Why portfolio management is NOT (just) project selection
Every now and then, I find myself in discussions about “portfolio management” where the implicit definition of portfolio management turns out to be “project selection”. Apparently, portfolio management is often interpreted as a one-off decision (upfront) whether a project must be run or not.
When looking at the essence of portfolio management, I prefer the following definition:
innovation portfolio management: the decision-making process to align all innovation activities with the organization’s strategic goals for optimum value creation subject to constraints on resources and robustness.
From this definition, it follows that at least 3 flaws in the simplest interpretation of project selection:
- It suggests that, once selected, projects are run to completion (I am tempted to add “No matter what happens..”‘ although that often is the case). Or, in a somewhat more mature organization, projects may run until they start failing. In a well-run portfolio management process, projects run until their resources can be reallocated to improve the portfolio value.
- It suggests that portfolios can be build on a project by project basis; however, since projects are almost always connected in various ways, this is not true. These connections include sharing budgets and resources as well as influencing each others benefits (by cannibalization of product sales for example). Even without these dependencies, it suggests that at some point in time (the portfolio meeting) everything that needs to be known about all project candidates is known. This is never the case in reality; attempting to run a process this way means that project candidates that are not yet mature enough are completely ignored.
- More importantly, and possibly reinforced by portfolio theory in economics or mathematics (where portfolio management is seen as an optimization problem), it suggests that a portfolio is composed by switching projects “on” and “off”. In reality, portfolio management is about maximizing the value as much by modifying project parameters (most often start dates and resources allocated) as by just selecting them in or out of the portfolio. Of course, proper ownership of these changes by those responsible for them is needed.
So portfolio management is not just saying yes or no (all or nothing) to projects. At the very least it includes what-if analysis per project (variants as we call them) and preferably a portfolio analysis reveals options in which projects can be improved to contribute more value to the portfolio.
Portfolio management and project prioritization
Even worse, sometimes portfolio management is seen as project prioritization, and then a subsequent process is required where the prioritized list of projects is confronted with budget constraints. It has been shown extensively that a portfolio that is created by first prioritizing and then cutting off the project list when budget is depleted leads to sub-optimal portfolios in most real-life cases. All of the above arguments apply to this approach as well, and in addition the following false premise is the foundation of this approach:
Fallacy: if we try hard enough we can concoct a “project attractiveness” formula that calculates a value for each project so that a higher value for a project always means it will contribute more to the portfolio value.
No matter how hard you try to puts weights on strategic contribution, risk, financial value, and cost, this will never properly address the balance of the portfolio or the strength of the projects’ synergies (whether positive or negative). In addition, it is really tough to get consensus on such a formula: it needs to cover so many aspects of attractiveness that it looses its transparency to the typical decision maker.
See my earlier blog posts here for more complications on project prioritization and here to see how to shift portfolio management from a project-by-project review to a more meaningful portfolio-level alternatives decision-making process. Or have a look at the basic implementation of portfolio scenario composition: