Portfolio Investment

Optimisation

Stuart Cassie

Defence Estate And Base Services Summit

21 September 2016

What is Portfolio Management?

Where does Portfolio Management fit and where does

optimisation start and finish?

CAPEX & OPEX – never the twain shall meet…..

What does good look like?

Contents

What is Portfolio

Management?

What is Portfolio Management?Portfolio Management – the practice

used to identify, prioritise, plan,

measure, control and optimise return to

the business on the portfolio of

investments at both an individual and

aggregate enterprise level across the

entire investment life-cycle

Program Management - the centralised

coordinated management of a group of

projects to achieve the program’s

strategic objectives and benefits – not

available by managing them individually.

Project Management - the oversight of

project activities with the goal of

managing risks, building accountability,

controlling cost/budget and measuring

benefits.

Levels and relations between portfolio, program and project

Tactical

Strategic

HighComplexity/interdependencies

Low

Portfolio

Management

Program

Management

Project

Management

• Strategic alignment

• Prioritization and funding

• Monitoring

• Group of related projects

coordinated and managed

collectively to achieve

desired outcomes or deliver

capabilities

• Defined scope, budget,

schedule

• Unique deliverables

• Progressive elaboration

Where does Portfolio

Management fit and

where does

optimisation start and

finish?

Where does Portfolio Management fit?

Vision

Mission

Organisational Strategy

& Objectives

Project Portfolio

Planning &

Management

High Level Ops.

Planning &

Management

Management of

On-Going

Operations

Management of

Programs &

Projects

This is where

Portfolio

Management

should fit in your

organisational

planning

The portfolio management cycle – when does optimisation start and finish?

Identify business drivers

• Organisation strategy & drivers identification

• Asset requirements

• Customer requirements

• OPEX and asset management requirements

Identify & screen projects

• Project identification

• Risk identification & analysis

• Project screening

Prioritise portfolio

• Business case analysis

• Portfolio value

assessment

• Portfolio optimisation

Plan delivery

• Integrated portfolio level

delivery planning & scheduling

• Operational stakeholder

considerations & integration

• Commercial models,

contracting &

procurement strategies

• Delivery process, controls &

procedure design

Execute

• Design management

• Project cost & schedule management

• Risk identification, analysis and management

Measure & improve

• Earned value measurement and analysis

• Data management & modeling

• Improvement identification & implementation

assessment, strategy and planning

Strategy

Identify Business Drivers Identify & Screen Projects

Capital

Projects

Portfolio

Value Creation

CAPEX & OPEX –

Never the twain shall

meet…..

Does this sound familiar?

Why is it OPEX considerations are often poorly considered

during CAPEX decision making?

Safety in design has been on a 20 year journey, ‘Design to

Operate’ needs to go on a similar one.

CAPEX & OPEX

CAPEX & OPEX – Total Cost of Ownership

Operating Costs

Asset Management

Costs

Power & Utilities Costs

Safety Costs

Unplanned Downtime

Replacement Costs

Labour, Training &

Education Costs

Project Costs

20%

80%

What does good look

like? – A real life tale

of two divisions…..

Two divisions in the same business

Both use the same project management process

In 2005 the two divisions’ management reporting line was split

One division continued in the same way

One division developed a new approach to improve management of the capital portfolio

Overview

In January the Commercial Manager calls the Engineering

Manager

The engineering manager starts a list by looking at the

previous year’s list

Management is polled for new ideas, a screening study is

done of the new ideas for costs and benefits

The lead team reviews the list, and select projects via a

semi –political/rational process ‘decibel management’ -

capital is allocated to the individual budget units

The list is put away until January of the following year

Approach 1 – “The February List”

‘Supporting’ Systems:

‒ Microsoft Excel list of projects

‒ ERP for actual capital expenditure

Approach 1 – “The February List”

Approach 1 – “The February List” Performance

30 – 40% of budgeted projects get cancelled or deferred

20-50% of the budget is NOT spent

Typical return of $80 NPV for every $100 of capital invested….

2003 2004 2005 20060%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Capital Budget Delivery

0%

5%

10%

15%

20%

25%

30%

35%

40%

2004 2005 2006

% Projects Cancelled

Entry into the portfolio was only considered after a project had completed the “Assess” phase

All projects then rated on a set criteria and then ranked against each other

The ranked list of projects submitted to the lead team for sanction

The executive manager ensured that the projects were aligned with corporate strategies & operational requirements

A resource plan to deliver the projects was developed

Much greater emphasis on capital forecasting

The lead team met every quarter to specifically review the status and performance of the portfolio. New projects were also considered. The look ahead period was increased to 18 months (average cycle time for projects)

Approach 2 – Portfolio optimisation

Identify Portfolio Risks

Analyse Portfolio

Risks

Develop Portfolio Risk

Responses

Portfolio Management Process

Current Strategic Plan

Aligning Process Monitoring and

Controlling

Project

Management

Process

Current Strategic Plan Goals and

Definitions

Key

Performance

Criteria

Capacity

Definition

Prioritisation

Portfolio Balancing

Allocation

Categorisation

Selection

Evaluation

Identification

Portfolio Reporting

and review

Strategic

Change

Project Execution &

Reporting

No

Yes

Approach 2 – Portfolio optimisation

Monitor and Control

the Portfolio Risks

Approach 2 – Portfolio Optimisation - Systems

Cost / Contract

ManagementChange Management

Contract Management

Claim Management

Issue Management

Planning & SchedulingProject Management

Risk Management

Project Scheduling

Resource Management

Content Management

Business Process Management / Workflow

Portfolio ManagementPropose, Prioritize & Select Initiatives

Review, Track & Adjust Portfolio

Integration with other core Applications

Risk AnalysisQuantitative Risk Analysis

Qualitative Risk Management

Analytics / BI / Reporting

ERP

Approach 2 – Portfolio Optimisation Performance

Only ~5% of projects were now cancelled or deferred

95%+ of capital budget was invested

The NPV returned by the portfolio increased year on year

2003 2004 2005 2006 2007 20080%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Capital Budget Delivery

2004 2005 2006 2007 20080%

5%

10%

15%

20%

25%

30%

35%

40%

% Projects Cancelled

Approach 1 vs Approach 2 – ResultsFebruary List

0

1

2

3

4

5

6

7

8

9

2005/06 2006/07 2007/08 2008/09

$M

Capital Spend Capital Budget Delivered NPV

New Approach

0

5

10

15

20

25

30

35

40

45

50

2005/06 2006/07 2007/08 2008/09

$M

Capital Spend Capital Budget Delivered NPV

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