project portfolio management...

Overview

Project Portfolio Management (PPM): is a term used by several software companies and consulting firms to describe various solutions project management (PM) by treating it as a proper investment portfolio. PPM purveyors see it as a shift away from one-off, ad hoc approaches to Project Management. 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. Whether PPM tools offer this solution or has even caught up with existing inestment analysis methods is a matter of debate. While many are represented as "rigorous" and "quantitative", few PPM tools attempt to incorporate established portfolio optimization methods like modern portfolio theory.

Investment discipline

Regardless of the lack of much of the more recent investment theory in their methods, developers of PPM tools see their solutions as borrowing from the financial investment world. 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. 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. However, most PPM methods and tools opt for various subjective weighted scoring methods, not quantitatively rigorous methods based on options theory, modern portfolio theory or operations research.

Beyond the project investment decision, PPM aims to support ongoing measurement 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 highly 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 its resources towards one that better fits 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.

Taking this top down, business first approach is a critical success factor of PPM. Before adopting PPM, many organizations were criticized for focusing on "doing the wrong things well." They often spent too much time looking at what individual resources were working on instead of taking a step back and asking the very fundamental question "Should we be doing this project or this portfolio of projects at all?" One litmus test for PPM success in an organization is to ask "Have you ever canceled a project that was on time and on budget?" The answer should be "yes" if the organization is using PPM to invest in the correct portfolio mix that meets the organization's overall goals. 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.

Optimizing for payoff

One method PPM tools or consultants might use to avoid over-investment 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. Furthermore, since risk is usually a major differentiator among projects and their is usually no attempt to quantify risk in a statistically and actuarially meaningful manner (with probability theory, Monte Carlo Method, statistical analysis, etc.) it is unlikely such an analysis would produce an optimal result according to proven portfolio optimization methods like modern portfolio theory.

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).

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 et.al. 1998); (Denney 2005) discusses project portfolio and pipeline management in the context of use case driven development.

source: wikipedia