Case Studies
Prioritizing the Portfolio for the Enterprise
Written by
Mike Lecky
Senior Consultant
February 2008
A Higher Calling
Increased demand for return on investment presents new opportunities and as well challenges for approaches organizations take to decide on what project to proceed with.
Historically, projects are often defined, initiated, and funded by individual functional departments enabling the advancement of specific imperatives with side affects of silo mentality resulting in poor alignment for benefits realization. Recognizing the requirement for a more comprehensive process that levels the playing field for individual functional departments to have equal voice for investment decisions has led many to pay closer attention to the approaches taken to prioritize investments.
As a result, Project Portfolio Management (PPM) has taken on increased importance within the organization. The regulatory climate that revolves around information and corporate governance has also contributed to the importance of PPM. Emphasis is now on strategically leveraging PPM as a way of bridging the divide between technology and business. However much confusion still exist about what PPM really is.
The Manta Group approach to PPM is in the context of viewing projects as investments and the requirement to bring projects into tight integration with business demands and priorities. Key disciplines include the ability to prioritize and select projects for the right “mix” of investment portfolio. Getting the most out of the organization’s resources and measuring benefits realization are fundamental aspects to this approach. In this paper we will set out a number of key disciplines that support the establishment of a strategic Portfolio Prioritization approach from an enterprise perspective and share a specific case study.
Portfolio Management - The Link To Business Strategy
Business strategy sets the direction of the business in terms of its growth strategies, target markets and competitive strategies. Project portfolio
management assists in determining the feasibility of business strategies and highlights risks associated with certain business strategies. Project portfolio management receives the strategy as
input and responds with a portfolio impact analysis.
Portfolio management will provide input into the
business strategy process by providing a
perspective of the current values of all IT assets.
The Services Architecture outlined in figure 1 below represents the ideal structure for managing investments in IT. As investments make their way through the lifecycle, best practices are used to manage that investment from Concept to Cash.
Figure 1: Manta Group Service Architecture
In this model every concept is aligned with business demands by the Strategy Management Office. The disciplines of Value Governance, Portfolio Management and Investment Management align IT investments to business demands and provides standards for business case management and benefits management. Once the strategy is agreed to and the portfolio balance is created, the strategy and expected spend is sent to the Project Management Office (PMO).
Project Portfolio Management resides within the PMO. The PMO rationalizes initiatives based on the strategy of the business and the recommended portfolio balance. It is here that projects are prioritized, categorized, accepted or declined. Projects are scheduled according to priority and resources are appropriately assigned.
There are many approaches that an organization can take to implement Project Portfolio Management. One approach is a six step life cycle view (Figure 2) designed to enable organizations to achieve reliable and consistent alignment of strategic objectives to project and program investments. Through this framework organizations develop internal capabilities and competencies to regularly assess projects from portfolio perspective and determine if projects should or should not be continued. If it does not make sense then projects can be replaced, shelved or terminated. Previously, projects were assessed, given the go ahead and never looked at again. The financial market has mastered this capability where investments are bought and sold on the merit of risk and reward in split seconds via the stock exchange.
Figure 2: Project Portfolio Management - Life Cycle View
Although all six steps are key elements within the life cycle view, it is our experience that organizations have the most difficulty with categorization, prioritization and portfolio balancing. The need for these expertises is a new phenomenon considering that organizations have historically been able to rely on silo mentality to achieve specific objectives. Furthermore the processes of categorization, prioritization and portfolio balancing are not a one-time event. Categorization, prioritization and portfolio balancing are ongoing processes resulting in best use of investment for the organization in accordance with the dynamic nature of the competitive business environment.
Specifically the process of categorization, prioritization and portfolio balancing enable technology and business leaders to identify the goals of the business, and then use objective criteria to prioritize and manage projects to achieve the highest value from the portfolio. All projects are viewed in relation to one another, not on a standalone basis. High-risk projects are balanced with low risk, and short term with long term. It follows the same principles as those employed in managing a financial portfolio.
For example, the organization can look at the portfolio and may see that most of the projects are in sales and none in manufacturing. That might be due less to real needs and more to the fact that the president of the sales division is a master at scoring investment dollars! A prioritization management approach attempts to take the politics out of investment decisions by taking a strategic view of the enterprise.
Setting Up The Portfolio
A clear understanding of business objectives is required in order to develop the appropriate investment categories. It is important that bias, distortions and other anomalous issues such as political favors are done away to eradicate inappropriate influences on investment decisions. To do this requires that the organization categorize each investment. Categorization facilitates and enables alignment of investment with strategic direction. This is typically a joint Business and IT facilitated selection of the right decision criteria and categories to group investments fitting to the organization.
Figure 3 outlines the Manta Group approach to categorization. The 4 categories enable organizations to group projects based on contribution rather than the traditional functional/departmental orientation.
- Informational - Projects categorized as informational enable management to make better decisions
- Strategic - Projects categorized as strategic address future business priorities
- Operational - Projects categorized as operational service the current business demands
- Infrastructure - Projects categorized as infrastructure target IT resources shared by underlying business processes
A Categorization Risk Benefit Analysis tool provides a way to model contribution of IT-enabled investments based on risk, benefit and cost. In Figure 3 the size of the bubble reflects the cost of the project. This view of categorization enables organizations to gain a better insight into the individual and relative contribution of IT-enabled investments.
Figure 3: Portfolio Management Categorization Risk Benefit Analysis
Supplementing the Categorization view is the Prioritization view. This view is achieved using the Priority Index Score Card (Figure 4) where projects are prioritized based on score determined by “viability”, “fit” and “confidence”:
- Viability Score determines the viability of investment (i.e. project) in business terms such as customer value proposition, economic upside potential and industry attractiveness
- Fit Score determines how well the investment (i.e. project) fits into the organization in terms such as alignment with company goals, leveraging company capabilities and ease of implementation
- Confidence Score determines the confidence towards the investment (i.e. projects) in terms such as reliable schedule and timeline, guaranteed costs, and low complexity
Figure 4 - Priority Index Scorecard
Priority Index Scorecard combined with business acumen enables organizations to leverage the power of PPM to level the playing field where investment decisions are:
- Driven by a consistent and comprehensive set of metrics that matter to the organization
- Not skewed to serve silo agenda based on cost, risk and benefit
- Supported through a repeatable and reliable processes
Figure 5 depicts the result of prioritization graphically providing more insight to each project investment. A larger bubble size indicates high confidence the project will satisfy the investment objectives. This dashboard of weighted projects provides visibility into the health of projects, the investment mix and alignment to business goals.
Figure 5: Priority Positioning Grid
The Priority Positioning Grid allow for clear decision criteria. Depending on their position within the grid projects are considered as follows:
- Pursued Aggressively if they are highly viable and a strong fit
- Pursued Cautiously if they are highly viable and not a strong fit
- Eliminated or Consolidated if they are not strong in either viability or fit
- Scaled Back if they are less viable but present strong fit
Investment decisions on which projects to pursue, defer, cancel and promote constitute the final step to balance the portfolio. Decisions are made according to the priority ranking and grid positioning of each investment opportunity and the total budget available. The output of the analysis process provides a continuous and defendable technology investment roadmap for Value Governance and serves as a beacon to direct the project organization to allocate resources and prioritize activities.
Case Study - Portfolio Analysis & Prioritization
Background:
A financial company faced eroding market share and increased requirements for regulatory compliance. The organization had traditionally done a good job balancing the need for investment in improving customer service against the need for new product and services as it enjoyed the number one position in terms of market share with strong profitability track record. With new competitors entering the market and offering lower prices, the old models were not working and company was on downward trajectory of losing market share and becoming less profitable.
Faced with the pressure of allocating capital budget to numerous demanding areas, the process of deciding what to fund and what not to fund was downloaded to operating units to justify their capital projects with a business case methodology driven by internal rate of return. The results were mixed as some initiatives such as regulatory compliance could not be valuated effectively while the validity of high capital projects such as acquisitions were questioned. At the end, those making the loudest noise got the capital which resulted in tremendous tension among the operating units.
The Manta Group was brought on board to apply the concept of portfolio management and level the playing field so that all requests for capital could be evaluated beyond the internal rate of return while improving the organization capability to quantify risk consistently.
The client engaged The Manta Group to perform a Project Portfolio Analysis on the complete list of projects planned for 2005 and to produce a Project Portfolio Plan. The objective of the initial assignment was to provide a prioritization of the 2005 set of projects, identify risks and dependencies, and provide recommendations for ongoing management of the portfolio given the above requirements.
Approach
Before plans could be made about the future, the current state of the projects had to be clearly understood by all. An analysis of the current estimating process, content for the project initiation document, front end planning and resource management was carried out. Since data accuracy directly influenced analysis, a template to capture key information was developed. The Inventory Summary Template covered off key areas such as project name, groupings, project start and end dates, current phase, project description, capital dollars, expenses, financial benefits. Also meetings were held with key stakeholders to vet and validate the initial analysis results.
Deliverables
The analysis of the portfolio required input from project owners and executive sponsors which was conducted under the guidance of the Project Management Office. A Prioritization Index Score Card (figure C-1) was developed in accordance to
the client’s business environment. Specifically the Priority Index Score Card was modified to reflect “viability” and “fit” criteria applicable and eliminated “confidence” criteria.
Figure 6 - Priority Index Score Card
Summary
Upon the conclusion of the engagement, the customer was able to apply the concept of PPM by allocating the capital to projects that offered the best return beyond the internal rate of return.
Through PPM, the organization transitioned from silo decision making where each operating unit was pushing its own agenda to an environment where the business imperative agenda became the driver for selecting investments (Figure 7).
Figure 7 - PPM Prioritization
Conclusion
This whitepaper described the approach The Manta Group takes to help organization to leverage industry best practices and as well customer’s existing decision making framework to create a collaborative learning environment.
It is important to note that prioritizing the Project Portfolio needs to become an organization core competency so that it can be embedded in the culture.