In the first article of this series on the fundamentals of traditional project portfolio management, I took a close look at the traditional project portfolio management process. This process is comprehensible and stable by nature. Even better: it has the appearance of a marvelous mechanical system that can be followed in a plannable, stable, and reproducible manner. In the end, the project with the greatest strategic contributions always wins the battle for the valuable resources.
Unfortunately, this process does not work well in the real world, despite its apparent elegance. Ultimately, it is characterized by uncertainty, difficulties, ever-changing market environments, and, of course, people – and these do not function like machines. For these reasons, the process generates problems that conflict with the underlying objective of finding the optimal project mix to achieve the business objectives. In this article, we will look at the problems with traditional project portfolio management.
The selection is rarely complete and neutral. This is because
- the exact strategy is not known, not developed, or cannot be applied to the project.
- you have a small “principal-agent problem”. This means that your project managers already suspect that only projects with high strategic relevance will be passed, and so they “optimize” their details accordingly.
- the data is collected in an entirely inconsistent manner.
- decisions are made in back rooms, bypassing the process.
The method of always selecting “the next project on the list, from top to bottom, until the budget runs out” does not work as a selection project for the project portfolio.
The problem here is that the resources often receive far too little consideration. Even a rough consideration according to the principle “it looks good overall” can lead to bad bottlenecks in the current year. Unlike money, resources cannot be moved and scaled at will. This means that bottlenecks quickly become determining factors and conflict with strategic priority and feasibility. In addition, external capacities are not available in the desired quantity. Also, the process of phasing in new employees creates friction, costs time, and temporarily reduces the capacity of the existing team instead of increasing it.
If projects are not completed within the fiscal period, they must undergo the laborious approval process again, in which time, the company strategy may have changed. In contrast, projects that arise in the current year and should be started very quickly have difficulty finding a budget and proper resources – everything has already been allocated. It is precisely this inertia that can stand in complete opposition to the actual company strategy.
Even if a long-term project no longer fits in with the company’s goals, large projects - sunk cost or not - are only reluctantly ended.
The objective of optimizing the utilization of bottleneck resources and arranging other projects around them fails. The reason for this lies in the project plans, which schedule bottleneck resources in insufficient quantities without accounting for timing conflicts and potential risks.
Projects are, by definition, determined by their risk and may fail even if planned perfectly. Therefore, it makes no sense to specify a portfolio for a year in advance. It would be better to factor in time for eventual difficulties from the start and to plan the portfolio in shorter, rolling intervals.
In modern times, the business strategy has to be changed in shorter cycles. Sometimes, it is even necessary to make a change within a few weeks or months. This conflicts with the traditional planning calendar.
The problem described above, regarding project selection based on available budget, is of course not applicable to all organizations. Even when an organization tries in good conscience to account for all eventualities, and approves the project assortment that seems to fit based on its utilization, it is still subject to the uncertainty problem of Problem 6. Consequently, the optimization of a one-year or multi-year portfolio based on the currently available project plan might sound like a problem that can be solved mathematically, but in reality it is risky, artificially precise, and quickly outdated.
“We also allow agile project management by providing an agile timebox in the portfolio and running the project within this timebox.” This sounds all right, and many today describe this method favorably as “bimodal.” However, agile projects are based on the acceptance of uncertainty and on the non-fixed scope – a purely iterative processing of a fixed specification is not agile. It is not necessarily bad or wrong, but the “Agile PM” label is misleading here.
- Ranking: Instead of managing the portfolio consistently across the entire organization, projects are subdivided into various classes (must-do projects; current projects, projects with high net present value, etc.). This classification process is decentralized, while the process of allocating the budget to the various classes is centralized. In this way, the advantages of decentralized decision-making are combined with those of centralized budget allocation.
- Domain: In the domain approach, projects are allocated to interdepartmental, content-related topics in order to take advantage of content-related synergies. These topics are also organized on an organizational level as a matrix, thereby obtaining a cross-departmental control. This method makes it easier to tap synergies while avoiding duplication of effort. Accordingly, the budget is no longer allocated centrally according to priority or ranking, but only in reference to the domain. Simply stated, the top management allocates the budget on a percentage basis; as a result, within the domains, the decision-making process regarding the use of the budget is decentralized.
So which projects should “win” now?
The dilemma of traditional PPM now consists in granting too little relevance to the actual feasibility at the expense of the strategic weighting. In actuality, it would be more important to produce a portfolio which, in its entirety, has a real chance of succeeding. It should also be regarded not in terms of a fiscal year, but ideally in much smaller time segments with constant review and the possibility of reprioritization.
Therefore, the question should no longer be “what can we get for this fixed amount of money in the upcoming year,” but rather, “what is the order of priority for us today?”
Here, the perspective moves away from an annually recurring budget process and toward a periodic social exchange of results, knowledge, and modified framework conditions. In the best case scenario, this penetrates the entire organization, from portfolio to project to daily duties. The SAFE framework has already made some interesting suggestions in this regard - more information will be provided in one of the future posts.
What do you think?
That completes our two-part overview of traditional portfolio management. We will be adding articles in the near future with ideas about alternative suggestions for PPM.
Get in touch with us! How does your organization run portfolio management? Are you familiar with one of the problems described here? What would you like to read about in the future? We look forward to your feedback.