CHAPTER 23
Project Portfolio Management: Principles and Best Practices

GERALD I. KENDALL, PMP, TOC INTERNATIONAL

Project Portfolio Management (PPM) is a set of processes to analyze, recommend, authorize, activate, accelerate, and monitor projects to meet organization improvement goals (see Figure 23-1). When performed successfully, PPM has yielded the following benefits:

• 20–30 percent improvement in time to market.¹

• 25–300 percent improvement in number of projects completed with the same resources.²

• Average project duration cut by 25–50 percent.³

• Over 90 percent project success rate, with double the profit margin.⁴

• 50 percent improvement in R&D productivity.⁵

These achievements apply to government, not-for-profit, and for-profit entities.

The principles and best practices of PPM presented here are backed up by research, case studies, and many years of experience. To accomplish its primary objective of improved ROI, PPM must ensure that all three of the following activities are performed expertly:

Choosing the right project mix—Choose those projects that will leverage the organization’s precious resources to bring large, measurable value to the stakeholders.

Ensuring the correct scope—Align projects and content cross-functionally to ensure that the combined changes will result in measurable improvement in meeting organization goals. Many of today’s projects have technical scope relevant to a single, functional area, but lack the organization-wide policy, measurement, and content changes necessary to have a significant impact on organization goals.

FIGURE 23-1. PROJECT PORTFOLIO MANAGEMENT PROCESSES

Executing quickly, in the correct sequence—To accomplish this, people performing PPM must understand and convince the organization to adhere to the organization’s project capacity. Any organization that is overloaded with too many projects sees a dramatic increase in resource multitasking or sharing with a devastating slowdown in project flow. Project durations climb exponentially. Quick execution also demands that PPM effectively monitor project execution to ensure that out-of-control situations are speedily recognized and acted upon.

Executives without effective PPM suffer from cross-functional resource conflicts with continual top management refereeing, poor or anemic organizational performance, and projects where the norm is to deliver late, over budget, or not within scope. Most executives are aware of the need for drastic change in multiproject management practices, but many place the emphasis in the wrong place. Unfortunately, a great deal of such investment is misdirected into multiyear efforts to implement software tools and time sheets before dealing with the highest leverage points.

THREE ROLES—GOVERNANCE, MANAGEMENT, AND PROJECT PORTFOLIO MANAGEMENT

To have an effective Project Portfolio Management System, there are three distinct roles that an organization must formally define:

1. Governance—This executive role is one of decision making, usually conducted by top management teams. In the most effective implementations that this author has evaluated, this role includes the “C” level executives (CFO, CEO, COO, CIO) who meet monthly to make decisions about:

• Which projects to approve/reject.

• When to activate projects.

• How many projects to activate and which projects to deactivate.

• Due dates for projects.

• Criteria for project proposals.

• Priorities.

• Resource allocation, including capital expenditure, people, and operating expense budget.

• Project reviews, with approval for a project to proceed to the next stage or to kill the project, or approval/rejection of project improvement plans.

• Investment in project management methodology and tools.

2. Management—Relative to PPM, management’s job is to ensure that the project management system is “in control.” According to the late quality guru W. Edwards Deming, a system is in control when the goals of the system can be predictably met better than 95 percent of the time. Every project has three distinct goals—to be delivered on time, on budget, and within scope, according to original commitments (not the 10th revision to a due date). This role includes providing the project management processes for planning and execution to deliver projects according to their goals. Usually, this is done by a Project Management Office or similar organization. Where such an office does not exist, this role will fall on the project portfolio management person(s).

3. Project Portfolio Management—The person(s) undertaking this role provides information and recommendations to the governance group for improved ROI. They also monitor execution of projects. Usually, there is a close relationship between the person(s) responsible for strategic planning and the project portfolio manager. While strategic planners identify the ideas necessary to meet organization goals, the portfolio manager makes sure that there are corresponding programs and projects sufficient to accomplish those ideas. Furthermore, the portfolio manager maps and tracks the project execution against the strategies and raises the red flag when there is danger of missing a goal. Finally, the portfolio manager also lets strategic planning know when the strategy is not practical relative to project resources available.

CHOOSING THE RIGHT PROJECT MIX

There are three common problems with the way that projects are sanctioned in most organizations.

1. Goals set by the senior executive are not measurably tied to projects—i.e., even when a functional VP claims that a project is essential to meet a goal (which is almost always true), the percentage of the goal that the project will accomplish is often not identified or committed to. This is vital information for the Portfolio Manager to be able to assess the health of the portfolio.

2. The collection of active projects is not formally tracked to see if it is meeting the goals (on time and magnitude of improvement promised). The author’s experience is that many projects, even in multibillion-dollar companies, lack formal, valid resource-based project plans. Furthermore, even when the plans exist, they are often sitting on a shelf rather than being used as the performance base to judge the project.

3. Organizations breed many projects that are not sanctioned by any executive. In a June 2004 research effort, this was a stated problem with 70 percent of respondents.

A formal portfolio management and governance process will help to overcome these problems. This is a prerequisite foundation for analyzing and improving the project mix.

When considering an organization’s project mix, two areas of analysis are very important. The first is whether the projects will provide high leverage on the organization’s precious project resources—people and capital—to generate measurable, bottom-line improvements within the coming year. The second area is a question of portfolio balance.

To leverage project resources, a portfolio manager must understand the overall “business” of the organization. Every organization has one major constraint—one area that, more than any other, limits the performance of the organization. In this sense, an organization is like a chain, with one weakest link. Leverage is based on finding and improving the weakest link of the organization. The weakest link can be anywhere in the supply chain—with suppliers who cannot provide enough resource (materials or people) internally, e.g., in production or operations, engineering, IT, in the distribution channels, in retail, or in the market (end customer).

For most for-profit organizations (about 70 percent), their constraint is in the market. This means that the organization has enough internal capacity to handle more business. To have dramatically better results, what they need is more customers who will buy from them. Given this scenario, a healthy project portfolio should have an imbalance. The project mix should include a disproportionately larger number of projects to address the market constraint. Many organizations in this situation have a large number of sales campaign projects, but few real market research projects. They must understand the deeper needs of their markets enough to overcome their constraint.

Many project portfolios have significant information technology components. To know that the IT projects in the portfolio are correct, the portfolio manager must be able to answer six questions about these projects.⁶ For example, what current technological limitation does the organization or its customers have that the new technology will remove? If the limitation is removed, what impact will that have on the organization’s bottom line? When these questions are asked rigorously, it is surprising to find how few of the currently active IT projects really make sense for an organization.

In a June 2004 survey, over 90 percent of organizations recognizing a constrained resource cited a technology resource. Since IT resources are often badly multitasked, working on far too many projects, the organization can achieve a much higher return on the IT investment by focusing these resources on those few areas that will address the organization’s constraint. In many organizations, the focus on deeper customer needs suggests a different answer in terms of IT projects. For example, many organizations have poor systems in their supply chain (relying on forecasts rather than pull systems, for example), inadequate customer resource management systems, and poor customer service systems.

If an organization does not have the correct balance of projects, with focus on meeting important customer needs, then the project portfolio often contains many projects focused on greater internal efficiencies. Without increased sales and profits, greater internal efficiencies often require layoffs to translate those efficiencies into bottom-line savings. The result, for project management, is that many people become less enthusiastic about working on projects.

Therefore, the second area of analysis of the project mix is vital. The portfolio manager must examine portfolio balance in the following areas:

Focus on market and customer needs vs. focus on internal improvements. If the company has cash flow or other serious financial issues, then internal improvements might be the desired “imbalance.” However, an organization cannot cost-cut itself to long-term health. It must be able to grow its business. The portfolio manager has the eyes to be able to assess and report an undesirable imbalance in terms of marketing projects.

Short term vs. long term. Often, too many projects spend money this fiscal year without bringing benefits until the next fiscal year, or sometime far into the future. This is a huge red flag. Who knows what will happen one or two years from now? The portfolio manager should be asking the tough questions, relative to project benefits and why they can’t happen sooner.

Research vs. development. To have a secure future, every organization must invest some of their project resources into research. Such projects need to focus on market research, experimentation with new methods, tools and processes, training and human development, motivation, and other areas.

Which organization assets are project dollars and human resources focused on? Assets are not just bricks and mortar. They include those assets that are strategic to the company’s future, such as web site, customers, external sales agents, and distribution channels. The portfolio manager should look at the distribution of project investments to the organization’s strategic assets, and determine whether or not the distribution makes sense, relative to the top five assets.

Sponsorship from IT vs. other functional areas. In many organizations, the author has witnessed over 70 percent of the projects in the portfolio sponsored by IT. This is a red flag indicating a lack of balanced ownership of project initiatives. It signifies that functional heads are not holding ownership—and therefore ultimate responsibility—for bottom line results.

ENSURING THE CORRECT PROJECT SCOPE

Two current common practices are at the heart of project scope problems. One is the dissection of organizations into silos (functional areas) combined with the initiation of projects that try to optimize within a silo. The damage can be illustrated with two real-life examples. In one case, the company had many sales campaign projects that brought customers into their shops and call centers requesting new, advertised products. At the same time, due to poor distribution logistics, the shops were often out of stock of the advertised products. Due to inadequate order entry systems, any customer that wanted two or more products had to wait while the salespeople re-entered all of the same customer information, often infuriating the customer to the point of canceling the transaction.

In another example, a procurement manager claimed to save over a million dollars per year in material costs while, at the same time, production stops due to the new materials were causing lost throughput of $100,000 per day. Every two weeks, the company was losing more than the annual savings from material cost reduction.

The portfolio manager must actively seek to replace this common practice of project scope within a silo by looking at the organization as a whole. Projects must be connected, cross-functionally, to make sure that the bottom line benefit to the entire organization is increased.

The second common practice that hurts scope is for technology solution providers (internal and external to an organization) to take responsibility solely for the delivery of the technology rather than partnering in responsibility for the business result that the technology is intended for. Technology providers argue that they have no control over the business results. This is correct in the current paradigm. In the future, they must become full collaborators with the functional heads.

For this current paradigm to change, one of the following two scenarios much occur:

1. Technology solution providers must develop a much better understanding of the business requirements to be willing to take a stake in the business results.

2. Business leaders must develop a much better understanding of the technology to better specify their needs, or both.

In either case, the IT resource crisis that we find so common across most organizations could be resolved overnight, simply by significantly reducing the project rework and waste through a strong, collaboration model.

In general, to begin to overcome these two scope issues and create a much more successful project portfolio management outcome, organizations must initiate cross-functional business training to help their top functional leaders, including IT, better understand the cause-effect relationships and conflicts between functions. Further, the organization must be sure that their metrics for each functional area (and the scope for any associated projects) are holistic, not silo-oriented. Finally, IT internal resources and external vendors should be asked to identify the limitation that any new technology is intended to overcome, what rules (policies and procedures) the organization is currently using to cope with those limitations, and how the rules need to change when the new technology is put in place. These actions will go a long way toward overcoming many project scope problems.

EXECUTING QUICKLY: PROJECT FLOW

One of the two keys to managing a project portfolio to execute quickly is to have an anchor mechanism for strictly activating projects according to the organization’s capacity. Many organizations make the mistake of trying to balance workload across all project resources. Managing project workload in this manner is far too complex to yield predictable results due to variability of both project task work and operational responsibilities.

There are two possible anchor mechanisms that work to ensure fast project flow. One is to stagger projects according to one strategic resource—that one resource pool, within each collection of projects, which determines how many projects the organization can handle without badly multitasking that resource. It is usually the resource which is the most heavily loaded, or the resource that project managers and sponsors fight over the most, or the resource that most delays projects. In many organizations, it is an IT resource, an engineering resource, or an integration group. In smaller organizations, it is often the availability of a project manager that governs how many projects the organization can accomplish.

A second possible anchor mechanism is to control the number of active projects allowed within a phase, such as integration or final testing. This mechanism only allows a new project to start a phase when an existing project completes that phase.

The governance process, with the portfolio manager’s help, must accommodate the deactivation of projects if the strategic resource is overloaded. In organizations such as Alcan Aluminum and TESSCO Technologies,⁷ this meant deactivating over 50 percent of the active projects. The portfolio manager must ensure that projects are staggered strictly according to the capacity of the strategic resource. Only then will project flow dramatically improve.

The second key to quick execution is to imbed a relay runner work ethic for people working on the critical path tasks in projects. The current practice imbeds a process of daily task management, best performed by expert coaches who ask two simple questions: (1) “How many days are left to complete the task? And (2) Is there any way to accelerate the task?”

These two keys—staggering projects and relay runner work ethic—are part of a project management methodology called Critical Chain.⁸ (See Chapter 29 for further discussion of Critical Chain project management.)

EIGHT MANDATORY STEPS FOR EFFECTIVE PPM

The following steps can be easily and quickly executed to launch an effective PPM process.

1. Collect current project portfolio information. If you are new to PPM, focus on basic information. Make a list of the formally recognized projects/programs that the functional heads see as essential to meet the organization’s goals. If the list is greater than fifty projects, this is a red flag that the organization is not focused on its key constraint. Collect any project plans associated with those projects, including resources allocated. Determine if there are financial and other justifications. Get a summary status on each active project (red, yellow, green). Document the sponsor.

2. Collect goal, asset, and resource portfolio information. Determine the official company goals (increasing revenues, market share, profit growth, etc.). Make a list of the top five organization assets, according to executive perception. For resources, do not go to individual detail. The Resource portfolio should include a list of the 25–35 resource pools (skill sets) used by projects, how many resources exist within each pool, and the approximate percentage utilization of those resource pools.

3. Measurably link project, goal, asset, and resource portfolios and assess. In this step, the portfolio manager determines if all projects are connected to organization goals, and to what extent they will meet the goals if executed successfully. Projects are also linked to the Asset portfolio to determine the extent of investment in the company’s strategic assets. The link between the project and resource portfolios determines resource loads and to what extent the organization has the capacity to execute successfully, on time.

4. Determine if the project portfolio is balanced correctly. See the discussion above regarding balance.

5. Determine the organization’s project capacity. Every collection of interdependent projects flows at a given rate (e.g., number of projects completed per quarter or Total Net Present Value generated per year). By reducing project work in process, and reassigning freed-up resources to remaining projects, the projects flow faster. By concentrating on task acceleration during execution rather than by estimates, organizations can increase their project capacity.

6. Develop and gain consensus on prioritization criteria and perform initial prioritization. There are dozens of criteria that you can use. However, almost every management team prefers simplicity. Some of the popular criteria that appear in opportunity template rating forms include relationship to organization goals, customer impact, competitive impact, risk, cash flow, level of difficulty to complete the project, and amount of strategic resource needed.

7. Develop recommendations for the governance board, relative to improving the portfolio ROI. Based on the information that you have gathered, make specific recommendations for executive decisions at the next Governance Board meeting.

8. Prepare for and Facilitate the Governance Meeting. Part of the preparation involves gathering information about new project proposals and circulating recommendations among functional heads prior to the meeting.

MONITORING MULTIPROJECT EXECUTION

When an organization has twenty or more large projects active simultaneously (and this is just a rule of thumb), they usually need a software tool with real-time, online status to help monitor project execution. This is necessary so that the entire community of project and resource managers have a real-time understanding of the impact on their projects and resources—enough to make good decisions on priorities and expediting. It is also necessary for the strategic resource manager to be able to do “what-if” analysis for new projects and stagger the projects correctly so as not to overload the strategic resource.

Executives cannot govern effectively with poor or nonexistent data. The data from execution of projects, based on performance against a resource-based project plan, is essential to give executives a meaningful status of any project. Today’s common practice is to provide summary reports to executives showing a green, yellow, or red status (green: project is on target; yellow: project has some minor problems; red: project is seriously off-track). However, the summary status often masks or does not have good enough data to help executives really understand the organization-wide resource issues or trend analysis to identify threats early enough to avoid disaster.

With poor data, executives often end up as referees, shifting resources to the major disaster areas. While this often solves one problem in one project, it also creates waves of effects on other projects. The underlying root cause of scheduling beyond the organization’s project capacity is not solved permanently, because the anchor mechanism is never identified or accepted in principle. The data does not exist to convince executives of the problem.

Therefore, two essential components of enterprise-wide multiproject management are multiproject software that shows trend analysis for each project and the recognition and acceptance by top management of the anchor mechanism by which all projects are scheduled. With these pieces implemented, a Governance committee has the tool to identify a negative trend within a project. From that identification, the portfolio manager should be able to state what task, right now, is causing the problem, what action the project manager is taking, and whether or not the portfolio manager believes that action is sufficient to overcome the problem. Then, the Governance Committee has a basis to take action or leave the project alone.

BEST MULTIPROJECT PRACTICES

The following were cited as the highest value multiproject management processes, from those companies that claimed to achieve 70 percent or better of their projects completed on time and within scope:

Visibility of the processes to senior management, with their involvement. This included regular and timely status reporting to senior management and program management, which was used to facilitate multiple business unit and product integration.

Stage gate project reviews, especially those conducted by the Governance board with staged funding. This brings “faster kills and better clarity on risks.” It also helps to prioritize new projects early on.

Prioritization of all projects, based on their value proposition with tangible ROI.

Much better resource management and allocation.

Consistency of applying best project management practices to all projects.⁹

Exemplary Organizations

I asked several organizations that were achieving much higher-than-average success rates in delivering projects on time, on budget, and within scope: “What do you think is the major reason why your organization has better-than-average success in managing its collection of projects?” Here are a few responses:

“Part of our success is attributable to the process surrounding the annual budget cycle by which we select our investments for the year. The process drives toward a set of outcomes: to prevent poorly conceived projects before they start, to select only projects aligned with our organizational goals, and to generate broad support for the resulting portfolio of investments. This helps avoid having a number of executive pet projects, projects to placate a squeaky wheel, or projects that serve only larger departments, with no priorities established among them. We put significant effort into constructing a decision-making framework that results in a balanced and prioritized investment portfolio that is grounded in our organization’s values. The confidence in the selection process at the executive level and the project manager level gives the organization a vested interest in the success of the project. As an initiative encounters difficulty, there is a measure of corporate resolve to right the project and see it through to completion.

Once the best projects are put into the pipeline, the PMO helps keep them flowing by increasing their visibility through regular, standardized status reporting back to the committee that authorized them in the first place. We have structured our status report to convey both milestones and budget in terms of planned (baseline), actual, and forecast, along with a statement of the status of risks and issues affecting the project. Status reporting by itself, however, is insufficient; the value of the status report lies in the ability of the executives to accurately interpret the information presented and from it make informed decisions.

As a further benefit, the visibility into the health of the project creates a powerful dynamic with both the project managers and the project sponsors. Both of these parties want their projects to show well before the executive committee. If project managers are aware of the visibility into their projects’ performance they will be more inclined to pursue their projects responsibly and raise red flags earlier than would be the case if their projects did not appear on the radar screen. This is a healthy and productive dynamic to have in place. However, for it to work effectively, it is essential to establish attainable performance standards.

There are many, many other factors to successful project portfolio management, but in Arlington we have found two pieces of the magic that the PMO can work: provide a relevant framework for analysis and decision making and lead the organization toward an on-going dialogue about desired outcomes and the path to reach them.”

—Denise Hart, Program Management Officer, Arlington County Government, Virginia

“The BASC PMO credits its strong foundation to the development of a strategic partnership with all operational organizations. This strategic partnership and the continuing efforts in promoting project management with executive sponsorship are the key success factors in meeting customer expectations and overall project success.

The strategic partnership emphasizes a mutual goal of defining and implementing best practices. As part of this effort, the PMO meets regularly with the Executive Director to review the projects within the portfolio. The creation and management of the portfolio includes the PMO conducting interviews with the operational organizations, IT, and finance departments. Several scenarios are then built based on different priorities: ROI, risk, business need, etc. These are then presented to the Executive director and his team for review. The PMO is involved in all stages of managing the portfolio thus creating value for the organization by assisting the operational entities with their resource allocations, requirements, and re-emphasizing the value of project management methodology. This enables the organization to experience first hand the value of the PMO and assists the PMO in assigning the best-suited resource to a project, thereby increasing the probability of a successful project.”

—Luke Foster, PMP, with BellSouth Affiliate Services

“The hands-down reason for our early success in project portfolio management has been top-level executive support. Commissioner Andrew S. Eristoff and his Executive Leadership Team understood that instituting a formal, yet flexible structure for managing scarce IT resources was essential to achieving multiple departmental goals. The Executive Team accepted the ownership of the IT portfolio of projects and embraced responsibility for accepting or rejecting new projects, discontinuing existing projects, and adjusting priorities among competing projects on a continuous basis. Our portfolio management process ensures that our scarce IT resources are applied to our most critical projects. The IT Department now has an active and involved partner in the Executive Team for making project decisions.”

—Vivian Conboy, Project Management Office Director, NYS Department of Taxation and Finance

“Tinker Federal Credit Union achieves success in managing its projects through their Electronic Services committee, made up primarily of senior managers from all of the organization’s operational areas. The committee ranks projects in order of their strategic priority, and only allows one to be activated if adequate resources will be available for its successful completion. By selecting the projects most closely aligned with their strategic plans, the committee guarantees that completed projects will make the most significant impact possible on the organization’s future growth and direction.

TFCU’s project managers closely monitor each active project’s progress and try to spot problems as early as possible so that corrective actions can be taken. Problems that cannot be resolved at the project team level are elevated to the appropriate senior managers on the Electronic Services Committee. This high level of visibility and authority allow resolutions to occur quickly and with minimal disruption to the project’s momentum.”

—Ben Mannahan, Tinker Federal Credit Union Project Manager

CONCLUSIONS

Executive understanding, buy-in, and direct involvement at the beginning of any project portfolio management effort are key ingredients for success. While executive understanding can be fostered by education in the form of reading and presentations, do not expect their buy-in to a different approach without giving them some logical data and analysis. The data and analysis are needed to prove that there are too many active projects (well beyond the capacity of the organization to do its work without multitasking). Furthermore, the analysis of the collection of projects, when linked to the goals of the organization, must clearly identify the gaps. Otherwise, executives will perceive the portfolio management recommendations to be illogical and unfounded.

The challenge of the portfolio manager is to perform his/her analysis and recommendations in a way that gets top management to act. If the data presented to senior executives lacks credibility, the portfolio manager will be asked to continually do more research, find more data and be caught in the web of analysis paralysis. Use the eight-step process recommended in this chapter to build a robust portfolio data warehouse that can be continually enhanced.

With the correct understanding of the executives, through the Governance Committee, a project portfolio manager will be able to move his/her entire organization up in portfolio management and project execution maturity level. Communications and collaboration in cross-functional projects will improve dramatically. Most importantly, the organization will move closer to meeting or exceeding its goals, with ever greater predictability on positive project results.

REFERENCES

¹ See Performance Measurement Group, LLC, website with several articles about over 1,000 development projects that they have analyzed: www.pmgbenchmarking.com. This data is from an article entitled Better Project Management Practices Drop Time-to-Market 20–percent. The article is from the company’s publication Signals of Performance, Volume 2, Number 1.

² See case studies in Project Management, A Systems Approach, 8th edition, Dr. Harold Kerzner, John Wiley & Sons, 2002, New York, chapter 22 on Critical Chain.

³ Ibid.—See case studies.

⁴ Performance Management Group, LLC, “Portfolio Best Practices Yield Higher Profits,” Signals of Performance, Vol. 3, Number 1.

⁵ Insight Magazine, Summer/Fall 2001, “How to Boost R&D Productivity by 50 percent.”

⁶ See Gerald I. Kendall, Viable Vision, J. Ross Publishing, 2004, Boca Raton FL for a full discussion of the I.T. implications of projects and the six questions.

⁷ Gerald I. Kendall, J., Advanced Project Portfolio Management and the PMO, Ross Publishing, Boca Raton FL, 2003.

⁸ Ibid., for a more detailed description and case studies.

⁹ Results of research study conducted by the author in June 2004. Quotes from survey participants were also collected during the course of this research.