1. Mgt 613 - Project Portfolio Management and the PMO Module 3 - Portfolio Risks & Balancing
Dr. Alan C. Maltz
Howe School of Technology Management
Stevens Institute of Technology
© Alan C. Maltz, Ph.D, 2014

2. Portfolio balancing
To develop the portfolio component mix with the greatest potential, to collectively support the organization’s strategic initiatives and achieve strategic objectives; balanced against risks.
© Alan C. Maltz, Ph.D, 2014

3. Why we need a balanced portfolio..
Most NP portfolios are unbalanced; they feature the wrong mix of projects.
Most are too heavily weighted toward the short-term, with a noticeable lack of visionary projects.
Certain markets or business arenas of the company are receiving a disproportionate amount of resources, far greater than seems sensible in light of the business opportunities.
Portfolio balance is also important in order to manage risk. So, if attaining the correct risk profile in your portfolio is an objective, then the balance of projects in terms of risk and reward is an important dimension of portfolio balance.
(Cooper, Edgett et al. 2001)
© Alan C. Maltz, Ph.D, 2014

4. What methods are available?
Charts are the most popular way to display balance in new product portfolios
Charts are favored for their ability to visually display the balance of projects in the portfolio
Visual representations include the popular portfolio maps of bubble diagrams
© Alan C. Maltz, Ph.D, 2014

5. Bubble diagrams
(PMI 2013)
© Alan C. Maltz, Ph.D, 2014

6. Portfolio balance – often discussed, poorly defined ..
Bread and Butter
Pearls
Rye
Akoya
Pumpernickel
Mabe
Sourdough
Tahitian
Confused
Biwa
Portfolio balance is a much discussed but poorly articulated concept. In the absence of quantifiable strategic and financial guidelines, balancing a Portfolio remains an elusive goal.
A good way of demonstrating the potential strengths and weaknesses of a Portfolio is to display its Projects (assets) by their probability of technical success and their commercial value (if launched and marketed successfully).
While almost all organizations have a fair representation of bread & butter Projects (cash cows), many have white elephants that are neither technically nor commercially attractive. Although all organizations strive for a disproportionate representation of pearls, the challenge is to unlock the technical potential of their oysters so that they can become pearls over time. Overall, it is this dynamic shift between the quadrants that predicates how well balanced a Portfolio is.
Pearl Bay
Abalone
Babar
Malaspina
Kumamoto
Jumbo
Royal Myagi
Dumbo
White Elephants
Oysters
Attributed to A.D. Little and SDG
© Alan C. Maltz, Ph.D, 2014

7. A Commercial System – Balancing Risks
Powersteering© by UPLAND
© Alan C. Maltz, Ph.D, 2014

8. Bubble diagrams ((Cooper, Edgett et al. 2001)
© Alan C. Maltz, Ph.D, 2014

9. A Commercial PPM System – Project Selection
Powersteering© by UPLAND
© Alan C. Maltz, Ph.D, 2014

10. A Commercial PPM System – Top Down Governance
Obtain top-down visibility into all IT work & investment to improve alignment with business strategy.
Optimize IT delivery by balancing work requests & proposed projects vs. the active portfolio.
Roll-up data without requiring granular tracking of all resources & tasks.
Drill into details of underlying portfolios & projects at a click.
Powersteering© by UPLAND
© Alan C. Maltz, Ph.D, 2014

11. Portfolio balance – often discussed, poorly defined ..
HIGH
25% LOW RISK & HIGH VALUE PROJECTS
25% LOW RISK & LOW VALUE PROJECTS
25% HIGH RISK & HIGH VALUE PROJECTS
25% HIGH RISK & LOW VALUE PROJECTS
25% RESOURCES ALLOCATED TO
LOW RISK & HIGH VALUE PROJECTS
HIGH RISK & HIGH VALUE PROJECTS
LOW RISK & LOW VALUE PROJECTS
HIGH RISK & LOW VALUE PROJECTS
25% GROWTH EXPECTED FROM
LOW RISK & HIGH VALUE PROJECTS
HIGH RISK & HIGH VALUE PROJECTS
LOW RISK & LOW VALUE PROJECTS
HIGH RISK & LOW VALUE PROJECTS
Although tempting to do so, few Portfolios are ever balanced by having a proportionate allocation of (a) Project types, (b) resources, or (c) growth expectations in each quadrant.
It is far better to provide Portfolio displays that bear different decision-relevant metrics so that Senior Management can be informed of the strengths and weaknesses of the Portfolio along these metrics.
PROBABILITY OF SUCCESS
LOW
LOW
VALUE
HIGH
© Alan C. Maltz, Ph.D, 2014

12. The success of PPM depends on strategic and business alignment..
STRATEGIC PLAN
INPUTS & OUTPUTS
Strategic orientation
Growth objectives
Scenario analysis
Effective and efficient Portfolio Management is the result of creating interdependent linkages between – in order of precedence – the Strategic Plan, Portfolio Plan, and Business Plan such that the outputs from one become the inputs to another.
These plans should be temporally related in an organization. In most organizations, the Business Plan follows the Strategic Plan leaving the Portfolio Plan with both its budget and human resource constraints to ‘figure out’ how the objectives of the Strategic Plan will be met.
PORTFOLIO PLAN
INPUTS & OUTPUTS
Scenario analysis
Portfolio analysis
Portfolio recommendation(s)
BUSINESS PLAN
INPUTS & OUTPUTS
Portfolio recommendation(s)
Investment strategy
Portfolio execution
© Alan C. Maltz, Ph.D, 2014

13. Which dimensions to consider?
Fit with business or corporate strategy (low, medium, high)
Inventive merit
Strategic importance to the business (L,M,H)
Durability of competitive advantage (short, medium, long- term)
Reward based on financial expectations (modest to excellence)
Competitive impact of technologies
Probabilities of success (technical and commercial success as percentages)
R&D cost to completion ($)
Time to completion ($)
Capital and marketing investment required to exploit ($)
© Alan C. Maltz, Ph.D, 2014

14. How about components of scoring models?
© Alan C. Maltz, Ph.D, 2014

15. How about components of scoring models?
Management interest
Customer interest
Sustainability of competitive advantage
Technical feasibility
Business case strength
Fit with core competencies
Profitability and impact
X: Value to the company
Profitability (0.66)
Competitive advantage (0.34)
Y: Probability of success
Customer interest (0.25)
Technical feasibility (0.50)
Fit with core competencies (0.25)
© Alan C. Maltz, Ph.D, 2014

16. Also, look at the balance across…
Markets or market segments (market A, B, etc.)
Product categories or product lines (product line M, N, etc.)
Project types (new product; product improvement; extensions and enhancements; maintenance and fixes; cost reductions; and fundamental research)
Technology or platform types (technology X, Y, etc.)
© Alan C. Maltz, Ph.D, 2014

17. Bubble diagrams
(PMI 2013)
© Alan C. Maltz, Ph.D, 2014

18. Risks and Uncertainties…
“Reports that say there's -- that something hasn't
happened are always interesting to me, because
as we know, there are known knowns;
there are things that we know that we know.
We also know there are known unknowns;
that is to say we know there are some things we
do not know.
But there are also unknown unknowns,
the ones we don't know we don't know.”
U.S. Secretary of Defense Donald Rumsfeld, 2002
© Alan C. Maltz, Ph.D, 2014

19. Definitions of risk, uncertainty and outcomes..
RISK – The likelihood of occurrence of one or more unfavorable outcomes (e.g. weather catastrophe) defined by a probability of such occurrence and a measure of its magnitude
MITIGATABLE RISK – Risk that is largely controllable (e.g. engineering specifications) and which, over time, can be lessened or nullified with adequate resources
UNCONTROLLABLE RISK – Risk that is largely uncontrollable (e.g. drug efficacy) and which, despite the provision of adequate resources, may not be lessened or nullified
UNCERTAINTY – The range of possible outcomes associated with an event (often stemming from a decision); such outcomes may be discrete (e.g. product label) or continuous (e.g. market share) in nature
OUTCOMES – Ranges of possible states of nature (e.g. resource estimation) which can be defined by a distribution and in which each state is characterized by a likelihood of occurrence
© Alan C. Maltz, Ph.D, 2014

20. Portfolio risk process..
Define Framework For Risk Management
Identify
Ownership & Allocation
Evaluate
Plan Mitigation Actions
Implement Actions
Assess Effectiveness
Embed & Review
© Alan C. Maltz, Ph.D, 2014

21. All risks are not created equal..
CAUSES OF RISK
Decomposition of the causes of risk is essential to quantifying overall risk.
In practice, non-mitigatable risk associated with a Project or Program is quantified. Otherwise, Projects and Programs can be burdened unnecessarily with the inclusion of risks that are largely mitigatable.
PRIVATE
OPERATIONAL
OTHER
EXTERNAL
© Alan C. Maltz, Ph.D, 2014

22. Project level risk – Expected Monetary Value can be calculated
EMV = (0.15*75) + (0.85*-8) = 4.45
© Alan C. Maltz, Ph.D, 2014

23. Depending on your choice of strategy, a Project, Program, or Portfolio may have different risks
RACE CAR STRATEGY
$$$$; $$$; High Risk; Dev. Time
MOTOR CYCLE STRATEGY
$$$; $$; Moderate Risk; Dev. Time
BICYCLE STRATEGY
$$; $; Low Risk; Dev. Time
ALTERNATIVES
STRATEGIC
A Project or Program does not have a static level of risk unless one defines the strategy being adopted to pursue the attainment of the objectives of that Project or Program.
Different strategies directed at the attainment of the objectives of a Project or Program therefore bear different risks. A good method of comparing the relative attractiveness of different strategies is to compute their respective Expected Monetary Values (EMVs). A risk-neutral decision-maker should choose the strategy with the highest EMV.
© Alan C. Maltz, Ph.D, 2014

24. Project level risk – determined by simulation using distributions of payoffs and payouts
© Alan C. Maltz, Ph.D, 2014

25. Portfolio level risk – determined by simulation using distributions of payoffs and payouts
© Alan C. Maltz, Ph.D, 2014

26. Portfolio level risk simulations..
© Alan C. Maltz, Ph.D, 2014

27. Class exercise
Develop a portfolio balancing procedure for your organization
Justify why you propose such a method, including its elements
© Alan C. Maltz, Ph.D, 2014

28. Thank You - Questions?
Alan C. Maltz, Ph.D. Howe School of Technology Management Stevens Institute of Technology Castle Point on the Hudson Hoboken, NJ 07030
Phone: +1 (561)
Web:
© Alan C. Maltz, Ph.D, 2014