Saturday, May 16, 2020

The Difficult Act Of Balancing Your Project Portfolio

Opportunity cost should be one of the biggest factors in your project portfolio valuation
Balancing your project portfolio is like juggling one hundred balls... in a storm... on a boat. 

Project portfolio management is not necessarily complex. The goals are clear and simple. 

2) Seeking the right balance of projects 

Achieving these goals, on the other hand, is not such an easy task. 

Especially balancing your portfolio is more an art than a science. Key considerations for your portfolio should include managing risk. Risk should be balanced across the portfolio, and risk should be diversified so that all projects are exposed to different risks. 

Breadth of strategic objectives and benefit types is also important; if every project is a cost-cutting project, then that has an impact on business performance and revenue growth will be reduced. 

It is only by treating projects as a portfolio that these trade-offs can be managed effectively. This article shows you a number of dimensions and visualizations you should consider when balancing your portfolio.

Maximizing Value

Let's start with the first goal: maximizing the value of your portfolio. Assuming you have your list of projects for the portfolio sorted by their value, as well as guidance on your available funding, project selection based only on the first goal is easy. 

If the available funding will cover all of the proposed projects, you will be in the enviable position of moving forward without further portfolio adjustment. However, this is rarely the case. 

The cost vs. value chart as shown below helps in allocating the budget efficiently by ranking projects by their ROI, or return-to-cost ratio. In the example, the budget is sufficient to fund projects E, O, D and C, and no other combination would yield greater total value. 

The vertical lines indicate that management can choose to cut the budget to just fund those four projects without losing potential value, or choose to increase the budget to capture the value from funding Project G.

When you would not balance your portfolio your job would be done right now. But it is not.
Portfolio View - Cost vs Value

Risk to Realize Value

The risk vs. value portfolio bubble chart as shown below represents a portfolio view of all (or selection of) projects and puts projects into one of four quadrants based on value and risk; this is important for identifying projects that drive overall greater value to the organization compared to other projects as well as highlight projects that should likely be screened out.

There are four primary data elements needed to build the risk-value bubble chart: value scores for each project, risk scores for each project, categorical data, and the project cost or financial benefits of the project (commonly used for bubble size). 
risk-value portfolio bubble chart

Difficulty to Realize Value

Another view on your portfolio should be on the difficulty to realize value. Difficulty is as different as costs. It is an estimation based on scarcity of skills and knowhow. It ties directly into goal number 4: Doing the right number of projects.
Portfolio View - Difficulty to realize
Scarcity of technical resources, such as engineering and marketing hours, affects each project’s chances of technical success, its potential value, or both.

At the top of this view by difficulty are easy projects that require less effort: Bread and Butters offer small returns and Pearls offer large returns. At the bottom are difficult projects requiring a great deal of effort that may not pay off: White Elephants offer small returns for the extra risk and Oysters offer potentially high returns.

Pursuing White Elephant projects creates opportunity cost in the form of resources that could be used to drive growth through creating and cultivating Oysters. Examine each White Elephant project to determine if it can pivot to be a high-potential Oyster; if it can’t, cancel it and redirect those resources to other projects to increase the overall upside potential of the portfolio.

Time to Realize Value

The third view you should have on your portfolio is time to deliver vs. estimated value. Cash velocity — the rate at which cash invested in business operations generates revenues and billings that replenish that cash — is relevant for your project portfolio.
Portfolio View - Time vs Value
Some projects require a few months to turn R&D investment back into cash-generating products or services; others may take years. A small-return project that completes quickly frees up development resources for the next project: the quick turnaround boosts cumulative returns.

Conversely, a small-return project that ties up resources for years creates the opportunity cost of preventing you from conducting several small projects in the same span of time.

Slow projects are Snails (small returns) or Tortoises (large returns); fast projects are Rabbits (small returns) or Racehorses (large returns).

Resource Spread

Many organizations have realized that a good approach for research spread is aiming for a project portfolio of short and fat projects. Short and fat projects imply that the company runs a small number of short projects in parallel, armed with sufficient resources.

The alternative is running many long and thin projects concurrently, which means that the organization’s resources are spread insufficiently between many parallel projects that are having a hard time crossing the finishing line. Portfolios consisting of long and thin projects are what we find in most organizations.

The underlying concept is visualized in the diagram below. At a minimum you should make sure your portfolio does not look like at the left.
Why your projects should be short and fat (and how to get them that way)

Strategic Objectives

In a previous article I explained in detail how to make sure your individual projects are aligned with your strategy. But on a portfolio level you have to take a broader view. Since your strategy is highly likely consisting of multiple objectives you should make sure as much of as possible them are supported by your projects, else certain parts of your strategy will just not be realized.

A simple way to do so is the so called Strategic Bucket Model. It answers the questions: “If this is our strategy, then how should we be spending our funds?” It starts with the individual strategic goals and then moves to set aside funds or buckets of money destined for each of the strategic goals. The goal of the portfolio is to fill as many buckets as possible in order to create a strategically balanced portfolio.

Investment Types

You organization has to strike a balance between Run, Grow, and Transform the business. This RGB model developed in the early 2000s by Louis Boyle at Meta Group, and in increasing use by companies like Gartner and McKinsey, can help you with both seeing and showing what you value.

It offers a business-oriented way to categorize technology investments at a high level in three different "buckets". 
Run, Grow, & Transform Technology Investments
Run the business” investments are about enabling essential, non-differentiated services having the desired balance between cost and quality. Benefits are measured in reduced cost, price-to-performance ratios, and risk. 

"Grow the business" investments are about improvements in operations and performance related to the company’s existing markets and customer segments. 

"Transform the business" investments are about new markets, new products, new customers—in other words, new horizons for the company, and maybe for the entire industry.

In a nutshell: Balancing your project portfolio is difficult but essential for any success.
Posted on Saturday, May 16, 2020 by Henrico Dolfing