focus of the organization. [C.F.Gray, E.W.Larson (2003), p. 447.]. Platje and Fröhlich have highlighted some additional characteristics the projects are incorporated into the strategy of the organization (an integrative approach). Projects share the same scarce resources, and management is concerned with optimizing the use of this capacity [Platje and Fröhlich (2000)]. Project portfolio management can be defined as the planning and management of a set of concurrent projects and programs within the organization that are not necessarily connected or interdependent, but that rely on the same scarce resources of the organization. Many projects in different parts of the organization, even if not interdependent, have some impact on each other, and the integrated view of corporate project management and an efficient project portfolio management are essential to ensure that the set of projects are aligned with the company s business objectives. The business rationale of an efficient project portfolio management process can be summarized by the following list [Cooper, R., Edgett, S., E.Kleinschmidt (1997)]: Strategic alignment: The project portfolio management process has to ensure that the projects initiated and run are aligned with the organisation s strategic objectives. Through the transparent and consistent portfolio planning, there is a clear view on priorities of objectives and priorities of projects as well as programs. Value maximisation: The transparent project selection process has to ensure the maximisation of the value of the total project portfolio (through measures like NPV, ROI, TCO, etc.) Balance: The portfolio planning has to ensure the balancing of risks in the total portfolio (risk vs. return, balance of high, medium and low risk projects) The portfolio planning and project selection process has to ensure a balance of long term and short term inflows 34 Performance
The overall project selection process has to combine all relevant aspects of the organisation (e.g. financial, technical and other functional). In order to achieve these goals, there is a need for a consistent project selection and approval process and for an efficient coordination of simultaneously running projects. Figure 1: Critical factors to enable successful project portfolio management. [based on Figure 2.1.: Determinations of MPM in L.Capitani, P.Steinbusch, A.Szabo, M.Takei (2001)] Project portfolio management Project Portfolio planning Project Portfolio co-ordination Organizational structure Processes, controls & systems People Transparent and effective project portfolio planning and efficient project portfolio coordination require a supporting organizational structure, well defined processes and systems as well as enabling human factors. Organisational factors to support project portfolio management (refer to figure 1) According to professional studies and practical experience, successful project portfolio management requires a distinctive managerial level - the so called tactical management level - to liaise between the senior management and the operational management (project leaders and operational department heads) [Platje, A. and Fröhlichs, G. (2000)]. This tactical management level is responsible for supporting project portfolio planning as well as the continuous project portfolio coordination processes. Major tasks related to the project portfolio planning: Liaising between senior management, the project leaders and operational department heads. Providing a view on the feasible and proposed project portfolio for the senior management Coordinating the decision making on project approval and on resource allocation. Set clear priorities and propose a transparent and consistent process for project approval. Coordinating the trade-off of interest of all participants. Major tasks related to continuous project portfolio coordination: Tracking and reporting: Provide senior management with an overview of the set of projects within the organization and on their status. Continuous tracking should ensure that initiated projects are achieving the preset targets. Coordination in case of resource reallocation needs. Coordination of communication between senior management and operational management in relation to project priorities and any changes. Project support tasks (often in a separate Project Support Office): Provide standard tools and templates for project teams and support for project managers. Set rules for project management standards within the organization. Tracking and project support may require the standardization of certain elements of project management and project reporting Liaise in resolving conflicts. This tactical management level is usually known as the Portfolio Management Office (PMO) or the Project Management Office (the name may depend on the type of responsibilities as well). Besides having a dedicated body for project portfolio management and project support, the organizations have to fulfil the following requirements in order to succeed in portfolio management: Transparency of clear goals and business objectives to all employees. Performance 35
Availability of real-time information on capacities (e.g. skills) to ensure efficient resource allocation and utilization. Efficient and seamless communication within the organization (e.g. crossdepartments communication). Flexibility within the organization (e.g. flexible reaction on changed priorities. See also human factors below). Based on the findings of the Project Management Survey in Hungary and in the Czech Republic, the maturity of the PMOs shows a varying picture among the organisations, and there is still space for development to increase maturity of special attention, as one of the most important success factors of the portfolio management body is its credibility within the organisation. Process related factors to support project portfolio management (refer to figure 1) In order to ensure the efficient handling of the portfolio of projects, the processes for portfolio selection and coordination need to be reviewed. Process related factors to support transparent and consistent portfolio planning: Ideally, projects are created by breaking down the strategy into actions; therefore are created from breaking down the strategy, there is often an implementation gap between the strategy created by the senior management and the operational action plans created by the operational management. Projects created in different departments and the priorities of these departments often do not relate to each other and to the corporate level strategy. [Gray, C.F. and Larson, E.W. (2003). They call attention onto the following threats if there is no clearly defined and transparent process for project portfolio prioritization and project portfolio planning: Implementation gap between top level strategic objectives and department level projects. project offices. Although more than 60% of the respondents answered that there is a Project Management Office within their organisation, its tasks and responsibilities vary from giving administrative project support to representing the project approving body. The overall satisfaction with the effectiveness of project offices clearly shows the need for further development. This requires strategic alignment of projects should be given by definition. In the real world, however, projects are not only created with a top-down approach driven from the strategy, but also based on bottom-up initiatives of the operational management at various parts of the organization. Furthermore, Erik W. Larson and Clifford E. Gray point out that, even when projects Misalignment of projects and priorities between departments. Corporate politics and lobbyism can influence decisions on projects. Resource conflicts and multi-tasking of employees are not taken into consideration at project initiation. 36 Performance
Based on best practice, an effective project portfolio planning process has to fulfill the following requirements: Project portfolio planning is a centralized final decision-making process that controls which projects get initiated and when. This centralized decision making should take all relevant aspects into consideration. The final decision on the project portfolio is done on the strategic level, after the consolidation of organizational aspects and proposals by the tactical level portfolio management team. Portfolio planning is a process that contains many iterations of proposals need to be transparent throughout the organization. There are various tools available to support an effective project approval process, which can be customized to the organization (e.g. strategic basket model, project scoring, project screening, etc.) Process-related factors to support continuous project portfolio coordination: The continuous portfolio coordination process has to ensure that projects are completed and deliver the expected benefits. The first critical element of project portfolio coordination is resource allocation. bodies. This is a typical approach, especially in cases of stage-gate models of project management. Using a stage-gate approach, first (in the initial phase) the project needs to get an approval on the approximate project content (rough project plan, ideas) in order to get resources in the next phase. The following phase (or phases) has to include a feasibility study, which delivers a more exact plan on project costs, CAPEX, time, etc. This needs to be approved again before proceeding to the next stages. These two decisions can be made by different bodies, but both decisions should be coordinated by the tactical level portfolio management team (e.g. PMO) and negotiations. The minimum content of the proposals and the negotiation process should be standardized as much as possible in order to provide a transparent decision making process. There is a need for clear pre-set priorities as a basis of portfolio decision making. These priorities Often the decisions on project initiations and on resource allocations are separated. As shown by the results of the Project Management Survey in Hungary, the approval on project content (i.e. approval on initiating the project) and the approval of the dedicated resources might be two separate decisions made by different If this feasibility study (or resource allocation) is rejected, then there are two possibilities of how to move forward: Re-work the project plan in order to be able to finish the project with less resource requirements (and make a new feasibility study), or Reject the whole project. Performance 37
A consistent and transparent approach to resource allocation and to potential reallocation is required in order to operate a credible portfolio management process. The second important element of continuous project portfolio coordination is the level of standardization in project start-up and project management within the organization. Even if project managers are encouraged to use own methodologies, and many organizations leave the freedom of using the right project management tools to the project manager, there is a need for a certain level of standardization, especially if the organization has reached a critical mass of projects. Standard tools and templates can provide a common language across departments. A particular phase is the project start-up, where the common understanding of the project details across the project team is essential. Therefore, some elements of project start-up (e.g. project definition template, or questionnaire among team members) could be made mandatory for projects within the organization. Closely connected to the project management tools, a third critical factor of continuous project portfolio management is tracking and reporting. Again, the standardized reporting templates can provide a consistent view on the state of the project portfolio. The project portfolio management body has a key role in consolidating information, on individual projects, and in providing a summarized overview on the status of projects and on the completion of major milestones to the senior management. It is critical to ensure that issues are escalated to the appropriate management level as soon as possible and the necessary decisions can be made on time, based on real information. e.g. project slippages can be handled quickly and individual project slippages do not endanger the timely completion of other projects. A critical enabler for the continuous project-tracking is an accurate information system that is used across the organization. The last critical factor of project portfolio management comprises the processes of resolving conflicts and terminating projects. In many cases project initiations are well regulated, but a clear process for project termination is missing. This is a common mistake, as a visible and fair process for project termination would be required to show clear guidelines for stopping projects when necessary. Changes in organizational circumstances may entail a shift in the strategic priorities, and this may cause a delay in some projects or even the need to stopping some projects. If there is a clear process for project terminations, and project terminations are not handled as project failures, then resources can be redirected to other projects and used in a more efficient way. To summarize, the key questions of process-related factors affect the level of standardization and centralization in project management processes and in project related decision-making. These questions are often raised as some level of standardization is required to support a quick overview and efficient control on the corporate portfolio of projects. In addition, a level of decentralization is required to keep the flexibility of the organization. As a general rule, the following can be stated: On a strategic level, there is a need to standardize planning and control of the project portfolio. Therefore, some standardized tools (e.g. project definition templates, project reporting templates) are required. On an operational level, it is often more efficient to allow more flexibility for the individual projects and allow project managers to use preferred tools, customized to the individual project or project team. This approach allows: Comparing projects on a portfolio level: this includes the calculation of resources on a standardized and comparable way, the possibility to redirect resources due to the standard reporting tools, and the availability of information on resource utilization The management and control of individual projects which can be customized according to the individual needs, and can avoid unnecessary bureaucracy. Human factors to support project portfolio management (refer figure to 1) The third enabler of successful project portfolio management is the human capital of the organization. There are some distinctive characteristics of the preferred management style in case of organizations dealing with a 38 Performance
Figure 2: Resource dedication profile Project leaders Resource leaders Specialists Project leaders Resource leaders All round project members Experts Service employees Source: M. Hendriks, B. Voeten and L. Kroep; (1999) larger number of simultaneously running projects [L.Capitani, P.Steinbusch, A.Szabo, M.Takei (2001)]. It is critical that responsibilities are delegated to the lowest possible organizational level and that people at all organizational levels are clear about the strategic priorities and can be assigned an individual and specific responsibility. The role of the general management should be restricted to setting priorities, authorizing the overall proposed portfolio and resolving those bottlenecks or conflicts that may not be resolved on the operational or portfolio management level. This management style also presumes active communication at all levels of the organization. Another interesting people factor that supports the efficient and smooth project portfolio management is the flexibility and multi-skilled profile of employees. Hendriks, Voeten and Kroep [Hendriks, M., Voeten, B. and Kroep, L. (1999)] point out that in order to become a more flexible organization, project teams should consist of all-round project members, supporting employees and some experts, instead of only specialists. This is shown in figure 2. All-round project members have general knowledge of the project, and can be placed in different areas within the project. Similarly, supporting service employees who do routine-type activities can be reassigned to different projects. Summary The project portfolio management activities in an organization have to ensure that the corporate portfolio of projects is aligned with the company s strategic objectives, and that the projects in the portfolio are achieving the expected results. Success requires a conscious review of the organizational factors and also an effective handling of processrelated and people-related factors to support an efficient and smoothly operating project portfolio management. Author Anita Szabo, Senior Consultant, Advisory Services, E&Y Hungary Performance 39