Popular portfolio questions
The most common question I encounter in real life portfolio discussions is the question: “Which project shall we postpone?” Although I do not keep detailed stats, I would guess that the question which projects to stop is not even second or third. Those places are for “How do we change project X to make it fit in the portfolio?” and “Where can we get more resources?” More on why just project selection is not the essence of portfolio management in my previous post here.
So, which project to postpone?
Coming back to the question, in case of abundance of work, there are three basic policies for answering the question”Which project to postpone?”.
1. First-come first-served
The essence of this approach is to first finish what has been started. It is the basic mode of operation if projects are more or less independently approved via a phase-gated process. Once all resources are allocated, new projects passing their initial gates are put on hold. In this policy, “we do not talk about new projects because they distract us from executing the running ones”. Typical problems include lack of flow (once a project does end, there is not good next project for the resources to work on) and lack of flexibility. If a new and better project proposal comes up, the portfolio cannot be improved.
This usually leads to some form of implementing a prioritization scheme:
2. Prioritize all projects and execute in priority order
Based on a set of criteria all running and new projects are prioritized periodically. This prioritized project list is then used to allocate resources from project #1 downwards until all resources are allocated. One typical problem with this approach is the difficulty of getting to a working definition of priority (not so strange because it is fundamentally impossible to get such a definition that aligns with portfolio value). We find countless discussions getting stuck on which criteria, which scales and weights, and how to apply. Another issue with this approach is the lack of timing in the portfolio decisions. It is important when a project will run, when a new product will be launched, when resource bottlenecks will manifest themselves, because that influences the portfolio value and feasibility. In innovation management , “know-when is often more important than know-how” (I learned from a wise man) .
With this policy, it is easy to confuse urgency with importance, so the preferred policy should be:
3. Postpone where it minimizes value impact
In one sense, this approach resembles the previous one, since it aims at postponing value projects. However, with this value-based policy, we add also look at the impact of postponing high value projects. By looking at the delay sensitivity of each project’s added value, it becomes clear how big the impact of delay is for each project. Low delay sensitivity can come from relatively stable markets, from technological differentiation, from regulatory trends etc.
Sensitivity analysis provides the answer
Practically this means we need a sensitivity analysis around each project’s value. Sensitivity analysis reveals the impact of changes in each project driver on the added value of the project (whether this is portfolio value, project NPV, ROI or any other value indicator). It is a technique that makes sense (pun intended) anyhow in innovation management:
- sensitivity analysis reveals the key uncertainties that need to be actively addressed through risk management in the project or resolved through further homework,
- it reveals these key uncertainty’s impact on value so portfolio risk impact can be properly assessed,
- it can support, or disprove. more generic sensitivity beliefs such as “time to market is always key” or “cost of goods is always critical”,
- it shows where not to put energy, by also showing how little impact most parameters have.
For further reading on how sensitivity analysis works, I would like to recommend the Wikipedia article, even though it is (overly) technical. The way we have embedded sensitivity analysis in FLIGHTMAP is a good example of how to make it accessible in practice (see screenshot above).
All in all, a good sensitivity analysis (based on the business case drivers of each project) is a powerful technique in innovation portfolio management. If only for providing the right answer to the question which project to postpone.