Project Portfolio Management Techniques Using Statistical Analysis MetricsHigh-Level Concepts

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Portfolio Management - Premise Companies Undertakes Programs & Projects to Define, Develop, Execute, & Validate Business Strategies that are Established to Create & Sustain Shareholder Value Projects are temporary endeavors undertaken to create unique products & services Portfolios are groups of related projects to be managed in a coordinated way to achieve the business strategies and objectives Products & services are the direct, tangible, measurable, verifiable, results realized from completing projects

Projects are a Basis for Future Profitability of the Enterprise Portfolio Management is Managing a Logical Collection of Projects in a Manner that Achieves or Exceeds the Target Business Initiative(s) and Desired Profitability Levels

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Portfolio Management - Purpose The Purpose of a Project is to Make a Profit All elements of the project are to be analyzed in a systemic manner that demonstrates the impact of alternatives on the project profit. Each project, managed as part of an integrated group of projects, is to be analyzed in an systemic manner that demonstrates the impacts of project-specific decisions on all other projects, and most notably on the multi-project profit. As projects are managed without regard to profit, undesirable, profitreducing decisions will be made, both randomly and systematically, throughout the enterprise.

A Collection of Best-Practice Business and Project Management Techniques Exist to Aid Portfolio Management Portfolio management can be used to manage the integration of projects, regardless of their function (Mfg, Mkt, Sales, IT, etc.)

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Portfolio Management - Process Identify & Exploit the Limiting Factors to Growth Improve Portfolio Management & Resource Allocation Leading to Greater Ability to Deliver Business Initiatives that Generate: Increased Portfolio Profitability Improved Product & Service Differentiation Improved Creation & Management of Leadership Brands Increased Product Speed to Market & Availability Improved Product Quality & Consumer Satisfaction Improved Coordination of Interdependent Center and Business Groups and Processes

Achieve and Manage the Integration & Coordination of Project Portfolios for the Center, Individual Businesses, or Combinations of Both4

Portfolio Management - Payoff Provide Integrated Measurement & Reporting to Deliver: Improved Selection of Future Projects - What Drives More Value & ROI?, Is It Likely to Succeed? Improved Project Control that Increases the Likelihood that the Project Will Produce as Expected - On Time, On Budget, At Quality Improved Stakeholder Expectation Management Improved Post-Project Validation - Prove the Value Improved Use/Reuse of Project Learnings & Work Products Product, Project & Process Improvements

Result: Greater Portfolio Alignment & Management Greater Recycling (Re-use) of Intellectual Capital Greater Shareholder Value, Market Leadership, Responsiveness to Change, Corporate Image, and Associate Retention Greater Coordination and Integration of Cross-Functional and 5 Cross-Business Initiatives and Teams

Simple Single-Phase Project Management SystemMeasure/ Report Business Value End State Scope/ Work Breakdow n Resources / Materials Perform Reqs

Costs

Schedule

Contain Risks

Contracts

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Project & Portfolio Value Estimation & MeasurementEarned Value Analysis (EVA)Measure Project Schedule Performance and Project Cost Performance In Dollars - Estimate to Completes (ETCs) for Schedule and Cost Are Easily Derived

Benefit-Cost Ratio (BCR)Measure Relative Project Profitability Using the Ratio of Discounted Cash Outflows Versus Inflows - Must Use With Absolute Contribution to Project Value

Expected Monetary Value (EMV)Statistically Assess Project or Decision Value By Weighting the Magnitude of the Outcome by the Probability of the Outcome

Decision Tree AnalysisDetermine Expected Payoffs Of Alternative Actions Using a Tree, of Decision Points and Probabilities, that Represents a Sequence Decision Situation

Dollar Index of Project Profitability (DIPP)Measure Return on Each Dollar of Cost Using the Ratio of the EMV against the ETC

Return on Investment (ROI)Measure Return using the Ration of Net Benefits to Investment Costs

Resource Pool Management MatrixEvaluate Portfolio-Level Planned Resource Consumption Against Total Pool Available

Systems-Thinking ToolsEmploy Causal Loop Analysis & Archetypes to Define the Behavior of Integrated Things 7

Earned Value Analysis (EVA)BCWS = Budget Cost of Work Scheduled - Performance Management Baseline (PMB) BCWP = Budget Cost of Work Performed - Earned Value ACWP = Actual Cost of Work Performed SV = Schedule Variance = BCWP-BCWS = Value of Work Performed Against Plan CV = Cost Variance = BCWP-ACWP = Cost of Work Performed Against Budget SVP = Schedule Variance Percentage = SV/BCWS CVP = Cost Variance Percentage = CV/BCWP CPI = Cost Performance Index = BCWP/ACWP BAC = Budget At Completion EAC = Estimate At Completion = BAC/CPI ETC = Estimate To Complete = EAC-ACWP EAC BAC

S-Curve

Time Now Cost Overrun

Costs ACWP BCWS BCWP Late CV SV

PMB

Late Time Project End

Project Start

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Benefit Cost Ratio (BCR)BCR =2010

Net Present Value (NPV) Revenue (Inflow) Net Present Value (NPV) Costs (Outflow)2011 2012 2013

NPV =

Cash Yr 0 + (1+CoC)0

Cash Yr 1 (1+CoC)1 $0 1.1

+

Cash Yr 2 (1+CoC)2

+

Cash Yr 3 (1+CoC)3

+

...

6 year(1) NPV Inflow = $0 + 6 year(1) NPV Inflow =

+

$17->34M $14->26M + + 1.33 1.21

...

= $61-130M

NPV Outflow = ($2.16M+$1M) + NPV Outflow =

$0 ($4.78M+1M) + + 1.21 1.1

$0 1.33

+

...

$3.2M + $5.2M = $8.4M

BCR =

61->130 = 7.3->15.5 8.4

Assumptions: 10% Cost of Capital (CoC) Internal Burdened Team Cost of $1M for two years prior to achieving benefit(1) Assumes 5 years of program benefits

Industry hurdle rates are approximately 1.25 to 1.33.9

Expected Monetary Value (EMV) and Decision Tree AnalysisEMV = Payoff * Probability of Success Payoff = Expected monetary gain Probability of Success must equal 100 for each branch (e.g. heads P=0.50 or tails P=0.50) Example: Project Cost = $200,000 If Demand is High: Profit Associated with High Level of Mfg = $700,000 Profit Associated with Low Level of Mfg = $150,000 If Demand is Low: Profit Associated with High Level of Mfg = $100,000 Profit Associated with Low Level of Mfg = $150,000

Payoff $500,000 -$100,000 -$50,000 -$50,000 -$200,000

Evaluate Decision to Develop versus Dont Develop EMV (High Level Mfg) = (0.40)($500,000) + (0.60)(-$100,000) = $140,000 EMV (Low Level Mfg) = (0.40)(-$50,000) + (0.60)(-$50,000) = -$50,000 EMV (Develop w/High Level Mfg) = (0.70)($140,000) + (0.30)(-$200,000) = $38,000 EMV (Dont Develop) = $0 EMV Suggests Develop w/High Level Mfg

$0

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EMV and Dollar Index of Project Profitability (DIPP) (1 of 3)Objective: Prioritize the Project Portfolio to Manage Project Profit DIPP = Dollar Index of Project Profitability = EMV/ETC

Example Project Portfolio Snapshot Original Project Current Due Due EMV Name Date Date A $ 1,000 1-Aug 1-Aug B $ 2,000 1-Oct 1-Oct C $ 5,000 25-Nov 25-Nov D $ 10,000 30-Jan 30-Jan

%Loss Per Week Late 5 10 20 10 18,000 6,200 11,800 2.9

%Gain Per Week Early 5 5 2 5

Cost ETC $ $ $ $ 200 1,000 2,000 3,000

Simple DIPP 5.0 2.0 2.5 3.3

Total Portfolio:

Expected Monetary Value: $ Cost ETC: $ Expected Net: $ Simple DIPP

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EMV and DIPP (2 of 3)Consider the addition of Project E to the Portfolio Project E has a very attractive DIPP of 4.0 and an EMV of $12,000 Project E has a rigid completion date because a 5 week late delivery creates a $0 EMV Unfortunately, traditional project management seeks to reduce costs or shorten project durations which divert the attention away from the portfolio profit Notice, the portfolio DIPP decreases to 2.2 because the impact to other projects isnt considered Example Project Portfolio Snapshot (after focus Project E is added which delays other projects) Original Project EMV Current Due %Loss Per %Gain Per Simple Due Cost ETC Name (revised) Date Week Late Week Early DIPP Date E $ 12,000 10-Feb 10-Feb 20 5 $ 3,000 4.0 A $ 800 1-Aug 29-Aug 5 5 $ 200 4.0 B $ 1,200 1-Oct 29-Oct 10 5 $ 1,000 1.2 C $ 2,000 25-Nov 16-Dec 20 2 $ 2,000 1.0 D $ 4,000 30-Jan 13-Mar 10 5 $ 3,000 1.3Total Portfolio: Expected Monetary Value: $ Cost ETC: $ Expected Net: $ Simple DIPP 20,000 9,200 10,800 2.2

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EMV and DIPP (3 of 3)Consider the following tactics to improve Portfolio Profitability Crash the Schedule for Project E by focusing more resource on it to accelerate delivery ETC for Project E is increased because of the added resources However, EMV and DIPP are also increased Add more resources to Project D Free up resources and/or extend the end date of other projects to accommodate Project E

Project Portfolio Snapshot (after all Project Trade-offs Are Analyzed) Original Project EMV Current Due %Loss Per %Gain Per Due Name (revised) Date Week Late Week Early Date E $ 14,400 10-Feb 13-Jan 20 5 A $ 700 1-Aug 12-Sep 5 5 B $ 1,600 1-Oct 15-Oct 10 5 C $ 5,000 25-Nov 25-Nov 20 2 D $ 8,000 30-Jan 27-Feb 10 5Total Portfolio: Expected Monetary Value: $ Cost ETC: $ Expected Net: $ Simple DIPP 29,700 10,700 19,000 2.8

Cost ETC $ $ $ $ $ 3,500 200 1,000 2,000 4,000

Simple DIPP 4.1 3.5 1.6 2.5 2.0

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Project Delay Curves and EMVScheduled Delivery Date Costs Scheduled Delivery Date

Costs

Months EMV Variance Due to Schedule Variance Around a Fixed Deadline

Months EMV Reduction for Unavailability of Revenue-Generating Equipment

Scheduled Delivery Date Costs Costs

Scheduled Delivery Date

Months EMV Variance in Market Due to Schedule Variance around a Seasonal Window

Months EMV Variance Based on Value and Probability of Being 1st or 2nd to Market

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Resource Pool Management MatrixMaintain Resource Leveled Project Schedules and Use as Input to Portfolio Resource Management ToolDepartment Plan & Alloc Project Project 1 Project 2 Total Required Total Available Total Unused/(Short) Stores Project 1 Project 2 Total Required Total Available Total Unused/(Short) Training Project 1 Project 2 Project 3 Project 4 Total Required Total Available Total Unused/(Short) Jan-11 5 0 5 7 2 1 7 8 10 2 1 1 0 0 2 2 0 Feb-11 5 0 5 7 2 1 7 8 10 2 1 1 0 0 2 2 0 Mar-11 5 0 5 7 2 1 4 5 10 5 1 1 0 0 2 2 0 Apr-11 5 0 5 4 (1) 2 5 7 10 3 1 1 0 0 2 2 0 May-11 6 0 6 4 (2) 1 7 8 11 3 1 5 1 1 8 2 (6) Jun-11 6 0 6 4 (2) 1 9 10 11 1 2 5 2 2 11 3 (8)

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Systems-Thinking Tools - Archetypes (1 of 2)Understand the Limiting Factors on Processes/Systems Archetypes can be Employed to Help Describe & Understand Patterns of Process/Project Behavior

Archetype - Reinforcing Loop An important variable accelerates up or down with exponential growth or collapse

Fixes that Backfire - Symptom alternately improves and deteriorates (worse than before) Fix: Reframe Root Problem, Reduce Frequency & No. of Fixes Archetype - Shifting the Burden Three patterns exist side by side, reliance on short term fixes get stronger while solving the real problem gets weaker Fix: Dont Use Quick Fixes Archetype - Tragedy of the Commons - Total activity grows, but the gains are dropping Example:Freeway Congestion Fix:Focus on Common Good Archetype - Accidental Adversaries - All performance declines or stays level and low, while competitiveness increases Example: My Win Is Your Loss Fix: Focus on Win-Win Fixes

Archetype - Balancing Loop There is movement toward a target (w/o delay), or else oscillation (w/ delay) Archetype - Limits to Growth There is growth, leveling off or declining Example: Resource Availability is insufficient to Support Initiatives Fix: Isolate interrelationships between success strategies and potential limits

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Systems-Thinking Tools - Causal Loops (2 of 2)Describe Integration Causal Loop Analysis can be Employed to Describe the Interdependencies of Processes/Projects Desire to Improve Project Performance in Portfolio APotential for Tragic Degradation Process

PMs Required for Portfolio A

Portfolio As Needs

Resource Limit Total Project Managers (PMs) Available

PMs Required for All Portfolios

PMs Available Per Project

PMs Required for Portfolio BPotential for Tragic Degradation Process

Portfolio Bs Needs

Desire to Improve Project Performance in Portfolio B

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Critical Success Factors to Portfolio Management Portfolio Management Focus Areas Driven by the single goal of profitability Quantified and measured on contributions to profitability Willingness to make and accept decisions based on quantified profitability analysis

Requires Systemic Project Management Portfolio Manager Must Be Qualified Project Managers, Assigned to the Portfolio, Must Be Qualified

Project Performance Measurement and Reporting Must Be Performed in a Standard, Meaningful Manner Actual Costs and Level of Effort (LOE) Tracked ETC Costs and LOE Tracked Earned Value Analysis (EVA) Used to Measure and Report Cost and Schedule Performance Resource Leveled Project Schedules & Resource Pools Managed Project Assumptions, Constraints, and Dependencies Validated Project Risks Properly Identified, Quantified, and Contained Benefit Cost Ratios (Per Project Profitability) Should Be Measured EMV & Decision Tree Analysis Used for Risk Management & Project Prioritization18

References - Sources Berry, David B., Planning and Managing Multiple Projects, (1999), PM Network, May 1999, Project Management Institute, p. 49-53 Brandon, Daniel M., Jr. (1998), Implementing Earned Value Easily and Effectively, Project Management Journal, June 1998, Vol. 29, No.2, Project Management Institute, p.11-18 Devaux, Stephen A., (1999), Total Project Control, A Managers Guide to Integrated Project Planning, Measuring and Tracking, Wiley Operations Management Series for Professionals, New York, NY, Wiley, p. 7-14, 277-297 IBM Education Services (1998), Risk Management, Armonk, NY, International Business Machines, Inc., p. 4-5 - 4-10 IBM Global Services Institue (1997), Engagement Environment, Armonk NY, International Business Machines, Inc. , p. 1-23 - 1-27 Knutson, Joan (1999), From Making Sense to Making Cents: Measuring Project Management ROI - Part 1, PM Network, January 1999, Project Management Institute, p. 25-27 Knutson, Joan (1999), Making Sense to Making Cents: Measuring Project Management -Part 2, PM Network, February 1999, Project Management Institute, p. 23-24 Knutson, Joan (1999), A Portfolio Management System, PM Network, June 1999, Project Management Institute, p. 21-23 Kazmier, Leonard J. (1996), Business Statistics, Schaums Outlines, Third Edition, Chapters 17-19, New York, McGraw Hill, p. 304-351 Levine, Harvey A. (1999), Project Portfolio Management: A Song Without Words?, PM Network, July 1999, Project Management Institute, p. 25-27 Senge, Peter (1994), The Fifth Discipline Fieldbook, New York, NY, Doubleday, p. 122-123 Smith, Stephen & Barker, Jon (1999), Benefit-Cost Ratio: Selection Tool or Trap?, PM Network, May 19 1999, Project Management Institute, p. 23-26