The most successful businesses organize the projects they launch into project portfolios to facilitate and optimize management. A number of strategic and operational considerations go into building portfolios, like project scope, strategic goals, risk profiles, and more. But in project portfolio management (PPM), things tend to change fast. This means a previously sensible portfolio of projects may need adjusting. To avoid ending up with imbalanced or low-performing project portfolios, portfolio leaders should frequently assess them for relevance and consistency.
With this knowledge in mind, project management offices (PMOs) can identify concerns early and take corrective action. Here’s what you need to know to effectively understand and evaluate project portfolios within your organization.
The Project Portfolio Evaluation Tripod: Value, Balance, Strategy
According to core project portfolio management standards, the decision to include a project in a portfolio should be based on three key goals:
- Maximizing value at the level of the portfolio
- Achieving the right balance of projects based on their value or risk profile
- Establishing a strong link to strategic action, including the direction and goals of the business
These are the three dimensions you’ll need to consider in order to assess or reassess the performance and quality of a project portfolio. So, what does evaluating a portfolio look like in action?
How to Assess Project Portfolio Performance in 3 Steps
Simplify the project portfolio planning and management process with these three basic steps, guided by the fundamental principles mentioned above.
Step 1: Maximizing the Value of the Portfolio
Maximizing value is undoubtedly one of the most important goals for PMOs, but also for organizations as a whole. However, this requires reaching a common understanding of what “value” means in the context of a portfolio. It also involves identifying sound, reliable ways to measure, assess, and track that value.
The value of a project portfolio depends both on the value of each individual project within it, as well as their arrangement, sequencing, and prioritization over one another.
The pool of resources available to project management professionals within an organization is, by nature, limited. Therefore, a valuable portfolio should make good and efficient use of resources by focusing funds, talent, and means on the highest-value projects in the portfolio.
How exactly do you evaluate the value of a project?
PPM leaders usually rely on a set of evaluation methods and metrics designed to assess a project’s ability to create value-added for the organization.
Among these is the essential return on investment (ROI) calculation. Determining a potential ROI is fairly straightforward, even if you’re not a math whiz. Simply divide the estimated return of your investment by its cost, and voilà!
There’s a caveat, though: it can prove challenging to fully assess a candidate project’s potential benefits. You may have to factor in a number of different aspects (sales projections, logistics costs, impact on organizational processes, etc.) and simulate hypothetical scenarios to assess the project’s potential impact on each of these dimensions.
Another widespread value metric is the net present value (NPV). This evaluates the amount of cash flow that your investment will generate over the years. NPV is expressed as the difference between the present value of cash inflows and outflows.
Step 2: Achieving the Best Risk-Value Balance
Assessing the potential value of the projects that make up a portfolio is not enough to draw an accurate picture of the quality of this portfolio. Why? Because estimates and projections are just that: estimates. There’s always a chance that you won’t be able to realize the hoped-for benefits. That’s called risk.
As a rule of thumb, the initiatives with the highest potential value-added are also the riskiest ones. Ask any investment manager or even just your common sense!
Mapping out projects on a chart or diagram divided into four quadrants (based on value and risk) is one popular method used to evaluate the risk-value ratio of a portfolio. Creating a visual like this gives you an at-a-glance view of the profile of your portfolio. You can then use it to add or subtract projects and reach whatever balance your organization considers optimal.
Step 3: Ensuring Strategy Alignment
Let’s circle back to the notion of value that we explored earlier. ROI, NPV and the likes will allow you to calculate the financial return of a project. This is an absolute definition of value — but value can also be relative.
Projects and initiatives that are helping a business to deliver on its key strategic objectives are creating value even if they’re offering subpar ROI. In fact, organizations should ideally prioritize the projects that align best with their strategies.
To assess strategic fitness, you can examine and analyze each of the projects in your pipeline, trying to determine which of the high-level strategic priorities or goals they align with. The connections you’ve established between project and strategies can then be weighed and scored in order to build a consolidated strategy alignment matrix at the portfolio level.
PPM Software Makes Project Portfolio Assessment a Breeze
You could attempt to take on the challenge of analyzing project portfolios on your own, but working with a project management tool like Sciforma will make your life significantly easier. That’s because PPM software like ours is built to automate essential tasks, help you understand key metrics, and centralize everything you need to plan and make informed decisions about project selection.
Abilities like scenario modeling give you the unique opportunity to anticipate a project portfolio’s health, challenges, and dependencies before you hit the ground running. Navigate your resources, goals, and strategic portfolio management activities all in one place with the help of Sciforma.
