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PPM (project and portfolio management) is a formal approach that an organization can use to orchestrate, prioritize and benefit from projects. This approach examines the risk-reward of each project, the available funds, the likelihood of a project's duration, and the expected outcomes. A group of decision makers within an organization, led by a Project Management Office director, evaluates the returns, benefits and prioritization of each project to determine the best way to invest the organization’s capital and human resources.
PPM does not involve running the projects, but it does involve choosing which projects to execute and how to fund them. The PPM group will examine each potential project to first determine if the project is supporting the goals and objectives of the business. Projects that fail this first criteria are eliminated from selection. The PPM group will also examine the interconnections and contingencies among projects. These relationships can affect the ranking, prioritization, funding and selection of projects within the portfolio. Finally, the PPM group will monitor projects that are motion. Poorly performing projects may affect other projects within the portfolio, so a consistent monitoring of portfolio projects is needed.
Project Selection Methods
PPM can rely on a project steering committee to help determine where to best to utilize the organization’s funds in project for a return on investment (ROI). Project selection often relies of the time value of money as an input to the project selection process. Time value of money uses a formula to determine either the present value or future value of a project based on some given assumptions. Here are the three most common time value of money formulas:
- Future Value=Present Value (1+i)n where i represents the interest rate and n represents the number of time periods for the project. For example a project requires $525,000 as its budget and will last for two years. If the interest rating were six percent the formula would read FV=$525,000(1.06)2 and would be solved as: FV=$525,000(1.124) which equals $589,890. This means that $525,000 today will be worth $589,890 two years from now at six percent interest. If the project will be less than this future amount of money then it is not a good investment for the organization.
- Present Value=Future Value/(1+i)n where i represents the interest rate and n represents the number of time periods for the project. This formulas determines what the assumed future value of the project is worth today. For example, a project that is believed to be worth $4,500,000 upon completion in four years at six percent interest would be written in the formula as: Present Value = $4,500,000/(1+.06)4 and would be solved as: Present Value =$4,500,000/(1.262) which equals $3,564,421.48. This means that if the project needs more than $3,564,421.48 to complete it is not a good investment for the organization.
- Net Present Value. This benefits measurement technique is used for projects that will have benefits and value each years the project is in existence. Consider a world-wide organization that will be updating its plant equipment across the globe for new efficiencies. The upgrade of the equipment won’t happen in all of its production sites at one time, but will be spread over five years. As soon as the first plant receives the new equipment there are benefits from the project for that plant. As more and more facilities receive the new equipment the benefits will accumulate for the organization. Net Present Value finds the Present Value for each year of the project and considers the cash outlay needed to complete the project and predicts the actual worth of the project.
These project selection methods are all financial-based decisions and do not consider the need of the solution, regulations, efficiency and productivity measurements. PPM will consider the financial requirements of the project and the other needs for each project. While the financial concern is just one aspect of selecting a project to be included in the organization’s portfolio is it a major concern because PPM manages the given budget for all project endeavors.
Organizational Maturity Models
A maturity model describes how well an organization can select, manage, and complete the projects within its portfolio. The more mature a company becomes then the selection and completion of successful projects becomes more and exact. Organizations that have shallow experience with selecting, prioritizing, and monitoring projects within the portfolio are more apt to have inconsistent results within their portfolio. Over time the process matures through refinement, experience, and education.
There are five levels of PPM and the associated maturity model (each higher layer includes the attributes of the lower layer):
- Level One: Reactive. This level has no formal project management tools, projects have cost estimates, and management directives are based on the most-needed projects first. Younger organizations or organizations with a more entrepreneurial bent are likely to be at this level of PPM.
- Level Two: Emerging Discipline. An organization at this level at least a PMO (Project Management Office), ensures that all project directly support an organizational strategy, there is a prioritization to the initialized projects, and the project managers are following a defined set of project management processes across all projects in the portfolio.
- Level Three: Initial Integration. The organization uses programs (collections of projects) within its PPM, has clearly defined project manager and program manager roles, functional departments collaborate across the organizational structure, and a PPM manager, project officer, and/or project steering committee exists.
- Layer Four: Effective Integration. The organization leverages different knowledge sets from across the organization, benefits from each project is monitored, tracked, and forecasted, and the project portfolio is modeling for risk, reward, and return on investment for the collection of projects.
- Layer Five: Effective Innovation. At the highest level of the PPM maturity all project changes and communications flow through an Enterprise PMO, the PPM projects are quickly rolled out (as compared to lower levels of the model), and project managers are given a steady stream of smaller projects for faster, more probable, success rates.
In addition to each layer of the maturity models leadership is to examine the probability of success for each project, perform lessons learned, and make adaptations to improve the flow of the projects throughout the enterprise.
Managing Risks within PPM
Risk is an uncertain event that can have a negative or a positive outcome. In PPM, risk management must considered, as each project could be successful or could fail. The risk-reward ratio describes the probability and impact for each investment of the PPM. Some projects may have a low probability of failing, but also a low impact or return for the investment. Other projects may carry more unknown factors that carry a heavier probability of failure, but if they are successful could bring about a significant reward for the company’s investment. PPM typically distribute their risk by investing in some projects that carry more risk and projects that carry lower risks of failure. The risk-reward is examined for each project and for the collection of projects in the portfolio.
There are two tools that are commonly used to predict, analyze, and balance risk within PPMs:
- Monte Carlo Simulation: named after games of chance in Monte Carlo, this approach uses computer software to show every possible outcomes of combination of factors. By simulating different factors the software can show extreme outcomes, both positive and negative, and more-likely outcomes for the project decisions. Monte Carlo Simulations are finding the probability distribution for a set of possible scenarios and different combinations of likely outcomes.
- Decision Tree Analysis: when selecting multiple project to invest in a PPM can use a decision tree approach to find the probability and success of each project. This analysis studies the likelihood of success for each project and determines the value of the project success and the value of the project failure (failure is a negative amount). These probability values allow the PPM to then determine the expected value of each project to make the best financial investment based on the risk of investing in each project.
Risk analysis within PPM examines the risk of doing, or not doing, the project. This is where a quantitative value of actually doing the project must outweigh the capital needed to do the project. A study into the value of the project examines both the anticipated efficiency and the productivity the project may bring the organization. A common risk, especially in IT, is the assumption that a new software or hardware solution will make the organization more efficient and therefore will make the organization more productive. Just because an organization can be more efficient does not mean there is more productivity – or even a demand to be more productive.
Risk identification is an ongoing process to try to capture all of the possible risk events that could affect the projects. Each risk then is quickly analyzed for probability and impact through qualitative risk analysis. Qualitative risk analysis quickly examines the risk event to justify further analysis on the risk. If the risk qualifies it then moves onto the more in-depth study called quantitative analysis. Quantitative risk analysis aims to quantify the true probability of success or failure and its financial impact if the risk comes into fruition.