Too often, the modus operandi for many organizations is to receive requests and filter them through a stage-gate process in order to evaluate the merit of the request and select the right projects. If the project is selected, a project team is assembled and the project planning begins. There is nothing wrong with this process, in fact, it is an important component of portfolio management.  The shortcoming relates to the lack of strategic planning and portfolio planning.

Strategic planning occurs once a strategic direction has been established within the organization. It is beyond the scope of this book to discuss how strategy is developed. Rather, our focus is on executing the strategy. The primary assumption is that strategies have been developed. From here, the senior leaders should be able to outline the major items they believe are necessary to accomplish or fulfill the strategy. These major items help define what the company intends to do on a larger scale (“the big whats”).  Going one step further, the senior leaders may have an idea of when these major items need to be initiated. With this information, a strategic roadmap can be built to lay out when major components of the strategies should be executed. This strategic roadmap is a critical component of strategic planning.  At this point, we are looking at strategic components from a 50,000 foot view. Few details may exist for each major component listed. If more information can be provided, all the better. The critical point is that the senior leaders outline some of the major items needed for the completion of the strategy.

Before the traditional portfolio management practitioners raise their arms in protest, I would point out that all of these projects will be reviewed like any other project and need to be prioritized. The creation of a strategic roadmap does not violate key PPM principles. Rather, the strategic roadmap aids the portfolio planning process by acknowledging major efforts that need to be undertaken. Without this view, it is all too easy for decision makers to approve projects (perhaps the right projects) at the wrong time. The creation of a strategic roadmap is a proactive step of leadership to better manage the portfolio. It is far easier to anticipate resource shortages when you can see all of the major efforts on the horizon. It is also easier to acknowledge the need for strong prioritization when key strategic projects compete for resources with smaller projects. The strategic roadmap is a key deliverable of the strategic planning process and is a major input for good portfolio planning.

Portfolio planning at a more tactical level helps senior leadership know when projects will get worked. Portfolio planning improves overall portfolio success by taking into account the limited resources (financial and human) and comparing this against known project dependencies in order to properly sequence projects. Strategic planning is proactive work that outlines the major components needed to accomplish strategic goals. Strategic planning will not account for the numerous small projects that get requested throughout the year (that’s the role of the portfolio management process).   Portfolio planning utilizes select information from all project requests (large and small) to sequence the projects (based on dependencies, resource constraints, and priorities) in a way that creates an ideal portfolio at a given point in time.

The chart below highlights three parallel steps of the planning process: strategic planning, portfolio planning, and project planning. Strategic planning often covers a 1-3 year planning horizon (or longer) and is generally longer than portfolio planning and project planning (except for large and/or complex projects).

Portfolio Planning vs Strategic Planning

Fundamentally, portfolio management is about strategic execution and maximizing value to the organization through important project investments. Through various processes, leadership teams can determine how well their project investments align to key strategic goals. Optimization techniques can further enhance the value of the portfolio, ensuring that organizations get the biggest bang for their project buck. Nevertheless, some organizations turn to portfolio management to merely help at the tactical level—getting projects done—and are less concerned with using portfolio management for strategic execution. Organizations should be mindful of their portfolio management approach—is it strategic, tactical, or both?

Tactically, portfolio management as a discipline can help organizations execute projects through better portfolio planning which includes: short-term resource capacity management, managing dependencies, and sequencing projects.

1) Resource capacity management from a short-term tactical perspective (less than six months) enables organizations to minimize over-utilization and unnecessary multi-tasking, both of which increase the risk of failed project delivery. By protecting organizational capacity, projects are more likely to have key team members available when needed to accomplish project work. In addition, fewer projects usually means less multi-tasking which is a known killer of project success.

2) Managing dependencies at the portfolio level starts with identifying all the upstream and downstream relationships to each project in the portfolio. More dependencies means more complexity and increases the overall risk to portfolio success. This is not merely a program management function, but is part of portfolio planning because such dependencies can span across the entire portfolio. When organizations understand the dependencies between projects, the portfolio management team (PMT) can make better tactical decisions to ensure that upstream projects do not negatively impact downstream projects.

3) Project sequencing is another part of portfolio planning because it is related to managing dependencies. Some dependencies affect project schedules (finish-to-start, finish to finish, etc.) and in order for these projects to be successful, project sequencing needs to be managed. The PMT should understand these relationships in order to initiate projects at the right time otherwise projects could be launched too soon only to find out that other work needs to be completed first (resulting in delays and likely re-work).

Although project portfolio management (PPM) has been traditionally performed to support strategic execution, some organizations may use a sub-set of the portfolio processes and adopt a more tactical approach to portfolio management. While this may seem less than ideal to seasoned portfolio management practitioners, it still yields benefits for existing projects and programs, and can ensure greater success than if no portfolio processes were utilized.

Portfolio optimization entails all the steps necessary to construct an optimal portfolio given current limitations and constraints. These steps occur repeatedly in the portfolio management lifecycle and work in tandem with Stage-Gate processes for selecting the right projects. The purpose of optimization is to maximize the portfolio value under certain constraints. Understanding and managing these constraints is critical for making portfolio optimization a useful component of the portfolio management process.

We can optimize a portfolio in multiple ways:
1) Cost-value optimization (aka ‘efficient frontier analysis’)
2) Resource optimization (aka ‘capacity management’)
3) Schedule optimization (project sequencing)
4) Work type optimization (portfolio balancing)

The question then is, when we are optimizing the portfolio, what is it that we are optimizing? Many portfolio management computing systems promote efficient frontier analysis which commonly focuses on cost-value optimization. However, as useful as this is, it does not often take into account resource optimization, schedule optimization, or even work-type optimization.  It is possible for portfolio systems to include some of these constraints, but most are not advertised in that way.

Furthermore, it is fundamental to understand the limitations and constraints on the portfolio, for without knowing the constraints it is not possible to optimize the portfolio and maximize organizational value.  The constraint for cost-value optimization is the available budget. This helps us determine an optimal budget based on limited financial resources. The constraint for resource optimization is human resource availability. This can be measured in a number of ways and will be discussed in another post. Optimizing against critical resource availability is recommended. Schedule optimization is focused on project timing and dependencies. Work type optimization is focused on categorical designations (i.e. portfolio balancing—how much do we want to invest in key areas).

Resource capacity planning is a hot topic in portfolio management discussions because it is one of the key steps for optimizing the portfolio, but it is also one of the most difficult processes to perform. For most organizations that operate in a multi-project environment, project demand far outweighs resource supply. Overloading the project pipeline puts added strain to organizational resources and reduces the likelihood of portfolio success. In organizations where human resources are over-utilized, excess overtime and recovery exercises can become common because project teams do not have enough time to complete all work on time. This can lead to delayed projects, and in the long-run, burns people out and lowers morale. Having under-utilized human resources can also be a problem, but not quite as serious as over-utilized resources.

The primary goal of portfolio management is to maximize the value an organization can deliver through its projects based on limited resources. The goal then of resource capacity management is to protect capacity in order to optimize the portfolio. In other words, the portfolio steering team needs to be very careful about approving projects that overload the system as this can very quickly increase the risk of not meeting portfolio commitments. Approving the highest value projects without overloading the system is a key success factor for portfolio management. The fundamental point is to make sure the organization is executing the most important work within the limitations of its current resource capacity. Therefore, capacity management therefore helps answer two fundamental questions:

1. When do we have capacity to commit to additional work? (Portfolio oriented for portfolio optimization)
2. Are resources available to complete our committed work? (Project oriented for project execution)

The first question is portfolio oriented because it is looking into the future to understand when new project work can be accepted into the portfolio. This step is critical because it directly affects project execution. Managing resource capacity at the portfolio level helps control work in progress (WIP). Controlling WIP directly benefits project execution because it limits the amount of bad multi-tasking. When resources are significantly over-committed, some activities do not receive adequate attention, thus raising the risk of schedule slides. Therefore, the first step in capacity management is to control the WIP by only approving projects when resources are available or when lower priority work is put on hold in order to free up additional resources for higher priority work. Understanding the organizational resource capacity helps draw a boundary (a constraint) around the amount of project work that can be reasonably accomplished by the organization. Without any boundaries, management may unknowingly authorize more project work and overload the system.

The second question is focused on short-term resource availability and is project execution oriented because the project manager needs to understand if resources are available to accomplish near-term work. If WIP is controlled, then fewer resources should be over-allocated, thus promoting more successful project completions.

Bubble charts are common place in portfolio management processes. Without a designated portfolio management tool, I have designed bubble charts by hand using Excel and PowerPoint. To determine a ‘value’, we use our prioritization value scores and compare that among projects. We have risk scores as part of our prioritization criteria that drive the ‘risk’ portion of our bubble charts. The challenge in the past was how to interpret a score. Is a score of 500 good or bad?  Since my organization was experimenting with a new prioritization process, we didn’t know what was good or bad. Therefore, I made the decision to normalize the scores so that we could fairly compare good or bad projects within the portfolio rather than try to determine a threshold for ‘good’ projects. This has been helpful in identifying which projects drive more overall value to the organization compared to other current projects in the portfolio. The downside of this however, is that you are always going to have a few projects that look bad. Until now, I had been normalizing only among current projects in the portfolio, yet it suddenly dawned on me this morning, that I should also normalize among all projects, past and current in order to understand whether we get more value now than in the past.

One advantage of a bubble chart is to locate those projects that are higher value and lower risk and ask the question, “how can we get more of these types of projects in the portfolio?” Likewise with the lower value higher risk projects, we should ask how to avoid those types of projects. By normalizing with respect to past and current projects, we will see whether or not the projects are moving toward the higher value lower risk quadrant.

In the book, Project Portfolio Management: A View from the Management Trenches, one of the questions posed is ‘can we absorb all the changes?’  At first glance I dismissed the question and instead focused on the four components of the portfolio lifecycle. However, after further reading, it became clearer to me that from a portfolio management perspective, it is very important to understand how much change is being pushed out to the respective organizations. If there is too much change going on, it is hard for employees to absorb it, adapt to it, and accept it. This leads to excessive churn in the organization which has negative implications such as burn out, lowered morale, inability to get work done, etc.

In my experience as a portfolio analyst, I have heard of other organizations complaining about the amount of change we were introducing to them, particularly at the wrong time. Individually, a system manager or project manager may communicate an individual change to an organization or group of users, yet have no idea about the magnitude of changes coming from other system managers and project managers. This is where portfolio management needs to understand both the amount and the timing of change to the company. As the book points out, it is possible to measure the amount of total change and the timing. Having such visibility give senior management a way to optimize the portfolio by adequately sequencing work so as not to overload the system with too much change at any given point in time.

Of course this is a communication issue, where both the project team needs to communicate implementation dates and the project beneficiary needs to communicate “black out” dates. However, without the portfolio level visibility, it is hard to maintain proper surveillance and protect organizations from receiving excessive change.

I believe that clear terminology and efficient communication are important to have effective operations. I also believe that the term “project portfolio management” is an excellent term to describe the function because it explains what the managers should already be familiar with: maximizing value for the organization through optimizing human and financial resources.

When I explain the concepts of project portfolio management, I point out that our projects help accomplish our strategic objectives and that those projects represent investments by the company both in terms of financial resources and human resources. I go on to explain that our project portfolio is also analogous to a financial portfolio where we balance our investments (long-term and short-term, high risk and low risk) and have the same goal—to maximize value.

The key then is to drive maximum value out of those project investments and PPM helps us do that. I finish by discussing our portfolio management lifecycle which consists of four major steps:

1) Selecting the right projects (selected projects must align with the business strategy and meet other important criteria. The result: the portfolio will contain a higher percentage of winning projects)

2) Optimizing the portfolio (All the steps necessary to construct an optimal portfolio given current limitations and constraints)

3) Protecting the portfolio’s value (During the execution of an optimized portfolio, the aggregate project benefits (portfolio value) must be protected. This occurs by monitoring projects, assessing portfolio health, and managing portfolio risk)

4) Improving portfolio processes (Higher portfolio maturity translates into a greater realization of the benefits of project portfolio management)

I have not had any trouble presenting the concepts of PPM, but communicating concepts and getting increased participation are two different things.

I think the problem could be somewhere else however. In a classic portfolio management article by Rachel Ciliberti <http://www.ibm.com/developerworks/rational/library/apr05/ciliberti/index.html#N10094>, she points out that PPM is a blend of management disciplines that combines:

1) A business management focus to ensure that all projects and programs align with the portfolio strategy.
2) A general management focus for managing an organization’s resources and risks.
3) A project management focus for reviewing, assessing, and managing projects and programs to ensure they are meeting or exceeding their planned contribution to the portfolio.

Most good managers will not have any trouble with the first two points. However, a number of managers may not understand the project management language well enough and that may be a stumbling block.

According to Merkhofer, “the efficient frontier is the bounding curve obtained when portfolios of possible investments are plotted based on risk and expected return. The efficient frontier shows the investment combinations that produce the highest return for the lowest possible risk. The goal for selecting projects is to pick project portfolios that create the greatest possible risk-adjusted value without exceeding the applicable constraint on available resources.”

In both the PPM literature and portfolio tool brochures, one would be led to believe that the application of the efficient frontier will provide the final answer of which projects to select. While doing more research on efficient frontier techniques, I started considering the work that still needs to be done once an ‘optimal’ solution has been developed that maximizes value under current constraints. Unless skill sets are included in the optimization, more time will be needed to determine if resources are available to execute the “optimal” portfolio. Additionally, the efficient frontier does not help with project sequencing, therefore further analysis will be required to properly sequence the ‘optimal’ portfolio. This is not to say that the efficient frontier technique should not be used, only that it still takes a little more time to complete the optimization exercise once the ‘optimal’ list of projects have been selected.

In fact, the efficient frontier approach can actually save management a lot of time and discussion by pointing to a set of projects that delivers maximum value for a particular level of spending. Instead of fighting for what should be included, the discussion can be focused on those projects that bring the portfolio off of the efficient frontier (such as mandatory projects that don’t provide much value). To use a golf analogy, using the efficient frontier will not give you a ‘hole in one’, but it will get you to the putting green nearly every time in one stroke. Every golfer would like that.