Capacity Planning helps to focus efforts on projects with high added value for the organisation over a specific period of time. This requires :
First, defining and prioritizing the project portfolio (Or how to focus on the essentials?)
Then, identifying and allocating adequate and available resources to the projects.
In this post we will discuss the prioritization of the project portfolio.
PROJECT PRIORITIZATION IS ABOUT MAXIMIZING VALUE
Project prioritization (and by extension, portfolio management) is about delivering the maximum value possible through programs and projects. In order to maximize value delivery, governance teams that approve work need to share a common view of “value” in order to select the most valuable work and assign the right resources to that work. Understanding the relative “value” of each program and project in the portfolio is at the heart of portfolio management and determines what work is selected, how it is prioritized, where resources are allocated, etc. In order to select a winning portfolio, every governance team needs to share a common understanding of value; without it, you’ll fail to realize the full potential of your portfolio. Project prioritization using a portfolio scoring model helps evaluate project value.
However, the definition of “value” will differ at every company because every company has different strategic goals, places varying emphasis on financial metrics, and has different levels of risk tolerance. Furthermore, even within a company, each department may interpret the strategic goals uniquely for their organization. Hence, “value” is not clear cut or simple to define. Any organization that manages a portfolio of projects needs to define and communicate what kind of project work is of highest value.
“Priorities create a ‘true north’ which establishes a common understanding of what is important. Without a clear and shared picture of what matters most, lower-value projects can move forward at the expense of high-value projects”
ASSESSING PROJECT VALUE
Assessing project value is particularly important in the first phase of the portfolio lifecycle (Define Portfolio Value) via a work intake process. The only way to have a winning portfolio is to include winning projects, and this requires that project proposals be evaluated. When evaluating new projects for inclusion in the portfolio, a governance team must understand the relative value of the proposed project in relation to the rest of the projects in the portfolio; this will help inform the governance team’s decision to approve, deny, or postpone the project. Every project has inherent value, but that value is relative when compared to other projects. Some projects are transformational in nature and are highly valuable. Other projects may introduce small incremental change and could be of lower value. However, without a consistent approach to measuring the relative value of all projects it is possible for lower value projects to move forward at the expense of higher value projects. This is why a governance team needs a consistent way to measure project value.
THE RIGHT TOOL FOR ASSESSING PROJECT VALUE – THE PORTFOLIO SCORING MODEL
There are many ways to prioritize projects, but the best tool for consistent project prioritization is a portfolio scoring model. Sometimes organizations will want to quickly come up with a stack ranking of projects and apply simpler approaches to prioritize work. This can involve long workshops with senior leaders to establish a rank ordered list of projects. While this approach can be useful in certain instances, it is not easily repeatable. In contrast, a scoring model provides a numeric score that can easily be used to compare projects. Moreover, organizations can also compare the project score of current projects against the project scores of completed projects to understand whether the relative value of projects in the portfolio is less than or greater than the value of completed projects.
The portfolio scoring model includes: the criteria in the model, the weight (importance) of each criterion, and scoring anchors to assess each criterion (e.g. none = 0, low =1, medium = 2, high = 4). A poor scoring model will not adequately differentiate projects and can give the governance team a false sense of precision in measuring project value. A good scoring model will align the governance team on the highest value work and measure the risk and value of the portfolio. Typical portfolio scoring models often include three categories of criteria (see example below):
Strategic Criteria: Based on strategic vision, define and rank the organisation's strategic objectives, to measure the strategic alignment of each project.
Financial Criteria: to measure quantitative financial value for each project (e.g. net present value (NPV), return on investment (ROI), payback, earnings before interest and taxes (EBIT), etc.) or qualitative benefits
Project Complexity Criteria: There are a number of points to be taken into account here: Implementation effort (FTE), Delivery times, Technical approach/technology (Innovation vs. Obsolescence), Exogenous constraints (political, fiscal, social, process, legal standards, etc.).
Risk Criteria: measure of the “riskiness” of the project; this is not about evaluating individual projects risks but evaluating the overall level of risk associated with a project. This is similar to evaluating the risk of an individual stock. Remember, if you could only choose one of two investments that each have the same return, you will always go with the least risky option.
There are various approaches to building a good portfolio scoring model, and we believe it is worthwhile to invest a little time with decision makers to build a robust model from the beginning. For teams that need to manage a high volume of work requests, check out our post on how to use a priority matrix.
I'm Joel Eloundou, your experienced and certified PMO Consultant. I have successfully implemented a project prioritization process, with the following benefits for the organisation:
Improved decision making
Focusing on the most valuable activities
Project risk reduction
Highlighting the value of the PMO