Project Portfolio is a discussion of how to prioritize projects, when resources are finite and you need to select the best portfolio of projects to maximize benefit, or in other words, “Those projects that give you the biggest bang for the buck.” How do you prioritize projects when resources are finite?
Let’s look at this life-cycle example. Strategy decisions are based on a multi-year business plan. These choices generate potential projects. The best projects are selected, prioritized and start-dates are determined based on the projects that generate the greatest benefit toward meeting the strategy objectives. They are planned based on the finite resource constraints of the organization.
The problem is which projects should be started, in what order; based on budget, people, risk, and time constraints—in order to maximize benefit?
In the following example, we’ll focus on the Prioritization, Selection, and Starts-Control step in the life-cycle. We know we can’t do all things, and we know that all things are not equal weight, so how do we determine what and when to fund? Where should resources be placed to get the greatest impact?
We’ll use a tool we developed called decisionAcceleratorto explore these questions. If we can select the right projects to fund, we can optimize our finite execution resources in order to achieve the greatest return, which in this case is to get the right-products at the right-time.
This is a subset of a larger 50 + project portfolio.
There were four strategic objectives that needed to be achieved; from selecting projects for their Tier 1 customers to increasing ROI. We went though a pairwise comparison of each objective to determine the relative weight of each objective. Then we scored each Project candidate as to how well they fulfilled each objective. The financial information was derived from simple business cases developed for each project.
In this subset of projects, we would need 50 million dollars to fund all of the projects. Funding all the projects would obviously generate 100% benefit.
Let’s apply a budget constraint of 25 million dollars to the model. With this limitation, I still get 77% benefit toward meeting my objectives, but my top and bottom ranked projects don’t get funded.
The red bars on the objectives indicate the contribution this smaller project portfolio makes to each of my strategic objectives, with more than 70% of my top two objectives being fulfilled and more than 90% of my bottom two objectives being realized.
However, for market segment positioning reasons, we must do Project C. This constraint generates a new combination of projects, with Projects A, D, and F dropping out. With this new portfolio, my overall benefit drops to 65% and I’m meeting much less of each strategic objective.
Lets see what happens when I increase my budget constraint to 35 million dollars. I can fund Project A now and my overall benefit jumps to 83% since Project A is ranked third in priority. This is a better portfolio mix, yet it requires an additional 10 million dollars to fund.
I’m continuing to simulate by setting back my budget limit to 25 million. Lets look at the impact of Risk on the funding priorities. I’ll also drop my requirement that I must do Project C. I calculated risk on these projects using a simple table based on my assumptions about each project. When risk is applied to the model, my benefit drops to 47%—this generated another new mix of projects to consider.
This is the cost-benefit curve for the unconstrained project portfolio. This shows me incremental funding pools based on benefit and which projects get funded for each pool. For 50% of my budget, these projects give me 77% benefit.
I need to spend half the budget to generate another 23% benefit. The projects on the right side give me a diminishing return. This would seem to indicate that by focusing my finite resources on Projects B, E, G, A, and D--I get the biggest return.
The alternative approach is to try and do all of them, A through F, and then fail on every one because I thinly spread my limited resources across all projects. They’d all potentially be late and be delivered below spec, given my inability to prioritize. Seems obvious in this example, but this “lack of focus” is more common than one would expect in business today.
By setting the cost-benefit to “keep funded once funded,” I effectively have a start-control tool if I wanted to do all of my projects, but phase them over time. This would be the order I should start them in to maximize benefit.
We can also use resource constraints in terms of skill groups to model constraints, but I don’t have time in this screencast to show this example. I’ll do this in a follow-on screencast.