Portfolio Management 101: selecting the right projects
According to the UK Office of Government Commerce (OGC) guide to Portfolio, Programme and Project Offices (P3O) an established structure for enabling the selection of the right programs and projects provides the following benefits:
- Reduced risk, quicker starts, quicker time to market, increased confidence in investment;
- Pet or rogue projects stopped at the initial investment stage gate; and
- Business strategy proved or disproved as quickly and cheaply as possible before major investment is committed.
KPMG International’s 2005 and 2010 Programme Management Surveys also recommend that, as one of the six golden rules for success, organisations should: “establish an enterprise-wide prioritisation process that objectively and continuously evaluates projects and programmes to help maximise and realise the value from investment.”
A structured approach to prioritising projects will also reduce the overheads for an organisation’s
executive committee as a level of pre-assessment can be carried out by the Portfolio Management Office before any project is submitted to the executive committee for consideration.
The prioritisation of projects is a key task for any organisation as it is clearly not possible to fund and resource all projects to be undertaken simultaneously.
Regardless of the organisation, projects have one of three motivators:
- Legislative implementation/compliance
- Capability maintenance; and/or
- Capability development to either build new business, reduce costs or increase revenue.
Of these, the first two are non-discretionary, although the means by which capability is maintained may change over time to suit the organisation’s forward plan/strategy. Capability development projects are discretionary in nature and are often competing for the meagre funds available only after the non-discretionary projects have been funded.
In addition to the three categories mentioned in the overview (compliance, maintenance and new capability) this paper proposes the following criteria for the selection and prioritisation of competing projects.
Of all the papers and references on portfolio, program and project management, business alignment is the most common criteria proffered as a means for the selection and prioritisation of projects. KPMG International’s 2002-03 Programme Management Survey reported that strategic/business alignment was the most often used criteria (75%) to make Go/Hold/Cancel decisions. Alignment with business strategies is also one of the golden rules for success offered by KPMG in its numerous surveys of program management.
Aim to endure all initiatives are clearly aligned with business strategy. Where appropriate, adjust to maintain alignment for reinvesting funds elsewhere.
—KPMG 2010 Programme Management Survey
By only a small margin (72% to 75%) cost benefit analysis (also known as return on investment or commercial value) is the next most often used criteria for the selection of projects.
Costs are a combination of the direct cost to the agency of undertaking the project and the indirect cost (aka dis-benefits) of undertaking the project.
Dis-benefits may take the form of:
- Additional loads on other areas of business. For example, a project that introduces a new communication channel with clients may significantly impact on the performance of the network, thereby bringing down the performance of all systems; or
- Additional loads on clients. For example, a project that introduces a new way of gathering information may require clients to build/acquire new systems to gather and provide that information.
The simplest way to estimate the value of these dis-benefits is to estimate the cost of activities needed to nullify the dis-benefit. For example, in the case of the new way of gathering information from clients, the quantum of the dis-benefit is the cost of providing IT hardware and software to all clients.
Benefits, on the other hand, are a combination of tangible and intangible outcomes. Furthermore, not all benefits can be translated into a financial equivalent that can be nominally used to offset costs (including dis-benefits) nor are all benefits realised by the organisation undertaking the project. Some benefits might only be realised by clients or the broader community.
Finally, the degree to which expected benefits can be truly realised is influenced by the ability of the organisation to undertake the necessary business change/transformation. For the purpose the project prioritisation model proposed in this paper:
- Cost shall be the combination of direct cost of the project and the indirect cost on other areas of the agency (indirect costs or dis-benefits on other stakeholders are already accounted for in the stakeholder alignment criteria);
- Benefits are limited to the expected benefits to the agency. Benefits to other stakeholders will be treated as null to offset the indirect cost the inefficiencies associated with change.