Defining the New PPM Processes

This chapter reviews the workings of the PPM processes, to describe the tools that are available to support these processes and to explain the interrelationships between the core planning and control components and newer facilities needed for PPM.

Phase One: Prioritization and Selection of Candidate Projects

In this phase, we identify and evaluate candidate projects. The evaluation requires us to consider the opportunity (value and benefits) as well as the risks (which modify the expected benefits). We also have to consider our ability to handle the project loads, much of which is dependent on resource availability.

Evaluating Candidate Projects. We'll assume that the objective of the PPM process is to prioritize work that brings the most value to the firm. The definition of value will certainly differ in accordance with the firm's focus, strategies, and types of projects. Regardless of these differences, a project portfolio management process will have to address the following:

• A ranking of value and benefits

• An estimate of the total costs

• An appraisal of risk (in achieving these benefits)

• An inventory of resource availability and allocation (capacity planning)

• An idea of an optimum or acceptable size of the project pipeline

While we will have a defined process specifically designed to guide and support the evaluation of candidate projects, we may rely on established tools to aid in some of these steps—for instance:

• Your standard planning and control tool would be a convenient source of the resource availability and allocation data.

• Your risk management tool would be used to address the risk component of the evaluation.

• Your enterprise resource planning (ERP) tools would cover financial and human resources (HR) functions, and possibly opportunity management.

• Using an integrated collection of project management tools, where available, minimizes redundancy (and conflicting data) and provides efficient, seamless flow of information.

However, most PM tools were not designed to hold the ranking data or to display it in ways that facilitate portfolio decisions by the governance team (although such capabilities are being added to some). For this, you will need a specifically designed PPM tool. In addition, some recognized decision support tools have been optimized for application to PPM.

Ranking Value and Benefits. Assuming that the number of potential projects exceeds the number that can be effectively executed in a reasonable time, there must be a means of prioritizing each project. Conceptually, this ranking process is simple, although the individual parameters will vary according to strategies, resources, profit motive, and other categories. Earlier, we noted that the process is not unlike that used in selecting items for an investment portfolio. In fact, this is an investment portfolio: you are investing in projects with the objective of maximizing the return.

One of the primary ranking factors will be expected return on investment (ROI) or net present value (NPV), or some variation of these traditional financial measurements. However, there are qualifiers associated with this process. You can't prioritize projects using ROI or NPV alone. You also need to consider:

• Alignment with strategic and tactical plans

• Balance between maintenance projects and investment projects

• Allocation balance of R&D or marketing expenditures and resources

• Effective use of resources

• Probability of delivering the project on time, within budget, and with the designed work scope

• Ancillary benefits (nonfinancial)

• Impact of potential risk

• Cost of performing the project

The last two items are often considered in a formula such as: Value = NPV x probability of technical success/costs. (See Chapter 4.2 for an illustration of a typical formula for value. See Chapter 7.2 for additional examples.) There are almost endless approaches toward developing a value figure. Your software should support your preferences in this area.

Risk. Risk is a modifier of opportunity. (See Chapter 3.3 for detailed discussion of risk.) Any estimate of the benefits of a project must be adjusted for the consideration of risk. There is always the issue of technical risk. What is the probability that the technical objectives won't be met? What are the consequences of that happening? Can anything be done to mitigate or otherwise contain the risk? If so, what is the impact of the mitigation action on benefits and costs? If the project is intended to generate income, what is the probability that the commercial objectives won't be met? If the project deliverables are targeted for a specific window of opportunity, what is the probability that the time objective will be missed? Again, there are the questions of mitigation and effect on benefits and costs.

This is a lot of information and data to keep in one's head or on the back of an envelope. As with any other project management and PPM processes, it is best to have a standardized, repeatable process for evaluating and managing risk, supported by appropriate software. And it is preferable to integrate the risk software with the other PPM tools.

Balanced and Weighted Ranking. The ranking practice should use a balanced scorecard approach, where each of the factors is listed and weighted. As each factor is rated, an aggregate score for each project is obtained. The rating of each factor can be prompted by a series of questions, with the answers noted in a narrative format and then converted to a numerical score based on the level of the answer against a guideline.

A common practice is to evaluate the value/benefit ranking and the risk ranking on a grid. Preference would be given to projects that appear in the high-value/low-risk quartile.

Analytic Hierarchy Process. The issue of ranking has brought an established, mathematics-based, decision-making process called analytic hierarchy process (AHP) to the PPM tool market. AHP involves the use of voting groups using paired comparisons to create weighted rankings for multiple objectives. For instance, the group may compare the importance of short-range income to long-range income, and then long-range income to technical standing, and so on. AHP software tallies all of the results to derive weight factors for each objective. Then the group may use the pairwise comparisons to judge how well each project matches up with the objectives. The result is a fairly weighted prioritization of the projects.

While the AHP method might appear (to some) to be overkill, it allows everyone to have an equal and complete voice in the ranking and selection process and minimizes the effect of personal biases. (See Chapter 4.3 for a detailed discussion of AHP.)

In addition to the formal application of AHP, other vendors have adopted similar capabilities aimed at optimizing the decision-making process. These include the use of pairwise comparison matrices, efficient frontier, and other structured decision analysis methodologies. (See Chapter 4.4 for a detailed discussion of the efficient frontier concept.)

Displaying the Ranking and Selection Data. Regardless of the techniques employed to weigh the selection criteria and prioritize the candidate projects, you will eventually have to display and communicate these data to the decision makers. This capability is supported by almost all PPM software solutions. In some cases, it is the primary PPM-specific feature in products that were developed with a PPM focus.

Common display mechanisms are bubble charts, spreadsheets, four-quadrant grids, X-Y charts, bar charts, matrix comparison charts, executive dashboards (see Figure 2.4-1), and an interesting graph called the Efficient Frontier, a portfolio optimization tool. They all support multidimensional analysis of data to provide multidimensional presentations. Through the use of axes, variable bubble size, colors, and shapes, some bubble charts can display as many as six different variables on one chart. Many products allow you to display multiple charts on a single page or screen.

Figure 2.4-1 An Executive Dashboard

Figure 2.4-1 An Executive Dashboard

Note: The figure displays summary information about the projects in a portfolio. Typically, colored "traffic lights" (green, yellow, red) call attention to the health (schedule and cost) of the projects. Thresholds for yellow and red are established by the user.

Most of these display methods support "what-if" analysis to test various scenarios. There is tremendous power and utility in these display methods. But a little caution is called for. The quality of the display is not a direct indication of the quality of the data. Without a meticulous, structured approach toward developing the data, you might be manipulating and displaying only junk.

One way to reduce the likelihood of bad data is to have a seamless connection from the data generators to the data displays. That is, the data is developed using accepted practices that provide an audit trail back to the source. You can be assured that the selection committee will frequently look at the data in a display and say, "Where did that come from?" Will you be able to answer?

Phase Two: Maintaining the Pipeline

The old conventional wisdom was that once a project has been initiated, it is active until completion (or failure). The new conventional wisdom is that a project is active as long as it continues to support the criteria that were established for its selection and acceptable performance. In this respect, projects are periodically evaluated against these criteria.

The evaluation considers two basic aspects of the project: project performance and an updating of the project critical parameters. Some of the things that we want to know are:

• Is the project still aligned with the strategies?

• What is the current probability that the project will be technically successful?

• What is the current probability that the project will be commercially successful?

• How is the project performing against the target criteria?

• What are the performance trends? Improving or worsening?

• Does the project still represent effective use of the firm's resources?

Measuring Project Performance. If you are directly involved with project management, you have been working with most of the project tracking practices. If we have a critical path (CPM) schedule, we maintain the project progress in the CPM software and monitor schedule milestones and float. Diminishing float is an indication of schedule slippage, but that value doesn't always reveal how much the work is falling behind. It focuses on the most critical schedule items.

A better way to look at performance is with earned value analysis (EVA), a process for evaluating schedule and cost performance on a project. It produces schedule variance data by comparing actual accomplishment to planned accomplishment. It produces cost variance data by comparing the actual cost for the work that has actually been accomplished to the budgeted cost for that quantity of work. EVA usually generates these values at a detailed level and then rolls the data up to summary levels for evaluation.

EVA provides an early warning system for schedule and cost overruns. When the EVA data indicates that certain work is not keeping up with the schedule target or is running over budget, the project team is expected to investigate the problem and, if possible, recommend corrective action. When the data (after considering corrective action) indicates that schedule or cost overruns jeopardize achievement of the project objectives, the PMO will communicate this to the portfolio governance council.

EVA capabilities are available in almost all conventional project management software. If you have planned a project using such software, the core data for EVA is already in place. If you use this software for project tracking, entering percent complete values will provide the data needed for automatic calculation of schedule variance (SV). If you track actual costs, you'll have what you need for calculation of cost variance (CV). (For a more detailed discussion of EVA, see Chapter 3.6.)

Updating Critical Parameters. The EVA data provides information about project performance against the plan. When the results show that project performance is deficient, the team should conduct an evaluation to consider terminating the project prior to completion, changing the priority of the project, or reallocating resources to other work.

There are generally additional factors to consider. Has there been any change in the need for this project? Is the window of opportunity still open? Has critical technology changed? Have the firm's strategies changed? On a periodic basis, all of the criteria that were examined when putting a value on the project should be validated and updated.

The PMO publishes reports indicating where defined targets, limits, and thresholds have been violated. As part of the periodic project selection cycle, it makes recommendations regarding rescheduling or terminating projects with deteriorating performance or that no longer rank well against the selection criteria. The PMO, as part of these recommendations, identifies funding and resources that could be freed up for new, more beneficial projects. The PPM software must be able to process and publish all of these data.

The PPM governance council considers this information, together with the updated critical parameters, to evaluate all projects for continuation or termination.

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