Jamal’s Musings – What is Portfolio Balance?

An interesting conversation clearly demonstrating the value of the portfolio balancing happened once when I was teaching my Project Portfolio Management Masterclass in the Gulf region. Among other attendees there were two high-ranking representatives of one of the largest construction companies: an owner (and a CEO) and his general manager. The following exchange took place between us:

CEO: This portfolio balancing theory is great but I can hardly imagine how it would apply to my business. We are basically very similar to a professional services company. People come to me and say, “Build me this!” What am I going to reply to them? “Sorry, your project does not fit into our portfolio balance model?”

Me: Well, let me finish the module on balancing the portfolios and we will have a chance to chat about this topic at the end.

CEO: (staring at Burj Khalifa visible through our conference room window) Wait a second! I think I get it! I am fairly old and close to retiring in a couple of years. Your presentation made me think; what kind of legacy am I going to pass on to my son, who will take over our business? Right now our entire portfolio consists of very low-risk, low reward projects. We basically build shoebox types of buildings with a very low margin of profit. I would like to have that (points to Burj Khalifa) on our company brochures!

GM: Forget about Burj Khalifa, we have conducted some calculations and if we get into HVAC business, our margins will go up from 5% to 25-30%. And if we somehow manage to get into the energy management business, we can raise our profit margins to 50-75%. Too bad we don’t have any internal expertise at our company.

CEO: Why don’t we hire several specialists in the HVAC and energy management and start a couple of projects from those domains next year? These projects will represent maybe 5% of our total portfolio, but this share will grow with time.

What happened in this conversation? The CEO of the construction company suddenly realized that almost 100% of his projects fell into the low-risk, low-reward category. Concerned with the sustainability of his business model and with the help of his general manager he decided to shift a small percentage of his projects into the high-risk, high-reward zone, hoping that with experience they would be able to turn them into the low-risk, high-reward ventures.

About the Author

Jamal Moustafaev, MBA, PMP – president and founder of Thinktank Consulting is an internationally acclaimed expert and speaker in the areas of project/portfolio management, scope definition, process improvement and corporate training. Jamal Moustafaev has done work for private-sector companies and government organizations in Canada, US, Asia, Europe and Middle East.  Read Jamal’s Blog @ www.thinktankconsulting.ca

Jamal is an author of two very popular books: Delivering Exceptional Project Results: A Practical Guide to Project Selection, Scoping, Estimation and Management and Project Scope Management: A Practical Guide to Requirements for Engineering, Product, Construction, IT and Enterprise Projects.