PPM - Four Types of Benefits
Project portfolio management when based on a valid method for measuring project value produces four types of benefits:
- Better decisions: A priority system enables the organization to improve project-selection decisions. If projects generate significant non-financial benefits it is hard to make value maximizing project choices without having a consistent and valid way of quantifying those benefits.
- Better project options: A priority system helps project sponsors design and propose better projects. Understanding organization objectives and having the capability to evaluate candidate projects, project sponsors will bring forth better projects.
- Better alignment of projects with organization objectives: A priority system enables the organization to make choices that better implement corporate strategy. The system prioritizes projects based on objectives and weights established by senior executives, ensuring that funding choices are aligned with strategy.
- More persuasive and defensible justifications for funding. A priority system:
PPM - How Much Benefit Can Be Expected?
Maximizing the benefits of the investment portfolio requires, among other things, measuring all of the benefits of each project. PPM based on multi-attribute utility analysis (MUA) provides a sound foundation for the measuring value of projects and for maximizing the value of the portfolio of projects. MUA based project portfolio management provides real benefits. The question is how much benefit can reasonably be expected?
For some industries applying MUA to optimize project spending decisions can result in increases in total portfolio value of 30% or higher! Increases for utilities appear to be smaller, in the range of 5 to 20%. Much of the increased value comes from quantifying non-financial project value and incorporating this information into project selection decisions. Limited data suggests average benefit-to-cost ratio for utility funded projects is around 5.
The table below shows the percent of total portfolio value by benefit category for two US utilities. Note the significant percent of value flowing from non-financial categories.
PPM - Two Factors That Impact Realization of Benefits
The benefits of PPM to an electric power organization can be significant (in the range of 5 to 20 percent). However realization of the benefits depend upon two factors:
- using a valid approach for measuring project value and
- implementing the system at a high level in the organization so that their is "enterprise-wide" optimization of project and portfolio decisions.
These two factors are discussed here.
What Are "Valid" Project Valuation Methods:
Most tools for project portfolio management have shortcomings that make them incapable of accurately prioritizing projects. A typically shortcoming is using measures of project impacts that are too high level and abstract. Another shortcoming is the failure to use legitimate methods for converting the measures of what projects change into measures of value.To value and compare projects that produce truly "apples and oranges" benefits you need three things:
- specific and sometimes detailed measures of what projects actually change,
- scales that convert the physical measures to measures of value (say on a scale of 0 to 1 or 0 to 10),
- weights which are the terms of trade, "exchange rates," among the different dimensions that give rise to value (e.g., monetary, safety reliability, etc.).
Multi-attribute utility analysis or decision analysis provides the strict valuation model with these three attributes.
Why Is Broad Organization Implementation Important:
At the business unit level many times project prioritization is not such a difficult problem. At this level, if projects tend to have homogeneous benefits and the engineers understand the technical details of the projects, there is some evidence that pure "forced rankings" produce reasonable project selections (forced rankings are situations where the project sponsors get in a room and discuss the projects and simply rank the projects without a formal system for quantifying project value). The engineers know which projects can be safely deferred and which projects need to be done.
The more significant benefits of a formal analytic-based prioritization system are at the enterprise level. At this level project benefits are truly apples and oranges. Company-wide prioritization benefits, as stated above, can be in the range of 5 to 20 percent. Enterprise benefits are derived from setting budgets commensurate with benefits and from shifting budgets around so that the money is allocated to the business units with the greatest potential for creating value.
Of course if you are going to use prioritization to set budgets levels and allocations, the enterprise must know how much value is created for given budget allocations to each business unit. This information is only forthcoming if the business units use a strict multi-attribute valuation model for evaluation of their projects.
Finally the implication of my arguments here is that prioritization is really about allocation of budget across organization units -- that is where the real benefits are derived