Selecting Project Portfolio Management Tools For Maximizing Bottom-Line Value

Let's start out with the purpose of Project Portfolio Management (PPM):

It is about maximizing value of business investments based on a company's strategic goals and tolerance for risk. That's it.

It is NOT about creating "balance" as some like to promote. Terms like "balanced portfolio" or "scorecard" or "strategic alignment" are popularly used descriptors that mostly have no real relationship to rigorous and defensible project portfolio value maximization in practice.

One of our clients spent two months "balancing" a portfolio of several hundred products and packaging configurations for marketing in over 90 countries.

Then they asked us to analyze it.

What we found was that they were getting 92% of their value from just 52% of their "balanced" portfolio.

They were going to do twice the work for only an 8% increase in value. That was an eye-opener for them.

So when you hear somebody talk about creating "balanced" or "strategic" portfolios, find out exactly how that relates to value maximization.

Usually, it doesn't.

Value maximization isn't just about financial metrics, although they are usually the most important ones. Value is also determined by strategy and risk tolerance. Given an identical set of projects and metrics to choose from, a company that is trying to maximize short-term revenue would choose different projects than an R&D-driven company that is aiming for steady long-term growth.

Why?

Factors like different risk profiles, different time horizons, and different capitalization models can all influence how a project is valued. Projects with very similar financial metrics such as expected net present value (eNPV) often have significant differences in their value from one company to another.

Consider two projects that would require identical investments and have identical time horizons:

  • Project A has a potential reward of $100 million and a 10% probability of success.
  • Project B has a potential reward of $1 billion and a 1% probability of success.

Which one would you choose?

Since they both have identical expected values of $10 million (reward x probability of success), you're going to need more information to decide which is a better fit in your company's overall strategy. For example, would one provide some synergy that would increase the value of other projects more than the other? Would one open-up or enhance existing markets for you?

Avoid Project Portfolio Management applications that rank projects solely on financial metrics such as NPV or ROI. Other metrics can add significant strategic bottom-line value to portfolios. Valuing solely by financial metrics will miss this value. Find out if the application can measure project value based on the quantifiable value-adding parameters that are important to you.

Be sure the Project Portfolio Management applications that you're considering have a direct link to the bottom-line of your company and can capture and maximize all the value in your portfolio.

Next: Project Ranking and Prioritization - The Heart of Project Portfolio Management

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