Portfolio Optimization—Data and Constraints


In our hyper-accelerated business world, data analysis and data visualization are exceptionally important. In the realm of project portfolio management (PPM) and PMO’s, organizations need robust data analysis to strengthen decision making and improve strategic execution. The key is to have the right processes in place to collect the right data and ensure that the data is of good quality. As I have said before, data collection is not free; any data that is collected but not actively used is a waste of organizational resources. Knowing what information is needed to drive better decision making will help ensure that only important data is collected. Therefore, organizations should wisely consider what metrics, analytics, and reports are most important to senior leaders and then develop or improve the processes that drive the collection of that data. The power of having good portfolio data is to conduct strong portfolio optimization.

3 LEVELS OF ANALYSIS

Once organizations have a stable foundation for PMO/PPM data collection, they can embark on the data analysis journey. The graphic below highlights three levels of data analysis:

  • Descriptive analysis—this helps answer the basic “what has happened?” This level of analysis is the most basic as it is fact-based and is required for developing key performance indicators and dashboards.
  • Predictive analysis—this helps answer a more important question, “what will happen?” With sufficient data, organizations can begin to predict outcomes, especially related to project risk and project performance and the impact to project delivery as well as the portfolio as a whole.
  • Prescriptive analysis—this helps answer a more difficult question “what should we do?” This requires more detailed and advanced analysis to determine the optimal path against a set of potential choices. Prescriptive analysis of the portfolio provides significant benefits by enabling organizations to choose the highest value portfolio and choose a group of projects with a higher likelihood of success.

pmo-analytic-capabilities

 

PORTFOLIO OPTIMIZATION

Portfolio optimization is major part of the prescriptive analysis described above. Organizations should endeavor to get to this point because it delivers substantial value and significantly improve strategic execution. In order to optimize any part of the portfolio, organizations must understand the constraints that exist (e.g. budgetary, resource availability, etc.). These constraints are the limiting factors that enable optimal scenarios to be produced. There are four basic types of portfolio optimization described below:

  1. Cost-Value Optimization: this is the most popular type of portfolio optimization and utilizes efficient frontier analysis. The basic constraint of cost-value optimization is the portfolio budget.
  2. Resource Optimization: this is another popular way of optimizing the portfolio, and utilizes capacity management analysis. The basic constraint of resource optimization is human resource availability.
  3. Schedule Optimization: this type of optimization is associated with project sequencing, which relates to project interdependencies. The basic constraints of schedule optimization are project timing and project dependencies.
  4. Work Type Optimization: this is a lesser known way of optimizing the portfolio, but corresponds to a more common term, portfolio balancing. The basic constraints of work-type optimization are categorical designations.

APPROACH

The following diagram summarizes the above points and highlights how having the right data inputs combined with constraints and other strategic criteria can produce optimial outputs across four dimensions of portfolio optimization.

PMO Analytic Framework for Portfolio Optimization

Point B Consulting’s 5-step methodology for conducting PMO analytics enables organizations to realize the full potential of their analytic processes.

  • Define: Determine the performance criteria for measuring PMO/PPM success and develop a set of questions / hypotheses for further modeling and investigation
  • Transform: Gather and transform all available resource, project, business data for further visualization and analysis
  • Visualize: Inventory all projects with related resources and highlight key trends/insights based on project and business data
  • Evaluate: Develop analytic framework to test, adjust, and optimize against tradeoffs between project sequencing, resource allocation, and portfolio value
  • Recommend: Develop a final set of project prioritization recommendations for desired future state

 

In summary, portfolio optimization delivers significant strategic benefits to any organization, but getting the right processes in place to collect good data is not easy. Having the right data can enable your organization to know what is happening to the portfolio (descriptive analysis), what could happen (predictive analysis), and what senior leaders should do (prescriptive analysis).

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Improve Portfolio Health By Avoiding Two Portfolio Management Extremes


Two Simple Questions

You can measure your general portfolio health with two simple questions:

1) Do you approve all or almost all of your projects?

2) Are you approving so few projects that people would say you are “cutting to the bone”?

These are two portfolio management extremes that we will examine in this post.

Approving Everything is Bad

Question number one highlights a common trap for many companies, approving all or almost all projects that get reviewed.  This indicates that the project selection process is not working well. When governance councils have a project approval over 90%, it means very few projects are getting screened out and some poor projects are probably getting approved. Approving nearly all projects also means that significant diminishing returns kick in for this group of projects and executing this work likely requires unnecessary multi-tasking and exceeding the resource capacity of critical resources. While it is theoretically possible for an organization to do an outstanding job of selecting the best possible project candidates upfront and still have a high approval rate, I doubt this occurs very often. More likely, organizations operate in a reactive mode and approve projects as they get proposed; since most projects look good by themselves and almost always have a good reason for getting initiated, the project gets approved and funded. Therefore, one of the best portfolio governance council metrics to measure portfolio health is the project approval rate. We can illustrate these concepts with the graphic below.

Portfolio Cumulative Frontier - Extreme 1
Portfolio Cumulative Frontier – Extreme 1

Here we have a bounded curve of possible portfolios (in this case we can apply the cumulative frontier, which is the cumulative portfolio value based on the rank order of projects in the portfolio, not to be confused with the efficient frontier which is based on portfolio optimization). At the upper far right is the problem area in question. If organizations are approving most projects it means there is little to no discrimination among projects which is a symptom of not having enough project candidates to review and stems from poor ideation and work intake. When organizations have more project candidates than they can reasonably take on, the governance council is pushed to do a better job of selecting projects. Organizations can still do a poor job of selecting projects (or may simply ignore resource capacity and continue approving everything) even when they have more than they can take on, but the emphasis here is on increasing the project pipeline so that the governance council will become less reactive and more proactive and say no to projects that really should be screened out. Creating a strategic roadmap to identify important projects (top-down approach) combined with an employee ideation (process bottom-up approach) will help build up the pipeline of projects and increase the decision making rigor by the governance council.

Don’t Cut to the Bone

We can also evaluate portfolio health by looking at the other extreme where an organization is cutting costs so much that any further cuts will hurt the organization’s day to day operations (aka “cut to the bone”). In one place I worked, the cost-cutting measures had been in place for years and a number of good project candidates were hardly under consideration because funds simply were not available and a buildup of project requests was accumulating. A few high value projects got approved, but “money” was left on the table as a result of not taking action on those good project candidates. In some cases, the rigor to do a good cost-benefit analysis is absent and makes it difficult to communicate how much ‘value’ is being ignored by not taking on additional projects due to strong cost cutting measures. Such extreme cost cutting also has the negative residual effect of discouraging innovation among employees. We can also illustrate this with the same graphic.

Portfolio Cumulative Frontier - Extreme 2
Portfolio Cumulative Frontier – Extreme 2

Summary

In short, asking simple questions about the approval rate of projects and the cost-cutting measures of an organization can highlight general portfolio health. In both cases, organizations should be pushing toward the middle. Adding more project candidates will help ensure that only the most valuable projects get approved. In the case of extreme cost-cutting, companies should improve their ability to measure project value in order to communicate the ‘value’ left on the table. This is best accomplished when a company is doing reasonably well and not when the company is truly in dire straits. Cutting costs “to the bone” is never a good way to stimulate innovation, therefore careful attention is needed when companies are cutting costs too much and not investing in the future.

Cumulative Frontier - Healthy Portfolio

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Resource Management and Capacity Planning Handbook


Book Review

The Resource Management and Capacity Planning Handbook by Jerry Manas is the authoritative source for any organization wanting to improve its resource management practices in the context of portfolio management.  The opening chapter does a great job of providing basic context of resource management and capacity planning and strongly leverages a benchmark study by Appleseed RMCP and expert practitioners in the field.

Organizations continue to struggle with the matter of resource management and “when you consider the constant change, lack of visibility into resource capacity, and no sense of which work is most important, the result is a perfect storm of resource management chaos.” In order to address this problem, Manas systematically covers key topics chapter by chapter that provide relevant help to companies seeking to improve. This book is not about mere theory, but gives literally hundreds of practical points based on corporate reality.

Chapter 2 addresses the road to maturity for improving resource management. I am a big believer in assessing organizational maturity, and Manas does a great job of acknowledging that organizations are on a road to maturity, and through the help of expert practitioners, gives examples of how organizations have matured their resource management processes.  The chapter also addresses the matter of time tracking and does an excellent job of providing a balanced view of why to do it and how to make it work.

In chapter 3, Manas presents a systems approach for diagnosing the root causes of poor resource management. He brings out a number of points that should strike a chord in any organizations. In the latter half of the chapter, he uses systems thinking to deep dive on estimating resources and tasks. The Resource Management and Capacity Planning Handbook demystifies the complexities of resource capacity and demand management and offers clear ways for maximizing your limited resources to drive business growth and sustainability.

Chapter 4 addresses the much needed topic of leadership and organizational change management. I was very pleased to see an entire chapter devoted to these two subjects, because most of the time in portfolio management literature, the emphasis is either on process or tools, with little regard for the people dimension (which is very critical). Much of the chapter is spent on the “50 ways to lead your users”, which is a systematic and structured approach to leading change in the organization.

Chapter 5 addresses key roles for making resource management and capacity planning successful. One of the key takeaways is that successful organizations very often have dedicated resources to support capacity planning exercises. He also takes time explaining the expanding role of the PMO.

Chapter 6 is an enjoyable chapter on strategic alignment and how not to manage resource capacity management like failed military leaders in the past.

Chapter 7 is a great chapter focusing on the human side of resource management. As chapter 4 addressed the people side of leadership and change management, this chapter does an equally good job of explaining why it is important for organizations to pay attention to the human side of project execution and resource productivity when trying to improve resource management.

Chapter 8 expands upon a white paper Manas wrote called “the Capacity Quadrant”. This chapter speaks more frankly about the topic of portfolio management and the need for visibility, prioritization, optimization, and integration of the portfolio. I loved his white paper on the topic and felt that this chapter could have been moved up earlier in the book to provide a clearer view of resource management and capacity planning within the context of project portfolio management.

The final chapter, chapter 9, concludes with industry specific challenges of resource management and capacity planning. This chapter turned out to be the cherry on top as it provided insight into unique challenges faced by different industries. Learning about challenges faced by other industries actually gives greater context to the capacity planning problem and puts readers on the alert for identifying and solving these problems in their own company.

My Conclusion to Resource Management and Capacity Planning

The Resource Management and Capacity Planning Handbook is a must-have book for PMO directors and senior leaders struggling with making the best use of limited resources. Jerry Manas has a great writing style that makes the book easy to read and easy to understand. He also does a fantastic job of blending theory with reality by explaining key topics and then providing numerous tips on how to be more successful with resource management.

Rating: 5 out of 5 stars

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Portfolio Review Meetings


Portfolio Review Meetings

Portfolio review meetings are a great way to review and assess the entire project portfolio with the governance team. Unfortunately in practice, these meetings can be overwhelming, time consuming, and unproductive. There are many ways to conduct a portfolio review meeting, but one of the key questions of the governance team is “what do they want to accomplish at the end of the portfolio review”? For some organizations, portfolio review meetings are about getting project status of every project in the portfolio. For other organizations, portfolio review meetings are designed to evaluate each project in the portfolio with the intention of updating priorities.

Options for Portfolio Review Meetings

With this background in mind, we can look at four options for conducting portfolio review meetings:

  • OPTION 1: A review of all in-flight projects, current status, relative priority, business value, etc. Some projects may be cancelled, but the primary purpose is to inform the LT of the current in-flight projects.
  • OPTION 2: A partial review of projects in the portfolio consisting of high-value/high-risk projects. This provides more in-depth information of critical initiatives and may result in a possible change of priority of certain projects.
  • OPTION 3: A high-level review of all projects in the portfolio with the intention of updating project priorities for every project in the portfolio.
  • OPTION 4: A review of portfolio scenarios that meet current business needs followed by a selection of a recommended portfolio

Option 4 comes courtesy of Jac Gourden of FLIGHTMAP in a 2012 blog post and is the best approach I have seen for conducting portfolio review meetings. I also have sat through long sessions (although not all-day sessions) of reviewing all the projects in the portfolio and it can be painstakingly tiring. Moreover, these types of portfolio review meetings wear out governance team members and do not yield much value.  While there is certainly a time and a place for review the status of all projects or conducting a lengthy review for the purpose of re-prioritizing projects in the portfolio, taking a strategic view is the way to go. Rather than merely focusing on individual projects, a portfolio team can compile a few portfolio scenarios that should be reviewed by the governance team. In many instances, there is significant overlap between the portfolio scenarios, but the emphasis is on the business goals of the portfolio and how a portfolio scenario supports a certain goal. Some examples of portfolio scenarios include:

  • Revenue Growth Scenario
  • Customer Growth Scenario
  • Market Growth Scenario
  • Reduced R&D Spend Scenario
  • Balanced Portfolio Scenario

These scenarios are easier to produce when efficient frontier analysis is applied. Even after a portfolio recommendation is accepted, there is further work to screen out the projects not included in the portfolio, and in some cases to make worthy exceptions for some projects that would have otherwise been removed from the portfolio.

 

 

What do you think? Have you tried this approach before? How successful was it? Let me know.

 

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Tactical or Strategic PPM


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.

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The Goal of Resource Capacity Management


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.

Capacity Management Example

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Bubble Charts and Normalization


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.

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Can we absorb all the changes?


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.

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The Efficient Frontier Will Get You to the Green


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.

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