Project Portfolio Management

James Groh

Introduction

The Project Management Institute (PMI) defines a portfolio as, “a collection of projects orprograms and other work that are grouped together to facilitate effective management of thatwork to meet strategic business objectives (PMI, 2008_a).” A portfolio consists of both currentand future initiatives, and thus, is not a temporary endeavor like a project or program (PMI,2008_b). An organization can have either a single portfolio or multiple portfolios with eachrepresenting one of the organization’s divisions. A single portfolio is more complex, butelevates portfolio success criteria to reflect the needs of the entire organization (Rad et al., 2008).

Project portfolio management (PPM) is the way an organization influences the direction of itsportfolio to achieve specific outcomes. Using PPM in addition to project management (PM)adds a level of complexity to managing projects, but effective PPM provides “better competitivepositioning, an improvement in the effectiveness of the project teams, and a lower overall cost ofprojects (Rad et al., 2008).” Effective PPM aligns projects in the portfolio with the strategicbusiness goals of the organization.

PPM involves the dispersion of an organization’s annual budget to the portfolio. Funds can bedistributed evenly or to groups of projects, with funding constraints applied to each group.Grouping can be based on the features of the projects, including cost, schedule, and scope, or thegoals of the organization, whether they be financial, strategic, or divisional in nature (Rad et al.,2008) An organization uses the techniques described below to identify, select, prioritize, govern,monitor and report on its portfolio and how it relates to organizational objectives.

Practical Recommendations for Project Portfolio Management

1. Single Project Management

How can individual project managers contribute to PPM efficiency? Martinsuo and Lehtonenshowed that single-project management is associated with portfolio management efficiencydirectly in the form of information availability and project management efficiency, and indirectlyin the form of information availability, goal setting, and decision making. The occurrence ofinformation availability as both a direct and mediating variable implies that upper managementshould inform project managers of the impact individual projects make on the portfolio. Projectgoals should be expanded towards wider business goals and have broader success criteria thanthose in the ‘‘iron triangle’’ (Martinsuo and Lehtonen, 2006). Upper management should buildlinkages between single-project management capabilities and PPM efficiency and identifypractical single-project level factors that organizations can analyze and modify to coverportfolio-level interests (Martinsuo and Lehtonen, 2006).

2. Formalization

Both PM formalization and PPM formalization are directly connected to portfolio success.Simultaneous formalization of both results in an increase in portfolio success that is more thanadditive (Teller et al., 2012). Both types of formalization improve transparency throughincreased availability and comprehensiveness of information. Formalization also increases thespeed of resource allocation, the reliability of commitment, and the willingness of projectmanagers to help fellow project teams; it reduces conflicts in resource endowment.Formalization is especially important for success in complex portfolios, whether complexity ismeasured by portfolio size or project interdependency. Therefore, formalization is not an end initself but rather “must correspond to the specific requirements for the complexity of theindividual project portfolio to achieve an optimal level of success (Teller et al., 2012).”

3. Strategic Management Theories

The Resource-Based View (RBV), Dynamic Capabilities (DC), and Absorptive Capacity (AC)concepts provide solid theoretical foundations for PPM. RBV views PPM as a strategic-levelcapability as it allows an organization to respond and adapt to changing environmentalconditions by monitoring and altering the project portfolio (Killen et al., 2012). DC and ACalign with the learning and change observed in an organization’s environment and outlinemechanisms through which PPM can contribute to competitive advantage.

4. Project Portfolio Management Offices (PPMOs)

PPMOs are a subset of project management offices (PMOs) that handle portfolios. PPMOs canadopt three roles. The coordinating role allocates resources to projects in the portfolio; thecontrolling role maintains a sound information base, thus increasing project transparency; thesupporting role cultivates project management standards, facilitates single project management,improves knowledge transfer between projects, and stimulates communication (Unger, et al,2012). The coordinating and controlling roles have shown to impact PPM quality. Thecoordinating role positively influences both cooperation and resource allocation in PPM, whilethe controlling role only influences information quality. Understanding the roles a PPMO shouldtake to improve portfolio success clarifies its duties and prevents overlapping responsibilities Forexample, an organization with multiple portfolios may have multiple PPMO’s, with one PPMOperforming the coordinating role and another PPMO performing the controlling role. AllPPMOs need to be aware of their foci to avoid conflicts of competence.

5. Risk Management

Portfolio risks are known unknowns. They are events or conditions that if they occur have eitherpositive or negative effects on at least one strategic business objective of the portfolio (PMI,2008_b). In PPM, risk management processes focus on analyzing the probability of the successor failure of projects and on analyzing risks generated by the selection of a collection of projectsduring the balancing of a portfolio (Sanchez et al., 2009). The project portfolio manager mustpay special attention to risks that come directly from portfolio processes such as projectselection, project alignment or project prioritization.

6. Uncertainty Management

Portfolio uncertainties are unknown unknowns. It is important to address uncertainty inindividual projects, but even more so in the project portfolio due to the regular adjustments to theportfolio that can occur because of changes in the environment. The organization’s businessstrategy might remain the same but its translation into the project portfolio must be modified inresponse to new external conditions (Petit, 2011). A portfolio level change control board andchange control process should be utilized when making alterations to the portfolio. When newproject requests are submitted in the organization, the portfolio manager should create andanalyze the scenario for consequences on other projects, access to resources, and uncertainties;project managers of the current projects should conduct an impact analysis for their projects.

7. Negotiation and Bargaining and Structural Reconfiguration

Most PPM models portray project selection as a rational decision making process. Because theassumptions underlying these models are poorly satisfied, Martinsuo proposes two alternativeperspectives to complement the rational decision making process: PPM as negotiation andbargaining, and PPM as structural reconfiguration. Studies of PPM in practice have shown thatmanagerial decision making involves intuition, negotiation and even bargaining not accountedfor in rational decision making models. Negotiation and bargaining implies influence betweenpeople and the organization, which is little discussed in rational decision making models. “If alot of portfolio managers’ attention goes to prioritizing between different projects, surprisinglylittle is known about how managers influence each other and bargain with resources and timingto compromise some priorities (Martinsuo, 2012).” The environment in which a portfolio isbeing managed is not stable but uncertain and evolving and influences the possibilities forproject success with certain practices. This contextually is not well accounted for in rationaldecision making models. Structural reconfiguration implies increased attention to various inter-project issues, interplay between the projects and the parent organization, and changes that drivereconfiguration (Martinsuo, 2012).

8. Project Portfolio Managers

How does the interplay between portfolio, line, and senior managers impact the project success?It is necessary to balance a portfolio manager’s empowerment with necessary interventions bysenior and line managers (Jonas, 2010). Senior managers should commit themselves toreasonable and transparent rules for intervention. Portfolio managers should relate decisions tocorporate strategy and make their decisions credible and comprehensible to the line managers.

9. Project Portfolio Control

An organization exerts control over its project portfolio through portfolio selection, portfolioreporting, portfolio decision making, and its organizational governance style. Successfulorganizations have an organizational-level practice of selecting and prioritizing projects in linewith strategy, a shared reporting approach to channel information flows from projects to theportfolio level, and shared responsibilities for decisions at the portfolio level (Muller et al.,

2008). Firms in portfolio management-driven governance structures are more advanced indecision-making practices than less mature multi-project organizations (Muller et al., 2008).

10. PPM Methods: Portfolio Maps and Strategic Methods

Portfolio maps, such as bubble charts and portfolio grids or matrices, have a strong positiveinfluence on portfolio performance. Portfolio maps aid group decision-making by providing adisplay of the projects in relationship to factors that need to be balanced. Research has shown apositive correlation between the use of portfolio maps and developing existing technologies andtechnological competencies, alignment with strategic objectives, and the portfolio containinghigh value projects (Killen et al., 2008). Business strategy methods, such as using strategy todrive top-down allocation of resource bundles, also have a strong positive influence on portfolioperformance. “A portfolio manager must understand the organization’s strategic goals andpriorities, and how the portfolio supports them (PMI, 2008_b).” The use of business strategy forresource allocation correlates positively with performance measures relating to alignment withstrategic objectives, enabling the business to enter new markets, bringing new technologies intothe business, balancing the portfolio, the portfolio containing high value projects, and spendingreflecting business strategy (Killen et al., 2008).

Conclusion

Effective PPM requires commitment from project, portfolio, line, and senior managers. Allstakeholders in the portfolio must ensure projects are properly selected and prioritized and thatthe overall portfolio is balanced. Once formed a portfolio must be methodically managed,adding and terminating projects when necessary. Only through effective PPM can theorganization’s portfolio be aligned with its strategy and add value to the organization.

References

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