M a n a g e m e n t o f e n gi n e e r i n g P rojects

Chapter 2 ! overview
The main aim of portfolio management is ‘to do the right projects right.’ Portfolio management
is a complex process that does not consist of one single form for all organisations. The process is
complicated to such an extent because various aspects need to be balanced: fit with the strategy
of an organisation, the value for the organisation and the risk profile of the portfolio. It is already
difficult to balance these items as such, but it becomes even more challenging given the fact that
all items are subjective and estimates of an uncertain future. For instance, with the subjectivity
the human aspect enters the arena. Still, methods are presented for dealing with these complex
items.
The strategic fit but certainly also the value of the projects in a portfolio should be presented in
the standard form of a business case, the justification of all separate projects. Besides that various
portfolio representation and selection methods are presented, which are often used to support
the portfolio board and the ultimate decision maker, the portfolio sponsor. It is advised to actually
use the data to avoid having too many ad-hoc portfolio decisions, but also not too much power
should be given to the numbers because they are ‘only’ models.
The portfolio manager is responsible for facilitating the portfolio process: making data available
and driving the portfolio process.

Chapter 2 ! outline
2.1 The basics of project portfolio management
2.2 Portfolio management and the business strategy
2.3 Project selection
2.4 Managing the portfolio
2.5 The Wind Farm

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Chapter 2
Project portfolio
management and
project selection
Herman Mooi and Sergey Filippov

2.1 ! The basics of project portfolio management

2.1.1 Project, programme and portfolio

When reviewing the project portfolio management (PPM) literature it seems to be of utmost
importance to outline the conceptual distinction between project, programme and portfolio. A
programme is defined as a group of related projects managed in a coordinated way to obtain
benefits and control not available from managing them individually. In other words, a programme
encompasses a group of similar projects oriented towards a specific goal (Meredith and Mantel,
2010). The most important aspect of a programme in the above definition is that it should be a
group of related projects.
On the other hand it can be found in literature that the terms ‘project’ and ‘programme’ are
used interchangeably, and programme management does not always seem to be substantially
different from project management. As Kerzner (2003) puts it, ‘whether we call our undertaking
project management or programme management is inconsequential, because the same politics,
procedures and guidelines tend to regulate both.’ On the other hand, a well-known programme
management method as Managing Successful Programmes (2011) does make a difference
between projects and programmes. According to MSP, in programmes more specific attention is
dedicated to the realisation of the (business) benefit than is done for separate projects.
Programmes and portfolios should not be confused, although it should be realised that in practice
there is often a confusion of tongues about the differences between programmes and portfolios.
Turner (2009) outlines the main difference – the programme has common outputs; the portfolio
has common inputs. The resources (inputs) may be made of finances, human capital, workforce,
data or technology. Smaller organisations might have only one project portfolio, while larger
organisations may have separate portfolios for strategic and operational projects as the selection
criteria and evaluation differ substantially (PMI, 2003). An example of this is a portfolio for deve-
lopment projects in a manufacturing company next to a portfolio for operational projects.

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A portfolio can be defined as (PMI, 2006):

‘A collection of projects and/or programmes and other work that are grouped together to
facilitate the effective management of that work to meet strategic business objectives.’

A crucial point of the above definition is that a portfolio is not a ‘pile’ of projects, rather it is an
effectively managed collection; and it is managed with an ultimate goal of achieving strategic
business objectives. The definition also makes clear that portfolios can contain programmes and
projects.
The relation between projects, programmes and portfolios can be clarified in a scheme as given
in Figure 2.1.

Four main characteristics of a project portfolio can be distinguished (PMI, 2006). Firstly, all com-
ponents of a portfolio represent investments made or planned by the company. Secondly, these
components should be aligned with the company’s strategic goals and objectives. Thirdly, all
components typically have some distinguishable characteristics allowing the company to cluster
them for more effective management; usually this is done in programmes. And fourthly, all com-
ponents of a portfolio are quantifiable, i.e. they can be measured, ranked and prioritised. This is
critical because an important mission of portfolio management is about making decisions about
allocation of resources or choosing between different alternatives. These decisions should be
based on objective (measureable) data.

The characteristics provided above imply that a portfolio should embrace all projects in the
organisation. However, a number of smaller projects are generally carried out ‘under the radar’.

Portfolio

Programme Programme

Project Project Project Project

Project Project Project Project

Project Project Project Project

Figure 2.1: Relation between portfolios, programmes and projects

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Such a situation may be potentially damaging since small projects will tend to rely on the orga-
nisation’s resources and may even lead to their reallocation away from the projects organised in
the portfolio. Based on a research project comprised of 128 in-depth interviews in 30 companies,
Blichfeldt and Eskerod (2008) found that PPM often covers only a sub-set of on-going projects,
while projects that are not subject to PPM tie up resources that initially were dedicated to PPM
projects.

The question of resource availability is a crucial item in portfolio management (see Turner, 2009).
Firstly, projects should be prioritised within the pool of available resources. Only a limited num-
ber of resources are available. Hence a limited number of projects can be performed. Secondly,
once projects have been selected, resources should be shared between them. Resource demands
for different projects may peak together, and unexpected events may cause resource clashes.
Thirdly, if projects are sharing data and technology, they may become linked, particularly if one
project produces inputs for another.

2.1.2 Definition and elements of portfolio management

Modern project portfolio management is rooted in portfolio approaches developed in the second
half of the 20th century. Back in the 1970s-1980s, consultancy companies (e.g. Boston Consulting
Group, McKinsey & Company) started using portfolio matrices to characterise product-market
alternatives.

The fundamental objective of PPM is to determine the optimal mix and the sequence of proposed
projects to achieve the organisation’s strategic goals, taking into account resource constraints
of project management. Hence, PPM is a dynamic decision-making process to help meet the
business strategy (Cooper et al., 1999). When speaking about portfolio management PMI (2003)
refers to the selection and support of projects or programmes investments. These investments in
projects and programmes are guided by the organisation’s strategic plan and available resources.
The benefits of PPM are better co-ordination of project and programme work in an organisation,
tighter alignment with organisational objectives, maximised portfolio value with optimal balance,
increased transparency and streamlined decision-making and better resource utilisation. In the
absence of PPM, individual projects are judged on an individual basis without global vision.
In general it can be seen that portfolio management is about selecting the right projects that are
aligned with the company’s strategy and about making sure that these are performed in the right
way, e.g. realising the promised benefits but also meeting the triple constraint promises (scope,
time and budget). In simple wording this is ‘Doing the right projects right’. It is important to note
that both elements are important for good PPM: ‘Doing the right projects’ (some people limit PPM
to this aspect only) and ‘Doing projects right’.

Only if projects are done the right way, they really can become the ‘right projects.’ Both elements
are indicated in the rows of the 2x2 matrix in Figure 2.2. On the other hand two major phases
can be distinguished: the phase of deciding to start or continue with the project and a phase of
realising the projects including the benefits in the portfolio. The decision elements of ‘Doing the
right projects’ will be treated in the next paragraph. The realisation of a portfolio is implemented
through projects (or programmes) which form the major part of this book; the decision elements
of doing the project right are related to good front-end development (Chapter 7) and planning
(Chapter 10).

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Decision Realisation

• Strategic fit
Doing the right projects • Portfolio value • Realising benefits
• Portfolio risk profile

• Resource allocation
• Can we absorb changes?
Doing the projects right • Manage triple constraints
• Organising our capacity
• Manage risks

Figure 2.2: Elements of portfolio management in different phases

2.2 ! Portfolio management and the business strategy

2.2.1 Strategic fit

The alignment of strategic priorities (strategic fit) is a central theme in strategic management,
and as the previous paragraph showed, alignment of project portfolio with the organisation’s
business strategy is a key task for PPM.

To start with, business strategy can be implemented through various means. While PPM is the
most popular approach to implement the corporate strategy, it is not the only one. There are var-
ious approaches to strategy. For example, Mintzberg et al. (1998) propose ten schools of thought
on strategy formation – the design school, planning school, positioning school, entrepreneurial
school, cognitive school, learning school, power school, cultural school, environmental school
and configuration school. The first three schools are prescriptive in nature; they are concerned
with how strategies should be formulated. The following six schools consider specific aspects of
the process of strategy formation, concerned with describing how strategies do get made. The
final group contains only one school, called configuration. It is intended to be integrative and to
cluster various elements of the strategy-making process. It should be noted that none of these
strategy schools deals with project management explicitly.

The fact that the business strategy of an organisation is clear does not mean that the spending
on projects clearly reflects that stated strategy and priorities. In practice there is often no link
between strategy and project selection (see Cooper et al., 1998). Similarly, Deloitte Consulting
found that only 23 percent of nearly 150 global executives considered their project portfolios
completely aligned with the core business strategy (McIntyre, 2006). These examples vividly
show that the issue of alignment is more complex than it may seem at first sight.

Strategic alignment can be defined as ‘the possibility of a portfolio to support future strategic
goals and objectives of the organisation’, see for example Cooper et al. (2001a).

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On top of that, project management elements should also be aligned with the business strategy.
Shenhar’s (1999) strategic project leadership (SPL) framework suggests alignment on the follow-
ing aspects: (1) project strategy, (2) organisation, (3) process, (4) tools, (5) metrics, and (6) culture.
Clearly the business-unit-level strategies should also be aligned with the main company strategy.
This holds for business units such as R&D, production, human resources, information techno-
logy, etc. In practice, project management is hardly ever visible on strategic company level as a
separate business unit, whereas projects are the basic building blocks of organisational strategy
through the management of the portfolio. The above means that strategic alignment needs to be
assured on company but also on lower business unit levels.

The strategic fit is also crucial between the project layer of an organisation and the executive
level above the projects. In practice often a gap exists between those layers, see Scholten et al.
(2010), where they analyse the difference in strategic alignment between the project manager
and other executives working on the project. Existence or perception of a gap between project
managers and senior executives is confirmed; and it is shown that this gap (strategic misalign-
ment) negatively influences the rate of project success.

It can be concluded that strategic alignment of projects with the business strategy is key and
it might look straightforward. In practice however, it is sometimes difficult to actually guaran-
tee true alignment and to make sure that all projects really fulfil their role in implementing the
companies’ strategy as intended. The link with the strategy is operationalised through the value
drivers (see Chapter 6). These indicate what driver is most important for a project (from among
others the triple constraint) and how that links to the strategy.

2.2.2 The value of the portfolio: the business case

The second important issue for the portfolio is to have a good picture of the value of the whole
portfolio. This means that for all the projects the organisation needs to have a picture of the
value of the individual projects. In order to develop an idea of the value of a project, two sides of
the coin need to be taken into account: the necessary investments as well the return on these
investments.

In managing a project, there is often one document used to give a clear picture that guides
the decision to perform the project or not. That document is the business case which gives
the (business) justification of a project. Next to advocating the reasons why the project should
be executed the business case should also describe the necessary investments – resources and
time – but also risks and potential scenarios for implementation. In the end this whole package
needs to be judged: an investment decision must be taken for this project.

The business case is owned by the decision executive in a project board, see Figure 2.6. In prac-
tice, the business case is often written by the project manager, which might be an advantage,
because of the fact that the business case is an important guiding document for decisions to be
made in a project. The business case is a dynamic document: in the initiating phase of a project
it starts small and after that it needs to be regularly adapted in line with the changed project
environment on one side and the changing project reality on the other.

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A recommended structure for a business case is:

• Management summary
• Description of the project (scope, timing, resources)
• Project justification (the ‘Why’ question)
• Expected benefits (hard and soft values)
• Expected costs or negative benefits
• Business risks
• Recommendation (with strategic scenarios)

Management summary – For a document like the business case it is important that the content
is summarised. The reason for this is that the business case is an important document for the
project that will be (frequently) used on portfolio level of an organisation. The portfolio board
will have to judge various projects against each other and in order to do so they need to have a
high-level overview of the justification of the project. Also, the document should be known by
more senior managers, who probably are also only interested in the high-level picture.

Description of the project – First of all, it should be clear which project we are looking at. It
means that a description of the scope of the project should be given, alongside with the pro-
posed timing and resource needs. Since the financial part of the resource need is described in
the ‘Costs’ part of the business case, this can be described on a very high level. It is important to
realise what role the time aspects play in a business case: the value of a certain project is highly
dependent on the timing. This can be related to external conditions, think of the release of a
certain product before your competitor brings it to the market, but also to the duration of an
investment, think of the role of timing in the Net Present Value or the time an organisation can
afford to miss the investments.

Project justification – An important part of the justification of a project are the reasons for
launching a project. An organisation is always interested in the ‘why’ behind a project. Therefore,
it is beneficial to prepare oneself extremely well for questions in this direction.

Example: the ‘why’ behind a project is not easy…

A manufacturing company is interested in updating the way-of-working in the operational
part of the company: this includes financial systems, logistical systems, planning systems,
etc. Basically all sectors of the company are touched, from clearly the production and
logistics, but also sourcing, R&D but even human resources and customer support, and
also the whole way-of-working of all sectors. The company uses a collection of systems
that are quite old and which have an enormous amount of patches and workarounds.
On the other hand they are still effective. The company does not quite embrace a change
culture: good is good enough, better is a waste of money. A danger is envisaged that
with the increasing complexity of new products and product development, the old
system might collapse. Or at least the new products only get out of the factory with much
additional effort and loads of new patches and workarounds. The organisation has ‘a good
feeling’ of a project that should change the whole way of working and recognises the risks
of leaving the situation unchanged. Still, the organisation also shows some hesitations: is
it really worth the several (tens of) millions of euros? Do the risks of implementing a new

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system – we will absolutely face unknown unknowns – counterbalance the risks of a

collapsing old system? We can all see the old system still works: what is the value of a new
system? Can we monetise that value towards the enormous investments? Are there any
other opportunities alongside these changes? Don’t we have other options? Do we deliver
the new system in an incremental way? Or as a big bang, with all the dangers involved?
Why do we want to do this risky and costly project in the first place? OK, because we have
an old system, but the old system serves its purpose, doesn’t it? It does not make sense to
do this project in a down-turn, right?

As one can see, there are a lot of emotions related to the reason behind this project. Reading
this example, it might seem over-the-top, but all too often these kinds of examples can be seen
in contemporary project practice. And especially in case of this kind of examples it is crucial to
step away from subjective reasoning towards a more objective decision making-process. The
business case is a very powerful tool for that.

In the business case an attempt is made to give a clear picture of the reasons for the project,
including the pro’s and con’s. These pro’s and con’s comprise more than just the costs and
benefits. As stated in the overview important elements of the business case are also: time planning
and high-level risks. These four items (cost, benefit, time and risk) together should be balanced in
order to either recommend the project or not.

Expected benefits (hard and soft values) – obviously these form an important argument for the
decision to do the project or not. These benefits are specifically not only financial benefits and
cost savings, but also softer aspects like user-friendliness, safety items or environmental consi-
derations play a role. Also, there are multiple financial measures to judge investments. Examples
are the Net Present Value, the Internal Rate of Return, the Payback Time, Return on Investment
(ROI) cash flow considerations, see Chapter 11.

Expected costs or negative benefits – on the flip side of the coin we see the expected costs an
organisation needs to make in order to realise a project, as well as the negative (financial) bene-
fits. The latter may also be soft aspects. An example might be that a certain environmental aspect
as benefit might have negative consequences for the user-friendliness of the product.

Business risks – all the above is by definition an estimated realisation potential of a project.
Therefore, it is absolutely necessary to also make an inventory of the uncertainties involved. This
can be done by either giving ranges of all the above numbers and/or the sensitivity of the given
numbers. In addition, the major risks that determine the uncertainties in outcomes need to be
given. For these risks, it is important to make clear how they influence the important promises of
the project (business case) and that they are phrased as clearly as possible (see also Chapter 8).
It is important to realise that there is a difference between risks in the business case and project
risks: in the business case also risks are mentioned that endanger the benefits of a project. Those
risks are not mentioned in the risk register of a project, because they cannot be influenced by
the project manager. An example thereof is the risk that the oil in a certain well might be less
than predicted. Such a risk can appear in a business case, but not in a project risk register. In the
business case typically only the high-level project risks are given.

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Recommendation – With all the above in mind, a recommendation with investment proposal
should be given for the project. This might either be one proposal or even more investment pro-
posals or scenarios.

2.2.3 Portfolio risks

We have now described two crucial aspects of portfolio management: the projects in the port-
folio should fit the strategy of the company and the portfolio should add value to the company.
Although these aspects are pivotal indeed, there is one crucial aspect around these two items
that also needs to be taken into account: the uncertainties around the assumptions. This aspect
is so crucial that it is treated separately in this paragraph, but risks also specifically appear in vari-
ous portfolio selection methods as separate decision criteria (see Paragraph 2.3). Obviously there
are many uncertainties around something like a portfolio of a company. But there is a portion
of the uncertainties that in the end can jeopardise successful implementation of the portfolio:
those uncertainties are the portfolio risks. In simple words: those uncertainties that matter for the
portfolio (see also Chapter 8 on project risks).

Portfolio risks can be divided into two categories (see also Cooper, 2001b): risks that can be
seen as a given (from the perspective of the organisation) and risks that are largely controllable
by the organisation. To start with, risks that can be seen as a given are related to the uncertain-
ties around the strategic developments of an organisation. Typically, they are related to larger
developments in and around the organisation. Market developments in general are the most
prominent factor for strategic risks. Examples are the market size and growth rate, product attrac-
tiveness, but also other external factors can play a role like the political situation and the labour
market aspects including resource availability. These risks can be seen as a given and can proba-
bly not directly be controlled by the organisation. Still, the organisation needs to take these risks
into account when making project portfolio decisions. The only way of dealing with this kind of
risks from the perspective of the organisation is probably to make sure that they have contingen-
cy plans built in.

Secondly, portfolio risks that are largely controllable by the organisation are basically risks that
are related to the execution of the projects in the project portfolio: the proficiency of the project
activities, technological uncertainties, speed to market, internal/external relations (including the
customer) and resource availability. This type of risks is treated in Chapter 8. Clearly, there are
many of these kind of internal uncertainties related to project realisation, which means they are
also directly related to the benefit of projects realised.

Clearly the cut between the two types of risks is not a sharp one: some risks from outside could
be mitigated by the organisation and especially product advantage is determined by the market
but clearly also by the proficiency of the organisation to create an attractive product.

As mentioned before, the essence of risks is that basically all predictions around a certain project
or product should be given in terms of a range. The benefits lie between € 10 and 20 million, the
estimated NPV is around € 10 - 12 billion, the estimated implementation time is between 6 and
8 months, we approximately need 50 - 60 resources, the investments might vary from € 15 to
18 million, etc. Often, risks are indicated in a bubble diagram as an important portfolio selection
criterion, see 2.3.3. In there, they appear as the size of a bubble (the larger the bubble, the higher

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the risk, not related to the values on the axes) or they are the cause for the ranges indicated in
the bubble diagrams (with a direct relation to the values on the axes, for example the NPV ranges
from € 10 to 12 billion) or risks are put on one of the axes of the bubble diagram, see Figure 2.3.

Now, we have described the main three elements that are necessary for making good judgments
on the quality of the project portfolio: strategic fit, the value of the portfolio and the risks around
the projects on portfolio level. In the next paragraph we will describe the process of actually
deciding on the right projects in the portfolio.

High

Probablility of technical success

Bread and Butter
Pearls

0 2 4 6 8 10 M€

Reward (NPV)

Oysters

White
Elephants
Low

Figure 2.3: Bubble diagram for portfolio of new products (Cooper, 2001b)
(size of bubbles = annual resources)

2.3 ! Project selection

2.3.1 Portfolio management process

PPM as a continuous activity encompasses a set of processes. In this paragraph three models
are given so that the reader can choose the elements in line with their own needs. The organi-
sational project management maturity model summarises the main activities essential to PPM
(PMI, 2003): (a) translating organisational strategies into specific initiatives or business cases that
become the foundation for programmes and projects; (b) identifying and initiating programmes
and projects; (c) providing, allocating and reallocating resources to programmes, projects, and

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other activities; (d) maintaining a balanced project portfolio; (e) supporting the organisational
project management environment.
More specifically, Turner (2009) suggests a five-step process for PPM:
1. Maintain a list of all current projects in a project database
2. Report the status of all projects through a central project-reporting system
3. Prioritise and select projects through a transparent system maintained centrally
4. Plan and assign resources on all projects centrally
5. Evaluate the business benefits of all projects post-completion.

The same idea is expressed in the standard for portfolio management. PMI (2006) aggregates all
PPM processes into two groups, known as portfolio management process groups. The first one
(aligning process group) determines how portfolio components will be categorised, evaluated
and selected for inclusion, and managed in the portfolio. The second one (monitoring and con-
trolling process group) periodically reviews performance indicators to ensure alignment with
strategic objectives. The first group would relate to the 1st, 3rd and 4th step of Turner’s model, and
the second group clearly relates to the 2nd and 5th step.

PMI (2006) provides guidance and enlists steps and procedures for PPM, including possible inputs,
outputs, deliverables, components, tools and matrices. By its nature, the standard is generic and
provides a box of reference rather than a precise PPM structure, tailored to specific organisations.

In (Meredith, 2010) an even more elaborate approach is proposed for a Project Portfolio Process,
with 8 steps:
1. Establish a project council – The main purpose of the council is to establish and articulate
the strategic direction of the projects involved.
2. Identify project categories and criteria – In this step the total portfolio is split into necessary
categories of projects, for contributing to the organisation’s goals.
3. Collect project data – It is important to collect recent data on project progress.
4. Assess resource availability – This step is about the inventory of available resources (internal
and external, human and machines); this is an ongoing activity.
5. Reduce the project and criteria set – In this step the set of competing projects is narrowed
down, a/o based on the changing market and labour condition. Also old projects can be
stopped and replaced by new, more promising ones.
6. Prioritise the projects within the categories – According to the set scores and weights the
projects are prioritised.
7. Select the projects to be funded (and to be held in reserve) – This step is the actual decision
step to determine the amount of projects for each category, taking into account some
reserve capacity (typically 10 - 15 %).
8. Implement the process – Inform the organisation about the decisions made and implement
the projects in line with the decisions.

As can be seen, part of the steps does not need to be repeated for every portfolio step, for exam-
ple steps 1 and 2.

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In line with the above described methods, three major drivers in a good portfolio manage-
ment process can be distinguished, (see also Cooper, 2001b): the business strategy, the stage
gate process and portfolio reviews. First and as stated before, setting a sound and widely
carried business strategy is an important and crucial step for being capable at all to manage
the company including the management of the portfolio. Secondly, the organisation should
adopt a stage gate process. A gate is a review and decision moment in a project or product
development. The gating process is a key driver, because only with such a structurally man-
aged process a good overview can be kept of all projects currently under development and
especially how well they are doing. And only with this overview good decisions on starting,
continuing and stopping projects can be made, which is part of the third step. Thirdly, port-
folio reviews should be organised periodically to analyse and decide on the direction and
content of the portfolio for the next period. It depends on the type, complexity and dynamics
of the business how often the reviews are held. The frequency of portfolio assessment is not
rigidly fixed, as it depends on the organisational context. Deloitte Consulting, for example,
suggest that there is no need to re-optimise a portfolio every week, but quarterly assess-
ments are highly recommended. Otherwise, there is no opportunity for making adjustments
and tracking continued alignment.

Gate versus review dominance

Considering the above drivers, one can recognise two dominant ways-of-working in practice:
one in which the decision gates of the projects dominate and one in which the portfolio reviews
prevail (see also Cooper, 2001b). In the approach where the decision gates dominate, the whole
portfolio is considered at all important decision moments of each project. Clearly, the advantage
is that a wider picture than just the project is taken into account at important project decision
points so that the organisation makes sure that the justification of each project is balanced with
the entire portfolio. A disadvantage is that for each project gate the whole portfolio status needs
to be reconsidered which probably means that in practice the portfolio status needs to be con-
stantly updated. This also means that this approach will only be practicable in companies with a
relatively small portfolio of large projects.

On the other hand, in the second approach a portfolio review is performed only 2 to 4 times per
year (typically). This means that the gate decisions for each project are made for that particu-
lar project only, or at maximum with the portfolio analysis in mind of the last portfolio review
moment. The advantage of this approach is a probably more profound dive into the status of the
portfolio these 2 - 4 times per year. A clear disadvantage of this approach is the fact that deci-
sions – also for large projects in the portfolio – are taken without the more detailed implications
of the decision for the portfolio. Especially resource implications (extra budget or man power),
but also benefit considerations might be sub-optimised towards the project in this approach. The
review approach typically suits faster-paced organisations with a portfolio with many, relatively
smaller projects.

There is no generic way of designing a PPM and each organisation should adopt specific
techniques and methods reflecting its unique environment and corporate strategy. The key
challenge to implement an effective PPM process is typically a political will and determina-
tion of the organisation’s leadership. Many companies stick to informal methods of selecting
projects and making project investment decisions. Failure of such an approach has led many

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organisations to introduce a more methodical and transparent decision-making process.

In the study on the importance of decision-making based on power, Pfeffer (1992) argues
that power is more important in major decisions where there are interdependencies and
in instances where uncertainty and disagreement are likely. Such situations manifest them-
selves in the field of PPM. For instance, launching a new project may require substantial
political support.

Tools and techniques

As shown above, there is a variety of separate techniques to estimate, evaluate and choose
project portfolios. Many of these techniques are too complex and require a lot of data; they might
also fail to recognise interrelationships. On the other hand, PPM by nature is a complex system,
and it needs complex tools to support it. Even if a PPM is implemented, there is no guarantee the
problems in an organisation are resolved, and problems may easily arise.

Supporting IT systems may enable visibility, standardisation and process improvement, with the
overall objective to manage the continuous flow of projects. Various software packages may
treat projects as part of an overall investment portfolio, and rely on established financial port-
folio optimisation methods, overlooking or even ignoring other important indicators. It should
be highlighted that the software plays only a supportive role to the PPM, the critical step is the
strategic decision to introduce a PPM and a change in philosophy at senior management level
entailing an organisational change.

2.3.2 Portfolio representation methods

A crucial aspect of portfolio management is the final choice of projects to be performed in the
portfolio. In this paragraph first a number of portfolio representation methods are depicted. After
that a number of selection methods is treated.

Before a choice can be made, it is important that the decision makers have a good insight in the
portfolio itself. This means that important characteristics of the projects need to be available and
that these characteristics are represented in such a way that the decision makers have a good
overview of the entire portfolio.

Typical characteristics that are taken into account when considering portfolios are:
• Fit with business strategy (qualitative: low, medium, high),
• Benefits (NPV, ROI, IRR, payback, etc.)
• Durability of competitive advantage (short, medium, long-term)
• Competitive impact on technologies (base, key, pacing and embryonic technologies)
• Time to completion
• Investments (R&D costs, marketing, operational costs, etc.)
• Market or market type (old or new market)
• Project type (new products or enhancements, fundamental research, etc.)
• Risk profile

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Sometimes project or portfolio risk is compensated for inside the characteristics used. An exam-
ple of this is to compensate for the risk profile of certain risky projects by increasing the discount
factor in the NPV calculation. This approach is not recommended as it introduces an additional
subjective judgment into the modelling. By doing so, either risk can disappear from the picture
because it is hidden in the NPV, or the risk can be counted double: both in the NPV and in risk as
a separate characteristic.

A well-known example of a 2x2 matrix for evaluating portfolios is the Boston Consultancy Group
(BCG) Matrix (developed in the 70s), that is depicted in Figure 2.4.

The BCG matrix is a nice example of a possibility for mapping projects in the portfolio.
Organisations aim at having ‘stars’ and ‘cash cows’ only. A ‘star’ has high growth potential com-
bined with a high market share. During the lifetime of the product the market becomes more
mature, so that the growth potential decreases which means that the product shifts into the
‘cash cow’ area. If the growth potential is high, but the market share is low the product is a
‘question mark’: the product can become a ‘star’ or a ‘dog’ and the decision to continue with this
product depends on the situation. Companies need to build a strategy around this product type.
‘Dogs’ products probably need to be divested if the company does not have strategic reasons for
pursuing with this product. Assessments like these relate to a good principle borrowed from risk
management in the financial market: diversity is the essence of risk management: don’t put all
your eggs in one basket.

In the BCG type of representation, projects are put into one of the four categories, without further
relative positioning. Projects can also be put in the whole surface of the plot taking into account
the relative position of all projects versus the other projects on both axes. This then becomes a
bubble diagram, an example of which is given in Figure 2.3.

Relative marketshare

BCG-Matrix

High Low
High

Star Question Mark

potential
Growth

Low

Cash cow Dog

Figure 2.4: The Boston Consultancy Group Matrix

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These characteristics can be used to make graphical representations by putting them into 2x2
matrices or bubble diagrams. A bubble diagram is a plot that gives three (or more) dimensions of
data: two are indicated by the xy-location in the two-dimensional graph, the third by the size of
the bubble that is plotted into that graph. Other dimensions can also be built in, for example by
different colours of the bubbles and/or by different patterns of the bubbles. The more dimensions
are used, however, the more difficult it is to interpret the diagram.

In this Figure 2.3 a nice example is given of the potential return of the projects versus the
probability of technical success and amount of resources spent annually. Current portfolio
management tools give users all freedom to give different representations. In this example a
balance can be made between risk and return: a company is basically interested in large returns,
with high chance of success (low risks): the ‘pearls’ area. Alongside this, the ‘Oysters’ are the
more speculative projects: worthwhile investing for the long-term development of the company,
but the investments are not too high. In the example given, the company spends quite some
resources on low return projects. There might be good (strategic) reasons for doing so, but espe-
cially the ‘white elephants’ area needs to be looked at carefully.

Note that investments are also represented double in the example in Figure 2.3: they are pro-
cessed in the NPV (per definition) as well as in the size of the bubbles. A large bubble might
look ugly, but if the NPV for that bubble is great this does not matter that much. In that sense
the ‘annual resources’ can be seen as cash flow considerations: an organisation needs to take a
maximum annual spent into account, obviously. Furthermore, it should be taken into account
that the organisation can take the risk of investing a large amount of money. Both the cash flow
and investment risk can be compensated for by the ‘pearls’ in Figure 2.3 or by the ‘cash cows’
in Figure 2.4.

2.3.3 Portfolio selection methods

Once the key characteristics of the projects are determined and presented in the right form the
actual selection of the projects to be performed should follow. In general, portfolio selection
involves a simultaneous comparison of a number of projects on specific dimensions in order
to make up a desired portfolio. Companies use many different methods to select projects to be
executed, see Figure 2.5 (based on a survey in 250 companies; Cooper, 2001b).
The most important selection methods are presented below.

• Ad-hoc approaches, such as profiles (a crude scoring model), and interactive selection
(an interactive and iterative process to choose the best project). The ‘Sacred Cow’ method
(Meredith, 2010) can be called an ad-hoc approach: in that case the boss just tells you that
a certain project needs to be done. This method should not be discarded immediately: the
method has a clear advantage of giving (top) management support to the project, which is
known to be an important success factor for projects.
• Operational necessity, including competitive necessity, product line upgrades, but also sus-
tainability, human safety, SOx compliancy, etc. There are various factors that limit the decision
room as to whether or not to perform a project. The level of freedom in choice varies: for SOx
compliancy, human safety but also certain operational upgrades an organisation might not
have much room for choice, whereas for competitive necessity and sustainability more room
is available.

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Senior exec.
makes decision
10 %

No formal ranking
method used
34 % Financial ranking
within buckets
27 %

Bubble diagramme Check list method

11 % 5%
Scoring model
13 %

Figure 2.5: How projects are ranked (Cooper, 2001b)

• Comparative approaches, including Q-Sort, pairwise comparison, the analytic hierarchy

procedure (AHP), dollar metric, standard gamble, and successive comparison. Q-sort is a well-
known method in which one responsible or a committee of persons are asked to rank-order
the projects based on their judgement of the benefits of the projects for the organisation. They
might use specific criteria for the ranking, but typically a Q-sort is based on subjective judge-
ment on the benefits of the project for the sorters. After the rank-order is made, the portfolio is
determined based on those projects fitting into for example the budget or resource constraints
of the organisation.
• Scoring models, these methods use a relatively small number of decision criteria (costs, work
force availability, etc.), and scores are then combined often using weight factors (‘weighted
factor scoring’). These methods are popular and widely supported by tooling. However, the
user should be careful not to overestimate the power of scoring models: they might give a
false sense of accuracy. One needs to realise that the majority of parameters in scoring mod-
els are based on subjective assessments. Besides that, the weighting factors are subjective by
definition and they have a large influence on the outcomes.
• Portfolio matrices and bubble diagrams, meaning graphical representation of the projects
under consideration on two or more dimensions – likelihood of success and expected eco-
nomic value. These can support other decision methods, such as the ad-hoc method, or be
used on their own.
• Mathematical models like optimisation, Monte Carlo and real option models – Optimisation
models use mathematical algorithms to select from the list of candidate projects a set that
provides maximum benefits taking into account certain constraints. Monte Carlo methods use
the calculating power of computers: they calculate the portfolio hundreds of times while they
vary the projects in the portfolio at random for each cycle. In the end they then come up with

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the optimum portfolio. The real options model stems from financial markets. The method is
based on the fact that if an organisation invests in a certain project, it gives the organisation
the option to do business in the future that it could not have done otherwise. In that sense
the real option method manages both technological and commercial risks in a progressive or
iterative manner. By doing so, it makes use of an intrinsic project management characteristic
of building in decision moments (stage gates) but now when better information has become
available. In that sense measures like NPV are often too pessimistic, because in the beginning
all (meaning on average too many) potential risks of a project need to be taken into account.

The above methods will often be applied next and/or in combination with each other.

2.3.4 The human side of portfolio selection

It is important to realise that all of the above methods have their own advantages but also
disadvantages and limitations. An important one was mentioned previously: basically all charac-
teristics in the above methods are based on subjectivity and they are in some form predictions
of the future. An issue related to that is that the characteristics, certainly the numerical ones,
suggest being precise which they are not. Furthermore, because the characteristics are subjec-
tive, it is important to realise that they all harbour some form of perspective (or more negative:
prejudice or even political aim) in them. The boss as ‘Sacred Cow’ might misuse numbers for
his convenience; a Study Lead might overemphasise the benefits of the opportunity she studied
and in general people might overestimate the positive side of projects that they like to work on.
All this might happen consciously and subconsciously. This goes alongside with the fact that
estimates are always and by definition influenced by the personality of the estimating person:
optimists simply have different views on the world than the devil’s advocates.

Last, it is important to mention that the portfolio selection process is not straightforward at all.
The first clear proof of this is the fact that hard and soft values need to be balanced. How does
one compare sustainability with hard earnings, human safety, highly innovative new opportu-
nities? Is it beneficial to monetise everything? And to what extent do we rely on numbers or
rather on the intuition of experienced managers? Mathematical models give us the possibility to
use a wide variety of characteristics and to arrive at the best portfolio. But is this really the best
portfolio? Do not disobey the shortcomings in the models and in the input estimates. Sensitivity
analyses can help out: the confidence in a model or computer calculation grows with under-
standing how the model reacts on changes in the input parameters. What is the feeling about
the risk profile of the portfolio? Is that feeling substantiated by numbers? Then again, once the
decision is taken on a certain portfolio: can the organisation deal with the changes related to the
choices? The most important thing to remember is that in the end the portfolio decisions need
to be based on careful human consideration, by the relevant senior management of an organisa-
tion, which might be assisted by (computer) models and decision criteria, obviously.

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2.4 ! Managing the portfolio

Portfolio management was defined as ‘Doing the right projects right’. Often companies appoint
a portfolio manager for guiding this ambition. This does not mean that the portfolio is ultimate-
ly answerable for all projects in the portfolio, neither does it mean that the portfolio manager
may decide on the content of the portfolio. Often the portfolio manager has a facilitating role,
making sure that the decision maker(s) can take the proper decisions on the content and realisa-
tion of the portfolio. On the other hand, she makes sure that the project managers get the right
means for actually realising the projects in the portfolio. This includes formal go-decisions but
also resources (including budgets).

In practice, there is no such thing as a single governance structure of portfolios, see for example
(Filippov, 2010) and (P3O, 2008). A typical portfolio governance structure is depicted in Figure
2.6, which is partly based on (P3O, 2008). As can be seen, the portfolio manager represents the
Portfolio Office. Dependent on the size of the organisation and the portfolio in question, the
manager may have one or more portfolio analyst(s) to support her in the preparation and pro-
cessing of the portfolio information. Scoring, optimisation models and other decision supporting
material is composed in the portfolio office under the responsibility of the portfolio manager.
The portfolio manager is the spider in the web of the portfolio. She needs to make sure that the
portfolio runs smoothly. All data need to be concise and timely. She needs to have profound
stakeholder management skills. Towards the portfolio board she needs to serve and follow, but
also guide and steer them in their information requests. Also, she should act as their conscience
to some extent. In the other direction she needs to have short lines with all programmes and pro-
jects because she needs their input and insight in their progress. She needs to be able to manage
without the formal power.

Commonly, portfolio managers are caught between the upper and lower levels in an organ-
isation which is shown in an empirical study into the portfolio management practice in five
organisations (Filippov, 2010). On one side, project management staff and project managers lack
inspiration and empowerment to work comfortably with portfolio management and consider it
as a burden. On the other side, portfolio management often lacks strategic political support from
the top executive level. Senior managers might be sceptical about project-based environments
(as a tool to deliver strategy) in general and about portfolio management in particular. In practice,
senior executives often disregard portfolio management as a tool to realise the business strategy.
On the other hand, projects may be poorly connected to the strategy, because of lack of strategic
thinking on how projects contribute to the organisation’s strategic objectives. Traditionally, pro-
ject managers and teams typically focus their efforts on getting the job done, and meeting time
and budget goals rather than meeting strategic goals as well.

The portfolio analyst actually provides the strategic overviews of the portfolio. She analyses the
portfolio and produces reports with recommendations on the project mix of the portfolio. She
develops and maintains the prioritisation models and Portfolio Management Dashboards. All
in all, she makes sure all relevant information is available and up-to-date for making portfolio
decisions, under responsibility of the portfolio manager obviously.

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Portfolio Board

Senior Portfolio
Strategy Operations
Executives Sponsor

Portfolio Office
Portfolio Portfolio
Manager Analyst

Programme Board

Program Programme IT & Business

Manager Director Finance Change Mgrs

Project Board

Senior Programme Senior

Supplier Manager User

Project
Manager

Figure 2.6: Portfolio governance (fat line means senior responsible role)

The Portfolio Sponsor is the senior manager responsible for the portfolio; ideally the sponsor is
member of the main board of the organisation. She makes the ultimate decisions on the port-
folio. In this role she is supported by the portfolio board in which other senior executives, strategy
and operations representatives are assembled, see Figure 2.6. Clearly, the Portfolio Sponsor role is
a very important role in a company. It requires strong leadership skills to be able to promote the
portfolio in all its aspects (internally, but also externally to third parties). Mind that the decision
right is only vested in the Portfolio Sponsor, not in the collective board. There should be one
person responsible for the decision.

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2.5 ! The Wind Farm

Allwind Energy has consciously investigated whether investing in the Wind farm Energy
Polder (WEP) is the right thing to do. First of all, WEP fits clearly within the strategy of
Allwind Energy: ‘Being the world’s largest supplier of a complete range of products,
services and solutions for the use of renewable energy, and power transmission in grids.’
Both the extension of the network grid and the wain farm itself fit in the companies’
strategy. Besides that, Allwind Energy developed a business case for the WEP project.
In the business case the investment costs of € 1 billion are balanced with the expected
return on investment. Also risk assessments are performed in which the technical risks,
but certainly also the spatial planning risks, the procedural risks related to the necessary
licenses as well as the risks related to the co-investment programme are incorporated.
The whole picture of the business case of the WEP project is used to decide whether
Allwind Energy should be investing in this project, or whether it would have been better
to invest € 1 billion in another opportunity.

The WEP project is seen as a ‘cash cow’ for Allwind Energy (see Figure 2.4): the company
has a wide experience with projects such as these and the market is quite mature. Perhaps
being a co-investment programme even makes this project a ‘star’: this new formula in
the market could have much greater potential. The project can be seen as ‘bread and
butter’ or a ‘pearl’ (see Figure 2.3). The probability of success of the WEP project is high
(given previous experiences) and dependent on the reward it ends in one of the two upper
quartiles.

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