This is the sixth and final part of my series explaining the reasons organizations tend to make poor project choices and what to do about it. Part 1 described the common errors and biases in human judgment that distort decision-making. Part 2 described the error of failing to see the forest for the trees and provided recommendations for establishing a project portfolio management function. Part 3 described the need for metrics for evaluating and selecting projects. Part 4 described the importance of properly accounting for risk, and Part 5 described the challenge of finding the efficient frontier.
This part provides a summary and describes the two pitfalls that must be overcome to successfully introduce effective portfolio management into the organization.
Project portfolio management is a way to organize and manage a multi-project environment. It is a dynamic process whereby projects and project proposals are regularly evaluated, prioritized, and selected based on the goal of obtaining the greatest possible value from the organization's limited resources. Selecting the right projects is the core of project portfolio management, but project selection includes deciding how to allocate and apply resources to projects, project timing, and when to accelerate, slow, or kill projects.
Almost any project selection process will separate "must-do" projects from clear "losers." How far organizations go beyond this depends on the effort they put into it. In order to get much beyond a "60% solution," however, organizations need to address the fundamental reasons that project selection decisions are prone to error.
Summary of what organizations need to do
Address the errors and biases that affect human judgment
- Increase awareness of prevalent errors and biases, including comfort zone, perception, and motivation biases, as well as errors in reasoning, and "group think." As Daniel Kahneman advises, use the knowledge to create "human error detectors" within your organization.
- Consider incentives and the effects of framing when evaluating your own and other people's judgments. Remember that an estimate from a disinterested but knowledgeable party may be more reliable than that of a better-informed but involved expert.
- Provide feedback to people on the accuracy of their forecasts. Require that forecasts of project performance be expressed in terms of observables that pass the clairvoyant test (See Part 3 Metrics as "observables" and the clairvoyant test.) Then, collect data from funded projects to help calibrate people and keep their estimates honest.
Get control of the project selection process
- See the forest as well as the trees. Collect projects and project proposals into a common database. Look for duplications and interdependencies. Establish common format and content requirements for project proposals.
- Move from project-by-project decision-making to decision-making aimed at producing optimal project portfolios. Create a project portfolio management office with responsibility for managing the organization's portfolio of projects.
- Understand the options that are created and destroyed by project choices. When choosing projects, consider project urgency as well as project value.
Develop an enterprise view of project value
- Create a value model for your business that documents best-organizational understanding about how projects create value.
- Use the value model to develop metrics and to estimate the impacts of doing projects.
- Engage senior executives in the process of establishing objectives, defining how value tradeoffs should be made, sharing ownership of project decisions, and co-developing project expectations.
Be proactive in addressing risk
- Establish processes for identifying internal and external project risks, communicating those risks, and implementing risk-mitigation action plans.
- Avoid the bias toward doing too many, mostly low-risk, low-return projects. Remember that risky projects often create learning and increased capability, values that aren't readily captured in financial metrics.
- For "big bet" investments, quantify risks and consider establishing an organizational risk tolerance to guide decision-making.
Get to the efficient frontier by institutionalizing decision making competencies
- Promote and attend training workshops on the logical principles of decision analysis, project prioritization, and capital budgeting.
- Learn the best techniques for articulating objectives, expressing value tradeoffs, assessing probabilities, and establishing risk tolerance.
- Recognize and reward people based on the quality of their decisions, not just based on the quality of their outcomes.
- Identify and utilize the best-available tools.