Improving the Prioritization Process
The weak link in the above description of the portfolio management office is the prioritization of projects. For most organizations, prioritization involves the forced-ranking of projects. Then, to select the project portfolio, considerations that apply at the portfolio level, such as project interdependencies, portfolio risk, and balance, should be used as final modifiers to the ranking. Needless to say, forced ranking as well as the final choice of which projects to conduct are difficult decisions, and politics often plays a major role. Although creating a portfolio management office and a project inventory helps, the key to reaping the true benefits of portfolio management is following through and evaluating alternative projects and project portfolios based on value and risk.
Many organizations use scoring models as aids to project prioritization. Middle scores are common for most projects, especially when numerous scoring criteria are used. High scores on some criteria cancel out low scores on others. Most scoring models aren't sufficiently precise to trust small differences in total scores. Furthermore, ranking projects by their project scores is generally incorrect anyway. Typical scoring systems ignore project cost and, therefore, fail to represent "bang for the buck." (Additional problems with scoring models are described in the next section.)
Prioritizing projects requires being able to estimate the costs, value, and risks of alternative project portfolios. But, both sides of the equation are difficult. Project costs include not just the funding request, but also any funding provided from other sources plus the opportunity costs of using equipment, personnel, raw material and any other "non-costed" resources that will be employed by the project. Also, all future costs necessary to obtain project benefits must be identified, estimated, and included in the calculation.
Some companies still do not track costs at the project level, relying instead on the general ledger system to impute approximate project costs. Tracking project costs is necessary to encourage accurate estimating and provide budget data needed to make, monitor, and update project decisions.
Estimating value is even more difficult than estimating costs. Systems must be in place to
help managers measure the benefits of projects as well as to determine the value of alternative
project portfolios. This leads to the hard part -- developing the metrics for measuring project
and portfolio value.
Part 3 of this paper will describe the third reason organizations
choose the wrong projects -- lack of the right metrics.