While being able to execute every project as close to flawlessly as possible matters more than ever to organisations running on Internet time, by itself it is no longer enough to ensure business success. These days, organisations can't hope to achieve sustainable competitive advantage merely by getting the right outcome from every project. They also need to make sure they work only on the right projects. Management, systems and technology consultancy firm PA Consulting Group says the best way to ensure you're working only on the right projects is to manage each and every project investment as part of an integrated portfolio.
But that's a lesson Australian organisations have yet to learn, according to PA Project and Programme Management managing consultant Ken Lowe, and one it could take them a while yet to master. A recent survey by PA's corporate headquarters of UK-based companies with significant business enhancement programs, soon to be replicated here, found organisations that actively manage their project portfolios achieve significantly superior returns. These include: - Significant increases in the business return from similar levels of investment- A better "strategic fit" as funds are directed to initiatives which better achieve the organisation's objectives - Improved justification for overall spending/resourcing/funding - Clear alignment between strategy, activity and outcomes n Significant net present value improvement "The more an organisation puts in to managing its portfolio of projects, the more it gets out," Lowe says.
The business case is compelling, given the return on investment (ROI) from improving the organisational portfolio and program management capability of large organisations. "We have demonstrated 20 times ROI on an investment comprising consulting fees, systems upgrades/development and staff time for this kind of change project where a range of direct and indirect benefits are delivered. [This includes] generating significantly increased value from project portfolios," Lowe says.
The term "portfolio management" is frequently applied to the management of investments in capital markets to balance risk and return. Extended to the world of project management, "project portfolio management" refers to the management of investments that organisations make through the projects they undertake. Where project management is concerned with doing things right (once a project has been given the go-ahead), project portfolio management is concerned with doing the right things from the start.
PA says actively managing project portfolios provides a consistent way to evaluate, select, prioritise, budget for, and plan the right projects - those that offer the greatest value and contribution to the strategic interests of the organisation. It ensures demand doesn't exceed capacity and helps ensure inappropriate projects never get started.
But like project management itself, project portfolio management is an area in which Australian companies severely lag behind their US and - to a lesser extent - European counterparts. In the US particularly, the concept has achieved levels of maturity undreamed of here, although take-up in many industry sectors remains slow.
The results of PA's research:
- Confirmed that active portfolio management delivers tangible benefits; - Highlighted that it is an end-to-end process where each stage is critical; and - Showed that the organisations with the largest programs tend to have advanced portfolio management practices, but there are notable exceptions.
"While this is, perhaps, self-evident, what is surprising is the scale of the potential benefits involved," the report says. "PA helped London Underground Limited move from the least effective group in this survey to the most effective . . . In the first year of operation, London Underground assessed this improvement to be worth £300 million, ($790 million) an improvement of 15 per cent." PA surveyed a range of UK companies - all with significant business enhancement programs - on the nature and perceived effectiveness of their portfolio management practices. The survey says the outcome proves conclusively those organisations that actively manage their project portfolios achieve significantly superior returns.
PA has already shared the results of the UK survey with some of its Australian clients and a few potential clients. It plans to run a similar survey here later this year, building in a component which discusses the complex issue of testing the business justification for developing an enterprise program management capability.
Low Levels of Adoption
The UK report says that while introducing project portfolio management practices delivers fast results, levels of adoption and achievement remain low across many industries even in areas of the world where the techniques are well known and recognised. "Indeed, much of the practice that exists, for example in the utilities industries, is driven as much by regulatory requirements as the desire to improve the impact on the organisation," the report says.
Most academic literature on project portfolio management techniques has focused on industrial R&D departments, although the principles and many of the techniques are highly relevant to non-R&D activities. PA says some of the most advanced practitioners are to be found in the pharmaceutical industry, yet the usefulness of project portfolio management goes across industry sectors. The UK report says there might be many reasons why some have been slower to adopt it than others.
Decentralised organisations tend to be highly resistant to any integration of planning. Similarly, where the number of projects is low, organisations are also likely to give less weight to issues of prioritisation. But whatever other factors come into play, the report says ignorance of the process can't be ruled out as a barrier to adoption. "PA's belief is that it is primarily due to a combination of the cross-functional change required, together with attendant shifts in the balance of power, compounded by a lack of awareness of the potential benefits of implementing the techniques," the report says.
"In the US, enterprise project management is quite a mature concept, and portfolio management to a degree is part of that," Lowe says. "It's only an emerging way of managing projects and linking projects to strategy in this part of the world." In Australia, PA is working closely with two clients from the telecommunications industry - with $1 billion-plus portfolios - on all elements of the portfolio management process.
"There's a stepping process through portfolio management: from setting clear investment objectives, through to defining better projects, through to selecting the optimised portfolio projects to balance risk and reward against a multiplicity of non-financial targets," Lowe says. "So we're actually doing all of that with two telcos here.
"And the fourth part of that, although it's not directly related to portfolio management, is creating a more effective delivery culture. It's all well and good choosing the right projects in combination, but if you fail to deliver them, you're wasting your time anyway," he says.
The consulting firm has also had a small amount of interest - although far less than it would have liked - from the finance sector. Lowe says the lack of enthusiasm from some sectors is hardly surprising. Organisations with an engineering bias tend to be more comfortable with the ideas that underpin portfolio management and also tend to have more enterprise project capability than those organisations without any kind of engineering influence, he says.
"Yet a major financial institution would have a huge portfolio of capital spend in the many hundreds of millions of dollars. Our observations at least would lead us to believe that money isn't spent as wisely as it might be, and the whole portfolio management process would potentially add significant value to the return on investment from projects in major finance organisations."The utility sector, he says, is quite different. "We've got a lot of utility interest," Lowe says. "The portfolios here tend to be smaller but there's a lot of capital-intensive change in that industry. We're talking people around, if you like, nuts and bolts change, so hardware infrastructure as well as civil-type infrastructure, as well as soft behavioural change. "There has also been significant uptake in the transport sector," Lowe adds.
Getting a Handle on Spending
"There is probably one overarching theme here and that is putting the right information in the hands of the decision-makers to enable them to decide the optimal choice of projects," Lowe says.
In a highly competitive marketplace where innovation is essential, most organisations use projects as the organisational vehicle for change. But Lowe says trouble occurs where complex project interdependencies, multiple constraints and multiple targets create multi-dimensional problems.
"Significant organisational credibility can be at stake if the organisation makes wrong decisions, while organisational culture can suffer if alignment between ambition and activity is not clear," Lowe says. "It needs a credible process.
"Our observations would lead us to believe that money isn't spent as wisely as it might be, and the whole portfolio management process can potentially add significant value to the return on investment from projects in major organisations," he says. "Fundamentally, far better business results can be achieved by considering the investment program as a total portfolio rather than as a set of unrelated decisions affecting individual projects."Lowe says portfolio project management lets business leaders focus on doing what leaders do best, setting goals and direction and delivering benefits, while leaving staff free to focus on generating the right projects. Such macro alignment is good for all, he says. And he says the quality and quantity of business cases improves, inappropriate projects can be stopped before they start, and bids can be improved continuously, with no rejections necessary.
"It also injects a lot of agility in the process by the use of what-ifs and rolling investment cycles rather than monolithic annual cycles; it also objectivises and renders credible a messy process in most organisations." Getting It Right The UK survey found project working is accepted as the key vehicle for implementing change, and project management is now an essential business skill.
"In most organisations, particularly those where innovation is critical or which have large infrastructures to support, the demand for project work exceeds the capacity to carry it all out. When additional issues such as strategic business change and increasing regulation are taken into account, the constraints become more apparent," the report says.
"Yet the success of an organisation's overall investment in project work is critical in a competitive business environment. With the focus increasingly on delivering value to the stakeholder and doing more with less, resources are simply too scarce to allocate to the wrong projects. Choosing the right projects is vital to business success."The report noted that the decision process tends to be complicated by a multiplicity of potential issues familiar to many organisations: - A range of business objectives, both hard and soft, financial and non-financial (for example, new markets, increased revenue, reduced operating costs, improved service quality or other key performance indicators (KPIs)- Many different types of projects (for example, strategic, business-as-usual, enabling or infrastructure), some more speculative than others - Competing business units with very different perspectives and expectations - Multiple resource constraints, including funding, management and technical resources- Limitations on an organisation's ability to assimilate change.
"In the face of this complexity, many organisations have adopted techniques for simplifying the investment decision. Unfortunately, these are often oversimplified and reduce the quality of the decision; the focus is all too often on delivering a politically viable solution, rather than seeking to optimise the overall result," it says.
That's where portfolio management comes in. In the face of scientific and commercial uncertainties, the portfolio manager's goal is to create as much value as possible without exposure to excessive risk. Lowe describes it as "a dynamic decision process that enables the delivery of a company's current and future products and hence its current and future revenues".
As the interface between strategic and operational decision-making processes, portfolio management has a simple objective that can only be achieved by doing a lot of things well. "Portfolio management is about giving senior busy people good visibility of a complex picture, what options they have and the confidence they are making the right decisions for the business," Lowe says. "It is a holistic way of looking at projects, which reinforces the vital connection between business ambition and its ability to deliver it - a measure of organisational acuity."Improved Definition The PA survey confirmed the importance of the link between the setting of business objectives and the definition of projects, with all - bar one - of the respondents saying they ensured close alignment between their portfolio management activities and the general planning of the business. The survey also found the essential difference between best and worst practice was that the most developed practitioners placed much more emphasis on the outputs required from the investment portfolio.
PA says the business case is a fundamental component of any portfolio management process, designed both to demonstrate that a project is worth proceeding with, and to select and refine its scope and strategy for execution from the options available. The survey found that, in high-performing companies where most of the expected benefits of portfolio project management were realised, the quality of business cases is consistent and high across the organisation.
It also found a strong correlation between the quality and consistency of business cases among the high performers and the effectiveness and credibility of the selection process. "Among the low performers, the prioritisation and selection process is neither credible within the organisation, nor delivers the optimum set of projects," the report says.
It found improving project selection enhances the potential of the overall portfolio, with high performers treating portfolio selection as an iterative process while low performers treat portfolio selection as a one-off event.
Equally, it found a strong positive relationship between the extent to which organisations analyse alternative what-if scenarios and the effectiveness of project selection.
"The systematic analysis of scenarios enables managers to obtain insights into the portfolio and the constituent project proposals, and thus provides them with the opportunity to take action to improve the overall result," the report says. "In PA's experience, introducing project portfolio management practices will deliver quick results. Given the low take-up, the challenge to organisations is clear: get the most from project investments by applying these techniques." Lowe says organisations looking to adopt portfolio project management go wrong when they fail to consider sufficient alternatives or where creativity is disconnected from markets or strategy. Failure is also likely when project management tools are biased against risk or long-term projects; where flexibility isn't valued; where project relationships are ignored, risk/diversification misrepresented, or the time dynamic simplified.
"If the system is overloaded, performance gets bad quickly," he says. "Risk is as much a consequence of strategy as it is of uncertainty; so all tools should test whether your strategy works in an uncertain environment. No project- level analysis can succeed; the biggest sources of risk are the interactions of projects.
"Whatever tools are used to manage the portfolio must address the way people think; the biggest risks come from outmoded ways of thinking inside the firm, not from uncertainties outside the firm," he says.
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