Lee Merkhofer Consulting Priority Systems

Choosing the Wrong Portfolio of Projects

I attended a business conference once where a management scientist spoke of the "60% solution." The idea is that organizations, public or private, obtain only about 60% of the value that potentially could be achieved by their organizations. The remaining 40% of value is lost due to errors in decision-making and weaknesses in business systems.

The phrase, "60% solution," stuck with me because I believe 60% is an reasonable characterization of the way most organizations mismanage their project portfolios. As I demonstrate in Part 7 of this eBook, 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 calculations (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 choices.

Can learning how to choose the right projects enable your organization to substantially increase the risk-adjusted value of your project portfolios? The answer is "Yes"! First, you must understand the 6 reasons organization's choose the wrong projects: 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 that the combined effect could be a 40% loss of project portfolio value.

As you read through the text, consider the degree to which each of the six reasons is a factor in your organization. Understanding organizational dysfunctions is useful even if you are not planning to implement all of the advanced decision-making methods that I describe in this text. By taking steps to mitigate problems that affect your organization, you will likely see opportunities for avoiding decision-making errors. Given the importance of project decisions, obtaining even partial improvements will be well-worth the effort.