by admin on January 16, 2012
Unsure as to what portfolio management is? If so then read on. (If you want to dive into the detail and learn about some of the techniques used in portfolio management take a look here instead).
First off, let’s clarify a quick point. You will often hear people referring to portfolio management, project portfolio management and even PPM. In reality they are all the same discipline. So to keep things simple, we will use the term portfolio management in this post!
When trying to get a handle on portfolio management, it may help by thinking about something you are probably a little more familiar with – project management.
Project management – “doing projects right”
Project management is concerned with “doing projects right”. Project management is all about the tools and techniques to run projects to achieve a desired end result.
Portfolio management – “doing the right projects”
Whereas portfolio management is concerned with ensuring we do the right projects. This implies a couple of things:
- Portfolio management helps us select the right projects to do.
- Portfolio management also helps us decide if we are still running the right projects.
This last point is often overlooked. A portfolio management approach to running projects means you periodically assess the projects you have already approved and check you should still be running them. Furthermore, a portfolio management approach is always trying to balance the projects in the portfolio to maximise return and reduce risk. Which means looking collectively across the projects and not just looking at projects in isolation.
Portfolio management is not merely running multiple projects!
The need for portfolio management
Firstly, many organisations don’t have any process in place for reviewing project proposals or requests. Often the decision for which projects to proceed with is based on “who shouts loudest”. Combined with poor knowledge of what other projects they are already doing, it is then easy for organisations to take on more projects than they can handle. Inevitably scarce resources get diluted and good projects get squeezed out for bad projects.
A portfolio management approach seeks to address these issues by providing a framework within which projects can be requested and fairly evaluated. It seeks to balance the mix of projects across different levels of risk, focus and spend and tie project selection back to the organisation’s fundamental strategy. Finally a portfolio management approach means that projects are constantly re-evaluated to check they are are on track and either close down or help projects that are failing.
What is project portfolio management?
by admin on October 18, 2011
Our previous posts have looked at NPV and project scoring to help us screen and prioritise our project pipeline. In this post we are going to add a further dimension to the project selection process – resource supply and demand which helps organisations understand if they have the capacity to take on new projects.
All organisations have a finite supply of resources and this must be taken into account during the project selection process. While techniques such as NPV and project scoring help organisations select and prioritise their projects, organisations also need to consider their ability to take on those projects from a resource perspective.
Adding further complexity to this process is the fact than different projects have different resource needs, therefore different mixes of projects will have varying effects on the overall resource demands of the organisation.
The solution is to use resource capacity planning software (also known as resource planning software). This lets you model the effects of different projects on your resource availability and review resource issues and shorfall. Using what if analysis you can also model the effects of delaying or cancelling lower priority projects or recruiting further resources and how this affects your resource capacity.
Only when you understand if you can take on the requested projects from a resource perspective are you free to approve them.
Analysing resource supply issues
Conclusion
In this series of articles we have examined techniques that an organisation can use to help identify, evaluate and prioritise the right projects for their pipeline. Project selection is a key principle in a PPM (project portfolio management) process and ensures you choose the right projects to do. Only then can you focus on doing the projects right.
As a leading PPM tool, iPlanWare supports an end to end PPM process. In particular, during the project selection process key features include a project request process, financial analysis, project scoring and resource capacity planning.
by admin on October 18, 2011
In our previous post we look at using NPV (net present value) to decide if a project was worth investing in or not. We also looked at why NPV cannot be used to prioritise projects or choose between competing projects.
Therefore the next tool in the PPM practitioner’s toolbox is strategic alignment analysis. Strategic alignment analysis involves examining each project’s match to the organisation’s underlying strategic drivers. Strategic alignment analysis is generally accomplished using a scorecard.
The advantage of using a scorecard is that they are easy to understand, quick to complete and can easily capture the multiple criteria used to select projects.
A scorecard consists of a series of questions and weighted answers. As the questions are answered a score for the project is calculated. Questions are ultimately tied back to the underlying strategy of the organisation relate to the key themes the organisation is looking to pursue.
So for example, questions may relate to project duration, customer service, level of risk, quality improvement etc. Here is an example scorecard from iPlanWare.
Using a project scorecard to prioritise projects
Once we have scored our projects we can then start analysing them.
A useful technique is to organise the scorecard so that separate risk and reward scores are calculated for each project then use an investment map to visually organise projects by risk and reward profile. Clearly the projects that have the highest rewards and lowest risks are the favourites to approve. The following screenshot is the investment map within iPlanWare.
Ranking projects using an investment map
Here we have constructed a project scoring and evaluation table showing NPV data in addition to risk and reward scores.
Analysing project scores by risk and reward
More: analysing resource supply and demand as part of PPM process.
by admin on October 18, 2011
Net present value is a financial technique which uses a projects costs and returns over time to determine if the project will make a positive return.
Importantly it takes into account the time value of money – i.e. that a £ earned today is worth more than a £ earned a year from now. As projects often have lifespans of a number of years, it is important to understand how the costs and returns on a project vary over time and factor in the time value of money.
Let’s explain this by way of a simple example. A company must decide whether to approve a recently requested project. The project has the following cash flow profile.
- Cash outflow of £100,000 which is an up-front investment in the project.
- Years 1 – 6: Cash outflow of £5,000 per year
- Years 1 – 6: Cash inflow of £30,000 per year due to new revenue streams
- No further inflows or outflows after year 6.
We also need to consider what is called the discount rate – in simple terms the level of return we want to make on the money invested in the project. In the following example, the discount rate is 10%.
Calculating Net Present Value (NPV) for a project
The sum of the present values is the net present value. As the NPV for the project is greater than zero, it would be better to invest in this project than do nothing.
Use NPV as a screening tool – not a prioritisation tool
In the project selection process, NPV is typically used to make screening decisions i.e. does this project make us money? Only projects that meet a certain level of return are considered further.
NPV cannot be used to prioritise or rank projects as the NPV of one project cannot be directly compared to that of another – a large project will probably have a bigger NPV than a smaller project, but require a bigger investment.
Making preference decisions i.e. choosing between different projects requires using a scoring model possibly combined with the profitability index of the project. The profitability index of a project is simply the present value of future cash flows / initial investment. The higher the profitability index, the more desirable the project.
Within iPlanWare, NPV can be easily calculated for projects and analysed across the portfolio.
Next: project scoring and strategic alignment.
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