Portfolio Review and Balancing

Portfolio Review

A balanced portfolio is one that delivers value for the corporate strategic goals.
The act of portfolio balancing necessarily follows the portfolio review and can be performed in different directions. The most common one is to put in relation the value of a project deliverable and its risk. By adding the project costs we then can create these famous bubble charts.

risk value bubble chart

With this diagram the portfolio manager can easily get an overview of the potential of the projects in the portfolio.

Project 1 is a high value risk with low risk, which means that there is a high chance that the full value will be achieved. Projects in this category should be executed above the other ones.

Project 2 und 5 are in the high value / high risk quadrant, which means that there is a good chance the project will fail and the value won't be delivered. The same as in project risk management one can take several actions to deal with the risk side of the project.

  • Avoid the risk: basically this means to not execute the project and to create a new one avoiding the risk with another approach of the solution.
  • Mitigate the risk: find options to reduce the risk. Usually this will lead to higher projects costs which on the other hand reduces the all-over value of the project.
  • Transfer of the risk: The risk is accepted but the impact is covered elsewhere, for example by an insurance
  • Accept the risk: this is the easiest form of managing a risk. Do nothing but accept it. Sometimes an organization needs to go the gambling way as there are no options to change the project approach and to not execute the project.

Project 4 has a high risk but low value. The project is delivering too little value compared the risk it is taking and so the project approach needs to be changed so that either more value is generated or the risk is significantly reduced. About on third and 25 - 30% of spending is falling into this category and by eliminating them the overall value of the portfolio can be dramatically increased.

Project 3 is in the low risk / low value area. We usually find many infrastructure lifecycle projects in this quadrant. These projects are fixing some problems and the value is that a certain service or operation can be executed with less disruptions.

Other forms of bubble charts are

  • Risk versus Reward
  • Technical Newness versus Market Newness
  • Ease versus Attractiveness
  • Strength versus Attractiveness
  • Cost versus Timing
  • Strategy versus Benefit
  • Cost versus Benefit

Apart from the categorization into risk, costs, reward, etc. the projects can be measured by their support of the business. An organization can basically only do three things. A company has to run its operations, it can grow (or shrink) or transform the way it is performing its services or produce the goods. On the other side project deliverables can fix a problem, improve or innovate something.
The table below is combining the two axis and we see that not every combination makes sense in the real world.

 
 Keep the lights on
Improve 
Innovation 
Run 
 Lifecycle, compliance or steady grow related projects
 
 
Grow 
 Major increase of capacity
 Enabling synergies
 
Transform 
 Enforced by technology or migration to a new technology
 Switch to a more powerful technology
 Building up new, leading edge capabilities

 

Keep the lights on

The main characteristic of projects falling into this category is that they are not discretionary so the freedom of making a decision is quite low. Not executing these kinds of projects will result sooner or later in a disruption of the business.
A special form of this category is projects that support organizational changes such as steady growth or projects derived mergers and acquisitions.
The "Keep the lights on" projects are more about fixing or preventing problems by executing maintenance projects or solve compliance issues. The delivered value is a continuous production without any disruptions or incidents. The return on investment is avoided costs, which is a hypothetical figure as you never will be able to 100% assign it to the project deliverable. And avoided costs will never show up in a profit and loss calculation. Still you can calculate a net present value or ROI. To distinguish between the real savings that can be measured at the end of a period, I call the "soft" NPV or ROI, whereas the latter are the "hard" ones.
Still there are some options that need to be reflected

Scope

Is the scope shaped adequate to the problem? To reduce project costs and resource need, the portfolio manager should challenge the project request in this direction. In addition not every lifecycle effort needs to be a project but can be executed as part of the operations (business as usual). A project creates an amount of overhead that not always makes sense.

Timing

Has the project really to be executed now? A project request can be non-discretionary but might be started later for example in another budget year. Be careful by challenging in this direction as the longer the maintenance is not performed the higher the operational risk gets. But in general it is a good idea to balance the execution of "keep the lights on" project over a longer period of time.

Improve

This category of is covering projects that will - as the name suggests - improve a certain service or capability in terms of making it

  • better
  • cheaper
  • faster

as a response mainly to market or cost pressure.

Even the pressure might be high one still can decide to not do these projects as they are discretionary, hence a closer evaluation on the value side of the deliverables makes sense.
The three attributes "better", "cheaper" and "faster" are often linked together and have positive correlation.
Here the portfolio value management becomes the key driver to only choose the best projects. In the balancing process the portfolio manager will ensure that the preliminary project value from the identification phase is challenged and compared with other projects that are currently executed or in the queue.

Innovation

Projects in the Innovation area are extreme forms of improvements where new technologies and/or processes are used to deliver cutting edge products.
These projects are possibly the most exciting but also the most challenging ones for the portfolio manager.

It is hard to evaluate the benefits of these projects as they are usually not delivering any positive net present value or return of investment. Innovation projects will usually establish a proof of concept demonstrating the usability of a certain technology and/or process resulting which will produce even more costs during the execution of the PoC.
That's why it is important to have here a "room" for innovation because you as a portfolio manager would hardly choose such a project candidate using the usual financial evaluation approaches.

Balancing the portfolio

The most common metric used to make project funding decisions is return on investment. However, there are other factors that, when used in conjunction with ROI, enable a project's business contribution to the portfolio to be assessed in a much wider context.

Strategic fit is a measure of how closely aligned a project is to meeting an organization's strategic goals. Strategic fit can be evaluated by looking at how tightly a project's deliverables are tied to supporting the achievement of a strategic objective as compared to the contribution of other projects in the portfolio. The strategic fit of each project is scored or weighted to enable comparison between projects.
Although it only represents one perspective across a project portfolio, the usefulness of the kind of project classification scheme described above is that it enables organizations to map projects into their ongoing business cycle. This can provide insight into what parts of the business cycle are consuming most resources or require investment in any given quarter or year.

Additionally, when viewed in this way, the mix of projects that an organization chooses to fund in its portfolio provides insight into how it is responding to changes in the business environment in which it operates. For example, one year the business cycle may create higher demand for Keep the lights on projects than Green field site projects, and in another year the opposite may be the case.
Applying such a classification scheme to a portfolio, together with strategic fit weightings and traditional ROI metrics can help to ensure that projects are appropriately prioritized and funded to meet an organization's business goals.