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 should address the following:

• A ranking of value and benefits

• An appraisal of risk (in achieving these benefits)

• An inventory of resource availability and allocation

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

The criteria for each of these factors will have to be customized by the firm that is implementing the PPM process. This definition will be driven by the firm's strategic focus. The project portfolio is one of the layers of tactical planning that are executed in support of the strategic plan. So we must add to the list above:

• Publication of the strategic plan to the project portfolio management governance council. (In defining the PPM process, we assume that the process will involve some type of governance council, usually a team of senior people designated by top management to make decisions about the project portfolio. The roles and organization for PPM are addressed in Chapter 2.3.)

• Development of tactical plans that would involve projects in support of the strategic plan

• Definitions of value and benefits as they apply to the tactical plans

• Some boundaries on acceptable risk parameters

• A long-range projection of resource strategies

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. This process must be structured and conducted by a team in order to eliminate the tendency to select projects by political means, power plays, or emotion.

Conceptually this ranking process is simple, although the individual parameters will vary according to strategies, resources, profit motive, and other categories. 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). However, there are qualifiers associated with this process. You can't prioritize projects using ROI alone. You need to also consider:

• Alignment with strategic and tactical plans

• Balance between maintenance projects and investment projects

• Allocation of R&D expenditures and resources

• Allocation of 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)

The ranking practice should use a balanced scorecard approach, with each of the factors 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. (For additional discus sion and details on ranking and prioritization of projects, see Section Four and Chapter 7.2.)

Risk

The value/benefits ranking may be modified by risk: the risk that the perceived benefits might not be realized. A potential milliondollar return with a 10 percent chance of happening is probably not as desirable as a potential quarter of a million-dollar return with a 90 percent probability. A new technology with a 20 percent chance of success may not fit with the strategy. A project that is vulnerable to critical delays might be a lower-ranked candidate than one that is certain to be delivered in time to produce the expected benefit.

A typical value formula takes the expected benefits, minus the total cost of ownership, divided by the risk. The risk factor takes time into consideration, acknowledging that a longer duration to ROI increases the potential risk. (See Chapter 4.2 for a detailed discussion on how to determine the value of a project and Chapter 3.3 for more on risk and uncertainty.)

A common practice is to display the value/benefit ranking and the risk ranking on a grid (Figure 2.1-1). Preference would be given to projects that appear in the high value-low risk quartile.

As the typical project environment moves away from repetitive-type projects to unique and original challenges, risk assessment and management becomes an essential part of PPM.

Resources

If we acknowledge that the availability of resources is a constraint on the number of projects in the pipeline, then why can't we just increase resources as we need them? There are a number of obvious answers to this question:

• Resources cost money. They have an impact on cash flow. In a well-managed organization, the size of a firm's labor force is dictated

Figure 2-1.1 Risk-Benefits Ranking Grid Diagram HP IT Program Selection Process

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Figure 2-1.1 Risk-Benefits Ranking Grid Diagram HP IT Program Selection Process

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High Value High Risk r °

Postpone Shift Right

A ^----

High Value Low Risk o o o o Good to Go

Vo* V

High Risk

Rethink

V A/ c

Retarget Shift Up

IT Ability to Execute Successfully

Source: Don Kingsberry, Hewlett-Packard. See the case study in Chapter 9.2.

IT Ability to Execute Successfully

Source: Don Kingsberry, Hewlett-Packard. See the case study in Chapter 9.2.

by the firm's revenue. In a growing organization, the amount of resources are increased incrementally as the revenues increase, usually by a set proportion. They are not increased just because there are more projects in the pipeline than can be supported by current resources.

• Effective and efficient use of resources calls for a stable workforce—a group of people who understand how the organization works and communicates and who fit the organization's culture and can work well as teams on projects. Although there are times when temporary or transient resources can be used to meet specific needs, it is best to avoid this as a standard source of resources. The cost of supervision, coordination, and learning curve issues will often negate the benefits.

• One of the key objectives of a managed portfolio is balance. This is a well-respected strategy in investment portfolios and should also be an objective in project portfolios. Resource balancing is one aspect of a balanced project portfolio. This is a bidirectional pro cess. The mix of projects and the mix of resources should be manipulated to best use the firm's resources on work that is well matched to the available strengths and skills.

Size of the Pipeline

How much project work is enough? How much is too much? If we proceed on the basis that projects generate value and benefits, then doesn't it follow that the more projects that we have in the pipeline, the better off we will be? Ridiculous! you say! Well, of course, it is. But that doesn't stop many organizations from shooting at everything that moves.

The opportunities (or demand) for projects usually exceed the capacity to execute them all. We all have stories in which project deliverables were significantly delayed because the pipeline was overloaded. In almost every case, the delays eroded the value and benefits of the venture (as well as alienated the client).

There is significant feedback from successful firms that tends to show that doing fewer projects actually improves the bottom line. Committed resources are staying on the assigned job and doing the assigned work in support of established target dates. The income or benefits start earlier, and everyone is happier. Furthermore, because the projects are not drawn out, new projects can be added sooner, and just as many projects may eventually find their way into the pipeline and under improved conditions.

The message here is very clear: limiting the amount of work in the pipeline so that the projects can be completed as quickly as possible results in increased profits or savings and more satisfied clients, and it leads to executing more projects without increasing resources.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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