Imagine you are the CIO of a financial-services company that is merging with a competitor. After some investigation, you uncover an inventory of thousands of homegrown applications. Now, you have many decisions to make: Which systems should be merged? Which systems should be eliminated? What approach should be taken?
Establishing a project management office (PMO) can help solve these issues and prioritize projects. Emerging from the challenge unscathed, however, will require the organization to take this strategy to the next level through project portfolio management (PPM). Whereas a PMO provides project oversight and visibility, PPM brings external strategic alignment, environment scanning and risk management to your project portfolio. Through a combination of four imperatives, portfolio management fundamentally improves the way IT organizations think about projects.
Imperative No. 1: Valuation
Valuation requires accurately measuring the value of project options and their alignment with business strategy. First, aggregate new project ideas and catalog existing projects.
Next, select the appropriate valuation model and discount rate according to the project's level of risk and the staff's level of experience. Generally, projects become more valuable when two conditions exist: Future payoffs are unpredictable (true in most technology environments), and projects can be staged in a series of go/no-go decisions.
Because each project depends on business activities such as process reengineering that affect the project's value, these side costs should be quantified when determining the project's value. Also, the portfolio committee must attempt a valuation of intangible benefits.
For each positively valued project, determine its strategic orientation. To do this, plot each along two dimensions - type of project and time to payoff:
Strategic projects deliver competitive advantage today. They have medium-risk, high-skill requirements and deliver on the existing business plan.
Utility projects deliver on currently promised service levels and support existing strategic projects. By nature, they are low-risk, low-ROI projects requiring moderate skills.
Venture projects are smaller, experimental projects that may deliver possible competitive advantage tomorrow. They are usually high-risk and often require resources that the organization does not yet possess.
Future utility projects are projects contingent upon venture projects.
Imperative No. 2: Optimization
Optimization involves prioritizing projects once they have been mapped on the strategic orientation framework as having value. Assess project dependencies, required competencies and risks by performing a systems scenario analysis (SSA). The SSA tests the assumptions made in the valuation process. Ask tough questions, such as, "If we accept this project (or continue to fund an existing one), what projects can we not do? What projects must be done first or in tandem? Which risk factors does the project expose us to? What does this project allow us to do in the future?"
Next, rank projects in terms of their alignment to business-specific objectives, such as a 5 percent increase in call-center productivity. Afterwards, use governance committees to prioritize, schedule and fund the selected projects, using one of four forms that comprise the program life cycle:
- Nurture The project receives more resources than average projects.
- Sustain The project is valuable but receives less funding. Enhancement requests often are accepted.
- Maintain The project receives little funding, as it is being phased out.
- Retire The project has reached the end of its life cycle and can be discontinued.
Finally, based on metrics from the PMO, the project prioritizations should be revisited to ensure that the business drivers behind a project's selection are valid and attainable; necessary resources are available; and the project is not negatively affecting other projects that depend on its outcome.
Imperative No. 3: Allocation
In allocation, resources should be balanced according to the demands of existing projects in the portfolio. Resources should be acquired according to the needs of upcoming projects in the portfolio. IT managers should perform an honest assessment of their departments' capabilities.
Effective skill management requires a centrally stored inventory of individual skill sets and project plans that accurately forecast the skills required for project success. To ensure people, individual goals and incentive systems are aligned, staff development must play an important part in portfolio management. Give people incentives to align their personal development goals with the needs of the project portfolio.
Imperative No. 4: Risk Selection
After projects are valued, selected, prioritized and resourced, the portfolio should be evaluated for risks and opportunities. Agile IT organizations have fundamentally different methods of managing three types of portfolio risk, including alignment, capability and dependency. Alignment risk is the probability that the expected delivery to business objectives will fall short. Capability risk measures the probability that the resources assigned to project delivery are insufficient. Finally, dependency risk is the probability that a previously unknown dependency could threaten the payoff value of the project.
Minimizing risks can be accomplished by using short "microventure" projects to test assumptions about payoffs and dependencies made in the valuation phase and capabilities determined in the allocation phase. Microventures begin with a measurable question, such as, "Can the larger project deliver a 5 percent productivity increase in the call center?"
Also, consider utilizing agile alternatives, serving as optional capacity additions to the portfolio, such as an outsourced call center.
Managers of the agile portfolio enjoy an enviable ability - making decisive, incremental changes to the portfolio, responsive to the shifting dynamics of the organization and its environment.
Jonathan Weitz is a supervising senior consultant with Grant Thornton's Business Advisory Services practice. He has led team engagements in areas such as IT transformation, process improvement, application development, outsourcing and PPM. He can be reached at [email protected].