Portfolio Management and Successful Decision Making

Portfolio Management and Successful Decision Making • Ernest Forman, DSc • Professor of Management ScienceGeorge Washington UniversityandCTO, Expert Choice • forman@gwu.edu • http://mdm.gwu.edu/forman ©2007 Expert Choice

Project Portfolio ManagementFrom Project Portfolio Management by Harvey Levine • Today’s businesses find it increasingly important to execute projects efficiently – to do things right – bringing to the customer the expected quality and benefits desired from each project • They find it equally important to optimize their portfolio of projects – to direct the resources to do the right things – in order to meet the organization’s strategic goals. ©2007 Expert Choice

Project Portfolio Management • To accomplish this, best practice organizations integrate project management and project portfolio management (PPM) to tie the executive decision process to resource allocation and day-to-day project execution. • Stakeholders for individual projects (project management) include business owners, business sponsors, and often the end user of a project’s output. They are specifically concerned with satisfying their own business requirements and needs and controlling cost and schedule. ©2007 Expert Choice

Project Portfolio Management • Stakeholders for the PPM process include financial management, senior business executives, and ultimately the stockholders of the organization. They are concerned with optimal investment of scarce company resources and typically are interested in return on investment, strategic alignment, and risk profile of the portfolio. • To satisfy both sets of stakeholders, organizations must define an integrated process that links project management and portfolio management practices. ©2007 Expert Choice

PPM enables businesses to: • Provide a structure for selecting the right projects and eliminating the wrong ones • Align portfolio decisions to strategic business goals • Base portfolio decisions on logic, reasoning, and objectivity • Create ownership among staff by involvement at the right levels • Help project teams understand the value of their contributions ©2007 Expert Choice

Making the Case for Project Portfolio Management • To make the case for PPM, it is necessary to demonstrate how PPM can address real and immediate problems. This is best accomplished by soliciting the input of coworkers to isolate known problems, making interpretations, developing potential solutions and outlining benefits accruing from these solutions, and communicating these findings. Examples… ©2007 Expert Choice

Statement 1. “I’m overloaded with too much work going on”. • Who Says: Any staff member • Interpretation. The staff member has too many projects. • Solution: Indicates a need to reduce the number of projects happening at one time. • Benefit: When the number of projects is reduced, project quality and performance increase as attention focuses on doing the right things. In addition, extra capacity is created for attending to emergencies or engaging in creative thought. • How Implemented: Constrain the number of projects being undertaken so that project managers are not overloaded and can increase productivity ©2007 Expert Choice

Statement 2. “I’m not sure how projects are approved or prioritized… • … or if the decisions are sound and the projects doable”. “The squeaky wheel sure gets the grease around here.” “Some managers on the business side are really good at getting to the front of the line”. “I’m not even asked what I think. We’ll see if they get my support when they come around asking for resources.” • Who Says: The functional manager. • Interpretation. The functional manager is resentful because she or he perceives the project selection process as unfair. Lack of visibility and due diligent, clearly defined etc. ©2007 Expert Choice

Statement 4. “We made this commitment to the client and must fulfill it.” • Who Says: The project manager • Interpretation. Someone has challenged the project’s validity (rightly or wrongly) or attempted to add scope to the project based on new information. In the absence of formal oversight of such requests, the project manager has decided to defend the project. He/she probably feels judged based on whether he/she delivers on time, on spec, and within quality constraints. This dynamic occurs in organizations that haven’t learned that project execution is subordinate to project relevance. Organizations that become fixated on technique will frequently fall prey to this miscalculation. ©2007 Expert Choice

Statement 5. “The project is a must-do” • Who Says: The client. • Interpretation: There is the sincere belief of a client who has decided (often unilaterally) that his project must take precedence over other projects. The client has gotten away with this before and often is willing to threaten taking his project elsewhere • Solution. All projects are assessed for their ability to meet strategic goals, which can then be articulated versus arguing, “Because I say so”. .. The governance body must apply scientific methods when evaluating projects while also allowing intuitive expressions , so the results are defensible and intuitive to system owners. ©2007 Expert Choice

Statement 11. “How can we make decisions with incomplete information?” • Who Says. A PPM governing body member. • Interpretation. PPM governing body members typically need three things in order to commit to a result: • They need to agree on the criteria that will be used to prioritize and select projects. • They need to have clear descriptive information about the projects (for example, the business case. • They need to have a mechanism for applying criteria to create project rankings. ©2007 Expert Choice

Statement 14. Portfolio management should be simpler. • Who Says. Any staff member. • Interpretation: People often avoid change, and implementing responsible portfolio management is a big change for many staff. A staff member may complain that PPM is too difficult in order to avoid accountability or out of fear that critical work will not get done in a timely fashion. • Solution. Simplify as much as possible, recognizing that a number of assumptions can be made about the complex interrelationships that exist in order to make progress. • But…. ©2007 Expert Choice

Statement 14. Portfolio management should be simpler. • With PPM however, multivariate criteria and analysis yield superior results to single-variable decision making. It is possible to combine simplicity with multivariate techniques to achieve a more balanced portfolio. • Organizations that implement this approach rank among the highest performing. • Integrating qualitative and quantitative data improves the probability of success, since it entails the consolidation of both subtle and supporting factors that are important to project work. ©2007 Expert Choice

Structure, Measure, Synthesize • Structure Complexity • Overcome cognitive limitations • Hierarchy of Objectives • Measure • Accuracy • Meaningfulness • Communication • Synthesize • After analysis must put back together • Arrive at consensus and committment ©2007 Expert Choice

Structuring Complexity • Numerous and often conflicting objectives • Qualitative as well as Quantitative • A simple linear list (as in columns in a spreadsheet) is not adequate… ©2007 Expert Choice

How can humans best deal with complexity? Herbert Simon, father of the field of Artificial Intelligence and Nobel laureate wrote: “Large organizations are almost universally hierarchical in structure. That is to say, they are divided into units which are subdivided into smaller units, which are, in turn, subdivided and so on. Hierarchical subdivision is not a characteristic that is peculiar to human organizations. It is common to virtually all complex systems of which we have knowledge. The near universality of hierarchy in the composition of complex systems suggest that there is something fundamental in this structural principle that goes beyond the peculiarities of human organization. An organization will tend to assume hierarchical form whenever the task environment is complex relative to the problem-solving and communicating powers of the organization members and their tools. Hierarchy is the adaptive form for finite intelligence to assume in the face of complexity.” ©2007 Expert Choice

Some guidelines for an Objectives Hierarchy • Experiments have proven time and time again that the human brain is limited in both its short-term memory capacity and its discrimination ability (channel capacity) to about seven things (some people 7, some 9, but on the average, about 7 (G.A. Miller) • To maintain reasonable consistency when comparing n factors, n must be less or equal to nine (T. Saaty) • Elements within a cluster should be relatively homogenous – i.e. differ in importance by no more than an order of magnitude (or two) ©2007 Expert Choice

Measurement Not Everything That Counts Can Be CountedandNot Everything that can be Counted, Counts Albert Einstein

Measurement • Some objectives may be quantitative while some may be qualitative • The relative importance of objectives is always qualitative/subjective • Even when there are no existing measurement scales we can derive priorities with relative comparisons • Measurement requires numbers, but numbers must be used with care ©2007 Expert Choice

Measurement and Numbers • Inputs • Data • Judgments about data about objectives and alternatives (projects) • Accuracy • Does it measure what you think it is measuring • How much variation is there between a measure and its ‘true’ value • Meaningfulness • Can it be meaningfully combined with other measures? Are results ‘mathematically meaningful’? • Communication and Understanding • It is meaningful to those who provided the measures • Is it meaningful to those who interpret the measures ©2007 Expert Choice

"Measurement, Statistics and The Schemapiric View" • S.S. Stevens Science, 30, August 1968, Vol. 161 No 3844, pp. 849-856. • Nominal --admits any one-to-one substitution of assigned numbers (identification of an object) • Ordinal -- can be transformed by any increasing monotonic function. (rank orders) • Interval -- can be subjected to a linear transformation • (determine equal intervals) • Ratio -- admits multiplication by a constant • (determine equal ratios) ©2007 Expert Choice

Common Mistakes • Meaningless aggregation of ordinal information Example -- Retirement places ratedIn the 1990 edition of Retirement Places Rated, author David Savageau ranked 151 retirement places on each of seven criteria and then added the ranks to determine an overall ranking. Using this methodology, Las Vegas Nevada came in 105th. In the next (1994) edition of Retirement Places Rated Savageau improved his methodology by ‘scoring’ (instead of ranking) 183 cities on the seven criteria This time, Las Vegas came in first! ©2007 Expert Choice

Common Mistakes • Weights and Scores • When assigning weights, what do the numbers really mean?When you ‘give’ an 80, what does that really mean? • When you “give” an 80 to one objective and “give” a 40 to another, do you really mean that the 80 is twice as important as the 40? • If you give a weight of 80 to the first objective and later give a weight of 2 to the 95th objective, can you remember what you did earlier and do you really mean that the first objective is 40 times more important the first? • Inadequate Scales • National Association of Home Builders SurveyA survey based on a 1-10 scale resulted in a ratio less than 2 to 1 between the most important and least important objective (out of 30 objectives) Results of priorities derived from pairwise relative comparisons in a structured hierarchy produced results where the ratio of largest to smallest was > 25 to 1! ©2007 Expert Choice

Common Mistakes • Optimization with non-ratio level measures (e.g. ranks, weights and scores, interval measures) • Optimization requires proportionality in measures which means ratio scale measures • Multiple Attribute Utility Theory produces interval level measures e.g. 6 is twice 3, but if you add 100 to each (thereby losing the ratio scale property), 106 is NOT twice 103! • It isn’t clear what level of measure is produced with weights and scores ©2007 Expert Choice

Standard 3-Point Scale Pros • Familiar • Simple Cons • Can’t adequately distinguish between the quality of investments – you don’t get a “good fit” • Does not support effective cost/benefit analysis or optimization – e.g. you might find yourself “skateboarding to work”…

Ratings Scales A Pair of Jeans What if you went to buy a pair of jeans and they were only available in three sizes…. Size 20” Waist 30” Waist 40” Waist …and you have a size 34” waist? ©2007 Expert Choice

Ratings Scales Skateboarding to Work Let’s say you live 30 miles from work, have a choice of 3 modes of transportation for your commute and want to select the mode with the highest cost/benefit… “Effectiveness” Rating Cost Benefit /Cost x 1000 High (1.0) Med. (.66) Low (.33) $30,000 $ 1,000 $ 100 .033 .066 3.300 …you’ll be skateboarding to work!

Improved Ratings Scale Pros • More accurately evaluate investments – “better fit” • Enable better cost/benefit analysis or optimization Cons • Unfamiliar • Clarity - Still may be challenging to objectively apply scales, but better than the three point scale. ©2007 Expert Choice

Analytic Hierarchy Process and Expert Choice • Judgment is used to create a hierarchy of objectives • Data and/or Judgment is used to measure Projects’ (alternatives) contributions to objectives • Technical Judgment to translate data to priorities • Managerial Judgment for qualitative judgments about projects (alternatives) or where no data exists ©2007 Expert Choice

Extensive Flexibility • Same Time Same Place • EC Rich Client with RF Keypads • Same Time Different Places • EC Rich Client with Audio/Video Conferencing • EC Comparion (very simple, intuitive web interface) • Different Times Different Places • EC Rich Client to develop model and analyze results • EC Comparion to collect data and judgments ©2007 Expert Choice

Fine Tuning • Roles • Top level management are responsible for prioritizing objectives and maintains control • Mid level and technical management provide data/judgments where in their domains of expertise • Meaningful synthesis of above leads to CONSENSUS and JUSTIFIABILITY • Targeted Contributions • Designate to what objectives each project contributes ©2007 Expert Choice

Selection/Choice Decisions • Mendota Plant's Options For Expanding Press CapacityComparion • Project Management Improvement • Project Approval Review Board

Validation Studies • Simple yet convincing experiments • Area Validation • Distance from any given city • ….. many others • Booz Allen Reproducing Calculations for the Analytical Hierarchy Process Booz | Allen | Hamilton International Infrastructure Team • Real World Acceptance over more than 20 years! • IBM Silverlake project • Xerox, Dod, CIA, NSA, World Bank, InterAmerican Development Bank, Gartner Group…. ©2007 Expert Choice

SQUARE C CIRCLE A RECTANGLE E DIAMOND D TRIANGLE B 1 Equal2 Equal to Moderate3 Moderate4 Moderate to Strong5 Strong6 Strong to Very Strong7 Very Strong8 Very Strong to Extreme9 Extreme 1. Circle A is _________ times larger than Triangle B 2. Allocate $100 among the five shapes in proportion to the area of each shape. (Write the amount you would allocate inside each shape).

Area ValidationEC modelComparion

Resource Allocation Decisions • Federal Reserve IT Resource Allocation • National Association of Home Builders • IT Portfolio Management

Portfolio Management and Successful Decision Making