Project Portfolio Optimisation vs Project Portfolio Management – What’s the difference?

Project Portfolio Optimisation vs Project Portfolio Management – What’s the difference?

The focus of this article is to identify the differences between Portfolio Optimisation, Portfolio Management, Portfolio Prioritisation, and Portfolio Scheduling. It then presents a pragmatic process through which a portfolio manager can perform those activities.

Ken Garrard, Founder, Kepa Software

If you search the web you will find, amongst the marketing hyperbole, definitions that rightly indicate that Portfolio Optimisation is the part of the Portfolio Management process, which prioritises and balances a portfolio of investments. To understand Portfolio Optimisation and how it relates you therefore need to understand Portfolio Management.

What is a Project Portfolio?

A portfolio is a collection of things such as drawings or paintings that an artist might have but in business it tends to relate to a collection of investments. The portfolio could be homogenous (all of the same sort of thing, such as securities) or non-homogenous (a mix of different things, such as investments).

Investment portfolios are commonly viewed in terms of the type of assets that form the portfolio. That type is known as the asset class. Asset classes are usually viewed as things like equities (stocks), fixed income (bonds), cash and cash equivalents, commodities, real estate, infrastructure, private equity, and hedge funds etc.

We maintain that an organisation should consider itself in the “Our business” asset class and view transformation initiatives within the organisation as investments in that asset class. Doing so enables much of the knowledge related to managing portfolios of investments to be applied to business transformation. It also allows valid comparison with investments in the traditional asset classes such as equities. In any case, each asset class has different regulatory environments and performance characteristics that drive specialisation of the portfolio and its management.

This article focuses on the management of portfolios of investments in “Our business” assets but can be applied to both homogenous and non-homogenous portfolios.

Individual investments in “Our business” are commonly known as projects. If groups of projects, managed as a group rather than individual projects because that is how the planned benefits can be gained, are commonly known and programs. Collections of programs and projects are known as “Project Portfolios” and usually include all the change initiatives affecting a particular business, or perhaps an individual business unit, which could be thought of as a sub-portfolio.

Like all other asset classes, investments in “Our business” have a lifecycle that starts from an idea that if we invest resources in changing our business in some way we might reap rewards and ends when the rewards are gained or not. This means that there is always the risk that the planned rewards will not be gained.

The Project Lifecycle Governance Process

Money and other resources are progressively committed to initiatives as they progress though the project life-cycle, from the initial idea through discovery (designing and planning) and on to development and implementation. So, the cumulative amount spent on any project increases throughout the lifecycle, meaning that more resources are lost the later in the lifecycle if the project needs to be stopped for whatever reason. So the risk of a greater loss increases as the initiative progresses.

Most organisations choose to manage the risk by applying business rules and processes that effectively provide a filtering mechanism to “weed out” those that don’t meet the required criteria for investment as early as possible. As the investments progress through the lifecycle the business rules are applied at various inspection points, commonly known as “Gates”, which determine if the investment continues to progress and in what form or if the investment is terminated. This process is called “Lifecycle Governance”. A “Gate” is usually a meeting, virtual or otherwise, of people who have been given authority and responsibility for making “Go/No Go” decisions on the projects and is usually chaired by the CFO or a representative of the CFO.

It is very common that the Lifecycle Governance process is structured into a series of phases (or stages) and gates that collectively govern transformation investments from concept to some form of fruition. Those investments being controlled by the governance process can be considered a pipeline.

The notion of a pipeline confirms that a portfolio of investments will likely include investments at all stages of that lifecycle, some just starting as ideas, some being planned, some involved in executing the approved plan and others harvesting the benefits and wrapping up. In the case of transformation these are commonly known as the Initiate (Ideation, proposal, and feasibility), Plan, Execute (Build, test, and implement) and Close (Wrap Up) phases of the pipeline. It is quite usual that each different asset class will be governed under a different governance process, due to the differing activities or stages, thus, in construction, they are usually known as concept, definition, design and development, construction or manufacturing, operations, and termination. 

Between stages/phases are the “Stage/Phase Gates”, which are decision points, and often implemented in two steps that may be executed by two separate groups of stakeholders. 

The ultimate Decision Authority is usually the CFO, but regardless, the Decision Authority receives recommendations from the first of the groups, the Recommending Committee, which is usually composed of people less senior than the second group. It is quite usual that the Portfolio Manager manages the process or chairs the meeting for the first step in the gate and represents the recommending committee at the second step in the gate. The two steps of the governance gates will be similar to:

1. The inspection of the initiative to determine if it has met all the business requirements established for the specific gate resulting in a recommendation to allow the initiative to progress to the next lifecycle stage or not, the outcome of which may be:
   1. The circumstances surrounding the initiative have changed such as the objectives can no longer be met or the business value available no longer meets the organisation’s investment criteria and a recommendation is made to terminate the initiative.
   2. The initiative is considered not to have sufficiently met the business requirements established for that specific gate but is recommended that resource be approved to allow the initiative to be adjusted prior to again being presented at that same gate.
   3. The initiative is considered not to have sufficiently met the business requirements established for that specific gate but is recommended that the initiative be allowed to proceed to the next stage with specific adjustments.
   4. The initiative is considered to have sufficiently met the business requirements established for that specific gate and it is recommended that the initiative is allowed to proceed to the next lifecycle stage, also possibly with specific adjustments.
2. The recommendation delivered from the first stage of the Gate is considered along with Portfolio Management’s recommendation with regard to how to progress the particular initiative, which results in decisions to:
   1. Seek clarification of the recommendations.
   2. Endorse any requested termination of the initiative by authorising the allocation of limited resource to plan and execute the termination within a set timeframe OR requiring the termination of the initiative to be re-considered by applying specific guidelines or requirements. If the termination recommendation is endorsed the initiative is terminated, lessons learned are produced and records of the initiative (including all original material presented at all governance gates and reasons for termination) are filed for future reference.
   3. Endorse progress as per the Portfolio Management recommendation OR require Portfolio Management to adjust the manner in which the initiative will be allowed to progress. It should be noted that Portfolio Management’s recommendation may be to move the initiative backwards through the pipeline effectively requesting that one or more lifecycle phases be re-executed either in entirety or in part. For example, re-executing stages or phases could be instigated if it is discovered that an options analysis or feasibility study needs more work or a different focus.
   4. Approve the allocation of sufficient resource to enable progress to the next gate. If insufficient resource is available to allow progress the initiative is placed on hold pending resource availability and continued recommendation to proceed by Portfolio Management. The initiative does not generally require further contribution from the recommending committee to progress to the next gate, however, portfolio management is required to monitor circumstances surrounding the initiative to ensure the planned business benefits remain available.

It is quite usual that some form of prioritisation of the portfolio is available to both steps of the stage gate, however, it is generally rudimentary because prioritisation tools with sophisticated value models, such as APO, are not available. It is very unusual for an organisation to be able to prioritise initiatives at each gate, thus reserving the resources available at the gate for the most important.

What is Project Portfolio Management?

The activities focused on optimisation of the business value derived from the application of resources that are being consumed, or are proposed to be consumed in progressing investments through all phases of the pipeline is portfolio management. If the pipeline relates to transformation investments, or perhaps asset maintenance etc. then it is known as “Project Portfolio Management”.

Process	Focus	Who	Activities
Portfolio Management	Alignment with business objectives (Business value)	Executives and Portfolio Managers	Demand managementPortfolio selectionPortfolio prioritizationCapacity planningPortfolio reporting
Program Management	Delivery of Program Benefits (Stakeholder value)	Program Managers	BudgetingResource planning and managementProject interdependenciesBenefits managementOrganisational change
Project Management	Creating deliverables	Project Managers	Cost, schedule, scope, resource, budget, risk, communication, quality, contract, document management

Note that the focus of Portfolio Management is alignment with business objectives, which are usually defined in the strategy development process.

What is Project Portfolio Optimisation?

A project portfolio should maximise the business value that can be achieved from available resources while managing any negative impacts related to the business environment and the inter-relatedness of initiatives within the potential portfolio. Project Portfolio Management reiteratively asks and then answers two questions:

1.  “In a perfect world, in what sequence should we execute the investments in our portfolio to achieve maximal business value?” In other words, “What is the most valuable investment in relation to our business objectives we could make right now, second most valuable, third most valuable, fourth etc.?” – This activity is part of Portfolio Optimisation and includes processes of portfolio prioritisation and can also include portfolio budgeting.  During this activity it is incumbent on portfolio management to continually analyse the available business value from each initiative and make recommendations when significant additional value could be gained from relatively minor adjustments to resource allocations.
2. “What changes to our “perfect world” portfolio execution sequence are necessary to manage resource availability and possible negative impacts derived from the business environment or inter-relatedness of the proposed portfolio initiatives?” – This activity is Portfolio Scheduling and includes processes of resource management, risk management, and portfolio scheduling.

Available, Recommended, and Executing Portfolios

Please consider that collectively all the proposed investments are the Available Portfolio or Requested Portfolio. 

It is very rare that all the proposed investments are concurrently executing. Instead, there will be a sub-set that is currently executing and this could be viewed as the Executing Portfolio. 

As a portfolio manager your role is to ensure that the executing portfolio delivers maximal business value and to do that you make recommendations to the Executive about value available by proposing the Recommended Portfolio and demonstrating the rationale behind that recommendation. 

There will always be transition activity from each Portfolio, Requested to/from Recommended to/from Executing by the nature of the ebb and flow of available business value.

You should note that a process that executes those with investment alternatives with the highest business value in a resource-limited environment will guarantee that some initiatives are never executed because there is always higher value investments entering the pipeline and consuming whatever available resources there are.

Portfolio Selection

We are not adherents to a “Portfolio Selection” activity other than applying the business rules at each governance gate because those initiatives that pass the business rules by definition meet the organisations investment requirements and, depending on priority, should be available for execution. Instead, given that business conditions are always in a constant state of change we hold that if portfolio prioritisation is able to appropriately measure the business value of each initiative at any point in time against a complex set of strategic criteria (tangible, intangible or a mix) the Portfolio Optimisation and Portfolio Scheduling processes will automatically act as a filter to “hold back” those that are not of greatest current value and/or those that present an unacceptable negative impact profile. Also, together, these two processes will ensure that the executing portfolio best supports the organisation’s strategic plan.

Where do the projects in a Project Portfolio come from?

There are a number of possible sources of investments in the “Our business” asset class but the predominant source is the Strategy Development Process. Since the phases of the transformation pipeline can be considered as the Strategy Delivery Process, Project Portfolio Management can be considered to link and align Strategy Development with Strategy Delivery. 

Other sources of transformation initiatives are:

1. Initiatives designed to correct minor process deficiencies or to create efficiencies usually within a single business unit
2. Initiatives designed to react to urgency such as rapidly changed market conditions, compliance requirements, significant business issues, and stakeholder demands.
3. Rarely, there may also be a “Bright idea” or some discovery that leads to forming an initiative that must then be included in the pipeline

The first two of these types of initiatives are commonly referred to as originating from Business As Usual (BAU).

How does Project Portfolio Management Differ from Project Management?

The characteristics of Project Management and Project Portfolio Management are compared in the following table:

Project Management	Project Portfolio Management
Tactical	Strategic
Defined project objectives	Aligned to organisational goals
Manage project changes	Monitor business environment changes
Detailed planning	High-level strategic planning support
Manager manages project team	Manager manages project management staff
Success defined by budget and schedule outcomes	Success defined in business value outcomes
Progress measured against project objectives	Progress monitored against business KPI’s

It should be noted that if sophisticated portfolio prioritisation tools, like APO, are available success of project management can be aligned to business value outcomes as well as budget and schedule outcomes.

Portfolio Optimisation

Especially in large organisations there is almost always more transformation work to achieve than there is budget and resources to achieve it. Thus, the work needs to be prioritised.

Since prioritisation should focus on delivery of business objectives, which are defined in the organisation’s vision, mission, and strategy statements and are then extrapolated to strategic goals. The Strategy Development process develops a series of activities or initiatives that are planned to deliver the strategic goals. Those initiatives are usually the majority of projects in a project portfolio and each should explicitly be designed to address or contribute to achieving one or more strategic goals. Documents used in the governance process at each gate should include very explicit statements and valuations of how much of each strategic goal will be delivered by each specific initiative. 

Strategic goals are almost never solely defined in terms that can be measured in money gained or expended, tangible measures. It is common that intangible measures such as ecological and societal impacts are also included.  

That means that prioritisation involves considering a complex mix of tangible and intangible outcomes, which can either rely on human experience with the high risk of flawed decisions or can be developed using a process called Multi-criteria Decision Analysis (MCDA). This article STRONGLY recommends the application of MCDA in portfolio prioritisation.

The University of NSW in 2017 researched over 100 MCDA methods for prioritising a Project Portfolio and found only two where the outcomes were recommended:

• Analytic Hierarchy Process (AHP), Saaty 1978, 1980
• Data Envelopment Analysis (DEA), Charnes et al. (1978)

Of these it was found that the workload involved in implementation of DEA to be significantly larger and produced similar outcomes. Thus, this article STRONGLY recommends the utilisation of AHP as the prioritisation process.

Once the prioritised portfolio is known the list of portfolio initiatives will then be “trimmed” to suit the available budget allocation. On very rare occasions the budget allocation is sufficient to execute all of the proposed initiatives and the organisation can progress to portfolio scheduling without further adjustment. If the allocation is insufficient to execute all initiatives then the recommended portfolio that is passed to portfolio scheduling is all the projects in priority order than can be executed within the available budget allocation.

Some organisations seek to balance the portfolio by instituting “Balance points” that define budgetary amounts or percentages that are to be allocated to initiatives impacting each business unit, function etc. If portfolio Prioritisation is able to appropriately measure the business value of each initiative against a complex set of strategic criteria (tangible, intangible or a mix) then to allocate amounts or percentages in this way will reduce the opportunity to capture maximal business value, which we STRONGLY counsel you against.

Portfolio Scheduling

There will almost always be circumstances that will influence the order in which initiatives should be executed and consume resources, which can include such as:

• Lack of availability of specific skills or resources to execute part or all of an initiative
• Urgency to begin or accelerate execution to meet such as compliance imperatives. In this case the Portfolio Manager must be aware of the “Critical Path” of the particular project or program.
• Inter-initiative dependencies that require tasks within initiatives and perhaps whole initiatives be moved forward or backward in time to maximise or even deliver planned business outcomes. In this case the Portfolio Manager must be aware of the “Critical Path” of the entire portfolio.
• Too much change being imposed concurrently on a business unit or stakeholder group. 
• Product and asset lifecycles, or market conditions that enforce early acquisition or development of replacements.
• Etc.

See our recommended sequence of application of each of the scheduling constructs later in this article.

Each time a scheduling construct impacts the inclusion of an initiative in the recommended portfolio the prioritised initiative list should be inspected to determine if other initiatives can now be included within the portfolio budgetary allocation. 

Following the development of a recommended portfolio it is submitted to the organisation’s executive for approval and, once approved, any changes in the approved portfolio are communicated to the appropriate stakeholders.

The approved portfolio is also submitted to both steps of each governance gate as guidance in developing recommendations to progress specific initiatives, or not. 

How to Optimise Your Portfolio if you have APO

If you’ve come this far you probably know that if you work for a very large organisation your transformation portfolio can be valued in the $ Billions. Our experience in Australia is that any organisation of 10,000 employees and more will have a transformation budget larger than $50 million per annum. Similarly in large asset management organisations the budget for asset maintenance can also be in the $ Billions with the average 10,000 person organisation controlling a budget of $100 million or more. 

The way in which an organisations intends to grow or mature (transform) is usually encapsulated in its strategic goals and asset maintenance will be aligned to a set of strategic drivers encapsulated in an asset management strategy as part of the asset management plan. Thus it is usual that what we are attempting to achieve in an optimal project portfolio is strategic alignment.

Strategy managers and transformation portfolio managers are tasked with delivery of the business strategy in an optimal manner, and should therefore focus on ensuring that transformation expenditures are as efficient as possible, limiting waste and producing the greatest outcomes possible. It is exactly the same for asset managers.

Recommending a portfolio to an executive group and therefore the priority or sequence of execution of the initiatives or opportunities within the portfolio requires significant analysis of proposed investments, usually at the cost of a great deal of effort, to deliver the executive evidential and information requirement. This document describes a pragmatic approach to ensuring that the recommended portfolio is as near to strategically optimal as possible.

Your executive group will be driven by the board’s fiduciary duty to maximise shareholder value thus they will be vitally interested in increasing the value of the organisation maximally so your two great challenges in recommending a portfolio are:

• To meet the requirements of your executive you will need to answer QUESTION 1 “Which is the investment opportunity (or group of opportunities) that we have available to us that will deliver the greatest business value right now, today, which offers the next greatest value, and the next after that, and so on?”, which we believe is the fundamental definition of the requirements of portfolio prioritisation based on business value (or strategic alignment, if you like); and. 
• Substantiating to the executive what the impacts are of available resourcing, finance, compliance requirements, etc. that force us to change the order of investment away from the prioritised list and why, which is fundamental to our definition of the requirements of portfolio scheduling.

Thus, portfolio prioritisation and scheduling should be treated as two distinct processes even though their execution can be reiterative.

The Concept of Relative Business Value

To understand APO analysis and how it can determine if one alternative is of higher value than another you need to understand the concept of Relative Business Value.

Business decisions are about choosing the most beneficial solution but should always have rational alternatives (Plans b,c,d, etc.).

To gauge the potential performance or suitability of any investment option (option, project, program, portfolio) APO analysis produces a number, usually between minus 5000.0000 and plus 5000.0000, that represents the relative value of the option to the business when measured against a hierarchy of value measures and calculated from an opinion of importance and an opinion of likely outcome of investment. This number is called the Relative Business Value or RBV. RBV is statistically defensable meaning that when two RBV values are compared the larger is the “most valuable” relative to value measures and opinions.

The reason why the number could be negative is that APO is designed to accommodate value measures that have negative impacts and value measures that have positive impacts. For instance, risk would usually be considered to be a negative impact but revenue would usually be considered a positive impact. A positive RBV is a benefit, a negative RBV is a dis-benefit. So, if the outcomes of the negative impacts exceed the outcomes of the positive impacts the resulting RBV will be negative and we STRONGLY recommend against investing in any initiative with a negative Total Relative Business Value because it would take value away from the organisation.

Using APO, but possible not other prioritisations tools, it does not matter what hierarchy of value measures is used to determine Relative Business Value, the relativity of the number will hold so that options considered using differing value measure hierarchies, as would occur when considering investments in differing markets or countries, can be compared – The higher the number, the greater potential contribution to value generation for the business.

The processes of collecting the opinions of importance and suitability and the calculation of RBV is supported by the works of Thomas Saaty (Analytic Hierarchy Process, 1978,1980) and Louis Thurstone (Pairwise Comparison, 1927) and has been tested globally for over forty years.

One of the issues currently facing company boards relates to sustainability e.g. How can we prove to our staff and ratings organisations that our reporting on sustainability is transparent? If you use APO your analysis including value measures, your opinions of importance and your opinions of likely outcomes of each alterative will be visible to your staff and you could consider disclosing them to other stakeholders in some form as public relations.

Simply by using APO your processes for making decisions will also be transparent, thus proving the transparency and substantiality of your measures, opinions, processes and decision outcomes.

Provided that a reasonable level of care is taken in analysing the portfolio for bias (intended or unintended), the value measures are reasonable, and the processes and people used to develop the opinions of value and suitability are reasonable, decisions made using APO can be considered to “Pass the pub test” or be supportable in the court of public opinion. In other words, decisions taken using a reasonable level of care will be entirely defensible during audit activities and in freedom of information requests in government agencies.

But What Does RBV Measure?

The simple answer is that what RBV measures depends on what you want it to measure. Please look at the following table for a few examples:

But why just look at strategic value when there may be additional insights by using multi-variate value models, each structured differently for different purposes? With portfolio optimisation tools, like APO, you could, for example, structure a value model strategically, another geographically, and yet another on business outcomes for budgeting purposes and analyse the same portfolio using all three.

Portfolio Prioritisation

Task – Produce a prioritised list of all the initiatives in the portfolio by assessing all with regard to prioritisation constructs and applying agreed weightings.

In answering QUESTION 1 (“In a perfect world, in what sequence should we execute the investments in our portfolio to achieve maximal business value?”), i.e. prioritising our portfolio, we need to apply the process of rational decision making, which is embedded into APO and has seven steps:

In step 1 we define what the decision environment is – To answer QUESTION 1 we need to know many things like who will make or approve the decision?, in what timeframe will we make the decision?, who will contribute advice and who will recommend the decision?, in what form do we require the output from the decision making process? Etc?”. The outputs of this step could optionally be documented in, and managed by an APO “Program” but it is not mandatory to establish a Program to prioritise the portfolio.

In step 2 we identify the things we will use as value measures, which will help us determine the strength of our decision. In other words we will again answer a question, in this case the question is “What are all of the things we consider to be of value that we hope to gain or not gain from making this decision? Is it financial outcomes? Is it reputational benefit, customer outcomes, community outcomes, ecological outcomes, safety, lack of risk, flexibility or simplicity of business model, people outcomes, compliance outcomes, meeting commitments we have previously made to others, ethical investment, fraud protection, etc? Is there something else that we value?

It is common that some of the value measures we have suggested above will not be sufficiently detailed for a true understanding of value. For example, if we consider financial outcomes we might measure those via a Cost Benefit Analysis (CBA), including a series of indicators such as Net Present Value, Internal rate of return, benefit to cost ratio, return per dollar of capital investment etc. Customer outcomes might include things like time to serve and customer satisfaction score etc. We are sure you can think of many ways in which your organisation measures performance (or value) and indicators that it uses to make management decisions to adjust performance.

Many people call these value measures the criteria for the decision. We could also call them prioritisation constructs. They are implemented in APO as “Value Models” and “Value Measures”. It should be noted that all investments will not contribute to all value measures, some value measures may only be contributed to by a single initiative, others will be contributed to by many initiatives.

Please note that prioritisation constructs are not, and should never be applied in any particular order, they are used instead in a matrix of relative value.

Also, you should NEVER use the available budget as a prioritisation construct because it has nothing to do with generating business value in other than tangible terms and is purely a measure of how much we have available to pay for a list of prioritised activities.

Now, who defines what our measures of value will be? In a corporate situation it is likely to be the board and the executive, in governments it is likely to be the government of the day. There are clearly other views that would add value to an analysis of business value, such as a view that is contributed to by surveys of our customers, our bankers, pieces of legislation and regulations, perhaps focus groups of vendors, and members of our staff, such as our accountants and auditors. 

Surely, to maximise business value from a group of investments we should consult widely and take opinions of what is of value to each of our stakeholder groups so we have confidence we at least understand the divergence of opinion and can plan mitigation action, should that be necessary.

With APO, strategy managers can include all the value measures of all of your stakeholder groups. It does not matter if one or more stakeholder groups do not include any particular value measure because APO will just treat that measure as “No input” and it will not contribute to the relative business value score. APO is limitless in the number of stakeholder opinions that could be considered and compared but we would suggest that you start slow, say with the collective opinion of the executive, which will give you an authorised basis from which you can mature. You could then seek to gain the opinions of each individual member of the executive and using APO’s ability to automatically infer the logical consensus and start analysing the portfolio on the collective opinion, the individual opinions and the logical consensus to point out the variations, understanding the key sensitivities of each and reporting on the impacts. You could then extend to using outputs from customer, investor, vendor, or staff focus groups or surveys etc. to again compare and report on variances and impacts.

We have seen many examples of attempts to ensure that value is understood across the organisation such as things like the “Balanced Scorecard”. Although it is usually the accountability of the executive you should make sure that, as much as is possible, all your stakeholder groups agree or at least understand what is being measured as value and what is not so that management and staff can all “pull together as one team” to gain the value that our stakeholder groups collectively seek. 

Your organisation is very likely to already have a lot of value measures that will provide an initial understanding of what the organisation sees of value and are sometimes used in prioritisation. Other value measures could be considered as opportunities to add value to the prioritisation process and your executive’s knowledge base. 

Typically value measures will include strategic drivers or strategic goals, critical success factors, “Balanced Scorecard”, key performance indicators or key result areas, and process volumes, process step execution times etc. But these measures at not at the same level, some are lower level and add more detailed definition of others at the higher level. The thing to note about those is that some will be a part or complete sub-sets of others. In fact it is rare to find an organisation with value measures at only one level, to a greater or lesser extent they can be thought of as a hierarchy.

If the hierarchy at the top level were the organisations strategic drivers (That measure strategic alignment) and each successive layer of measures further detailed the layer above (e.g. if the second level were say Critical Success Factors, the third Key Results Areas, the fourth Key Performance Indicators, the fifth Balanced Scorecard Measures and Program Benefits Measures, and the “nth” level Process volumes and process execution times) then you will have linked strategy development to strategy delivery and to operations with a consistent set of measures understood by all.

If you have not approached value measures from a hierarchical perspective in the past you will have a task ahead of you to gain agreement on what is of value and should be used to drive prioritisation. The easy way is to start small, say with just the strategic goals or strategic drivers then seek to progressively detail the strategic goals into finer value measures. Doing that reiteratively will connect each measure in the balanced scorecard (or similar), if you use them, back to a specific strategic driver and thus measurement of any balanced scorecard measure will directly measure its impact on the strategic driver and thus also measure contribution to strategic outcomes.  As you get more detailed you are likely to be reflecting specific benefits expected to be gained from a program of work, project or initiative. We have some guidance from APMG International’s Managing Benefits Guide by Steve Jenner, the man behind benefits management implemented within the Prince2 Project Management methodology, Managing Successful Programs methodology and P3O Portfolio Management Framework:

So, not an easy thing to do and the process is likely to take a while to mature. As the value model is being matured you will be tasked with ongoing effort to detail value measures in a hierarchical fashion until you have your measures of operational performance rationally linked all the way back up to strategic drivers. Again then, we can directly measure variations in operational performance back to contribution to strategy which, in turn, will provide input to management decisions to adjust strategy.

You may need several attempts to create a workable hierarchy of value measures for your organisation. APO provides you the ability to apply multiple hierarchies against the same investment alternatives, thus you could keep an operational set while you develop another set that extends the organisations maturity in using hierarchical value measures. So you could envisage further hierarchies to test “What if?” scenarios, to test hypotheses and to compare the performance of a set of investment alternatives against very different sets of value measures as may be encountered by the organisation operating in very different market segments or in varying countries.

In step 3 we determine the relative importance of the things we find of value and express that relativity as a weight to be applied in step 6. For example, how much more or less do we value financial outcomes over customer outcomes? How much more or less do we value Net Present Value over benefit to cost ratio? How much more or less do we value customer satisfaction score over time to serve? Put another way we answer yet another question, which is “What is the ratio of value between our value measures?” 

Once we know the ratio we can convert that into a weight. For example if one is valued more than another by a ratio of 3 to 1 then the first will have a weight of 75% of our decision value (3 times the other) and the second will have a weight of 25% of our decision value (or one third of the other).

In gathering the ratio you will find it common that in the one organisation, probably in yours, there will be differing views of what is most important. It is however, also common that the executive will agree to “park” their minor (and sometimes major) differences of opinion to ensure the organisation operates as a team, all heading in the one direction. That does not mean that they no longer disagree, it just means they will work as a team for the common good. We have seen executive teams where they agree to be at war with each other over what is of value and what should be done, how the organisation should behave etc. believing that extremely robust debate is the best way to achieve an outcome. We have not, thus far, seen an organisation that acknowledges those differences and has systems in place to report on the impact of each differing view with the intention of proceeding to consensus or at least understanding each other’s divergent views. Thus, it is our contention that when you recommend your optimal portfolio you would be advantaged if you could recognise the divergent opinions and be prepared to suggest what the impact of a divergent opinion might be on your optimal portfolio.

You will need to collect the ratios of value for each stakeholder group or individual stakeholder that you intend to use to analyse alternatives in APO. Each set of ratios for each stakeholder or stakeholder group is known in APO as an “Importance”.

In our experience and generally the more remote the employee is from the executive the less likely the appreciation of value will align with the executives agreed position.

Fortunately, for you to develop the weights from ratios of value for a range of interconnected value measures (input to step 6) a process called pairwise comparison, otherwise known as two-factor analysis, was developed by Louis Thurstone in 1927 and has been proven to be statistically defensable over nearly 100 years of testing and is implemented into APO.

For each stakeholder or stakeholder group you will then input the ratios of value for each pair of value measures and APO will calculate the inverse ratio e.g. if value measure 2 versus value measure 1 ratio is 3 times then value measure 1 versus value measure 2 is 1/3 and APO will use the combination of all ratio/inverse pairs to calculate the statistically defensable weight of each measure.

APO can use the statistically defensable position derived from value ratios or it can directly accept user-developed weights. Please accept our warning that user-defined values are very rarely even close to statistically derived weights so we would recommend that you persist or insist on collecting and inputting ratios regardless of how onerous that can be with large numbers of value measures. Only in extreme circumstances when you want to produce “Quick and dirty” results or employ them as a “What if” mechanism should you consider directly input weights.

In step 4 we identify all the alternative investments that could meet our requirements. Yet another question – “What are all the things that we could invest in, either alone or in combination that could deliver some (most) or all of the value we are seeking to gain by making this decision?”

That question is usually answered relative to business transformation when corporate strategy is being developed. So, in terms of business transformation the output of step 4 could be a list of all the strategic, tactical and operational change initiatives that have been suggested or are being executed. 

Sometimes these initiatives could have options. For example, developing additional production capacity could present options of creating a new production facility or expanding the existing and in the case of creating a new production facility we might be presented with further options of buy versus lease, various options of the tools of production, fitout options, incremental development versus development as a whole. 

APO, with its ability to “Fuse” investment opportunities will allow each of the combinations of project options to be fused into individual project views, thus enabling the analysis of which set of options generates the most business value (Plan a), the next most valuable (Plan b) etc. You could then aggregate various sets of projects as options into programs to provide another layer of analysis for value. In any case, you will need to be able to justify all of your option selections if you are to present the truly optimal recommended portfolio to the executive. In our experience when the options are numerous and the integrations complex the analysis effort will be offset by the discovered value.

In terms of asset maintenance the output of step 4 could be a list of all the assets that need to be maintained or it could be a list of project options to meet the end-goal of maintenance. So again, asset maintenance could have options with regard to the asset lifecycle and replacement, buy versus lease, service outsourcing etc. which will also need to be justified in our optimal portfolio.

In step 5 we evaluate all the alternatives by answering the question “In the view of our foremost experts, how much of each of our value measures that we listed at Step 3 is each of the alternative investment opportunities and options likely to deliver?”

One of the issues to be overcome in step 5 relates to who is our foremost experts? Is it the people who will be most affected by the investment opportunity, is it those who understand the detail and impact of our investment best, is it our corporate leaders, our suppliers, our customers, those who will execute/deliver the investment opportunity, or is it some external third party subject matter experts? Could it be a combination of all of the above to be sure that we have the defined the greatest value that can be delivered to all our stakeholders right now, today?

Another issue to be overcome or at least to be aware of in step 5 is the potential for bias. Recent dissertations suggest that there are over 200 different types of cognitive bias alone, and that every human suffers from at least one or more cognitive biases, developed from their lifetime experiences and impacts. Other biases could be introduced due to lack of knowledge of the investment itself, poor communication, a lack of understanding of what is actually being measured, a lack of understanding of what each value score actually means, it can come from dominant stakeholders who influence less dominant stakeholders, etc. OR bias could be intentional. We will need to be able to justify the opinions of value that will underpin our recommended and optimised portfolio.

To understand if there is bias we suggest that you consider aggregating “Importances” on worst case and again on best case and comparing the alternatives under worst and best case. If there are marked differences in the analysis outcomes then there are either very divergent options of value or it is possible that bias has been introduced. If bias is possible then use analysis to identify the sources of divergence from the perspective of individual “Importances” against best case and worst case. 

Step 6 is where the magic really happens – If you have been able to drive agreement between your stakeholders, most commonly the executive, in producing the outcomes of steps 1 to 5 then you have been through the pain and there is really no magic here at all, just mathematics. We would recommend that you utilise the Analytic Hierarchy Process (AHP) developed by Thomas Saaty in 1978 and then revised in 1980. In 2017 the University of New South Wales published research (Darius Danesh*, Michael J. Ryan and Alireza Abbasi) entitled “A systematic comparison of multi-criteria decision making methods for the improvement of project portfolio management in complex organisations” in the International Journal of management and Decision Making (Vol 16, No. 3) that included over 100 methods of analysing project portfolios and concluded that there were only two that were appropriate. The other will commit you to significantly more work than AHP.

Here we take the assessments of likely outcomes for each of the value measures delivered by each opportunity and multiply the assessment by the weights we calculated at step 3. We then sum the products of those calculations for each initiative to come up with a single measure of total business value.

So:

• Assessed likely outcome (Step 5) times Importance (Step 3) = business value (or strategic alignment) for this measure
• Then sum all business value for this opportunity = Total relative business value (or strategic alignment score)

Then, rank all opportunities, highest to lowest, in order of Total relative business value to determine the most valuable opportunity and produce a prioritised list of all the initiatives in the portfolio

But that is not really where it all ends. You will need to read Saaty’s and Danesh, Ryan and Abbasi’s works to understand how to compare a subjective measurement (opinion-based) with an objective measurement (fact-based), while taking into account the variation in scale of each measure, which is where some more magic happens (just kidding, it is all still mathematics).

Please however also note that under certain conditions it may not be wise or appropriate to recommend the inclusion or lifecycle acceleration of an initiative in an executing (or even non-executing) portfolio. For example, if an initiative displays any of the following characteristics you may need to do more work before inclusion in a portfolio:

• “Approved” by a clearly questionable governance (and gating) process or no process at all – Possible what is known as a “Pet Project” where a stakeholder uses their influence to push an initiative forward into execution avoiding any comparison with strategic intent.
• Inability to acquire specialist resources – Perhaps requiring re-planning and thus impacting the cost/benefit of the initiative
• Inability to identify specific benefits – If you can’t identify benefits then how can you measure strategic alignment?
• Inability to create statements that define the Problem, Objectives and Vision – Worse than no benefits, no vision, no understanding of what we are trying to achieve
• Inability to define high-level scope – Again, what is it we are trying to achieve?
• Etc.

In between step 6 and step 7 lies the murky realm of Portfolio Scheduling, PLEASE SEE BELOW under Portfolio Scheduling and Step 6A.

Another thing you might want to do is to analyse the total spend on the prioritised portfolio with regard to each of the value measures. This is a standard analysis type in APO but if you were brave enough to do it manually you could take the budget being assigned to each initiative and divide it by the total relative business value (step 6) then take that amount and multiply it by each value measure’s contribution to relative business value (Step 5) for that initiative. Sum those amounts across all initiatives for each value measure to calculate the total amount being assigned to each value measure. Then calculate what percentage of the total budget is assigned to each value measure by dividing the total amount assigned to each value measure (which should exactly equate to the total spend) by the total budget. You can then compare the importance of each value measure against the total budget assigned to each value measure. If the budget exceeds the importance the spend on that measure is too high, if the budget is lower than importance then the spend on that measure is too low. Significant variations, say greater than 5%, may indicate a poorly balanced portfolio.

We suggest that if the total spend percentage on any value measure differs from the importance of that value measure by more than say five percent (You will need to set your own standard once you have experience in this type of analysis in your organisation) you should bring the divergence to the attention of the strategy managers and work together to recommend a more balanced portfolio.

Step 7 is where you hand over the initiatives, once approved by your executive, to form or join the executing portfolio, for delivery and to await the status reports to be able to adjust the information you have and perhaps present a revised recommend portfolio, particularly if:

• The assessments produced at Step 5 have changed because during execution something changed such as a benefit is no longer available, costs have increased or decreased, etc.; or
• There has been a change of opinion on what is of value (Step 2) or the relative importance of a value measure (Step 3) has changed.

If either of these has changed for an initiative then the relative business value of that initiative has changed, which might lead to:

• Movement in the ranking order of the initiatives
• Recommendation to accelerate the initiative if the change has been for the better. Note that this might also lead to a recommendation to slow or stop other initiatives depending on the impact of scheduling constructs.
• Recommendation to slow or stop the initiative altogether if the change has been for the worse. Note that this will probably lead to acceleration of, or entry into the executing portfolio of other initiatives.  

Portfolio Scheduling

The task of portfolio scheduling is to adjust the list of initiatives in order of priority and apply the scheduling constructs in the correct order to develop the proposed sequence of execution of the portfolio.

Refresher – Here we are answering the question “Considering the sequence in which we would invest if it was a perfect world in which we had no constraints and no urgencies, what changes to that sequence are necessary as a result of the imperfection of our world?”

Answering that question provides all the reasons (justification) why the adjusted prioritised list should become the recommended portfolio, which will contribute to your executive overview (and perhaps addenda) to your recommended portfolio list.

Note that when scheduling complex initiatives with a common resource pool impacting various but common business functions, especially when some initiatives will deliver outcomes that are critical to the continued performance of the business (e.g. product lifecycles) the scheduling constructs should be applied in strict order.

Step 6A – Analyse the proposed portfolio with regard to value, risk, resource demand, business impact, cost, etc. profiles (as per the table below) and provide analysis to Exec with proposed portfolio and either:

• Receive Executive approval for delivery of recommended portfolio; OR
• Receive Executive direction that an adjusted portfolio be delivered OR
• Receive a request from the Executive to provide analysis of an alternate portfolio, analyse and present a comparison of the alternate and recommended portfolio

Please note that if you are severely constrained with resource availability, have significant apparently undeliverable demand from compliance requirements, a plethora of complex project interdependencies, heavily change impacted business functions, or really pressing asset lifecycles (let’s hope you never have them all at the same time) you may be forced to apply the scheduling constructs reiteratively to get to a working portfolio OR even break the rules of sequence.

If you need to apply the sequence out of order then we suggest you request a pre-meeting meeting to go over your portfolio with your super-ordinate and seek guidance as to how to approach the recommendation with the executive.

Scheduling Constructs

Please contact Kepa Software should you have any questions or comments associated with this article.