Beyond Number Crunching

BMUS. Is portfolio management something companies currently take seriously enough in your experience and where managers going wrong?
DP. The term ‘portfolio management’ has many interpretations; within the context of project management, it can be described as ‘doing the right projects’ rather than necessarily ‘doing projects right’. Doing projects right has been the focus of project management for many years and project scheduling tools are now so advanced that they are almost a commodity. What is still lacking is the big picture view – that is, a true understanding of portfolio analysis even before the proposal in question has become a true project. Such analysis or project selection should be carried out in a formalized manner and should be based upon weighted criteria that are agreed upon by the CxO level and shareholders alike.

Offsetting, say, pure profit on a project against the potential risk and exposure to the organization is something that every portfolio analysis should include. Project portfolio management is evolving to something more than just number crunching – it is becoming more of an analytical science and in order to succeed, project and program managers need to be ahead of the curve in recognizing this.

MM. Portfolio management is rapidly becoming a widely accepted best practice in many industries. Specifically, it is seeing broad acceptance in two main areas, IT portfolio management and product portfolio management. According to Gartner Group, by 2005, 40 percent of large IT organizations will take a disciplined, portfolio management approach to managing IT investments with the primary objective of improving business alignment.

According to AMR Research, product portfolio management (PPM) remains a strong area of investment with 10 percent growth, providing management teams with the tools and dashboard visibility necessary to ensure the most important new product programs are prioritized and on track.

MS. A variety of factors are driving organizations in the direction of portfolio management, although some companies are more inclined towards it than others. Organizations turning to portfolio management include those dealing with the prohibitive costs of project inefficiency and project failure, as we’ve seen with internal IT groups, while for others it’s a compelling event such as SOX that has created the need for greater rigor, prioritization and focus on better project delivery. Similarly, companies in highly competitive, product-driven industries must balance delivering a constant flow of innovative new products with implementing modification requests from large, influential customers.

Unfortunately, some organizations neither manage their initiatives effectively nor take a portfolio approach to prioritizing their growing pipeline of work, projects and initiatives. They are likely to dedicate most of their financial and human resources to the least competitive areas and are much less adaptive to changing business needs. They struggle with prioritizing, estimating and authorizing projects – both large and small – with the highest profit potential, and fail to assign the right people to the initiatives where they can have the biggest impact. They lack sufficient resources for work they have committed to and they lack insight into the real status of their portfolio with appropriate financial and non-financial controls.

BMUS. It seems these days there is a technology out there for everything you might need in your business, and a heap of things you don’t. Where does one start when trying to prioritize what’s needed and how are new tools enabling companies to do so?
DP. Successful project management has nothing to do with a powerful toolset. It is a combination of process, people and tools to support this. My recommendation is simple. Firstly, define the process and methodology that will support your project and business need. Then obtain buy-in and team consensus on this methodology – without this, the first step will fail. Thirdly, once these first two steps have been completed, use the requirements of the methodology as a checklist for choosing the right technology. There is a right fit for every type of project. There is a reason why spreadsheets alone are not used to manage complex projects and likewise, overseeing your back yard improvement project does not require an enterprise PPM solution.

What is important from a technology standpoint is to consider the total cost of ownership. The up-front costs are often minimal compared to the ongoing support and integration costs. The right tool can make a project manager a hero but the wrong investment in the wrong toolset will inevitably lead to a false sense of security. Be on the cutting edge and not on the bleeding edge…

MM. The first step is to define and document the process used to evaluate and select IT investments. This process typically includes establishing key metrics for describing the business value and alignment of IT investments and can include financial metrics such as NPV, ROI and/or IRR and qualitative metrics that capture the business impact.

Next, the organization must clearly define the governance process and roles that define the approval steps or gates within the investment lifecycle and identify the individuals responsible for gate reviews and approvals.

Many organizations begin automation of this process using homegrown and disconnected office productivity tools. Typically they will use spreadsheets to manage financial metrics and budgets, desktop project management tools to manage project schedules and homegrown databases to manage resource allocations and actual costs.

Integrated portfolio management tools provide a single repository of IT portfolio management information that includes portfolio management metrics and scorecards, financial management for managing budgets and actuals, program and project management for managing schedules, resource management and lifecycle management that manages the approval and notification process.

MS. Portfolio management can be addressed at several levels – from simply taking an inventory of the projects under way and the resources working on them to applying strategic criteria and ROI measures to new projects and initiatives in the pipeline. Clearly this could be done on paper, with a spreadsheet, with a portfolio-only analysis tool, or with an end-to-end solution like Primavera that fully integrates project, resource and portfolio management.

Our experience is that there is payback to the organization regardless of what they do, but for maximum payback, portfolio management needs to become an ongoing endeavor that is complemented by project management to provide the real-world feedback on how well you are achieving the portfolio goals you establish.

Organizational strategy plays a key role in the success of a portfolio management initiative. It’s valuable to have a cross-functional, project management office at the enterprise level to establish processes and to act collect and communicate best practices across business groups. Likewise, without executive support and commitment, portfolio management initiatives will likely fail.

At Primavera we’ve also found that organizations who already have some level of project management maturity are most likely to be successful with portfolio management. After all, even if a company has gone through a portfolio planning process to select the right projects, if they don’t have the discipline and skills to carry those projects to their completion – and garnering the intended ROI – they are no better off than they were before.

BMUS. How important is it to have a 360-degree view of your companies operations before you can start investing in technology and how can you help them to do that?
DP. A 360-degree view is really a no-brainer. So often, different pockets or divisions within large corporations will follow completely separate technology and PM paths often in complete ignorance of what other divisions are doing. PM tools today are so collaboration-focused and with the advent of mediums such as the web, every organization should be looking at standard solutions across the board.

MM. The implementation of an enterprise management solution requires the convergence of technical, organizational and cultural change to ensure acceptance and successful deployment. To achieve an optimal level of integration, balanced against the competitive needs of the business, the organization needs to undertake many parallel efforts with varying degrees of complexity. The Artemis Solution Management Methodology (SM2) approach ensures early convergence of these key elements thereby accelerating benefits delivery.

The SM2 approach can be summarized by these 4 key principles:

Implement change in manageable steps
Business change is most reliably achieved through a series of incremental phases, rather than a ‘big bang’ approach. Each phase in our approach builds on previous work as it moves the organization toward the overall goal, yet also delivers its own measurable benefits.

Implement each step-change quickly
Shorter implementation phases lead to faster user adoption, better program control and quicker business benefits. We scope each phase to be completed in 90 days or less, avoiding the risk of inefficient, runaway engagements.

Implement change using collaborative workshops
Each phase is delivered through a set of standard workshops involving key members of staff. Each workshop has a specific purpose, scope and deliverables and ensures the project team learns to design and manage the solution for themselves.

Address key aspects of business change
To be successful, change programs have to tackle the organizational, process and technical aspects to change. Our consulting workshops address all these aspects in an integrated way, ensuring that each is aligned to the specific business objectives of the change program.

MS. As a first step, it’s essential to identify the current active project and resource inventory, as well as the demand pipeline for projects/programs that are forthcoming. This makes it possible to begin aligning the project inventory and the resources with business strategy to launch a ‘portfolio’ approach. Then they need to understand what criteria will matter to them as they prioritize the work. Other key considerations include such variables as resource availability and skill sets, balancing the risk and reward of game-changing products vs. incremental improvements, and aligning the portfolio with business strategy and core competencies.

At Primavera, we can help executives to model their company-specific portfolio decision criteria, both qualitative and quantitative. A company can establish its own criteria for evaluating new initiatives, or consider some of the following: how closely aligned the opportunity is with the company’s strategy, will the initiative provide the necessary competitive advantage, is the market size and growth rate sufficient for the investment, what is the probability of marketplace success, and what are the expected profitability (NPV) and payback (ROI% or IRR%)?

By automating their portfolio management, Primavera also helps them to perform what-if portfolio analysis and view portfolio alternatives as XY charts, bubble diagrams and with a waterline that clearly shows what they can do within their budget. They might analyze the portfolio by viewing the ROI vs. probability of marketplace success (risk/reward), the strategic fit vs. market opportunity, or cost to implement vs. time to impact (time/cost analysis). By viewing the portfolio from different perspectives, the appropriate project mix will be more apparent because projects are not only compared to predetermined criteria, but also against the other projects underway or under consideration.

BMUS. What are some of the benefits of doing it properly? Can you give any examples of recent success stories – what are some of the practical and financial rewards you’ve seen companies achieve through better portfolio management?
MM. For Artemis customer Chicago Mercantile Exchange (CME), 80 percent of all IT initiatives have supporting project information and estimates (less than 50 percent before). Furthermore, the number of staff required to input budget detail into the financial system has been reduced by more than 50 percent, from nine to four. This reduction in effort was largely due to the ability to easily export the budget data out of Artemis 7 and electronically upload it into its financial planning software.

CME is now able to provide business sponsors with near real-time analysis of budgetary ‘what-if’ analysis; enhanced transparency in the budget process and commitments being made by IT; and SOP-98 reporting in two days instead of seven (a 70 percent reduction).

MS. The organizations that we have worked with have cut project and program costs drastically made much more efficient use of scarce resources. Many of them launched portfolio management initiatives when the CIO discovered identical, redundant projects occurring simultaneously. Those savings are easily demonstrable and intuitively obvious.

For example, the IT group within a Fortune 500 life insurance company was able to effectively deal with 23 percent budget cuts over two years, while still delivering on all of its commitments to the business. However, over time, it was able to reprioritize its portfolio of work such that maintenance costs were slashed from 30 to 18 percent of the IT budget.

There is also ongoing value to an organization from becoming more efficient at project and portfolio management competencies. Another Primavera customer, a large semiconductor manufacturer, manages its entire work with portfolio analysis and makes go/no-go decisions based on the financial impact and human resources available. It has been able to further develop the project management skills of its IT group, while increasing its project success rates amid huge budget cuts of 2001 and 2002.

Competitive benefits also accrue to organizations that become proactive in their business and IT project, program and resource prioritization, as a result of visibility into initiatives and the ability to relate them back to corporate strategy. Quick turnaround and response times to competitive threats yield key strategic benefits, measurable in increased revenue through earlier time to market, increased customer adoption due to better prioritization and application of early and frequent customer input to project decision-making on the part of IT.

BMUS. Compliance with regulations, such as Sarbanes-Oxley, is a huge issue for businesses today. How can you enable organizations to better deal with these requirements effectively and cost-efficiently?
DP. Regulations such as SOX and OMB300 are absolutely a win-win. Adhering to mandates requires both formalized processes and corresponding audits. Certainly SOX has brought together many of the previously disparate project management knowledge areas. There is now a much greater emphasis on risk management – mandates for ensuring that sufficient regard to risk and uncertainty has been given.

True project portfolio management is still in its infancy. There is still a technology and mindset divide between project management and program and portfolio management within the context of the overall organization. However, with the introduction of the likes of SOX, this divide is slowly but surely diminishing. Project management tools historically have been very powerful at provide detailed, task level information (yet irrelevant at the organizational level). Conversely, at the organization level, cost, schedule and risk analysis has been carried out for the most part without consideration and input from this detailed project level. As the PPM market space matures and consolidates, the true leaders will be those who can cross this divide and push the detailed bottom-up project-level information to a meaningful summary that can then form the basis of a true portfolio analysis.

MM. Currently, project portfolio management (PPM) applications’ greatest relevance to the Sarbanes-Oxley Act is their use in internal IS departments. Although Sarbanes-Oxley does not specifically point to internal IS departments as business units in need of compliance, it does not exempt them. Thus, IS departments, which have long maintained untamed and unmanaged budgets, will now have to become more transparent and ensure quality, visibility and real-time access to the data and information that passes through their hands. PPM applications can be used to manage compliance as an ongoing project as well enable enterprises to scrutinize and document their internal processes and develop repeatable methodologies to standardize planning and spending habits.

MS. IT governance initiatives and regulatory legislation such as Sarbanes-Oxley require greater discipline on the part of project and program managers. Extending a more rigorous approach to projects to encompass a broader, portfolio management strategy makes sense and is indispensable for competitive business environments.

An emerging trend to provide an accurate portrayal of the financial situation of projects has come out of the public sector: the application of earned value cost management techniques to non-government projects. Earned value measures the current status and forecasts final required costs on major capital projects that span multiple fiscal years.

Today, most corporate financial executives measure the cost performance on projects using only two dimensions: planned costs versus actual costs. If all the allotted money is spent, they are right on target. If less was spent, then there is an underrun of costs; if more, then an overrun. What is missing is the ‘value of the work’ performed for the money spent, in other words earned value management.

For example, if the project budget was US$10 million, you spent US$9 million, but had only accomplished US$8 million of work, you essentially have a US$1 million cost overrun. You are already spending money ahead of accomplishing the work it’s budgeted for. This information helps you to predict how much the project will cost at completion.

As a result of Sarbanes-Oxley, there is a fiduciary duty placed on corporate executives to tell the whole truth when reporting the financial condition of their companies. This duty includes an accurate assessment of the true current status, and the final required costs to finish all multi-year projects.