Lee Merkhofer Consulting Priority Systems
Implementing project portfolio management

Part 2:  Missing the Forest for the Trees

Most organizations put ample effort into making individual projects successful, but not enough effort into making the entire portfolio of selected projects as successful as it could be. The fault does not lie with project managers. Most project managers are highly motivated. If their projects are funded, they do their best to deliver on time and within budget. However, just because an organization has a portfolio of mostly on-time and on-budget projects does not mean that it has the best possible project portfolio, or that it is effectively allocating resources among the projects that it is doing.

The problem is that project managers are focused on their individual projects, not on the success of the overall project portfolio. Few project managers, for example, suggest terminating their projects if things are going badly. Likewise, the typical project manager does not look for opportunities to redirect his or her resources toward the projects of other project managers who would benefit from them more.

Senior executives, unlike project managers, do not judge success on a project-by-project basis. What does (or should) matter to them is the aggregate cost, value, and risk of the project portfolio. Likewise, the chief executive's concerns are mainly about achieving the over-arching objectives of the organization, for example, maximizing return for investors. Whether or not individual projects succeed is, generally, of secondary importance.

Although it should be obvious that it is the performance of the project portfolio as a whole that really matters, many organizations do not manage the aggregate cost, value and risk of their total project portfolio. Either no one has responsibility for managing the project portfolio, or the efforts to do so are not as effective as they could be. Project managers tend to the individual "trees", but no one is caring for the "forest." Failure to see the forest for the trees is the second reason organizations choose the wrong projects.

Problems with Project-by-Project Decision Making

Failure to manage at the level of the project portfolio creates several predictable and closely-related problems, including portfolios with too many projects, inadequate and poorly disseminated project-related information, poor project choices, inconsistent and inappropriate priorities, and misallocated resources.

The Downward Spiral that Produces Poor Project Portfolios

If project selection decisions are not made at the portfolio level, by default the project portfolio is the end result of individual project choices made one at a time with little regard for the impact that one project choice has on the next. The typical result, illustrated in Figure 7, is a dysfunctional feedback loop, or downward spiral, that produces too many projects, inadequate project information, inability to kill failing projects, and too many low-value projects.

Cycle leading to poor project portfolios

Figure 7:   The downward spiral resulting in poor project portfolios.

Too Many Projects

The reasons that organizations generally undertake too many projects have to do with the way projects are generated and the way that project go/no-go decisions are made. In many organizations, projects are initiated by functional executives and others with little regard for whether resources are available to do the work. Most organizations have many pressing needs, so there are many opportunities for spending project resources. Because there is little or no collaboration or coordination among project requesters, many more projects are proposed than there are resources to conduct them. Then, regardless of whether tools are used to formally evaluate project proposals, the basis for a "go" in project-by-project decision-making is necessarily whether or not the proposed project is judged to achieve some hurdle or threshold of acceptability. Project proponents learn to persuasively argue that acceptability criteria are met. Thus, projects look good, especially in their early stages, so many projects pass the hurdle. Later, when people are assigned to projects, it becomes apparent that they are committed for more than 100% of their time.

A typical hurdle for large projects imposed by many organizations is calculation of financial net present value (NPV). If the NPV is positive, the hurdle is achieved and the project is deemed a "go." For most projects, it is easy for project proponents to make assumptions that ensure that the project NPV will be positive. Thus, few projects get screened out based on financial criteria.

Poor Project Performance

Resource managers feel they have no choice but to undertake approved projects, so resources are multitasked in the attempt to satisfy all. The more people multitask, the less efficient they become. Too many projects mean that resources are spread too thinly. Project managers compete for necessary resources. . Key resources become overloaded and progress slows. People take shortcuts to complete projects because they have too many things to work on and can't take the time to do what they need to do right. Stress levels go up, morale suffers, and the team concept starts to break down. Quality of execution drops and project schedules slip. More time is spent negotiating for resources, adjusting project costs and reviewing budgets than on finishing projects.

Inadequate Project Information

Surveys routinely report that management complains about insufficient information for decision-making. For example, R. G. Cooper reports that a study of product development projects at 300 firms "...revealed major weaknesses in the front-end of projects: weak preliminary market assessments, barely adequate technical assessments, dismal market studies and marketing inputs, and deficient business analyses" [1]. The information that is available is typically scattered across different people, departments and business units, making it difficult to aggregate knowledge sufficiently to execute informed decisions about where to invest scarce resources, how to prioritize initiatives and balance project demands. Doing project work competes with time spent developing project data, so too many projects means that insufficient time is devoted to developing better project data.

Failure to Kill Projects

Poor information gives management an insufficient basis for making tough decisions. No one wants to be the one to kill a questionable project, "It's like drowning puppies!" As a result, failing projects don't get terminated soon enough. Failure to kill failing projects compounds the problem. Nothing sucks up resources and exhausts project teams more than trying to save a failing project. Resources are spread even more thinly.

Bias Toward Small, Low-Risk, Short-Duration Projects

Not only does inadequate information lead to an inability to kill projects, it also tends to create a bias toward small, low-value, low-risk, short-duration projects (e.g., extensions, modifications, up-dates). High-value/high-risk projects aren't viewed as feasible (given the constraint on resources). Even if bigger, riskier projects are proposed, management may be unwilling to take the risk due to the lack of adequate information. When a large project does get started, available resources get sucked into the big one, often leaving other projects high and dry.

Insufficient Innovation

Using financial analysis as the primary basis for evaluating projects creates a bias against innovation. NPV calculations compare the future state evolving from the project against the present. What should be happening, though, is a comparison of two future states, one with the project and one without, both conducted recognizing that the challenges faced by the organization are continually changing. Financial analysis frames decisions in a way that is disadvantageous to considering innovative projects, and status quo bias, supporting evidence bias, and bounded awareness compound the problem. "Run the business" projects get the resources. Senior executives still expect innovation to happen, but without allocated resources, it won't.

Disengaged Employees

People want to believe that the organization cares about the work they are doing. Thus, they should be confident that they are working on the best possible projects. An environment where project choices are poorly understood and inadequately explained produces apathetic, frustrated and disengaged employees. If middle managers aren't convinced their projects will make much impact, they'll put less effort into achieving project deliverables. If line and delivery workers are assigned to projects they perceive as unimportant, they are unlikely to devote the energy and hustle that may be essential to success. Employees disengage when they feel the organization doesn't care what they think. Project-by-project decision making with no obvious big-picture strategy causes people to question whether what they are doing is really contributing to the success of the organization.

Other Symptoms of the Downward Spiral

Not sure if your organization is suffering from the downward spiral? Other symptoms include:

  • No standardized way to document or compare projects.
  • Politics plays a bigger role in project selection than business value.
  • Projects experience excessive delays due to not enough resources.
  • Project status can change frequently from "active" to "on hold" to "top priority" and back again.
  • Departments and business units compete, rather than cooperate, when staffing and funding projects.
  • Executives have no clear view of the project portfolio and its business motivations.
  • There's no obvious link between the portfolio and executive-level concerns, such as organizational mission, market share, or stock price.
  • " Project managers frequently find it difficult to find enough of the right people to adequately staff their projects.
  • There's no real evidence that completed projects contribute much to the business.

Inconsistent and Inappropriate Priorities

A related problem is that the failure to establish organizational project priorities causes inefficiencies in the day-to-day allocation of people's time. Consider the following example from an article by the Product Development Institute, Inc. [2]

Imagine that you are a member of a project team in a typical organization. Like most project team members, you are working on several projects simultaneously. You are under pressure from all your project managers to make faster progress. Suppose you finish a milestone on an important project ahead of schedule. Do you use the opportunity to get an early start on your next task on this project?

More likely, you turn your attention to one of your other projects. Your day-to-day priorities are based on your desire to minimize the pressures you feel from your various project managers. Although the organization may benefit more from your taking the opportunity to put your important project ahead of schedule, that project is unlikely to obtain the benefits of your early finish.

The point being made by the authors is that work is always prioritized. It is only a question of who does it and how. In the absence of established priorities, people use their own prioritization methods. One common prioritization method is first in first out (FIFO). "Whatever task shows up in my in-box first, I do first." Another common prioritization method is the "squeaky wheel." Whoever complains to me the loudest gets the work done first." Others include doing first the work for the manager that you like the best, has the most interesting projects, or writes your performance reviews. None of these methods is likely to result consistently in the best allocation of resources for the organization.

Prioritization is a task for the organization's leadership. Unless management makes the effort to prioritize projects, the allocation of project resources will be left to individual project managers, and they will prioritize based on what seems best from their personal perspectives, not the perspective of the organization as a whole. The results will be unpredictable and not likely in the best interests of the organization.

Misallocated Resources

Too often, an organization's approach to allocating a limited budget is something like this. Individual business units identify projects, compute their funding needs, and submit budget requests. When the total funding requirement is computed, executives decide that spending must be reduced. Rather than consider carefully how the shortfall should be distributed across organizational units, the decision is made to cut each unit's request by the same percentage. Taking the same cut from each unit's project portfolio is regarded to be "fair."

Fair Share Allocations Aren't Fair

The problem with this approach is that all organizational units do not have the same ability to absorb cuts in spending. A 10% reduction in project funding may result in more than or less than a 10% reduction in the value delivered from the unit's projects. In some extreme cases, such as that illustrated in below, eliminating a fraction of funding can eliminate all of the value of the project!

Incomplete bridge

Figure 8:   Cutting the budget may eliminate all of the value of a project portfolio.