Lee Merkhofer Consulting Priority Systems

Choosing the Wrong Portfolio of Projects

If you attend business conferences, you may have heard speakers refer to the "60% solution." The phrase refers to the belief that organizations obtain only about 60% of the value that could be derived from their investments. The remaining 40% of available value is lost, due to errors in decision-making and weaknesses in business systems.

I believe 60% is an reasonable characterization of the way most organizations mismanage their project portfolios. As demonstrated in Part 7 of this paper, it is possible to compare, using models, the value generated by an organization's current set of project choices with the value that would be generated under a value-maximizing set of choices. My comparisons (similar results have been obtained by others) show that organizations can increase value by 20-40% without increasing portfolio costs, or decrease costs by 20-40% without decreasing portfolio value, each budget cycle, by making better project decisions.

Forty percent is BIG, and you may not be convinced by a claim based on models. Accordingly, I offer further evidence by explaining the 6 reasons that orgnizations miss opportunities to obtain more value from their project portfolios. 1) errors and biases in judgment, 2) failure to see the forest for the trees, 3) lack of the right metrics, 4) ignorance of methods for quantifying project value 5) inattention to risk, and 6) inabilitiy to find the efficient frontier. Each of these reasons can by itself produce significant losses. It should not be surprising, therefore, that the combined effect could be a 40% loss of value.

As you read the 6 reasons, consider the degree to which each is a factor in your organization. Understanding organizational dysfunctions is useful even if you are not implementing a state of the art, project portfolio management system. By taking steps to mitigate problems that affect your organization, you may be able to reduce costs while obtaining more value from your projects. Given the importance of project decisions, obtaining even partial improvements will be well-worth the effort.