Monday 13 October 2014

To kill a project ...

Written by Bryan Fenech, Director - PPM Intelligence.
"Action expresses priorities" - Mahatma Gandhi

When to kill off a project, and the decision criteria for doing so, has been a prominent discussion topic among my colleagues lately. It seems that it doesn't happen nearly as often as one would expect. And, perhaps surprisingly, there is not a lot of science that goes into such decisions.

What the theory says

The theory says that you should kill a project when its business case no longer makes sense. There are 2 reasons why this may be the case. Either:

  1. Costs are higher than expected because of delay, poor estimation of effort, error and rework, or resources have become more expensive than planned, or
  2. Benefits have been compromised due to delay, overly optimistic estimation of new revenue or cost savings, competitors getting to market first, downturn in market conditions, or disruption of the market due to external conditions.

The availability of other projects that represent a better return on the investment of organisational resources should be a determining factor also. Why persist with a project that is no longer expected to deliver valuable outcomes when there are other more attractive options?

What happens in practice

In practice these principles are a good basis on which to make a case to wind up a failed project. More often than not, however, I find its much simpler than that and if there is a major project failure - usually a significant delay or cost blow out - no one will want to be associated with it.

However, statistical studies such as the CHAOS Report suggest that, while about 25% of projects are failures that are killed off at some point, about 50% continue on through to completion even though they are on average around 200% over budget or late. The latter figure suggests its harder than expected to kill a project, and not always a rational decision.

Human factors

This accords with feedback from some of my colleagues from the MBITM Program at the University of Technology, Sydney who work in the field. Consider the following 2 quotes which I think put the matter succinctly:
"It seems to me that many projects don't refer back to the Business Case often enough. And that human trait of wanting to salvage something (anything!) from the investment in the projects leads to a reluctance to kill it off." 
"I've not seen any project 'killed' in my experience. What I've experienced is that when a project fails to deliver, rather than killing it then and there, more resources (money, labour etc.) are thrown at it to 'make it work' - nobody wants to be seen or associated with a failed project. Or it is re-scoped to such an extent that it really bears no resemblance to what was originally envisaged or sign(ed) off on. Successful projects have many parents, while a failed project is an orphan."

Killing a healthy project

I have heard it sometimes said that the maturity of an organisation's portfolio management capability can be measured by its ability to kill projects that are not troubled.

The reasoning is that an organisation with a high portfolio management maturity level will be so in tune with its resource-supply/project-demand equation that it will be able to respond to new opportunities and make space for them by stopping or deferring less valuable in-flight projects.

But is it really that easy? In my experience, not only do organisations not have the tools to do this with any level of rigor, but there is no agreement on the critical issues involved.

For example, when comparing the value of a new opportunity with an in-flight project should we take into account the sunk cost expended to date in the latter? If we do a straight NPV comparison at the time of decision the in-flight project has already expended some of its costs so its NPV at that point will be hard to beat? Alternatively, should we include this sunk cost in the NPV equation? But if we do that then it is no longer an NPV that we are measuring but a present value of both past and future cashflows.

Another problem is that the estimates for in-flight projects are likely to be more accurate than those for a new idea. Should we discount estimates, or apply a risk factor, to account for the different levels of confidence?

What does best practice say?

There are no hard and fast rules here. Both of the key industry standards - Management of Portfolios (Axelos) and The Standard for Portfolio Management (PMI) - are silent on these questions. This is curious given that killing off projects when appropriate is often cited as one of the key objectives of portfolio management.

This area is ripe for field research to survey and gather data on how organisations are approaching these issues.

Tuesday 23 September 2014

Third wave portfolio management: using market mechanisms to prioritise projects

Written by Bryan Fenech, Director - PPM Intelligence.

The textbooks tell us that there are 2 portfolio management approaches to evaluating and prioritising projects:

  1. Quantitatively using financial return measures – e.g., Net Present Value, Payback, etc or
  2. Qualitatively using a multi-attribute scoring model or algorithm.

There is, however, a third option emerging which offers exciting new possibilities – harnessing the power of market mechanisms to select portfolios.

Markets versus hierarchy

In a market both the price of goods and services, and the distribution of information and resources, is a function of the transactions between buyers and sellers and the relative balance between supply and demand involved in these interactions. At a macro-economic level it is recognised that this mechanism is more efficient, and less prone to corruption, than a “command and control” model based on bureaucratic directives by “experts”.

The power of markets has many applications, from moderating debilitating price fluctuations through futures markets to reducing dangerous pollutants, such as atmospheric lead and CFCs, using cap and trade systems.

The internal workings and governance of business and government organisations, however, has tended to be a domain of hierarchical decision making and centralised control of information and resources. The market is for the most part excluded.

Until recently, that is. Organisations are starting to explore how they can harness the power of markets to solve a range of complex business problems.

Ideas futures

In his book The Future of Work Professor Thomas Malone of MIT describes an experiment at Hewlett Packard where a market was set up that allowed employees to buy and sell predictions of future sales in any given month. Employees received $1 for each “futures contract” they had acquired that correctly predicted sales. The result – the markets repeatedly predicted sales more accurately than the official sales forecasts of HP’s expert analysts!

How is this possible? Because of the distributed nature of knowledge the dispersed workforce will collectively always possess more wisdom than central planners. Further, in a hierarchy there is always an incentive to make biased judgments – e.g., choosing a number to keep the boss happy.

Supply chain allocation

Similar experiments have been conducted where market simulations have been set up to complement, or as an alternative to, supply chain planning, budgeting and scheduling. In these experiments plant managers, sales representatives and other staff can buy and sell futures contracts for specific goods in the supply chain, for which there is a degree of price volatility. The objective for each participant is to maximise their personal profit margin but the overall result for the organisation is close to perfect allocation of plant capacity and sales.

These approaches offer much potential. Traditional, centralised supply chain planning and allocation is cumbersome at the best of times. In particularly volatile business and economic environments it is nearly impossible to respond effectively to change. The cycles of data gathering, analysis, approval and syndication cannot happen quickly enough.

Portfolio selection

Some organisations are now experimenting with applying these ideas to the problem of portfolio selection. 

There are many ways that this can be done. One way is to establish an ideas futures market in which employees are given $100 of virtual money to invest in a mix of projects that they think will have the best return. The market will in effect evaluate and prioritise projects and select a portfolio based on the distributed knowledge of the workforce rather than a small number of portfolio analysts working with biased business case cost and benefits estimates. The results can be very interesting. And challenging!

The next step here is to conduct a study comparing methods: which approach selects the most optimal portfolios – traditional centrally controlled quantitative and qualitative evaluation and prioritisation techniques or market mechanisms. Such an experiment would be difficult, because of the length of time required to collect the data required to do the comparison, but not impossible.

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Saturday 2 August 2014

Change the world with project portfolio management

In Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919) a US superior Court held that pioneer car maker Henry Ford owed a duty to profit his shareholders, rather than to benefit the community as a whole or employees. Ford was prevented by the Court from investing a $60M capital surplus “to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes”, and was required to pay special dividends to shareholders.

While the Corporations Law in Australia, and similar legislation in other countries, has over time broadened the duties owed by Directors, the primacy of shareholder return nevertheless remains the chief lens through which company decisions get made.

This was very strongly borne out in interviews I conducted recently with 7 CEOs (2 of whom are also Chairpersons), 3 CIOs and 1 CFO. All of the leaders I spoke to work for large organisations ranging in size up to $87B by market capitalisation and 40,000 employees. One of the practical constraints on the power of these leaders to implement change is risk aversion in the broader industry context, particularly amongst large institutional shareholders and creditors such as banks and superannuation funds, to anything that might potentially impact steady returns. As one CEO put it
In the world’s business model today that’s a major thing for any chief executive, you get up in the morning saying you want to change the organisation you probably won’t have a job in a couple of weeks … you’re not going to deviate from my risk versus return thanks very much.
It is no wonder that corporate social responsibility and environmental sustainability objectives struggle for priority with initiatives that bring a financial return. Unfortunately, stories about companies engaged in environmental damage, sweatshops and anti-competitive practices in the pursuit of profit are all too common.

If this is to change, businesses need a broader conception and longer term view of value built into their DNA. Putting this into practice also requires businesses to adopt entirely new valuation techniques that are aligned to this more developed notion of value. Today’s most popular techniques, such as Net Present Value and Payback period, are designed to select for short term financial return. The challenge is to be able to measure value in a more flexible, nuanced and multifaceted way that strikes a better balance between profits and other objectives.

Project Portfolio Management (PPM) has an important and emerging role to play here. There are 3 PPM techniques, in particular, that can help business strike this balance between their corporate social responsibility and environmental sustainability objectives and the need to be profitable:
  1. Portfolio segmentation
  2. Multi attribute scoring models, and
  3. Portfolio balancing.

Portfolio Segmentation

Portfolio segmentation refers to splitting the funding available for undertaking projects and other initiatives into segments that reflect high level strategic choices. Projects are prioritised within each category rather than all of them competing for the same investment dollar. This ensures that there is a guaranteed level of investment in each strategic category.

These categories can be defined to reflect an intelligent balance between profitability and other objectives. For example, a business might segment its capital budget as follows:
  • Customer satisfaction (25%)
  • Employee engagement (10%)
  • New revenue (20%)
  • Cost savings or avoidance (20%)
  • Carbon neutral (5%)
  • Indigenous communities programs (10%).
In this example, projects that contribute toward carbon neutrality do not need to compete directly for funding with projects that grow revenue or reduce costs.

Multi Attribute Scoring Models

Multi attribute scoring models measure the relative potential contribution of projects and other initiatives against a set of strategic objectives or parameters. Parameters are created for criteria that are important to an organization – e.g., improving customer service, productivity improvement, new product development and growth, cost savings or avoidance, strategic market positioning, and so on. Scoring against these parameters may involve a numerical scale or use natural language that is mapped back to a numerical scale.

Parameters can be defined that reflect corporate social responsibility and environmental objectives alongside profitability objectives. Models can be refined over time and objectives weighted to reflect the relative importance that the organisation places on them. A high degree of sophistication can be achieved with such models, bringing greater precision to the way organisations go about determining which projects and other initiatives they invest in.

Portfolio Balancing

Finally, portfolio balancing refers to assessing whether a portfolio is optimal taking into account timing, spread of strategic objectives served, business impact, risk versus reward, and resource availability. This often involves undertaking “what if” analysis and comparing the results.

This “helicopter view” of the overall portfolio affords opportunities to adjust and improve the portfolio and here is also an important opportunity for an organisation to assess its role as a responsible corporate citizen. It can ensure, in effect, that it puts its money where its mouth is.

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Tuesday 22 July 2014

Portfolio risk management – do you have the right focus?

Written by Bryan Fenech, Director - PPM Intelligence.

“Without it [risk management], portfolio management is just a way to organise the view of projects that will certainly fail” – Scott Berinato in CIO July, 2003.

Portfolio risk management is important; if we characterize an organization's projects as an interrelated portfolio of investments then we need a corresponding portfolio risk management process. This has been borne out by various studies, such as the Standish Group’s CHAOS Report, which highlight a persistent trend of high project failure rates.

Over the course of my career I have come across many ineffective portfolio risk management approaches. The most common problem is that risk management at the portfolio level simply duplicates what is being done at the project and program level. By this I mean that the Portfolio Board or Governance Committee reviews a consolidated list of risks (and their treatments) which have already been reviewed by Project and Program Steering Committees, and which are being managed at that delivery level. This is generally wasted effort because it rarely adds value. More importantly, it is a missed opportunity for the organisation to leverage the advantages and value that a portfolio perspective can bring.

Here is an example to illustrate the point. Imagine we are reviewing a consolidated list of project and program risks as members of a Portfolio Board. Very sensibly we focus our attention on risks that have the potential to derail projects that either have the highest spend or from which the greatest benefits are expected to be derived. However, it may be that the greatest threat to these projects comes not from these risks but from risks impacting other projects upon which they have a logical dependency. Or it could be that the combined impact of risks impacting a cluster of lower credentialed inter-dependent projects is more significant in terms of value at risk. We are failing to incorporate into our risk management approach the view of inter-project dependencies that a portfolio perspective can provide. We are running blind and taking a sizable gamble.

Applying a threshold – e.g., only “catastrophic” and “very high” risks are reviewed by the Portfolio Board – is worse still as this is likely to further obscure the significance of inter-dependencies.

In my opinion, portfolio risk management primarily needs to focus on 3 areas:

  1. Investment at risk
  2. Common risks, and
  3. Domino risks.

Investment at risk

Investment at risk is a measure of the number of projects or the dollar value of projects by risk level. Figure 1 provides a graphical depiction of this using a Red-Amber-Green scheme for risk level.

Figure 1
While this seems like a very simple thing to do it is powerful. For example, where investment at risk is high it indicates that the Portfolio Board may need to pause the introduction of new projects and/or revise benefits and cashflow projections.

Common risks

Common risks are categories of risk that occur most frequently across the portfolio. Figure 2 provides a graphical depiction highlighting the incidence of red ratings by category.

Figure 2
Risks that are common to (or similar across) more than one project or program should receive priority attention because resolving them will have a greater positive impact on overall levels of risk and because they can be dealt with together.

Domino risks

Domino risks are risks that, due to dependency relationships, may have a flow on impact across multiple projects. The things to look for here are:

  1. Measuring aggregate value – i.e., the aggregate value, in terms of costs and benefits, of clusters of interdependent projects could be more significant than even the highest priority projects and attention should be focused accordingly
  2. Identifying portfolio breakpoints – i.e., projects with the highest number of dependencies with other projects need the most attention because they may take down a significant number of other projects if they fail.

Figure 3 highlights how our priority focus for risk management might change when we incorporate a view of the aggregate value of clusters of interdependent projects.

Figure 3

Key portfolio risk management themes

The key takeout here is that portfolio risk management is about identifying threats to overall portfolio performance and benefits. It complements and uses as an input the risk management activity that is undertaken at the project level. But it needs to mine that information and look for patterns that have portfolio level significance.

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Saturday 19 July 2014

The business benefits of portfolio management

Written by Bryan Fenech, Director - PPM Intelligence.

I undertook my first portfolio management implementation back in 2001. I was the new Enterprise PMO Manager following a merger of the Australian Data Advantage group of companies and New Zealand’s Baycorp Holdings.

There was a lot riding on the merger. Strategically, it was in part a defensive move to counter the threat of new entrants into the market, such as Experian, which were global brands. Expectations were high that there would be significant synergy benefits resulting from the integration of the operations of the 2 companies. It would also enable a lot of new product development both in Australia and New Zealand.

These business conditions created huge demand for new projects and very quickly the new company was swamped in infrastructure upgrades and new product development initiatives. Progress was slow on what had been launched as The Quick Wins Program, and the company’s share price took a battering. The path to Hell is paved with good intentions.

The portfolio management capability that we implemented at that time got things back on track. Primarily, this involved identifying resource bottlenecks and managing contention for these resources by sequencing projects according to business priority. A few projects had to be deferred as the Leadership Team recognised that they could not pursue every worthwhile idea simultaneously. Within 3 months the wheels were turning freely once more. Within 6 months the portfolio was working like a well-oiled machine.

That first experience highlighted the immense business value of portfolio management to me. These benefits included:

  • increased project throughput compared to the previous twelve months - by trying to do less we achieved more;
  • increased return on investment from projects compared to the previous twelve months;
  • cost savings and freeing up of resources to work on the most valuable projects;
  • establishing an overall plan that sequenced projects over a six-month period according to relative value, subject to organizational and environmental constraints; and
  • reducing the Company’s portfolio of major transformation projects to a more manageable number – from 52 down to 12.

There are many case studies like this in the literature. To take just one, the Management of Portfolios (MoP) standard, citing research by Sharp and Keelin in the Harvard Business Review, highlights how “a pharmaceutical company increased the expected value in its drug development portfolio by around $2.6B (25%) without any corresponding increase in spend, via more rigorous prioritisation and allocation of available funds” (2011 Edition, p 13).

I recently undertook research into a number of such case studies in order to develop a list of business benefits which can be expected to flow from the adoption of portfolio management. Here is that list:

  1. optimal capital allocation – including rationalisation of duplicate investments, cancelling of underperforming investments, prioritisation of the most valuable investments, logical sequencing of investments within constraints, balancing of risk versus reward, and more efficient resource allocation
  2. increasing project throughput and therefore accelerating benefits realisation and achievement of strategic objectives
  3. better management of global or aggregate risks – e.g., risks that are common to multiple projects and risks that can have a “domino effect” impact across multiple projects due to dependencies
  4. more holistic and coordinated communication across the business regarding business change
  5. enhanced transparency and governance
  6. improved knowledge about the portfolio and sharing of that knowledge across inter-organisational boundaries  – portfolio management as a dynamic capability
  7. improved inter-organisational coordination and collaboration.

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Wednesday 9 April 2014

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Thursday 20 February 2014

Project Portfolio Management Essentials Course

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This course equips students with the essential knowledge and practical skills they need to develop, manage and participate in PPM business processes. The course materials have been part of the syllabus for the Masters in Business in IT Management Program at the University of Technology, Sydney since 2004.

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In today's global knowledge economy businesses need to differentiate themselves by constantly investing in and developing new and innovative products and services. It is more critical than ever that business and IT leaders collaborate to optimize the value of their organisation's human resources, digital and other assets by making prudent project investment decisions. Project Portfolio Management (PPM) is the set of management disciplines through which this alignment is achieved.

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Monday 13 January 2014

Killing a project?

Killing a project? Just how easy is it to do?

If the project is troubled it can be a relatively straightforward thing to do. And you don't need to apply portfolio management (PPM) concepts to do it. Its just a case of winding up a failed project.

But its often stated that the maturity of an organisation's PPM capability can be measured in its ability to kill projects that are not troubled. The reasoning is that an organisation with a high PPM maturity level will be so in tune with its resource-supply/project-demand equation that it will be able to respond to new opportunities and make space for them by stopping or deferring less valuable inflight projects.

But is it really that easy? When comparing the value of a new opportunity with an inflight one do we take into account the sunk cost expended to date in the latter? If we do a straight NPV comparison at the time of decision the inflight project has already expended some of its costs so its NPV at that point is going to be hard to beat? Alternatively, should we include this sunk cost in the NPV equation?

Another problem is that the estimates for the inflight project are likely to be more accurate than those for a new idea. Should we discount estimates accordingly to account for the different levels of confidence?

There are no hard and fast rules here. All of the industry standards are silent on these questions. Which is curious given that killing projects when appropriate is often cited as one of the key objectives of PPM.

Anyone care to share their ideas?

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PPM Capability Research 2012

PPM Capability Research 2012
This document presents summary findings of research into the project portfolio management capability of organisations operating in Australia, including global organisations with an Australian presence. This research was undertaken in 2012.