Budget-based Portfolio: “It has always somehow worked out.”
In a recent conversation with a CIO, I asked how he would make decisions on the portfolio for the upcoming year. His reply: exclusively based on the budget. When I asked whether that could be reconciled with the well-known scarcity of resources, he gave me the baffling response: “It has always somehow worked out for the current year.” Can that really work? Or is it no longer valid to only consider projects from a year-based fiscal perspective?
In my opinion the clear answer is: No. And quite simply, you cannot afford to overstretch employees today, and in the end lose them. At the same time, you cannot afford to let employees sit on the bench and deliver projects too late. And finally, it is necessary to have the ability to change the course quickly, i.e., within a few weeks, not a year.
This article is part of a two-part series that explains the fundamentals of traditional project portfolio management, which will serve as a reference for future articles that will further discuss conflicts within current project portfolio management.
What is the Determining Factor for a Portfolio? Money or People?
What is the determining factor for a portfolio? Money or people? As you might guess, it depends:
- The budget is certainly not a wrong criterion for companies whose projects are characterized by low uncertainty and whose staffing can be quickly increased by external resources. Ultimately, this ensures that the limited supply of money will actually be used for the most important projects.
- For other organizations, however, the limiting factor is personnel, not money. This does not mean that these companies have a surplus of money. Instead, it means that they actually have problems implementing projects even when they have enough money. These problems either occur in the current year or are foreseeable: known scarce resources are not available as planned, certain people suddenly become bottlenecks, employees are locked into long-term projects and are no longer available for other projects and their problems.
Given the ever increasing competitive pressure from all sides and ever shorter time-to-market requirements, recent experience has shown that organizations tend to fall under category two. In this environment, employees play a much larger role than the budget, larger than was previously recognized. Why?
- The employees are the deciding factor. They determine which combination of projects can actually be implemented and are thus at least as important as strategic relevance and budget availability.
- Employee utilization must be carefully thought out and planned in advance. Simply saying “You’ll just have to get that done, too” is no solution – burned-out employees will be no help to you.
In traditional stock portfolios, investors choose stocks that fit their investment strategy and that offer the greatest potential for profit. Applied to project portfolio management, this means that the projects chosen are those that will be the most profitable. Depending on the organization, profit can actually mean sales, potential future product sales, or a strategic benefit.
Let’s take a brief look at the traditional standard process: The planning calendar for the upcoming year begins at a certain point between the start and middle of the fiscal year. The following steps are then defined:
- Specify the business strategy for the upcoming fiscal year.
- Divide the strategy into sub-objectives.
- Weigh competing objectives
- Develop a weighted evaluation catalog to assess the strategic relevance of a project. (This catalog should also include “must-have criteria” such as legal requirements, etc.)
- Collect all project proposals (this is referred to as Demand).
- Perform the evaluation. This evaluation is performed either by project initiators themselves or in the form of a concerted effort by several involved parties (e.g., IT and the applicable department separately). The result is typically a score or percentage that indicates how well the proposal fits the business strategy.
- After a defined deadline, all project proposals are sorted by strategic fit.
- The “winners” from the first round are asked to develop a rough plan and perform a financial assessment.
- Then, the planning for the next fiscal period takes place. In the simplest case, the list is sorted by strategic fit and approved until the money runs out. Of course, it is also necessary to ensure that the necessary resources are available.
- The chosen projects are approved. In the current year, the projects are then monitored to ensure that they adhere to their original plan, or, if necessary, can be funded from a previously established “change request budget pot.”
- The planning calendar for the upcoming year begins shortly after the release of the portfolio for the upcoming year.
This process is transparent and stable by nature. Better still: it has the appearance of a marvelous mechanical system that can be planned, stabilized and reproduced. 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. In the next article in this series, we will discuss the problems with the traditional PPM process.
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