When Selecting Your Project Portfolio, Don't Pick Just Your Highest Value Projects

If you have a portfolio of projects and you don't have enough money or resources to do them all, how do you pick the right set?

One way picking projects is commonly done is to rank or prioritize the projects from high to low by return on investment (ROI), net present value (NPV), or other value metric, and then choose only the highest ranking projects by starting at the top and going down the list until the money or resources run out.

This is a very poor way of picking projects. Even doing this using an efficient frontier, such as selecting projects in the order of greatest financial return per unit of cost, is a poor way to pick your projects.

Why?

Let's look at an example. Suppose that near the top of your list is a big project that requires $12 million and 30 full-time employees (FTEs) to complete and has an ROI of $30 million. Now, also suppose that near the bottom of your list are three separate projects that each require $4 million and 6 FTEs and would deliver a combined ROI of $30 million. If you were to pick those three smaller projects at the bottom instead of the single $30 million project at the top then you would have the advantage of getting the same potential ROI for the same cost using fewer FTEs as well as potentially reducing your portfolio risk because now your project portfolio is more diversified.

You wouldn't find this value if you selected your projects by starting at the top of your prioritized list and stopping when you ran out of money and/or resources.

Therefore, project selection should be based on optimizing the portfolio to find the maximum value of the portfolio against multiple constraints, including financial, resource, time, dependency, and risk constraints. Project prioritization is mostly a separate exercise from project selection, although individual project values can change as projects are selected. Project prioritization should be based on the potential value that each individual project brings to the firm.

For portfolios of any significant size, the chances of finding an optimal portfolio successfully using spreadsheets alone are about the same as winning the lottery.

Consider that for a portfolio of 20 projects, there are over 1 million possible sub-sets of projects to choose from. For a portfolio of 40 projects, there are more than 1 trillion possible sub-sets of projects to choose from. So trying to choose the right set that will deliver the highest value manually using spreadsheets is virtually impossible. And it is made even more complex when you're trying to manage multiple resource type allocations across different projects. This is why using a project portfolio management tool designed for this kind of optimization is critical for maximizing the value and controlling the risk in your project portfolios. If you don't use a tool designed for portfolio optimization, then you're essentially playing the lottery with you portfolio selection process.

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