project portfolio formation framework

Reza Masoumi

A FRAMEWORK FOR PROJECT PORTFOLIO FORMATION USING A HYBRID OF

MULTICRITERIA DECISION-MAKING METHODS

July 2015

Construction Management

2

Outline

1) Research objective and contribution2) Introduction3) Project portfolio formation framework4) Case study5) Conclusions and future studies

3

1) Research Objective and Contribution

A systematic approach for project portfolio formation

by prioritizing and selecting projects considering the

most important criteria to form balanced portfolios

under budget constraints.

4

2) Introduction

Project Management Institute (PMI):

A coordinated management of portfolio components to achieve specific organizational goals.

Portfolio

Project AProgram APortfolio A

Project BProgram B (CII IR303-2, 2014)

Portfolios

Programs

Projects

Organizational Goals

What is Project Portfolio Management?

5

The CII Research

Title:

Managing a Portfolio of Projects – Metrics for Improvement

Problems:• Organizations inclined to have several small

projects• Best practices are for project managers and not

portfolio managers

2) Introduction

6

The CII Research Objectives:

• Identify major gaps in current best practices• Identify tools and processes for portfolio

management• Understand major implementation barriers• Recommend best practices to improve portfolio

management• Recommend areas of future research

2) Introduction

7

Collect Data

• Industry Survey• Interviews• Case Studies

Analyze Data

• Identify Business Drivers• Identify Recommended

Practices

Develop Tool

• Portfolio Management Playbook

The CII Research Methodology:

(CII RR303-3, expected 2015)

2) Introduction

8

Barriers based on the CII survey:

• Unclear objectives and priorities (78%)• Lack of industry standards and best practices

(78%)• Lack of management support or direction (74%)• Cost of implementation (74%)• Lack of awareness of value added (59%)

Balanced Project Portfolio Formation

2) Introduction

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3.1) Project Portfolio Formation Process

3.2) Balanced project types and business lines

3.3) Group projects

3.4) Rank projects

3.5) Balanced risk

3.6) Select projects and form portfolios

3.7) Check interdependency

3) Project Portfolio Formation Framework

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Criterion 1 Criterion 2 Criterion 3 Criterion 4 Risk FactorCriterion m

... +

Candidate Projects

Ranking Projects

Budget Ceiling

Organizational Risk Tolerance Level

Selected Projects

P11

P4

P10

P2

P8

P6

P5 P3 P7

P1

P9

Pn

P12

P2P7

P3

3.1) Project Portfolio Formation Framework

Schematic

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Identify portfolio categories and project types

Portfolio Formation Process

Project Selection (Ranking)

Consider budget restriction

Identify preferred criteria for evaluation of projects

Decide about weight of each criterion

Establish quantitative or qualitative values of criteria

Select a decision making method

Do you allocate budget to portfolio categories or

project types?

Are all projects in different project types

ranked?

No

Yes

A

Assign selected projects in their portfolio types

Finish

Portfolio

Project

Decide weight of each portfolio categories for budget allocation

Decide weight of each project types for budget allocation

Assign candidate projects to their related portfolio categories

Did you give weight to portfolio categories or

project types?

Project

Portfolio

Assign candidate projects to their related project types Select projects from

different project types based on their ranks and

budget restriction for each project type

Select projects from different project types

based on their ranks and budget restriction for each

portfolio categories

Create balanced portfolios in terms of risks

Check the interdependencies among selected projects

Select one portfolio

Calculate risk factor of projects

A

3.2Balanced Project Types or Portfolio Categories

3.5 Balanced Risk

3.3Group Projects in Different Project Types and Portfolio

Categories

3.4Rank Projects

3.6Select Projects and Form

the Portfolios

3.7Check Interdependency

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3.2) Balanced Project Types or Portfolio Categories

Rank Tool/technique Used (%)1 SWOT 702 Benchmarking 603 Critical success factors 514 Competitor analysis 385 Stakeholder analysis 356 Core competencies 327 Balanced scorecard 308 Scenario planning 289 Lifecycle analysis 239 Culture analysis 23

10 Stakeholder mapping 22(Gunn and Williams, 2007)

• Use different strategic decision making tools to create balanced project types and portfolio Categories

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3.3) Project Types and Portfolio CategoriesProject types:• Productivity projects: to lower utilities costs or

decrease maintenance costs• Environmental, Health, and Safety (EHS) projects• Maintenance projects• Strategic projects: increased sales/revenues• R&D projects

R&D

Offshore

Portfolio CategoriesA Sample Oil & Gas Organziaiton

Upstream

South America

North America

Middle EastEurope

Downstream

Onshore

Refineries

South America

North America

Middle EastEurope

Petrochemicals

South America

North America

Middle EastEurope

Level 1

Level 2

Level 3

Level 4

MaintenanceProductivity EHS StrategicLevel 5

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3.4) Rank Projects

• Calculate the risk factor of projects• Identify preferred criteria for evaluation and

optimizing the list of candidate projects• Decide the weight of each preferred criterion• Establish quantitative or qualitative values of

criteria• Select a decision making method

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Calculate Risk Factor of Projects

Create an RBS for the portfolio

Are risks for the portfolio evaluated

qualitatively?

Decide on the weights of risks

Evaluate risks on the RBS qualitatively

Select one candidate project from a portfolio

Yes

Use a Likert scale to convert the qualitative risks to quantitative

Calculate projects’ risks using AHP

No

Determine the impact of risks and their probabilities

Are risk factors for all the projects calculated?

Multiply the impacts and probabilities

Add up the expected values

NoYes

Finish

StartRisk factor:• Qualitative risks

• Quantitative risks




Calculate projects’ risk factor using AHP

Determine the impact of risks and their probabilities

Multiply the impacts and probabilities

Add up the expected values

3.4)

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OVERALL PROJECT RISK

INTERNAL RISK EXTERNAL RISK

LOCAL RISK GLOBAL RISK

LABOURRISK

PLANTRISK

MATERIALRISK

SUB-CONTRACTORRISK

SITERISK

PERFORMANCERISK

CONTRACTUALRISK

LOCATIONRISK

FINANCIALRISK

availibility

quality

productivity

availibility

suitablility

productivity

availibility

suitablility

supplywastage

availibility

quality

productivityfailure

ground conditions

accessibility

type of workcomplexity of work

management experience

availability of partners

relationship with clientworkload commitment

contract type

contractual liabilities

amendments to standard form

head office

project

funding

cash flow

economic conditions

inflation

exchange rate fluctuation

technology changemajor client induced changes

politics

A Sample RBS for Contractors

(Tah et al., 1993)

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LABOURRISK

PLANTRISK

MATERIALRISK

PERFORMANCERISK

CONTRACTUALRISK

LOCATIONRISK

INFLATIONRISK

EXCHANGERISK

TECHNOLOGYRISK

POLITICSRISK

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Example of Calculating Risk Factor




LABOURRISK

PLANTRISK

MATERIALRISK

PERFORMANCERISK

CONTRACTUALRISK

LOCATIONRISK

W11 = 0.667 W12 = 0.333

W111 = 0.164

W112 = 0.539

W113 = 0.297 W123 = 0.681W121 = 0.201

W1 = 2/3 W2 = 1/3

W122 = 0.118

INFLATIONRISK

EXCHANGERISK

TECHNOLOGYRISK

POLITICSRISK

W12 = 0.157

W12 = 0.104

W12 = 0.510

W12 = 0.229

3.4)

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Likert scale:RBS and evaluation of risks:

3.4)

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AHP

: value of risk k for project i

Ak : pairwise comparison matrix of risk k

: priority vector of risk k

a 𝑖𝑗𝑘=w kiw kj

Ak = =

(k = 1, …, m and p = 1, …n)

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RF1 = 0.667 * [0.667 * (0.164 * 0.136 + 0.539 * 0.133 + 0.297 * 0.400) + 0.333 * (0.201 * 0.190 + 0.118 * 0.063 + 0.681 * 0.417)] + 0.333 * (0.157 * 0.133 + 0.104 * 0.200 + 0.229 * 0.167 + 0.510 * 0.143) = 0.219

RF2 = 0.329RF3 = 0.166RF4 = 0.287

Example of Calculating Risk Factor3.

4) R

ank

Proj

ects

-Ste

p 1





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Identify Preferred Criteria for Evaluation of Projects

Productivity projectso Payback periodo NPVo IRRo Pioneer producto ROI

EHS projectso Safety complianceo Safety risk o Amount of damage

Strategic projectso Alignment to goalso NPVo IRRo Pioneer producto ROI

Maintenance projectso NPV (based on failure

cost history)o Criticality scoreo Safety risk

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Decide the Weight of Each Criterion

• Weight various in different organizations• AHP• Delphi• Survey

3.4)

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Establish Quantitative or Qualitative Values of Criteria

• Quantitative (facts and figures)

• Qualitative (Likert scale)3.4)

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Select a Decision Making Method

Decision Analysis Methods

Single Criterion Decision Making

Decision Making Groups

Multi-Criteria Decision Making

(MCDM)

Influence Diagram(ID)

Decision Tree(DT)

Multiple Objective Decision Making (MODM)

Multiple Attribute Decision Making (MADM)

PROMETHEE ELECTREAnalytical Hierarchy

Process (AHP)

Multiple Attribute Utility Theory (MAUT)

Benefit-Cost Analysis

Elementary Methods

Pros and Cons Analysis

Maximin and Maximax Methods

Conjunctive and Disjunctive

Methods

Lexicographic Method

Outranking Methods

Simple Multi-Attribute Rating

Technique (SMART)

3.4)

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PROMETHEE vs. AHP

• Consistency in results

• Flexibility on defining preference functions:o Various preference functions for each

criteriono The combination of the Ex-PROMETHEE and

@Risk gives the ability to have probabilistic analysis

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PROMETHEE3.

4) R

ank

Proj

ects

-Ste

p 5

• Preference Ranking Organization METHod for the Enrichment of Evaluations

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PROMETHEE

(a,b) ,

Pj : a preference function for criterion jGj : a non-decreasing function for criterion j

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PROMETHEE I and II

a,b¿ : preference index

(a,b) = (a,b) .

= .

= .

(a) = (a) -

: positive outranking flow : negative outranking flow ф : net outranking flow

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Ex-PROMETHEE

• PROMETHEE on an Excel worksheet• 4 spreadsheets

o Entry sheeto Calcs sheeto Net flow sheeto Preference function sheet

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Ex-PROMETHEE + @Risk™

• Use probabilistic input variables o Values of criteriao Weights of criteria

• Use Monte-Carlo simulation• Analyze projects’ ranks• Give net outranking flow variations

3.4)

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AHP3.

4) R

ank

Proj

ects

-Ste

p 5

• Analytical Hierarchy Process

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Step 7

Step 8

Calculate priority vector

Check consistency (CR < 0.1)

Determine the priority of each alternative

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AHP-Matlab Code

• Avoid numerous calculations

• Open source for future development

• Use Matlab capabilities for probabilistic analysis

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AHP-Matlab Code

Finish

Part 1Enter the value of criteria to form matrix (A),

number of alternatives, number of criteria

Part 2Enter the entities of pairwise comparison matrix of

criteria (C)

Part 3Calculate the C’s priority vector, l max, CI, and CR

Part 4Define the ideal value of each criterion

Part 5Calculating the entities of pairwise comparison

matrix of alternatives

Part 6Calculate the A’s priority vector, l max, CI, and CR

Part 7Calculate the value of each alternative

Start

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3.5) Balanced Risk

• Including organizational risk tolerance level

(risk-prone vs. risk-averse)

• Sensitivity analysis on risk factor to prioritize and

select projects

• Example in the case study

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3.6) Select Projects and form portfolios

• Organizational goals are consideredo Budget for each portfolio categoryo Budget for each project typeo Risk tolerance level

• Risks at different levels are included o Organizationo Portfolioo Programo Project

• The optimized list of selected projects are identified

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3.7) Check Interdependency of Selected Projects

InterdependencyTree

MultiInterdependency

Two wayP4

P1 P2 P3

One wayP4

P1 P2 P3

MultiP4

P1 P2 P3

SingleInterdependency

Two way

P1 and P2 are complimentary

P2 P1

One way

P2 is predecessor of P1

P2 P1

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Finalize this project in the portfolio hierarchy

Single interdependency?

No

Yes

Does the project have any interdependancy?

Yes

One way?

Does the project a preceding project?

Yes

Is the preceding project selected?

Yes

No

Yes

Put the project on waiting list and select the next project

No

Preceding & succeeding projects

selected?

No Yes

No

One way?

Yes

NoNoAll

connected projects

selected?

Yes

No

Any projectsleft?

Finish

No

Yes

Choose a project from selected projects

Start

3.7) Check Interdependency of Selected Projects

38

Three cases:4.1) Case I: All candidate projects in one bucket4.2) Case II: Candidate projects in various buckets

based on their types4.3) Case III: Prioritizing projects based on project

types with balanced budget on portfolio categories

4) Case Study

• A large chemicals, plastics, and fertilizer organization• Plants in over 40 countries

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4) Case Study

• Strategic objectives:o Keep the existing units operational

based on the environmental protection agency (EPA) regulations

o Provide a healthy and safe environment for operators

o Maintain the existing units in good working conditions

o Increase the productivity

Plastics

Organization Portfolio

Fertilizers Chemicals

... Site 2Site 1 Site 15 ... Site 2Site 1 Site 8 ... Site 2Site 1 Site 17

P

EHS

S

M

P

EHS

S

M

P

EHS

S

M

P

EHS

S

M

P

EHS

S

M

P

EHS

S

M

P

EHS

S

M

P

EHS

S

M

P

EHS

S

M

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4.1) Case I: All Projects in One Bucket

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• PROMETHEE selects P1, P3, P8, and P14 instead of P10

selected by AHP• The top three projects have identical ranks in both

methods• EHS projects are not selected

4.1) Case I: All Projects in One Bucket

P2

P1

P3

P4P5

P6

P7

P8

P9

P10

P12P13

P14

P15

P16

P17

P11

Bucket of Projects

Portfolio of Projects

P6

P11

P7

P2 P3

P8

P12 P14

P15 P17

P1

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4.2) Case II: Projects in Various Buckets Based on their Types

P11

P2

P1

P3

P4

P5

P6

P7

P8

P9

P10

P12

P13P14

P15

P16

P17

Productivity Bucket EHS Bucket Maintenance Bucket

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Probabilistic analysis (NPV, IRR, and ROI)

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• Balanced Risk on Portfolios

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4.3) Case III: Prioritizing Projects based on Project Type with Balanced Budget on Portfolio Categories

Allocate budget among top level portfolio categories

Top-down budget allocation

Collect list of candidate projects

Group all projects based on their types

Prioritize candidate projects in each project type

Assign budget ceilings to project types considering portfolio budget

Select high value projects aligned with organizational goals

Form portfolios

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5) Conclusions and Future Studies

Conclusions:• A systematic project portfolio formation

framework is essential for organizations :o Meet strategic objectives/organizational goalso Maximize the value of their portfolioso Create a balance in terms of risks, business

lines, and project types• The organizational goals drive project portfolio

formation

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Conclusions:• An optimized list of projects will be selected to

form portfolios• Favoritism will be avoided in selecting projects• The risks can be included in the portfolio

formation• PROMETHEE is an appropriate MCDM method for

ranking projects• All the criteria should be included in the project

ranking process at the organizational level


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Conclusions:• Organizational risk tolerance level should be

included in portfolio formation


50

Future research:• Standardize list of criteria for various industries• Identify the typical criteria’s weights for different

industries• Develop a comprehensive software to facilitate

portfolio formation process


51

Contributions

• Design a framework for systematic project portfolio formation using a hybrid of MCDM methods (PROMETHEE and AHP)o Incorporate a global risk factor in the process

of prioritizing projectso Use a MCDM (AHP) to calculate a risk factor

having qualitative riskso Create the Ex-PROMETHEE tool for

probabilistic analysis of projects’ ranks

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Contributions

o Consider organizational risk tolerance level in the portfolio formation framework

o Develop AHP Matlab code as an open source to avoid numerous calculations