Choosing which projects to invest in is a strategic decision to be taken based on objective data. In this article, we explore the problem of subjectivity and analyze the solution that allows management to make decisions based on a business plan, in a rigorous and transparent way.

 

The Problem

In businesses where the source of income comes from making projects for clients, it is easy to decide which ones are to be put in place: (usually) those of greater profitability. And in some cases, all, if sufficient resources are available.

However, internal projects, such as those of transformation, tend to not offer such an obvious criterion as their value to the business is less evident and often more subjective to anticipate.

The fact that an expected value is subjective does not mean that its effects are not going to be real. It means that the benefits are hard to predict, and investment decisions can be based on perceptions.

This is a challenge that managing directors have always tried to address. The most used resource as a solution has been that of the "business case", which requires promoters to express the profitability or value contribution of their initiative in measurable terms, either in sales increase or in cost reduction.

The main difficulty presented by the business case is the human factor: a promoter of an initiative that has a strong motivation to give positive figures and show that their idea is profitable. Though it is desirable to have intrapreneurs on your team it is essential to validate their figures through a homogenous and and objective process.

The second difficulty of requesting profitability to internal projects arises from each promoter having limited vision to their area of competence, defending their plot without considering the overall vision. In turn, management considers these business cases as if they had been generated with the same criteria, which is not usually the case. Each promoter applies with different degree of ingenuity the data to the same template.

The issue at hand is knowing when to recognize, in an objective fashion, what initiatives will bring more value to the business when the projects deliver their expected benefits.

 

 

The Approach

When it comes to value, it is not always possible to apply a purely financial standard via project profitability based on forecasts in isolation and in comparison of each other.

  • The value contribution of a project to a strategic plan may be broader than profitability, even if the savings or earnings have been realistically calculated. For example, a process automation project can throw modest savings, but positively influence a priority target of customer quality perception.
  • Strategic project planning should not consider initiatives in isolation, as the result of the set may be greater than the sum of the parties. It is common for the result of some projects to enable others, and its set to offer strategic value. This is why program and portfolio management exceeds project management.

The strategic management of projects lies in the competence of the management and must be facilitated by the Project Management Office (PMO) to the extent that their objectives are the maximization of value and not only the transversal coordination.

Thus, the strategic planning approach to the composition of the project portfolio should consider two main elements:

  1. A strategic plan that exposes the objectives of the Organization
  2. A list of project proposals (initiatives)

With these two elements, we can prioritize initiatives that will order them from higher to lower value, generating an orderly list of approved projects (portfolio backlog).

Strategic management of project portfolios

A great advantage that offers prioritization of projects by value is that it supports applying resource constraints as a cut-line to its output. If we have a list ordered by value and – for example-a budgetary limitation, we will be able to establish the approval of projects based on those that contribute more value and that are within the available budget.

 

The Process

Once we have the two main elements (objectives and demand), we can start two classification processes that can run in parallel or go in sequence. What is important is to isolate each other to ensure objectivity and ease of adaptation to the general standard.

Process 1: Prioritization of Objectives

Participants: Board of Directors
Objective: To put some objectives in front of others, with specific weight of each one on the total.

Sometimes strategic plans already specify priorities, but in others they do not give explicit weight by objective. For example, how much more important is "to grow in sales by 20%" than "to increase operating efficiency by 15%"?

There are several techniques that can be employed to achieve a table like the one above. From something as simple as an agreement amongst the Board of Directors to the most sophisticated such as an Analytic Hierarchy Process (AHP). The latter could be considered more rigourous, though its execution could be simple if you have a Pairwise Comparison Tool, like the one provided by ITM Platform.

This simple table will generate an orderly and quantified list of objectives.

As an added feature, ITM Platform calculates a "consistency ratio" that indicates how logical and objective the prioritization is. In this article, you will find an explanation of how this index is calculated.

It is possible to make different sets of the same objectives through scenarios, and even use different objectives for different programs. The reality is complex and there is not always a single combination or scenario.

Process 2: Contribution of project value to objectives

Participants: The Project committee and promoters

Objective: To determine how much each project contributes to each objective


Ignoring for now the relevance of each objective on the strategic plan, this step will assign a weight to the contribution of each initiative to each objective. This weight will be translated to a number base on 100, but if you use ITM Platform you can also use the comparison by pairs previously used or use a qualitative methodology based on ideograms such as the image (Harvey balls), providing a visual support.

Process 3: Analysis of the optimal selection of the Portfolio

The two previous phases provide the necessary parameters for the system to calculate the value of each project, based on 100 and depending on the value of each objective.

List of initiatives orders by value

If money wasn't a problem, then we would probably carry out all “reasonable" projects. But in a real organization, the resources available are finite and the previous list of initiatives is not enough to make a good selection of project portfolios.

Thus, it is not only enough to select the most valuable projects, but it is also necessary to filter those that fall within the constraints, be it economic, technical and human resources, or temporary.

In this article, we will use the available budget as an example of a main constraint because this is the most frequent case. Imagine that we should select a portfolio of projects that does not exceed $900.000. Taking the previous list into account, the "New Star Product" ($ 1.5 M) exceeds that amount and also provides a similar value to other more economical projects.

So, with the data we have, we choose the combination of projects that are closer to the available budget: a total of $885.400 and a value of 61% accumulated in three projects.

With this selection achieve the given criteria. But note that the efficient central border graph is indicating the selection is not optimal (value/cost) and that there are better combinations: similar value for less money or greater value for the same sum.

And, indeed, with a portfolio of a total of $528.840 we achieved a contribution of value very similar for 35% less in cost.

If you are interested in understanding how the calculation scheme is made,

Download the guide here.

Conclusion

It is possible to apply rigorous standards in the selection of a portfolio of projects, basing the selection on the value they bring to the business strategy.
Key points to consider:

  • A separation of work between the management team that defines and prioritizes objectives, and the teams that analyze the benefits by project.
  • A process sponsored by management requiring rigorous standards when making investment decisions and implementing transparency between teams.
  • An integrative platform that combines information and exposes the results.

If you want to know more about the management of organizations by projects, download the white paper, where you will learn to:
- Connect management of your Organization with that of projects
- Manage portfolio of projects to create competitive advantage
- Agile Portfolio Management

 

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unicorn on black backgroundToo much innovation can be bad

Innovation is dangerous. Despite the many benefits of marketing new products and services, it is important for any private organization not to underestimate the complications of practicing innovation on a day to day basis. In short, for a private organization with limited resources, too much innovation without sufficient control, can quickly lead to disaster.

Start managing your innovative projects in a unified portfolio with ITM Platform 

Innovative ideas are, by definition, very risky. When you launch an innovative project, the future, the success and acceptance in the market, and often the technical difficulties for its development are unknown.

Solution: portfolio management of innovative projects

Over time, some innovative projects will fail, while others will succeed, they will come to market and may even become established.

This means that, in order to achieve successful innovation, it is imperative to fail, close defective projects, expose oneself to risk and, ultimately, lose financial resources that will not produce results.

So that the risk of innovation does not overwhelm your organization, it is essential to treat innovative projects as a portfolio that is managed according to unified criteria. Therefore the team that manages the portfolio has the important task of monitoring the organization's innovative projects.

Responsibilities include the following:

  • Demand a clear business argument about the commercial feasibility of the development and its relationship with the needs of customers.
  • When there are no spontaneous candidates for innovation, it is essential to request new proposals in the strategic directions and areas that have been identified.
  • Establish evaluation criteria for proposals.
  • Evaluate the proposals, discarding those that are too risky or do not promise sufficient benefits.
  • Decide investment limits for innovative projects, as well as total risk capacity.
  • Compose a balanced portfolio.
  • Coordinate the management of projects that make up the portfolio, especially in the case of shared resources.

How to monitor a portfolio of innovative projects?

When composing the portfolio and with a view of monitoring innovation, it is important to:

  • Have an appropriate balance between different types of projects, such as small technical innovations that improve an existing product or totally new products and services; and types and levels of risk.
  • In addition, it is essential that innovative projects are not linked to each other and can fail or continue independently. Otherwise, if projects share risks and have dependencies, failure in a component could have an impact on the whole portfolio. The fundamental idea of ​​a balanced portfolio is diversification and experimentation: that each project has its own life.
  • Achieve a number of projects low enough to be feasible with available resources (which will often be shared) and high enough to allow the introduction of new products and an interesting flow of projects for the portfolio's half-yearly and annual evaluations.

Evaluation of innovative projects

As we indicated above, in order to evaluate innovative projects and decide whether to keep them in the organization’s portfolio, it is important to define a series of benchmarks. Although it will depend on the sector and the characteristics of each entity, some typical criteria are:

  • Estimated cost
  • Development time
  • Critical resource consumption
  • Alignment with the strategic factors of the organization
  • Innovative and differential character
  • Technical success probabilities
  • Commercial success probabilities
  • Ease of imitation by competitors

Once the criteria are selected, it is important that they be assigned a weighting that allows final estimates to be made. The relative weight of each factor is usually a measure of the organization's situation. For example, in consulting firms that rely on networks of collaborators, the consumption of critical resources will be of little importance, whereas the limitation of development time may have more weight than in other more stable organizations, where innovative projects can be developed with stability over the years.

The score is a good estimate of the value of the project. However, the viability of an innovative portfolio depends on special attention to the composition of its risks. Therefore, beyond that final score reached by the projects based on the selected criteria, it is recommended that the composition of the portfolio of innovative projects make use of an assessment matrix.

The assessment matrix of innovative projects

Many of our readers are already familiar with the ITM Platform risk assessment matrix. The evaluation of innovative projects allows a completely analogous technique to be used.

In the assessment matrix of innovative projects two variables appear:

  • Expected commercial return of the project
  • Risk level

returns/risk

Ideally, all projects will be placed in the upper left quadrant of the matrix, they may be scarce and there may be many projects in the balanced quadrants marked in blue (where returns are proportional to risks).

Bearing in mind that it is good practice to include projects of different types with different levels of risk and knowing that, no matter what we do, some of the innovations will not be successful, a good result is the allocation of the project budget with Percentages that follow a proportion like that of the illustration.

percentages in rectangles

From the location of innovative projects in the matrix and their combination with the punctuation according to the criteria listed above, it should be much easier to make the final decision about which proposals to accept and which to discard.

Innovation will remain risky; but well-organized monitoring will increase the organization's chances of success and learning, with the potential to turn unsuccessful projects into better, more ambitious proposals in line with the pulse of the market.

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Throughout the history of mankind, there have been various ecological catastrophes that have shaken public opinion because of the serious effects they have had on natural resources and human health. Surely some of these would come to mind: The Exxon Valdez disaster, which affected the coasts of Alaska, Fukushima or Chernobyl and their respective nuclear accidents; or the depletion of the Aral Sea to 10% of its original size due to canal diversions by the Soviet Union for irrigation purposes.

With proper project management, such accidents or catastrophes in most cases could have been avoided, as we will discuss in this article. By using one of these real cases, you will understand how most of the problems that arise and that we may think are inevitable, can be anticipated, managed and avoided in a more effective way, thereby reducing impacts and their consequences on our environment.

Water pollution in Flint, Michigan Downtown Flint MI, on Tuesday, October 4, 2016 U.S. Department of Agriculture (USDA) Food and Nutrition Service (FNS) Disaster Household Distribution Program (DHHDP) activities by Genesee County Community Action Resource Department (GCCARD), are helping those in need. USDA Foods are being packaged and delivered to 17,000 households eligible for The Emergency Food Assistance Program (TEFAP) in the Flint area to help address the ongoing water crisis. DHHDP packages are prepositioned in shopping carts in the onsite distribution area that includes receptionists, commodity shelves, assistants, and checkout counters. The DHHDP consists of an additional 14-pound nutrient-targeted food package, containing foods rich in calcium, iron, and Vitamin C – which are believed to help limit the absorption of lead in the body. This number of boxes will be distributed each month for four months. The food is in addition to the regular allotment that TEFAP recipients currently receive. The packing line team included Michigan government employees volunteering their personal time produced hundreds of Commodity Supplemental Food Program (CSFP) and TEFAP packages. CSFP works to improve the health of low- income elderly persons at least 60 years of age by supplementing their diets with nutritious USDA Foods. USDA photo by Lance Cheung. For more information about USDA -- www.usda.gov For more information about FNS -- www.fns.usda.gov For more information about Disaster Nutrition Assistance Programs, including DHHDP -- http://www.fns.usda.gov/sites/default/files/disaster/Disaster-Brochure.pdf For more information about CSFP -- http://www.fns.usda.gov/csfp/commodity-supplemental-food-program-csfp For more information about TEFAP -- http://www.fns.usda.gov/tefap/emergency-food-assistance-program-tefap @USDA

A particular case that may sound familiar recently affected the residents of Flint, Michigan. The economic crisis that has hit much of the planet during the past decade was also felt in Flint, which faced a huge financial debt. To try to reduce its debt, it was decided that a new source of drinking water was to be used. Instead of bringing it from Detroit, it was sourced from Lake Huron, enabling the city to save about $2 million a year, which, considering the situation at that time, would mean some relief. However, to bring it to the city from this new source took time - about two years -, therefore a new source had to be selected so that the residents could continue to have fresh drinking water. It was then decided that the Flint River, which practically crossed the city, would be the solution, which was then implemented in 2014.

However, this was not the solution, but rather the source of their problems. After its first introduction, residents complained of its salty smell and taste. Moreover, the bacterium E. coli was detected and the water analysis determined very high levels of carcinogenic substances and trihalomethanes. As if all this wasn’t problematic already, there was an additional fear that the General Motors factory would have to stop using the water because it was corroding parts of its facility. The water from the river Flint was transferred through pipes that contained lead, which dissolved into the water. This can generate problems, specifically with the nervous and cognitive systems, known as lead poisoning, one of the causes that historians argue to explain the fall of the Roman Empire.

A management possibility for avoidance

Could all of these problems been avoided? It seems that the obvious answer is yes. It is true that the causes were external, with the crisis and the financial situation of the city council. However, a necessary step that was neglected was taking into account the characteristics of the pipes that were carrying the water from the river to the city: these pipes were about a hundred years old and heavily corroded. All of these elements should have been considered and taken into account during the first phase of the risk management process: identification. Focusing only on one element, such as the need to save money, and ignoring the rest was the likely cause of the disaster.

Once this identification process was concluded, both the pipes’ age and lead content should have been observed in the next phase of analysis. In the third phase (evaluation) the magnitude of the risks should have been prioritized.

In Flint, a greater importance was attached to the economic issue rather than to human health, when it should have been otherwise.

Once this process is done, next should be the treatment phase: what can be done to avoid impacts that can be considered catastrophic? And here the process and control of corrosion would have cost between $80 and $100 per day. With that cost and planning they would have saved all the difficulties in the aftermath. If it had been done, it would only be the last phase, the monitoring phase, a simple verification that the systems worked during the time that the works took place.

Due to the consequences of the disaster, for two years Flint’s inhabitants have had to endure non-potable water and between 6,000 and 12,000 of the residents have developed excessive levels of lead in their blood. All this to end up reconnecting the city to the Detroit water network, the same initial situation. This is a great example of extremely serious problems that should be avoided using risk management techniques and tools.

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Qualitative and quantitative risk analysis are two very different processes. In this article we explain qualitative evaluation with an example taken from the video game industry.

In general, qualitative analysis seeks to identify risks by using scales that summarize visually and intuitively the relative dimensions of each risk, allowing to prioritize: providing a visual representation that combines the most basic factors, such as the impact that the risk would have on a project and the likelihood of it occurring.

In spite of its name, qualitative evaluation implies a numerical estimate of these two variables along previously defined scales using a quick and subjective approach. It's something like when doctors ask: From one to ten, how much does it hurt?wong-baker faces pain rating scale

Similarly to the intuitive scale of Wong-Baker's expressions, qualitative assessments of risk have visual translations in a geometric representation that allows a systematic comparison in risk assessment matrices.

In the example that follows, we have used our online risk assessment matrix to estimate the comparative weight of the following risks for a team of developers in a video game studio:

  • Inadequate graphics engine

  • Loss of programmers

  • Failure in approval process of the game build after submission

If we assign impact and probability values to these risks, we obtain the following table.

Risk

Probability

Impact

Graphics engine

20% 40

Personnel

33% 50

Certification

8% 100

The table itself suggests some observations.

  1. Experience, the mother of probability

Firstly, in a video game studio that launches, say, half a dozen titles a year, after 10 years of activity there is a portfolio of 60 titles that allows to draw certain conclusions about the frequency with which these risks occur. The probability estimate is based on the experience of the organization, which has suffered personnel losses in the programming area in one out of three projects.

  1. Simplify and then discuss the details

This model simplifies factors in just two values, but it is important not to lose sight of the fact that the variables hide more complex realities that should appear in the quantitative phases and in the discussions with the stakeholders. For example, loss of talent can hide many different realities, depending on the number of people lost, their roles within the organization, or whether the loss is due to a transfer to another company, vacation, retirement or inability to hire according to the forecasts of the HR department.

With all these nuances, when we load the table into ITM Platform’s online risk assessment matrix we obtain this result:

Risk matrix videogame sector example

Although there is no single interpretation for this type of result, the visualization emphasizes that the most threatening risk for this study is the loss of personnel, while the selection of the graphics engine and certification seem to be more controlled by the workflow and process procedure. The HR department of the studio will probably need a mitigation plan in order to be able to face situations of personnel shortage in times of high load of work. Such a plan could include:

  • Reassignment of tasks to existing resources.

  • Segmenting possible delays, or cost increases in case the scope is maintained.

  • Communication plan to stakeholders involved in the tasks who may suffer because of the delays.

  • In severe cases, reconsideration of non-critical components that allow the viability of the product to be saved.

Remember that you can compose your own set of risks in ITM Platform’s online Risk Assessment Matrix. In addition, if you can register, save and share them with your team.

In the next article of this series, I will expand the example to the context of a quantitative evaluation to better understand the differences between the two approaches.

 

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business management meeting and brainstorming concept with people on the round table in top view

One of the most intangible tasks when managing risks is at the very beginning of the process. Not in designing procedures or planning, which is streamlined thanks to the efforts of the international community of experts in project management.

No. The most fleeting task is to define the risks and identifying threats before they are verified. For this purpose there is no definitive formula. But fear not, because the standard ISO IEC 31010: 2009 includes up to 30 techniques to identify risks which you can use for inspiration.

 

In this article we will discuss a selection of the twelve most interesting techniques. Note that the best results will depend on how you use a combination of different techniques to extract the maximum amount of valuable information. At the end of the day, it is the human talent in your organization who will be identifying, evaluating and planning all aspects related to the risks; techniques are only a shuttle to expedite the talks.

One of the techniques is the familiar SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). Although it is not a specific technique, the upside is that it is well known in any organizational environment, allowing rapid participation of people unfamiliar with the more technical aspects of risk management.

Brainstorming

It is not a specific method for identifying risks, but is commonly used in departments related to the creation and design of the product. However, it can also be applied to this area.

Allowing room for imagination, creativity and exchange of ideas can lead to discovering unidentified risks and thus taking appropriate measures before they happen.

Brainstorming can be done in different ways:

1. Structured brainstorming. Each participant works on their own and share only the ideas that seem most appropriate. A variant of this method is that each team member says his idea without having prior time to reflect on it. The main advantage of this method is that all team members have equal opportunities to contribute their ideas, regardless of their rank in the company or personality profile. The drawback may be the lack of spontaneity.

2. Free brainstorming. The meeting participants bring their ideas spontaneously. The advantage of this system is that participants can build their ideas spontaneously from the contributions of others and letting their imagination flow.

3. Silent brainstorming. In this case, post-it are used by each participant to write down their main ideas. Upon completion, post-its are placed on the board.

Checklists

Checkpoints ensure that no significant errors occur during the execution of the project.

Simplicity is their fundamental advantage. However, placing undue reliance on these lists can lead to avoiding an exhaustive analysis.

Lists are very useful for repetitive and highly standardized procedures such as manufacturing, but are deficient in innovative environments and in the context of customizable services.

SWIFT

The Structured "What-if" Technique essentially consists on an analysis method where you consider what the consequences of certain events could have for the project. The counselor of the session repeated again and again: "Should this happen, what could we do?"

SWIFT usually starts off with a brainstorming session to compile a number of risks, which are then structured in a logical sequence. Then they are analyzed in detail, taking into account their possible causes and consequences and allowing to identify interdependencies.

Situations analysis

Closely related to the method described above, however, this analysis uses different timelines or alternative contexts, which occur as the situations arise.

At the meeting, the impact that each of these scenarios would have on the project should be analysed, and the actions should be undertaken if appropriate.

Fault tree analysis

This is a useful tool to identify and analyze the causes that lead to an unwanted event. It is placed on the top of the diagram and then lines are drawn in the form of an inverted tree, identifying at successive levels the causes that led to it.

This technique could be considered as a particular type of brainstorming focused on causality. Possible causes that produce a certain event are discussed.

The emphasis of this technique in causality makes it particularly relevant when searching for solutions. Having identified the root cause of the problem, it’s easier to find ways to eradicate it and thus cancel undesired consequences.

Bow tie analysis

This analysis is characterized by an emphasis on the graphical representation of causes and consequences of a risk.

The risk is written in the center position of the diagram.

A causal tree, similar to the fault tree analysis, emerges to the left. To the right, a tree of direct and indirect consequences forms a mirror with the causes. The end result of the scheme resembles the shape of a bow tie, where the risk is the knot and the causes and consequences are each of the loops.

Direct observation

Although not a specific technique for risk identification direct observation has a prominent position. In fact, establishing a culture of lifelong care and continuing training is the best way to be prepared for any risk. The team assigned to a project is the first that can sense when something does not work in the appropriate way, making alarm ring and taking the necessary measures.

Incident Analysis

During the realization of a project, previously non identified risks are presented. Once submitted, you must perform an analysis of causality to know the reasons that have led to the occurrence and also examine the impact consequences have had on the whole project.

A register of these events and their analysis will form the basis for the detection of future risks.

Similarly, the repetition of a given risk should lead to an analysis of deeper causes on which we should act to achieve an effective solution.

Structured interviews and surveys

Structured interviews in which team members of different ranks and sections are selected allow you to obtain an overview of project status and potential risks that may arise. Despite the fact that questions are closed, face to face interaction allows to gather open feedback.

Surveys can be considered as a modified version of structured interviews, with the drawback of giving less room to open-ended questions.

However, they can result in larger samples and more representative data.

The Delphi method as an example of iterative system

The Delphi method is based on an expert consultation structured at successive levels that feed into each other, chasing progressively closer to an agreed response that can predict the future of a particular event or project.

In a second round, experts show their answers and these are elaborated in a group.

After several rounds, moderators modify the questions and seek common points that allow to reach a consensus, results are statistically analyzed and a collective response is achieved.

Applied to the identification of risks, the Delphi method is a robust and sophisticated system of consulting experts, as they are asked several times on the same subject thus getting closer and closer to a consensus among them.

Due to the repetitive nature of the consultations, the Delphi method is an iterative technique.

Monte Carlo analysis

The Monte Carlo analysis is a complex system of mathematical analysis whereby arithmetic calculations make approximations in which a precise solution cannot be obtained.

Specific software calculates the odds of different risks considered as random events, taking into account the impact each would have on the project and the likelihood of occurring. If you want to know more about this technique you can keep reading here.

 

Here are some recommended articles:

Our new Risk Assessment Matrix is online

Keys to becoming a good risk manager

Risk management… The what, the why and the what to do

 

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