What the Heck is Project Portfolio Management?
The Steppe Winds and the “Virgin Lands”
In 1953 after the death of a dictator Joseph Stalin, Nikita Khrushchev, the new Soviet leader became aware of the serious issues in the country’s agricultural sector. Because of the prolonged heavy investments in the industrial and military growth, coupled with a devastating war, the production of wheat, meat and dairy in Soviet Union had plummeted to historic levels. Russia, a traditional exporter of grain, was forced to buy it abroad.
Khrushchev, always an energetic and vigorous party leader, came up with what appeared to be a very creative solution to the grain shortage problem. He proposed to open up millions of acres of “virgin” land in the steppes of Kazakhstan north and east of the Aral Sea.
The overall aim of the “Virgin Lands Project” was to produce 20 million tons of grain by 1956. The project has begun with an army of 300,000 volunteers travelling by special trains to Northern Kazakhstan and Southern Siberia and erecting hundreds of tent cities. Another group of several hundred thousand students, soldiers and agricultural professionals joined them on a temporary basis until the first year’s harvest. In addition, 50,000 tractors and more than 6,000 trucks were moved to the area to assist the “project team” in preparing and ploughing the vast areas of land. As a result of these preparations in the first year of the programme, 190,000 km² were ploughed; in 1955, an extra 140,000 km² were ploughed.
The 1956 was a year of great success for the “Virgin Lands”; the original target of 20 million tons of wheat was more than tripled. Mr. Khrushchev and the rest of the country rejoiced. The original idea of investing billions of roubles into the steppes of Kazakhstan looked like a stroke of genius. Thick books were written and large canvases were painted describing the heroic efforts of the people. The project was a great success.
Unfortunately, around the end of 1956 major problems started to emerge amid all of the celebrations and festivities. First, it was discovered that the government was not prepared for a harvest of such proportions. Lack of storage barns and harvesting equipment led to immense losses. In addition, the Transportation Ministry had not reserved enough freight trains to move all of the grain to major cities. As a result the Soviet Union was forced to buy 20 million tonnes of grain from Canada to meet its needs and avoid famine. It was a humbling and humiliating experience for a country whose leadership was boasting that they could outpace US agricultural production.
The state had also discovered that the cost of Kazakh wheat was three times that of the grain grown in Ukraine, because of all the additional investments, increased demand for fertilizers and the need to support several hundred thousand workers in the middle of nowhere. Another reason was that there was only a 40% chance of favourable weather conditions in Kazakhstan in any given year. This fact was well-known to meteorologists and Khrushchev’s economic advisers, but they conveniently chose to ignore it.
And finally, the really horrendous effect of this endeavour was that the pioneers in 1954 while ploughing the thin fertile surface of the steppes had dug into the saline layer. As a result, in several years, due to lack of any measures to prevent erosion, much of that soil was simply blown away by the 95-mile-an-hour winds, covering many nearby towns with dirt and dust to a depth of up to six feet.
Let’s try to conduct an on-the-spot “lessons learned” exercise on this case study. If there ever was a project manager of the “Virgin Lands” endeavour, what mistakes and miscalculation did he make? The goal of the project in question as worded by the Soviet Gosplan (Ministry of Planning) was to “harvest 20 million tons of grain by ploughing at least 43 million hectares of ‘virgin lands’ in several areas of the country including Kazakhstan.” If we follow this definition, then the manager of the project, real or imaginary, did not commit any major mistakes; indeed 33 million hectares were ploughed and more than sixty million tons of wheat was harvested. Who can blame the project manager who had been told in no uncertain terms, “Take these resources, move them to Kazakh steppes, plough a lot of land and harvest even more grain”?
Subsequent transportation was the responsibility of other government bodies, namely the Ministry of Transportation. Calculation of economic feasibility of such venture was definitely not in the scope of project manager’s responsibilities, and finally, even if he had known about the ecological impact of his project, he wouldn’t have enough authority to go against Nikita Khrushchev.
In that case, who is to blame for this fiasco? Who should have forecasted the high cost of the final product? Who should have initiated several other parallel projects including silo building and preparations of additional freight trains? Who should have studied the historical meteorological data and drawn proper conclusions? Who should have foreseen the ecological impact of the “Virgin Land” project? Who should have assessed the overall value of the project; the balance of the auxiliary projects required to support the original one and calculated the strategic impacts?
In the context of the Soviet Union it was obviously the government, the, so to speak, executives of the country. However the purpose of this case study is not to lay blame on a specific group of people, but to ask a more interesting question:
“If these were not project management mistakes, what kind of mistakes were they?”
The answer to this question lies in the area of portfolio management – the art and science of assessment, selection and management of the projects in order to maximize their benefit to the organization.
The Story of Two Project Requests
To bring the portfolio management concept closer to home, let me share an event that happened to the author of this article not very long ago. I was working as a project management consultant for a very large retail company. One day I was approached by a representative of the accounting department and the following conversation took place between her (Accountant) and me (PM):
Accountant: “We have discovered a problem with our accounting system. Because of the glitch in the software a certain percentage of transactions is “lost”. These orphaned transactions have to be posted manually which requires a lot of time and effort. According to our estimates we lose approximately $60,000 annually on manual corrections. Can you help us with that?
PM: “Yes, we have been informed about this issue and have done some homework; it looks like a $50,000 project …”
Accountant: “Hmm … Unfortunately we have exhausted our budget for this year. I guess we will have to revisit this issue in the next quarter”
One the same day I was approached by a representative of the marketing department who also wanted to discuss a project idea.
Marketing Representative: “We need to update our website; we have a fairly long list of modifications to implement and need you to help us with that.”
PM: “OK, no problem. So, what is it that you want to change?”
Marketing Representative: “Well, we need to change bullets on this page from small black ones to larger red ones. Also, increase the font size from 9 to 11 and modify this area so we can insert photos here… (a very long list of purely cosmetic requirements follows).”
PM: “No problem, I think we can do it. If you don’t mind me asking, who uses this website?”
Marketing Representative: “It is a section of our company’s intranet. It is targeted at our store sales associates. They use this website to learn about updates in HR policy, read company news, etc.”
PM: “So, are there any direct financial benefits you expect to realize from this project? I have to warn you, the total cost of all these improvements will be around $50,000.”
Marketing Representative: “No benefits I can think of. We just have approximately $50,000 remaining in our budget and our director decided to improve this site.”
What happened in these two conversations that took place a couple of hours apart? Two project requests generated by different departments of the same company were presented and described. The first project with a very positive return on investment was rejected because the department in question did not have enough money in their budget. One does not need complicated financial formulas to understand that a deal involving $50,000 investment and resulting in $60,000 annual savings is a very lucrative venture.
The second project was a purely cosmetic uplift to an internal website infrequently used by the most junior members of the corporation. It was not expected to generate any additional financial or other benefits, whatsoever. If one takes off the “project manager’s hat” and puts on the “CEO’s hat”, what do these two stories tell you about the health of the company’s project portfolio mix? Obviously, that the $50,000 project estimate was negligible in comparison to the rest of the company’s portfolio. But still, if part of the vast machinery had malfunctioned, wasn’t it a symptom of much bigger problems?
The explanations of this situation as well as of the failure of Virgin Lands project lies in improper portfolio management – the art and science of selecting and managing the right projects for one’s company.
Is improper or complete lack of project portfolio management an issue in today’s corporate world? Let’s revisit some of the statistics from article “Harnessing the Chaos; Are Portfolio, Project and Requirements Management Interrelated?“
- The Project Management Institute found out (based on the data released by the Bureau of Economic Analysis) in 2001, that the US public and private sectors combined spend approximately $2.3 trillion on projects every year.
- This number accounts for a quarter of the United States’ GDP. If you care to extrapolate this number to the global level, you will arrive at a staggering number of $10 trillion worldwide being spent on projects.
- 84% of companies either do not conduct business cases for their projects or perform them on select key projects
- 89% of companies are flying blind with no metrics in place except for financial data
- 84% of companies are unable to adjust and realign their budgets with their business needs
- End result? Close to $1 trillion in underperforming projects in US as of 2001 and $4 trillion worldwide
The numbers provided above clearly demonstrate that modern businesses are not exactly, what one would call, methodical or systematic when it comes to proper assessment and selection of their project mixes.
What Executives Want …
An executive I spoke with recently complained about the problems he associated with project management,
“You know, we implemented project management methodology at our organization several years ago. There are some improvements, obviously: projects are more controllable, most of them are on time and on budget and the quality has improved considerably. There is, however, something missing, something we hoped would be addressed by project management. Firstly, a considerable percentage of the products we deliver to the marketplace turned out to be not as successful as we expected them to be. In addition, my people still complain that they are overworked and project managers constantly demand more resources. We claim to be the market leader in innovation but I have recently discovered that only five percent of out projects can be qualified as R&D ventures … What are we doing wrong?”
A book I read recently contained another very interesting description of executives’ needs:
“Executives do not go to shareholder meetings and cocktail parties to brag about what a professional group of project managers their organization has. Their mission is to make more money or (in a non-profit organization) to achieve their specific goals”
Gone are the days when the presidents and vice presidents were interested in just two things about their organization’s projects: when will they be finished and what will they cost. Now, especially in the for-profit areas, they want to know if the mix of projects will maximize long-run growth and ROI for the firm, how these projects support strategic initiatives, and how they will affect the value of the company’s stock.
Project Portfolio Management Introduced
“The New Product” Case Study
Let us start this section with a discussion of the following completely fictional case study – an impromptu conversation between Bob, director of mobile devices and Michael, senior vice president of product development.
Michael: “What’s new in mobile phones?”
Bob: “Nothing much on our front; we are preparing for the release of our ‘Notebook’ product with advanced word editing, spreadsheet and e-mail capabilities. But I read in a press release that our competitor ‘Mokia’ is introducing a new cell phone with a 15-megapixel camera and 1,000 gigabyte storage for media files.”
Michael: “Oh my God! They have beaten us again! We can’t let this happen. I want you to concentrate on the improved camera and storage capabilities. There is an industry exhibit in January and I want us to showcase a product that will outperform their device. Get the design and engineering teams to work on it with you. This is a top priority from now on!”
Before moving on to the analysis of this case study, ask yourselves, how many times in your professional lives – irrelevant of what industry you are in – have you witnessed a situation similar to the one described above? How many times have you seen projects initiated based on the “on-the-spot” decision by your superior?
So, what mistakes (if any) were made by Michael in this story? Exhibit 1 lists some of the problematic areas in his decision to concentrate on camera and storage capabilities for the new cell phone.
What is the opinion of the technical experts (engineers and marketing people)?
How important is this project to the goals of the company?
How well is it aligned with company strategy?
How good is the project?
Where will the resources come from for the project?
What projects should be “bumped”?
Project Portfolio Management Explained
Project Portfolio Management is defined as a methodology for analyzing, selecting and collectively managing a group of current or proposed projects based on numerous key characteristics, while honouring constraints imposed by management or external real-world factors.
The three key requirements that portfolio management professionals impose on every candidate are:
- Each project as well as the portfolio of projects should maximize the value for the company.
- The candidate project should preserve the desired balance in the portfolio mix
- The final portfolio of projects is strategically aligned and truly reflects the business’s strategy
The definition of “value” can vary from company to company and even from project to project but typically it includes certain economic measures (e.g. return on investment, net present value, and payback), competitive advantage, market attractiveness, expected sales, probability of success, etc.
The “balance requirement” ensures that the following situations are successfully avoided:
- Too many small projects and not enough breakthrough, visionary projects
- Too many short-term and not enough long-term strategic projects
- Certain business areas are receiving a disproportionate amount of resources
- Poor risk management (all eggs in one basket)
Finally, the “fit to the strategic goals” requirement makes certain that company finances and other resources are not wasted on ventures outside of the organization’s sphere of strategic interests. This particular topic of strategic blunders has been discussed in numerous strategic management textbooks: Harley Davidson deciding to create “Harley Davidson” perfumes, French pen-maker Bic producing women’s underwear, salty snack maker Frito Lay coming up with a “Frito Lay Lemonade” product and Xerox’s decision to move into the software business, to name a few.
Project Portfolio Management Process Overview
The project portfolio management process can be subdivided into two separate steps:
- Prioritization and selection of candidate projects for the portfolio
- Maintaining the pipeline: continuing, delaying or terminating approved projects
The first phase happens before project initiation and starts with a preparation of business cases and a subsequent evaluation of the projects’ values, benefits and risks that may modify the aforementioned benefits (see Exhibit 2). Then, the overall fit of each project in the organizational strategy is determined. Next, the overall balance of the project portfolio is examined in order to ensure that no department or direction has received insufficient or too much weight in the final portfolio.
- PPM – project portfolio management
- PM – project management
- SM – scope management (aka scope definition)
- VHL – very high level
- HL – high level
The next step would be to rank all of the successful candidates according to their selections criteria and assess the overall company resources available for the next period. The resources start getting assigned to the projects on the list until all of the resources are exhausted.
The interesting aspect of the last two exercises is that the company management will need to assess the inventory of available resources (including human resources), decide on an optimum or acceptable size for the pipeline (while considering “Business As Usual” aspect) and estimate durations, costs and human resource requirements for each candidate project. Accomplishing these tasks without a sound project management and scope definition capabilities would be very challenging tasks indeed!
In a simplistic project portfolio management model, once the final selections have been made and the sequence of the projects established and properly aligned with company resources, the process moves into the second phase. In this phase, the project pipeline is maintained by traditional project initiation, execution, and control techniques as well as periodic reviews of each project with respect to the original three pillars of portfolio management:
- Balanced portfolio and
- Fit with the company’s strategic goals
The questions that should be asked at each review – especially at the end of project initiation and project planning stages – include:
- Is the original business case for the project with respect to value, balance and strategic fit still supported?
- Are there any drastic changes to the project budget, duration, revenue projections and any other factors considered at selection?
- What projects should be killed because they no longer fit the original criteria?
- What projects should be added to the mix because of the conditions, ideas and market demands?
Once the projects move into the execution phase the following questions get added to the mix (see Exhibit 3):
- Is the project on time?
- Is it on budget?
- What are the key milestones?
- What are the technical and design issues?
- PPM – project portfolio management
- PM – project management
- SM – scope management (aka scope definition)
- DL – detailed level
What Project Portfolio Management Isn’t
Project portfolio management frequently gets confused with enterprise project management, professional services automation, management of multiple projects and program management. It should be noted that all of the above are variances or expansions of the project management since they do not address the alignment of projects with strategies or the science of selecting the right projects.
Project vs. Portfolio Management: The “Typewriter Effect”
Let us also try to establish a boundary between project management and portfolio management. There is a group of activities sometimes – at least in my experience – attributed to project management responsibilities, but belong to a completely different group; Identifying needs and opportunities, deciding which projects should be undertaken and which ones should be killed, establishing project priorities, assessing revenue and cash flow projections, aligning project mix with organizational goals and balancing the project portfolio. All of these tasks fall into the portfolio management’s domain, which is typically the responsibility of the executives rather than project managers (see Exhibit 4).
I like to refer to this phenomenon as a “Typewriter Effect”. Imagine, that project manager Bob was hired by Company X and told to deliver the best model of the typewriter ever built. He may have questioned the financial feasibility of such venture, but was told in no uncertain terms to stop complaining and concentrate on the project. As a result, Bob has collected all of the requirements from appropriate stakeholders, built the project plan with schedule and resource requirements, managed the team properly and successfully delivered the product on time and on budget.
Once the product was shipped to stores, company management – to their great surprise – discovered that there were no line-ups and waiting lists of consumers anxious to buy it, because everybody has been using word processing software for the last twenty or so years.
Can we blame Bob for the product failure? Could he really continue insisting that the project was a bad idea? Would he be able to keep his job if he did that?
This example, albeit a bit unrealistic, clearly demonstrates the boundary between portfolio and project management. Whether the project is a good or bad idea should be decided in the portfolio management phase of the overall process, while the successful delivery is taken care of in the project management phase.
What Happens without Project Portfolio Management?
Sounds Like Your Company?
What happens if a company does not have sound portfolio management methodology in place? Some of the symptoms that the organization does not properly analyze, select and manage its projects are:
- Project and functional managers often fight over resources
- Priorities of projects frequently change, with resources reassigned
- Senior managers have authority to unilaterally approve and release projects
- Projects are started as soon as approved by senior managers, irrespective of the resource availability
- Senior management frequently complains about how long the projects take
- Even if the strategic idea is implemented, the company sometimes does not achieve the expected improvement
- There is no comprehensive document or portfolio that links all of the organization’s projects to the strategic plan
- There is a significant turnover at the senior management level, right up through the president
- The strategic plan is presented as a list of initiatives. The cause-effect logic tying those initiatives to the goals of the organization is absent
- The list of initiatives is not prioritized. Therefore, it is assumed that all ideas should be implemented simultaneously
There are 10 symptoms listed above. Out of curiosity, try to read through them once more and try to determine how many of them apply to the organization you are currently working for?
The Cause and Effect Matrix
The symptoms of lack of portfolio management, described above, unfortunately represent only half of the story. The end result is even more depressing (see Exhibit 4).
Reluctance to kill the projects and maintenance of an ever-widening tunnel rather than funnel of the project pipeline leads to chronic lack of resources, poor quality of product, missed deadlines and, most importantly, high commercial failure rates of the products or services created as a result of these projects.
A logical by-product of such an approach is the apparent lack of real “product winners” that capture the customers’ hearts and generate considerable revenues for companies.
Finally, if there are no strategic fit criteria present in the selection mix, a lot of the company’s projects may end up – and in the author’s experience they almost always do – being secondary, unimportant and wasteful ventures that do not benefit the organization.
What Is Needed For Project Portfolio Management?
The obvious question to ask at this point would be, “What kind of capabilities should an organization have in order to implement a successful portfolio management program?” As can be seen for the previous sections (see Exhibits 2 and 3) running proper portfolio management processes implies having well-developed and centralized project management capabilities in place, especially project scoping and estimation.
Scoping and estimation play an especially important role during the business case, project charter and project plan phases when the organization’s executives have to assess the economic feasibility and resource requirements of the proposed projects in order to come up with the prioritized project list (see Exhibit 6).
Also, there must be a desire to develop a structured approach to project selection going all the way to the upper echelons of the organization. Since the selection processes should be handled by the most senior people in the company, implementation of the portfolio management must be accompanied by their explicit approval and participation.
Finally, depending on how far the company is along the project management path, new support roles may need to be created. Finally, depending on how far the company is along the project management path, new support roles may need to be created
These may include, project and program managers, portfolio director, PMO roles, etc.
Most companies today are struggling when it comes to proper and systematic analysis, assessment and selection of the right projects.
Furthermore, the executives of many organizations are shifting their focus from tactical project management aspects of their ventures to more strategic, portfolio management facets of their entire project mix. Their interests lie more in the domain of the value of their portfolios, their proper balance and their alignment with organizational strategic goals.
Project Portfolio Management is a systemic approach to analyzing, selecting and collectively managing a company’s projects according to three key characteristics – project value, portfolio balance and alignment with strategy – while subject to resource, fiscal and other relevant constraints.
The portfolio management process consists of two sequential phases: selection and prioritization of candidate projects and maintaining the pipeline by continuing, delaying or terminating approved projects.
The absence of a systemic approach to portfolio management can result in high project failure rates, either technical or commercial, too few stellar product winners, increased times to market and wasted resources.
While project and portfolio management are two distinct domains, having established and centralized project management capabilities, especially project scoping and estimation, are paramount to a successful portfolio management methodology implementation.
- “Project Management” by Robert Santarossa
- “Project Management Body of Knowledge (PMBOK)” by Project Management Institute (PMI)
- “Portfolio Management for New Products” by Robert Cooper
- “A Management Framework for Project, Program and Portfolio Integration” by Max Wideman
- “Project Portfolio Management: A Practical Guide To Selecting Projects, Managing Portfolios and Maximizing Benefits” by Harvey Levine
- “Advanced Project Portfolio Management and the PMO: Multiplying ROI at Warp Speed” by Gerald Kendall and Steven Rollins
- “IT Portfolio Management Step-By-Step: Unlocking the Business Value of Technology” by Bryan Maizlish and Robert Handler
- “IT Project Portfolio Management” by Stephen Bonham
- “The Program Management Office: Establishing, Managing and Growing the Value of a PMO” by Craig Letavec
- “Best Practices in Product Innovation: What Distinguishes Top Performers” by Robert Cooper
- “Brand Failures: The Truth About The 100 Biggest Branding Mistakes Of All Time” by Matt Haig
- “Historical Blunders” (Paperback) by Geoffrey Regan
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Jamal Moustafaev, MBA, PMP – president and founder of Thinktank Consulting, is an internationally acclaimed expert in the areas of project/portfolio management, scope definition, requirements analysis, process improvement and corporate training. Mr. Moustafaev is author of “Delivering Exceptional Project Results: A Practical Guide to Project Selection, Scoping, Estimation and Management” (released by J. Ross Publishing in September 2010). He is also the author of various project management and business analysis webinars delivered in partnership with Project Times:
- Why and How Should You Manage Scope and Customer Expectations?
- Are We Supposed To Negotiate On Projects?
- Top Ten Things You (Probably) Did Not Know About Estimation
In addition to teaching a highly acclaimed “Project Management Essentials” course at British Columbia Institute of Technology, Mr. Moustafaev also offers the following corporate seminars through his company:
“Practical Portfolio Management – Selecting & Managing The Right Projects”
“Successful Hands-On Management of IT and Software Projects”
“Successful Hands-On Management of Modern-Day Projects”
“From Waterfall to Agile – Practical Requirements Engineering”
For further information, please contact: Mr. Moustafaev Phone: 778-995-4396