Key Takeaways:
- Portfolio managers should regularly reevaluate their project portfolios throughout their life cycles. The goal is for you to make sure that your portfolio still creates value for your organization and is still relevant against your strategic directions.
- There are three key criteria to take into consideration when assessing a portfolio: the combined value of the projects in the portfolio, the overall risk/value balance, and the alignment of the portfolio with the strategic goals of your business.
It is common for businesses to organize the projects they launch into portfolios in order to facilitate and optimize management. A number of strategic and operational considerations go into building portfolios, such as the scope and nature of projects, the strategic drivers or priorities they align with, their risk profile, and more.
In project management, things tend to change fast. This means that a previously-sensible portfolio of projects may devolve into a motley assortment of projects and thus need adjustment. To avoid ending up with imbalanced or low-performing project portfolios, PMOs and project management leaders should frequently reassess the relevance and consistency of their portfolios and possibly correct the course. Here’s how to proceed.
The Project Portfolio Evaluation Tripod: Value, Balance, Strategy
According to Project Portfolio Management standards, the decision of incorporating a project into a portfolio should be based on a set of three key goals:
1. To maximize value at the level of the portfolio
2. To achieve the right balance of projects based on their value/risk profile
3. To establish a strong link to the strategic directions and goals of the business
These are the three dimensions you’ll need to consider in order to assess or reassess the performance and quality of a portfolio of projects.
1: Maximizing the Value of the Portfolio
Maximizing value can be viewed as an unchallengeable goal. However, this requires reaching a common understanding of what is “value” in the context of a portfolio and identifying sound, reliable ways to measure, assess and track that value.
The value of a project portfolio depends both on the value of each individual project within it, as well as their arrangement, sequencing, and prioritization over one another. The pool of resources available to project management professionals within an organization are, by essence, limited. Therefore, a valuable portfolio should make good and efficient use of resources by focusing funds, talent and means on the highest-value projects in the portfolio.
How exactly do you evaluate the value of a project?
PPM leaders usually rely on a set of evaluation methods and metrics designed to assess a project’s ability to create value-added for the organization.
Among these is the famous Return on Investment (ROI) calculation. ROI is a performance measure commonly used to assess the relative efficiencies of multiple possible investments. The calculation itself is pretty straightforward, even if you’re really not into math: simply divide the estimated return of your investment by its cost, and voilà!
There’s a caveat, though: it can prove challenging to take the full measure of the potential benefits of a candidate project. You may have to factor in a number of different aspects (sales projections, production and logistics costs, impact on organizational process and productivity, etc.) and to simulate hypothetical scenarios to assess the potential impact of the project on each of these dimensions.
Another widespread value metric is Net Present Value (NPV), which evaluates the amount of cash flow that your investment will generate over the years. NPV is expressed as the difference between the present value of cash inflows and outflows.
2: Achieving the Best Risk-Value Balance
Assessing the potential value of the projects that make up a portfolio is not enough to draw an accurate picture of the quality of this portfolio. Why? Simply because estimates and projections are just that. There’s always a chance that, for some reason, you won’t be able to realize the benefits that you’re hoping to achieve through your projects. That’s called risk.
As a rule of thumb, the initiatives with the highest potential value-added are also the riskiest ones (ask any investment manager or just ask your common sense!).
A common practice to evaluate the risk-value ratio of a portfolio is to map out the projects on a chart or diagram divided into four quadrants based on value and risk. This will provide you with an at-a-glance view of the profile of your portfolio, based on which you can decide to add or subtract projects in order to reach whatever balance your organization considers optimal (the optimum will vary from one company to the next based on maturity, line of business, culture and values, etc.)
3: Ensuring Strategy Alignment
Let’s circle back to the notion of value that we explored earlier. ROI, NPV and the likes will allow you to calculate the financial return of a project. This is an absolute definition of value — but value can also be relative. Projects and initiatives that are helping a business to deliver on its key strategic objectives are creating value even if they’re offering subpar ROI. In fact, organizations should ideally prioritize the projects that align best with their strategies.
To assess strategic fitness, you can examine and analyze each of the projects in your pipeline, trying to determine which of the high-level strategic priorities or goals they align with. The connections you’ve established between project and strategies can then be weighed and scored in order to build a consolidated strategy alignment matrix at the portfolio level.
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