2. Initiative Selection

Note: In this framework, the term initiative refers to programs and projects. The term work execution unit refers collectively to programs, projects, phases, releases, and work packages, all of which are considered temporary organizations.

The Strategic Role of Project Portfolio Management

From Collection to Strategic Vehicle

A project portfolio should not be a random assortment of initiatives. Instead, it must be curated as the primary mechanism through which an organization achieves its strategic goals. For example, if an IT department’s objectives are cost reduction and increased security, its project portfolio must consist of initiatives specifically chosen to produce those outcomes. This perspective transforms the portfolio from a simple list of tasks into a dynamic tool for strategic accomplishment.

Linking Strategy with Execution

Organizations realize their objectives by balancing current business operations with activities that transform those operations. project portfolio management provides the selection process necessary to ensure that only initiatives contributing to the desired transformation are approved and prioritized. Given that there is always more work than can be accomplished, this process is essential for managing priorities and making informed decisions.

Key aspects of this linkage include:

• Active Management: The portfolio’s composition requires regular review and adjustment. initiatives that are failing or no longer align with shifting business priorities can be canceled, and their resources reallocated to more critical initiatives.
• Resource Competition: Competition for resources is an inherent part of the organizational landscape. A formal management process helps leadership navigate these complexities.
• Dynamic Composition: The portfolio changes not only based on project outcomes but also in response to shifts in business priorities, new opportunities, and updates to the organization’s strategic plan.

Portfolio Structure within an Organization

It is common for an organization to have multiple project portfolios operating concurrently.

• Strategic portfolio: This contains programs and projects that contribute to the goals of the entire organization and typically receives top priority.
• Departmental portfolios: Individual departments, such as IT or marketing, function as organizations within the larger company and have their own objectives. They manage their own portfolios of programs and projects to meet these specific departmental goals, using resources not allocated to the strategic portfolio.

This structure necessitates careful coordination, as departments must contribute resources to the strategic portfolio while simultaneously executing their own programs and projects and maintaining day-to-day operations that generate revenue.

The Seven Components of the Portfolio Management Cycle

Managing a project portfolio is a leadership approach composed of seven distinct components that form a continuous cycle.

1. Idea Generation and Capture: This initial phase involves collecting ideas for potential initiatives from all areas of the organization that can help achieve strategic objectives.
2. Business Case Construction: Proponents of ideas retained from the first phase must build a standardized business case. This allows for in-depth analysis and comparison using rough estimates of costs and benefits.
3. Capability Assessment and Modeling: The organization evaluates the feasibility of executing the proposed initiatives. It assesses whether the necessary people, skills, and other resources are available without disrupting essential daily operations.
4. Selection and Prioritization: Using the inputs from the first three phases, this component employs a rational selection process to create a balanced portfolio. It considers additional parameters like risk, cash flows, and other criteria within a decision matrix to avoid inter-departmental conflicts.
5. Strategy Implementation: This is the execution of the projects and programs within the portfolio, which runs in parallel with current operations. The portfolio remains dynamic; projects may be adjusted or removed based on performance against initial estimates.
6. Change Management: A complex aspect that accompanies the entire cycle, change management addresses human factors influencing the organization’s ability to change, such as culture and values. It includes assessing readiness for change, tracking results, and mitigating factors that hinder transformation.
7. Benefits Harvesting and Feedback: This final component validates the benefits achieved against those planned. It identifies what was not accomplished and provides crucial feedback that informs the start of the next portfolio management cycle, allowing new initiatives to be defined to address any identified gaps.

The Integrated Framework of Projects, Programs, and Portfolios

Effective management requires an integrated vision of how projects, programs, and portfolios interrelate to deliver value. Difficulties encountered at the project level, such as resource shortages, often have their root cause in inadequate portfolio management.

A Hierarchy of Value Delivery

• Projects: Deliver specific products or services. Modern project management emphasizes that projects should also generate tangible outcomes from the use of those products. For example, a project to deliver a new IT system should demonstrate an outcome like an increased number of transactions per hour.
• Programs: A collection of related projects and operational activities managed together to achieve specific benefits. For instance, a program to increase customer satisfaction might include a project to build a new system, a project to change logistics, and a marketing project, all integrated with operational activities to ensure the benefit is realized.
• Portfolios: The highest level, which aims to achieve the organization’s strategic goals. This is accomplished by ensuring that the benefits delivered by various programs, such as increased customer satisfaction, translate directly into high-level objectives like increased sales volume and overall company profitability.

Phases releases and work packages are not selected directly within portfolios; they are authorized through the decomposition of approved programs and projects.

The Business Case as a Justification Tool

Purpose and Core Elements

A business case is a formal proposal that details the potential impact on the business if a proposed initiative is either approved or rejected. Its primary goals are to prevent investment in unfavorable initiatives and to help prioritize the most promising initiatives as candidates for portfolio selection. It also serves as an initial filter; if a proponent is unwilling to invest the time to create a business case, the idea likely lacks sufficient priority.

A comprehensive business case includes the following elements:

• initiative Justification: An explanation of the problem to be solved or the opportunity to be seized, detailing its causes and effects.
• Alternatives: An evaluation of different options, which must always include the alternative of “doing nothing” as well as a “minimum solution” to mitigate negative effects.
• Financial Assessment: Rough estimates of the initiative’s costs, benefits, and timelines.
• Risks, Assumptions, and Constraints: An identification of known risks, the assumptions underpinning the estimates, and any existing constraints.
• Executive Summary and Recommendations: For extensive business cases, a summary is included to facilitate executive decision-making.

The Nature of Estimates

Estimates within a business case are approximations and not a substitute for detailed planning for an approved initiative.

• Rough Order of Magnitude (ROM): At this early stage, estimates are ROM, which allows for a wide range of variation (sometimes over 100%) to account for the high level of uncertainty.
• Preliminary Step: The business case serves to determine if investing in the subsequent initialization and planning stages is worthwhile. A manager for the initiative (e.g., a project or program manager) has not yet been assigned.
• Feasibility Studies: For very large or complex investments, the initiator may propose a separate, smaller feasibility study project. The successful completion of this preliminary project provides a solid basis for the main initiative’s business case.

Parameters for initiative Analysis and Selection

At the portfolio level, the evaluation of candidate initiatives typically utilizes a combination of financial and non-economic parameters to ensure a holistic and strategic decision-making process.

Financial Analysis: Return on Investment (ROI)

ROI is one of the most common financial metrics used to evaluate and compare candidate initiatives. Its purpose is to measure the rate of return on an investment, allowing for a comparison of profitability even between initiatives of a different nature. A higher ROI indicates a more attractive investment.

• Calculation Example: An investment of €100,000 in equipment takes one year to become operational. It then reduces costs by €45,000 per year for four years.
• Total Return: €45,000/year * 4 years = €180,000
• Net Return: €180,000 – €100,000 = €80,000
• Annual Net Return: €80,000 / 5 years = €16,000
• ROI: (€16,000 / €100,000) * 100 = 16% per year
• Context is Key: Whether an ROI of 16% is considered “good” depends on the returns offered by alternative initiatives and on the minimum ROI threshold set by the organization.
• Sophistication: More advanced ROI calculations discount future cash flows to their present value, allowing for a more accurate comparison of initiatives with different timelines.

Non-economic Analysis: Qualitative Parameters

This analysis incorporates “soft” elements and subjective judgment to assess intangible information that financial metrics do not capture. Examples of qualitative parameters include:

• The initiative’s risk level.
• Its impact on brand image (e.g., contribution to decarbonization).
• Social factors (e.g., accessibility for individuals with disabilities).
• Alignment with strategic objectives (e.g., promoting a technology deemed critical for the future).

Synthesizing Data with the Multi-Criteria Decision Matrix

To make decisions when financial metrics conflict with qualitative factors, a multi-criteria decision matrix can be used. This technique provides a structured way to combine both types of parameters for a comprehensive evaluation. The process involves:

1. Defining Parameters: All relevant financial and non-economic criteria are listed.
2. Assigning Weights: Each parameter is assigned a weight based on its strategic importance. The sum of weights does not need to equal 100.
3. Scoring Alternatives: Each candidate initiative is scored on a consistent scale (e.g., 1 to 10) for its fulfillment of each parameter.
4. Calculating a Total Score: For each parameter, the weight is multiplied by the initiative’s score. The resulting scores are summed to give a total comparable value for each candidate initiative.

The following table illustrates an example where one candidate initiative (project 1), despite a lower ROI, achieves a higher overall score due to its lower risk and greater contribution to other strategic non-economic goals.

This method allows organizations to justify allocating a portion of their budget to higher-risk or less immediately profitable initiatives that offer significant long-term strategic value.