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The Art and Science of Effective Portfolio Management

The Art and Science of Effective Portfolio Management

Effective Portfolio management is more than managing a group of projects and in this post we examine the three pillars to selecting the right projects to run.

The key – and the art – to effective portfolio management is the science of selecting and managing the projects so you can maximize their contribution to the overall success of the business, subject to internal and external constraints. The stress to make here is on selection. Once you have selected the right projects to run, then program management takes over and they run those projects.

1. How do you select the right projects to run?

There are three pillars of project portfolio management. First, by selecting projects, we should maximize the value for the company. It’s a very easy statement to make, but it’s a very difficult thing to do in real life. How do I know that the value of project A is higher than the value of project B? Forecasting project performance is notoriously arbitrary because you can get a huge variation on project estimates, especially on new projects.

2. Get the balance of your portfolio right

The second pillar is balance. There are many ways you can balance usually two-dimensional models. Traditionally, it’s risk versus reward. I want to share a very interesting story with you. Basically, the idea behind the risk and reward balance model is you want to see visually what percentage of your projects are in the high-risk, high-reward quadrant and what percentage of your projects are in low-risk, low-reward.

You can probably appreciate the effect that if you’re, say, a bank or an insurance company, you probably want to see 95% of your projects in the low-risk, low-reward category. However, on the other hand, if you are, say, a cutting-edge software company that produces cool new applications, you probably don’t want to end up in a situation where 95% of your projects are in low-risk, low-reward. You want to see probably, I don’t know a 50-50 split, for example.

3. Does the project align strategically?

The third pillar is strategic alignment, which can be very difficult to implement. There’s a very famous case study, for example, that appears in lots of the strategic management books. It involves a French company called BIC. It’s famous for its cheap lighters, pens, razors. They were selling them in their truckloads.

In 1998, however, BIC decided to take a different strategic direction. They decided to go into high-end ladies’ underwear. The diversification plan was a catastrophe. (It followed another failure, too, nearly a decade earlier, when the firm spent $20 million on a marketing campaign for a perfume line, which tanked.)

It begged the obvious question: if you have been producing cheap pens and razors, and selling them well, why would you diversify into ladies’ lingerie? Stores that sell cheap pens don’t usually sell high-end ladies’ lingerie. Before giving a green light for a project, it’s vital to do basic background checks. Do we have resources? Do we have in-house knowledge? How many crazy projects have been started because a senior executive walked in said: “Wouldn’t it be really cool if you could do this?”

Pillars Need Firm Foundations!

Once you have selected the projects you need to ensure that sufficient resources are in place in order to manage them. Here are three important factors to effective Portfolio Management

1. Get management involved

It’s vital to get senior management buy-in. Get them involved in your portfolio management initiatives. They should be involved. You should also make sure you have a good governance structure in place. You should have a standardized practice for submitting proposed projects. You should have a business case template.

That way every time someone says, “Wouldn’t it be really cool if you could do this?” you should know that you should take out the business case and get them to fill it out properly and then submit it to the project management office. If you think that the entire PPM deployment would be too big, try with a pilot program for it first.

2. The Pareto principle

Don’t forget the Pareto principle: it’s an 80/20 rule where the top 20% of your projects consume 80% of your resources. Consider internal resources. Many companies make the assumption that internal resources are free. You shouldn’t probably be considering them as free resources. The employee costs should always be included in the project feasibility calculations.

3. Beware the optimism bias!

Be aware of optimism bias. As human beings, and this is borne out by psychology studies, we tend to overestimate our abilities required to perform a task and constantly underestimate the complexity of the task in question. Hence, whenever we estimate a project, one of the main reasons why projects go over time and over budget is because of the optimism bias because we think it is easier than it actually is. “Oh, we have the resources to handle that.” So you have to make an adjustment for that – both on the revenue side and on the cost side.

Find Out More

Cora Systems CEO Philip Martin goes into more detail on the pillars described above in his guide to effective Portfolio Planning entitled “Portfolio Planning Can Save Millions on Your Bottom Line”The guide draws on Philip’s 30 years of experience in the portfolio and project management industry, helping organizations across Europe, the Middle East, and the USA.