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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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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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.