Overview of Portfolio Optimization

By Tim WashingtonSeptember 14th, 2011

PPM ExecutionAt the highest level, Project Portfolio Management has four basic components:

All the steps necessary to construct an optimal portfolio given current limitations and

constraints.

Higher portfolio maturity translates into a greater

realization of the benefits of project portfolio management.

Selected projects must align with the business strategy and meet other important criteria. The result: the

portfolio will contain a higher percentage of winning projects.

During the execution of an optimized portfolio, the aggregate project benefits (portfolio value) must be protected. This

occurs by monitoring projects, assessing portfolio health, and managing portfolio

risk.

The Goal: Maximize Value to the Organization

Select the Right Projects

Optimize thePortfolio

Mature thePortfolio Processes

Protect thePortfolio’s Value

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Optimize the Portfolio

Activities involved:

CAPACITY PLANNINGPRIORITIZATION

PORTFOLIO BALANCINGPROJECT SEQUENCING

All the steps necessary to construct an optimal portfolio given current

limitations and constraints.

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“PPM aligns what an organization wants to do with the resources—the money, hours, people, time, and equipment—required to get it done”

Resource Capacity Planning

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Resource capacity management helps answer three questions:

1) When do we have capacity to commit to additional work? (forward looking)—Portfolio Oriented

2) Do we have the necessary resources to complete our committed work? (present)—Project Oriented

3) Are we adequately using our resources? (present and backward looking)

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March April May

Wk 1 Wk 2 Wk 3 Wk 4 Wk 1 Wk 2 Wk 3 Wk 4 Wk 1 Wk 2 Wk 3 Wk 4

Resource Manager

“stabilization”

Bottom-Up (Detailed Resource

assignment)

Project Manager

“execution”

FTE

.25

.50

.75

1.0

“Peanut butter spread”

Top Down (Resource Allocation)

There is a slight disconnect between these two, but is “close

enough” and acceptable for portfolio capacity planning.

High level resource availability is sufficient for understanding when new projects can be brought into the portfolio

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Resource-Skill Code

IT Resource Capacity vs. Demand

0

2

4

6

8

10

12

Ava

ilab

le I

T F

TE

's

Supply

Demand

We Can Analyze Capacity By skill Set…

IT Resource Capacity

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We Can Analyze Capacity By individuals across time

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Aug Sept Oct Nov Dec Jan

Month

FT

E

Project D

Project B

Project C

Project A

Sustaining

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Without defining project priorities, there is no way to effectively distribute personnel to the highest valued projects.

Prioritization

“Things which matter most must never be at the mercy of things which matter least.”

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“The focus and discipline of prioritizing projects is essential to making the best use of the company’s resources….”

Prioritization—True North

Prioritization (cont.)

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True North

Priorities create a ‘true north’—a common understanding of what’s important.

Once you get prioritized, you get higher efficiency and execution success.

-Gaylord Wahl, Point B Consulting

Prioritization (cont.)

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Prioritization (cont.)

Without a clear and shared picture of what matters most, lower-value projects can move forward at the expense of high-value projects.

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The dictionary defines ‘balance’ as the “equal distribution of weight, amount”.

Balancing the portfolio means to distribute the projects with respect to categories, risk, duration, and schedules.

Balancing

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Portfolio Balancing Steps:

1) Categorize projects to balance the types of projectsbeing done.

2) Risk—balance low risk and high risk projects

3) Sequence projects according to project inter-dependencies, external dependencies and/or critical resources.

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Balancing (cont.)—Categorization

“The mission, vision, and strategy of a business is made operational through the decisions that the business makes on where to spend money.”

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•Categorizing projects provides management with a clearer view of how money is spent within the portfolio.

•Categorization can reveal gaps in portfolio strategy

•Categorization helps diversify project investments to create a balanced and value-optimizing portfolio.

Balancing (cont.)—Categorization

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Balancing (cont.)—Categorization Examples

If a key component of an organization’s strategy was to reduce the number of systems and applications being used, then the example below may reflect how a Portfolio Management Team would want their portfolio to be balanced.

However, after categorizing the portfolio, an entirely different picture is revealed…

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Balancing (cont.)—Categorization Examples

The Portfolio Management Team discovers that in actuality, their portfolio contains a very different mix of projects, many of which may have a low return on investment (ROI) and taking up resources.

Now the gap analysis begins…

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Balancing (cont.)—Risk

Like a financial portfolio, riskier strategic projects (investments) must be balanced with more conservative projects (investments).

PPM ExecutionBalancing (cont.)—Risk

Based on the project opportunity score and risk score, the data for each project can be plotted. The resulting chart allows management to see at a glance the overall value and riskiness of the portfolio.

D

Value (Opportunity Score)

Risk

F

C

B

Lower value Lower risk

Lower value Higher risk

Higher value Higher risk

Higher value Lower risk

X

G H

A

E

J

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Management must decide how much risk to accept within the portfolio and then balance the portfolio by:

• Removing projects.

• Putting projects on hold.

• Re-sequencing projects.

Balancing (cont.)—Risk

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Project Sequencing

• “Unlocks” additional value

• Releases projects according to resource availability.

• Manages risk across dependent projects

• Coordinate and manage organizational change.

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Based on the constraints identified above, we can select the right mix of projects and optimize the portfolio by applying the concept of an “efficient frontier”, the points at which for a given amount of investment there is an optimal portfolio that will provide maximum benefit.

Portfolio Optimization

The efficient frontier helps show which portfolios deliver the best bang for the buck under various cost thresholds.

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When to Optimize

All the steps of the optimization process should be reviewed whenever the following conditions occur:

A new project enters the portfolio

Customer needs change (more/less urgent)

Program emergencies impact project(s)

Project performance deteriorates

Resource availability changes

Strategic direction changes