There is a multitude of potential problems that await the company without proper project portfolio management processes in place. Initially lack of portfolio management manifests in terms of reluctance to kill weak project proposals, project being selected based on politics or emotions and lack of strategic criteria in the project selection.

What are the immediate results of such ad-hoc approach? There are at least two: too many projects are added to the pipeline and many – if not the majority – of these ventures are of low-value to the organization.

These two aspects also have several long-term effects. Because the company resources are too thinly spread across multiple initiatives, delivery times tend to increase and the final quality of the products tends to suffer, because the employees are scrambling between multiple ventures, missing deadlines and making mistakes that are harder and harder to fix as the projects progress from initiation to the close-out stages.

The project failure rates increase either because the initial ideas were of poor value or because – even if they were indeed good ideas – the project teams fail to deliver quality products. As a result, the proverbial “product winners” that every executive craves to see in his company offerings are very hard to come by.

If one can use the sniper analogy, instead of placing few well-aimed shots from a high-quality rifle, the company fires multiple blasts from the shotgun hoping that some of the pellets fired will hit the targets.

Another interesting phenomenon that I have observed at multiple organizations is the accumulation of the technical debt that eventually eclipses all of the high-value project work the company can deliver instead.

Let me demonstrate this by a real-life example (see Figure 1). I once worked at an IT department of a large financial institution. The executive management of the department had a very interesting approach to their strategic planning; at the beginning of every year they would examine the previous year’s performance statistics and discover that the information technology group has delivered, say, fifty projects. They would go the strategic planning meeting of the entire company and claim something to the effect of:

A question that I get asked fairly frequently during my consulting or training engagements sounds something like this:

We have heard about this "project portfolio management methodology" ... How valuable is it and how do we go about implementing it?

Considering the number of times I had to answer this inquiry in the last four or five years, I decided that it might be a good idea to sum up at least the high-level steps required to implement PPM at any given company. And here is what it looks like:

Step 1: Executive Commitment

There should be a serious commitment from the senior executives of the company to install a systematic, formal and rigorous portfolio management process. The senior management must believe that companies that use PPM outperformed those who don’t.  For more information about the value of project portfolio management, see my earlier article "What is the Value of Project Portfolio Management?"

Step 2: Mature Project Management In-place

Successful implementation of project portfolio management would be severely challenged for organizations lacking   the ability to scope, estimate and manage its projects. Therefore the introduction of project portfolio management should start with a company getting a good grasp on project scoping and estimating, followed by project monitoring and control.

Step 3: Establish Your Throughput Capacity

Once the scoping, estimation and other project management processes have been implemented, the efforts of the organization should focus on the determination of throughput capacity of the project pipeline.

One of the easiest ways to assess pipeline capacity is to measure it in dollars or some other currency. For example, the company executives may decide that the total budget allocated to projects in the next calendar year will be $100 million. The budget for each successful project is then estimated and, depending on the allocation method used the projects will be added to specific buckets until all of the buckets are full.

To develop or maintain a competitive advantage in the marketplace it is common practice to evaluate the actions of industry leaders if possible. Although we have discussed this thing called “project portfolio management” on this website numerous times, let us look at some historical data collected during two independent studies comparing the actions of industry leaders against the laggards*.

The first study that we will review attempted to answer the following question “Is there a systematic relationship between sound project portfolio management technique usage and the financial success of companies”.

The study included 205 businesses with an average of $6.4 billion in annual sales. The breakdown of the respondents by industry was:

• High technology – 17.6%
• Processed materials – 8.3%
• Industrial products – 8.3%
• Chemicals and advanced materials – 26.3%
• Healthcare products – 6.3%
• Others – 19.0%

 At the time of this study 37.9% of the leaders had an institutionalized approach for idea generation in their organizations compared only to 11.5% of the worst performers. Also, almost 65% of the best performers conducted technical assessments of their projects. Only 23% of the worst performers did that (see Figure 1).

Figure 1

By the same token market research preceding the project approval was undertaken by almost 38% of leading organizations. Merely 7.7% of the worst-performing companies assessed  market conditions before  project approval (see Figure 2).

Figure 2

Business cases required for the project proposals assessment and approval were built by 57% of the industry leading firms. Just 23% of the worst performers invested time and effort into proper project proposal analysis.

Almost 45% of the leaders investigated product performance after the completion of the project, whereas only 7.7% of the worst-performing organizations researched whether the products they created had indeed performed as well as the initial forecasts (see Figure 3).

Figure 3

Prologue

I remember an episode from my early career. I got hired as an independent consultant to run a project for a Canadian software company that was doing a project for a much larger US organization. Right at the very beginning of the project we did a high-level estimate with the help of our sales team and came up with a budget of $1.5 million. The customer rejected the number and claimed that they would be able to pay only $750,000. Our company's management agreed (don't ask me why) with the new "forecast", contracts were signed and the work commenced.

Several month later, once we had the detailed requirements document on our hands, we went through the estimation exercise again, this time the bottom-up version. The number we came up with? The same $1.5 million. We felt it would be the right thing to do to go back to the presidents of both organizations and let them know about the results of our findings ...

The reaction from the client's side has been very interesting to say the least. "We feel that Jamal is overly pessimistic in his approach, and we want him to be replaced with a more confident project manager!"

We Still Suck at Estimating

We all know about the famous examples of projects being grossly over budget and late. These include:

• The Denver airport baggage handling system that required an additional 50% of the original
  budget - nearly $200m.
• Eurotunnel - an actual cost of £10bn, over double its original estimate of £4.9bn to build
• Virtual Case File (FBI) – scrapped after $170 million while delivering only 10% of the promised scope

What are the explanations for such colossal failures? Currently there are at least three different schools of thought on this topic:

• The Standard Economic Theory
• The "Mass Delusion" Theory and
• The "Machiavelli Factor" Theory

The Standard Economic Theory Explanation

The classical economic theory states that our high failure rates on projects are very simple to explain. If companies take rational risks in order to earn abnormal incomes, these poor outcomes are inevitable. One of the key laws of the financial theory states that in a perfect market, the higher the expected return of an asset, the higher is the inherent risk associated with it.

The definition of portfolio’s strategic alignment is fairly simple and straightforward: all of your projects must in one form or another assist the implementation of your company’s strategy. A very simple statement that at times is very difficult to explain. In order to do that, let us examine several examples of the project alignment and non-alignment.

At one point of time the executives of Société Bic (commonly referred to just as Bic), a French disposable consumer products company known for their razors, lighters, ballpoint pens and magnets made a very interesting decision. The company decided to enter … the ladies underwear market by designing, producing and selling among other things ladies pantyhose. Needless to say the company failed miserably with this project since the consumers were unable to see any link between Bic’s other products and underwear, because, of course, there was no link at all.

Although, as the urban saying goes “hindsight is 20/20” let us nevertheless try to assess this initiative from the strategic alignment perspective. Here is a list of potential questions one could direct at the Bic executives who proposed to add this project to the company portfolio:

• We manufacture disposable products made from plastic. What the heck do we know about ladies underwear?
• All of our production facilities are built based on the injection-molded plastic technology? Where will we get the equipment to manufacture underwear?
• People, especially females, perceive us as producers of cheap disposable lighters and pen? Would they be interested in purchasing our lingerie products?
• What about the distribution channels? Retail outlets that trade disposable razors, pens and lighters usually do not sell underwear. Does this mean we will have to acquire a brand new group of retail channels?

It is obvious that none of the answers to the above questions were very encouraging had they been asked at the time of project initiation. Indeed, there was little or no alignment between the proposed endeavor and the overall company strategy.

An attendee of my Project Portfolio Management

workshop at a large German conglomerate

Sometimes there comes a proposal across the steering committee's table that scores very low across almost all of the scoring criteria and yet the key decision makers feel that this is a very important and valuable initiative that can become the next breakthrough project that would generate millions if not billions of dollars for their company.

Let me use a somewhat “fantasy” scenario to illustrate this concept. The work on the first iPhone started in Apple in 2004. I don’t know whether Apple used a portfolio scoring model to assess its project ideas.  If they had one, I wouldn’t know what variables exactly they use in it. So, let us make two not-too-far-fetched assumptions:

1. Apple does use a portfolio scoring model
2. Apple’s scoring algorithm is not too dissimilar with other hi-tech product companies

If we continue our logical line of thinking, then it is safe to expand the second point and assume that their imaginary scoring model included parameters like:

• Financial value,
• Competitive advantage,
• Technical risk,
• Commercialization risk,
• Technical feasibility and
• Time to market

Let us try to pretend that we are in the same room with Steve Jobs where he just proposed to embark on creating something called a “smart phone”. What would the assessment of this proposal look like in 2004?

THE ECONOMIST

JUL. 19, 2014

Plans were announced on July 5th to build the Mall of the World, a mixed-use complex incorporating the world's largest shopping mall, to be built in the heart of Dubai.

A number of other mega-projects have also been announced in recent months. Although these plans reflect strong economic momentum in the UAE, they are also a cause for concern, presenting the risk of a dangerous mix of fresh debt and overcapacity emerging in the medium term. Further policy measures are needed to address these concerns.

The Mall of the World, to be completed by Dubai Holding, follows a number of other mega-projects announced recently, notably Deira Islands (a 15.3-km waterfront cluster of hotels, residential areas, resorts and retail) and Mohammed bin Rashid City District One (a development of 1,500 villas), while leading developers Emaar Properties, Nakheel and Dubai Properties have all unveiled new phases of existing projects.

Back To The Peak

The development frenzy comes as developers look to ride a surging wave of optimism about the property market. House prices in some areas have already rebounded past the previous peak reached in 2008. But the extent of new projects is fuel ling worries about the danger of overcapacity and the emirate lurching back into a renewed boom and bust cycle.

That happened previously in the wake of the global financial crisis of 2008 when a credit freeze and a loss of investor confidence caused values to tumble by more than half from their peaks. The ensuing meltdown prompted developers including Emaar Properties, Dubai Properties, Nakheel and Dubai Holding to stall projects or abandon them altogether. The latter two were particularly hard hit and underwent painful debt restructuring from which they have emerged only relatively recently. Since then Dubai's economy has regained strength and the financial health of large corporates, including developers, has significantly improved.

Expo Effect

Whenever I either teach my “Project Portfolio Management Masterclass” or consult on project portfolio management initiatives I like to surprise the senior executives with a seemingly innocent question:

Oh, by the way, do you consider your internal company resources to be free?

After the angry noise in the audience finally subsides, one of the executives – usually in a voice full of emotion – replies to me:

Of course not! Our employees are the main and the most valued asset at this organization!

Knowing that the trap is set and the victims are completely unaware as to what really awaits them, I ask the next innocuous question:

So, in that case, do you include the cost of internal resources when assessing the feasibility of your projects?

As a rule, about 90% of the time my question is greeted by a complete silence. The executives exchange glances attempting to comprehend the meaning of my question and finally answer something to the effect of,

“Uhm, no, not really … They are considered to be a fixed rather than a variable cost”

In order to analyze this problem, let us consider two scenarios. In the first one we have to choose between projects A and B. For simplicity let us assume that the only factor of importance in this case is the return on investment (ROI), one of the most uncomplicated financial formulas.

Project A should generate revenue of $1,000,000. The external (direct) cost of this project is $500,000 (e.g. purchase of materials and equipment).  In addition the company should expect to “invest” about 200 man-months of their internal resources, but since we are not considering the internal employee costs, the overall impact of this factor on the total project budget is zero (see Figure 1).

Project B is also expected to generate $1,000,000 in revenues, but the external cost is expected to be $750,000. Also, the human investment is estimated to be 5 man-months. But again, since the “internal employee” costs are ignored, the overall impact of this factor is also zero.

Hi all,

Just wanted to let you know that I will be teaching my 2-day “Project and Portfolio Management Masterclass” in London, UK in partnership with Marcus Evans on 13-14-Nov of this year. Here is a high-level outline of the class:

• How to Deliver Exceptional Project Results
• The Art of Estimation
• Are we Supposed to Negotiate on Projects?
• How to Define Project Scope?
• Customer Walkthroughs, Technical Inspections and Peer Reviews
• Why Should You Manage Scope and Customer Expectations?
• How to Maximise a Portfolio Value?
• How to Balance Your Portfolio?
• How to Link Portfolio to Strategy
• How to Implement Project Portfolio Management?

The detailed course outline can be accessed here (note you will be taken to the Marcus Evans website). For a detailed course brochure and registration information click here.

Let me know if you have any questions @ jmoustafaev@gmail.com

Cheers,

Jamal

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Contact me if you have any questions regarding the article or our services at info@thinktankconsulting.ca

My sincerest thanks to all the people who organized and attended my “How to Deliver Exceptional Project Results” seminar organized by the American chamber of Commerce in Baku, Azerbaijan. Some photos from this event for your viewing pleasure :)