Keys to ImplementingProject PortfolioManagementLee Merkhofer, Ph.D.Project portfolio management (PPM) is a tool-supported process for optimally selecting and managingthe organization’s “portfolio” of projects. PPM can provide real value, but many organizations arefinding implementing PPM difficult. This paper describes seven keys to success and presents arecommended step-by-step process for PPM implementation.c 2007-2009 Lee Merkhofer Consulting

Implementing Project Portfolio ManagementTable of ContentsIntroduction .21. Embrace PPM Principles .32. Choose an Approach that Fits .33. Secure Executive Support .44. Establish Governance Structure .55. Develop a Value-Measurement Framework.76. Implement Effective Processes .87. Institute Essential Capabilities .98. Follow a Roadmap for PPM Implementation.11Step 1: Assess Current Capabilities. 11Step 2: Analyze Stakeholders . 11Step 3: Define PPM Implementation Teams . 11Step 4: Develop a Charter . 12Step 5: Design Your PPM Approach and Value Measurement Framework . 12Step 6: Pilot Test the Approach . 12Step 7: Build or Acquire a PPM Tool . 13Step 8: Roll It Out . 13Step 9: Practice Continuous Learning . 14Critical Success Factors.14Summary .14Notes . 14www.prioritysystem.comic 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio ManagementIntroductionSo, your organization is ready to implement project portfolio management (PPM).Congratulations! PPM is an effective business practice that can enable you to generatesignificantly more value from your project investments, even while cutting costs. Best practiceorganizations are finding that PPM enables them to make better, more informed, and more costeffective decisions on an on-going and regular basis.Be aware, though, that the road to PPM is often rocky. For many organizations, successfullyimplementing PPM is difficult and time-consuming. Also, establishing PPM is a high-riskinitiative. Failures are not uncommon.There is no way to guarantee that you will be successful in implementing PPM. However,having observed many organizations at various stages of the process, I have concluded thatthere are 8 keys to success: (1) embrace the principles involved, (2) choose an approach thatfits, (3) secure executive support, (4) establish governance, (5) create a value-measurementframework, (6) implement effective processes, (7) institutionalize essential capabilities, and (8)follow a road map.Figure 1: Keys to implementing PPMwww.prioritysystem.com2c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio Management1. Embrace PPM PrinciplesPPM is not just another project management process. PPM is a philosophy—one that, inaccordance with the analogy based on financial portfolio management, is focused on valuecreation. Getting the most from PPM requires reshaping thinking. Your people should fullyembrace the following principles 1 : Projects will be managed as a portfolio of investments. The goal is to create the greatest possible value (considering the resources available andaccounting for risk and organizational risk tolerance). For the purpose of decision making, projects will be defined to include the full scope ofactivities necessary to generate value. Because projects produce different types of value in different ways, they must beevaluated and managed differently. Value delivery will be managed throughout the project life-cycle and the life-cycle ofany products, services, or assets created or enhanced by the project. Value delivery practices will engage all stakeholders and assign appropriateaccountability for the delivery of project benefits and the realization of value. Value delivery practices will be continually monitored, evaluated, and improved.Getting clarity on basic principles is important for three reasons. First, decisions at all levels ofthe organization affect value creation. If only project-acceptance decisions are made consistentwith value maximization, the gain can easily be undone if countless, day-to-day, apparentlysimple choices aren’t in tune. The principles must be applied universally. Second, gettingclarity on the principles promotes understanding and agreement on what you are doing and why.They provide a compelling argument for overcoming inertia and the status quo. Third, theprinciples provide the foundation for creating the structure, supporting processes, and tools thatwill enable you to put the principles into practice. They translate readily into designspecifications for your PPM implementation.2. Choose an Approach that FitsPPM is not a “one-size-fits-all” solution. Despite the general applicability of the principles,there is no single, universal approach to PPM. The alternative approaches reflect differentviews on how best to accomplish PPM goals, and the appropriateness of those alternative viewsdepends on the specific situation and practical realities. Different approaches reflect differentassumptions, methodologies, models, structures, roles and responsibilities, reporting lines,resource demands, and levels of authority. The challenge is choosing and designing anapproach that will work for your organization.1These principles are essentially the same as those established for IT portfolio management by the InformationSystems Audit and Control Association (ISACA), as described in the suite of documents known as Val IT (see, forexample, pg 13, “Enterprise Value: Governance of IT Investments, The Val IT Framework,” IT GovernanceInstitute, 2006) . ISACA is an international body concerned with IT governance and auditing.www.prioritysystem.com3c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio ManagementWhy do different organizations need different approaches? Organizations in different industriesconduct different kinds of projects that create value in different ways. Also, an organizationthat conducts hundreds of projects each year has different needs than one that conducts a halfdozen. A decentralized organization requires a different structure for decision support than onewhere decisions are centralized. A key function of PPM is to measure and account for risk, butthe nature and magnitude of the relevant risks differs greatly, as does the willingness and abilityof organizations to accept risk. Furthermore, your PPM solution should minimize necessarychanges to those aspects of your current systems that are working well. Finally, your approachto PPM must be sensitive to your culture. Your organization’s ability to tolerate change is a keyconsideration in determining what you should strive for and how quickly you can achieve it.Here are some of the things that you will need to decide when formulating your approach toPPM. What is your vision for PPM within your organization and how, exactly, will theorganization benefit? What is the scope of application in terms of types of projects to beincluded and organizational units impacted? Will there be a single portfolio, or a hierarchy ofportfolios designed to support a decentralized decision-making structure? Will projectprioritization be conducted once a year in support of the budgeting process, or will projects beevaluated more frequently or continually as needed? How will PPM interface with existingfunctions and processes, including finance, accounting, and human resources? What new rolesand responsibilities will need to be created? What budget will be required for implementingPPM, and what is the time frame?When designing your approach, don’t make purchasing PPM software the first step. A softwarevendor will advise you to buy their software and implement a PPM process around it. There aremore than 80 PPM tools currently on the market. When a vendor designs its tool, it makesassumptions about the sort of PPM approach that the tool will support, and most tools don’tprovide much flexibility. Without first defining your requirements, you cannot know whichtools will work for you. It is tempting to imagine that there is a miracle tool that can quicklyand painlessly resolve the difficulties of implementing PPM. Don’t believe it. Purchasing PPMsoftware is risky, especially in the early stages when PPM needs to be embraced by people, notimposed on them.3. Secure Executive SupportSurveys show the biggest challenge for implementing PPM is lack of adequate executivesupport. Because PPM involves instituting a strategic, value-focused, decision-makingperspective throughout the organization, it must start at the top in order to successfully spreadbelow. Ideally, the CEO or president should be your main champion.Also, introducing PPM into an organization requires a significant investment of time andmoney, which will be easier to secure if there is support from the top. Success will requirelearning new concepts and skills, instituting new processes, and achieving cultural change.Realistically, the deployment of PPM within the organization will not be popular with everyone.Support from the top will lend credibility and authority and to drive the right behavior in theorganization.www.prioritysystem.com4c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio ManagementWithout the clear support of top executives, you may not be able to obtain the necessarycommitment from the senior management of the impacted business units. PPM inevitablyplaces new demands on business units, and you’ll need commitment at this level for the processto work. Quality data, critical for the application of PPM, will likely not be collected if it is notdemanded by senior management. Strong support from senior management also provides anavenue for understanding the details of business-unit decision-making. The knowledge held bythis group can be essential to successfully designing your PPM approach.For an initial, limited-scope implementation of PPM within a single department (e.g., a proof ofconcept), support and leadership from the department head might be sufficient to enable you toget started (assuming the department “owns” the resources to be allocated). However, don’texpect to get very far without top-level, cross-functional executive support from finance,operations, human resources, and the impacted functional areas, as well as from otherexecutives who have major stakeholder responsibility.4. Establish Governance StructureEffective governance starts with leadership, commitment, and support from the top.However, such leadership, while crucial, is not enough. You must define appropriateorganizational structure and rolls and responsibilities for all participants.There are three main organizational components to PPM: executive leadership, the portfoliomanagement team, and program and project managers. The table below defines some of thebasic roles and responsibilities that may need to be established. You’ll need to tailor this basedon the size of your organization and the complexity of the portfolio management ing and oversight group, composed of senior executives. The groupsets portfolio funding levels, approves project recommendations, and providespolicy guidance.PortfolioManagementTeamThe portfolio management and competency center, composed of the PortfolioManager, Portfolio Administrator, and, potentially, impacted Program Managers.Responsible for the portfolio management process.PortfolioManagerHead of the Portfolio Management Team, responsibilities include making projectrecommendations and reporting to the Executive Team.PortfolioAdministratorResponsible for collecting project information, applying tools, and coordinating theday-to-day steps of the portfolio management process.ProgramManagersResponsible for managing groups of projects with similar characteristics or directedat specific goals (e.g., capital projects, maintenance projects, customer-supportprojects). PPM responsibilities include verifying project cost, value, and riskestimates for projects within their respective programs.Responsible for day-to-day management of individual projects. Responsibilitiesinclude providing project proposal data and communicating project status toProgram Managers and the Portfolio Manager.ProjectManagerswww.prioritysystem.com5c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio ManagementNote that PPM does not necessarily require defining new functional positions at a senior level.The basic responsibilities associated with PPM (e.g., selecting projects, managing the deliveryof value, etc.) are not new. What is new is that these responsibilities are to be carried out in aformal, structured, and organized way. Oftentimes, the PPM process can be added to theexisting responsibilities of the PPM team’s senior members.Tiered organizational structures, based on a hierarchy of programs and portfolios, are commonfor PPM implementations of larger scope. In the example shown in Figure 2, the ExecutiveTeam consists of the VP's of four business and service organizational units that conduct or makeuse of projects within the enterprise portfolio. The enterprise portfolio consists of four subportfolios, two of which contain smaller portfolios. In such implementations, the managers ofsub-portfolios are responsible for verifying the input data needed to evaluate the projects withintheir sub-portfolios. These managers may or may not retain ultimate authority over thepriorities assigned to projects within their respective portfolios.Figure 2: Example portfolio organizational structure.www.prioritysystem.com6c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio ManagementNote that, in general, it is not a good idea to have PPM organized under a project managementoffice (PMO), should one exist. The PMO is typically a support function. PPM requiresgovernance at the executive level.5. Develop a Value-Measurement FrameworkThe principles of PPM define the goal—to realize the greatest possible value from projectinvestments—but you’ll need a value-measurement framework to put the principles to work.The core of the framework is a workable definition of value. I define the value of a project tobe the worth, to the organization, of the consequences that result from conducting that project.In order for organizations to successfully practice project portfolio management, theorganization must have some means for estimating project value.A value-measurement framework is a model that documents the organization’s bestunderstanding of how the projects it conducts create value. Well-established methods areavailable for constructing such models; however, the fact that different organizations createvalue in different ways means that at least the details of the models for measuring project valueare necessarily different for different organizations.Creating a value measurement framework begins with a decision about for whom value is to becreated (e.g., shareholders, customers, etc.). In other words, who are the stakeholders that yourorganization is in business to serve? You’ll then need to develop a clear understanding of whateach of the relevant stakeholders wants. What do they value that is or can be impacted byproject choices? Look at things from the perspectives of those who ultimate derive the valuefrom the organization’s projects. This will enable you to clarify and define the types of benefitsthat your projects produce and, therefore, what must be estimated in order to establish priorities.Next, you’ll need to identify the factors that determine or influence the amounts of the variousbenefits produced, and the information needed to support the estimations. Also, yourframework should indicate how to compare and trade off the different kinds of benefits that maybe created. Finally, the framework should indicate the risks that will be considered, and howsuch risks will impact priorities based on your organization’s risk tolerance.Providing the answers to the above sorts of questions defines the framework. The answerscould be documented simply as lists, tables, and graphic displays. In this case, the resultingframework is a qualitative model. Its purpose is to assist those tasked with assigning projectpriorities. The model documents the logic to be applied. At the other extreme, the frameworkcould be implemented as a mathematical model to be used to forecast the consequences ofproject choices and to ensure that those consequences are valued in a consistent and appropriateway. The choice of a qualitative versus quantitative model is one of the things to decide whendesigning your PPM approach. Many organizations begin with a qualitative value model andthen later convert it to a quantitative one.A common mistake in PPM implementation efforts is to give insufficient attention to the designof an appropriate value measurement framework. For example, you might be tempted to acceptwww.prioritysystem.com7c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio Managementwithout evaluation the analytics that a PPM vendor incorporates into its software. But, most“off-the-shelf”software products do not include quality analytics (because the appropriateanalytics are specific to the organization, industry, and types of projects conducted). Softwarevendors want products that will work for the widest possible customer set, but lowest-commondenominator solutions cannot capture the specifics needed to measure project value.Don’t underestimate the importance of developing a quality, value-measurement framework.The framework is what allows you to answer the important questions: What is the value of conducting this project? What are the sources of value (e.g., reduced costs, increased revenue, increasedcustomer satisfaction, new learning and capability, etc.)? What are the risks and, given our organization’s risk tolerance, what is the risk-adjustedvalue of the project? Is the value of the project sufficient to motivate spending what it will cost? What set of projects will enable us to create the most value for the available resources? What if we select an alternative set of projects, how does that affect portfolio value? Suppose we increase or decrease available funding, how will that increase or decreaseportfolio value? Are we allocating resources optimally among our various project portfolios, and, if not,how much value are we loosing because of this misallocation?I recommend developing your value-measurement framework early on. Your processes forimplementing PPM must include procedures that specify how you will apply your valuemeasurement framework. Also, developing the framework before you begin looking at PPMtools will ensure that you will know what is required in a tool to accommodate your framework.6. Implement Effective ProcessesThe value measurement framework defines the logic for choosingprojects, but, you need process to make it work. In many organizations,process is not well defined, or actual process does not follow writtendocumentation. Who makes decisions, how, and the steps involved areimbedded in organizational culture, and mechanisms and authorities maynot be readily apparent or easily ascertained."An efficient andeffective process iskey to PPMsuccess." [1]In contrast, PPM must be established as a formal, consistent, documented, and repeatableprocess. How well the process is executed will have the greatest possible impact on thecontribution that PPM makes to the success of organization. True excellence can only beachieved when standardized procedures, tools, training and support functions are wellestablished, implemented, and continuously improved upon.Your organization will most likely already have processes in place that are relevant to PPM, forexample, processes for planning and budgeting, project management, risk management, andresource management. Elements of these processes may need to be refined, expanded, or bettercoordinated. In addition to defining those new procedures unique to PPM, you’ll need towww.prioritysystem.com8c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio Managementconsider the impacts to related functions including resource assignment, benefits realization,and budgeting. You will also likely need to address communication and liaison between thePPM function and others inside (and perhaps outside) the organization.A common approach is to implement PPM in support of the regular budgeting cycle. In thiscase, it is helpful to distinguish three phases: (1) preparation, (2) execution, and (3)performance management. Figure 3 shows some of the steps in a typical process.Figure 3: Sample PPM process steps.In addition to identifying the steps for PPM, defining PPM process requires specifying howeach step is conducted, what decision points or gates exist, who makes those decisions, whatinformation and analyses are conducted, and what the schedule is.7. Institute Essential CapabilitiesThe basic capabilities you will need to practice PPM are::1. Capability to collect, store, and access project data. You’ll need to create one ormore standardized templates for collecting data for proposed projects (you mightneed different templates for different types of projects) and establish a centralizeddatabase for storing that data. You’ll want to make it as easy as possible for theappropriate parties to access project data and to keep it up to date. Simplewww.prioritysystem.com9c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio Managementspreadsheets may be adequate, so long as they can be accessed from the networkand you can avoid multiple copies that get out of sync.2. Capability to evaluate project proposals. Assuming your project valuationframework is a quantitative model, you’ll want it implemented in software so thatprojects can be evaluated quickly and consistently. Software allows virtuallyinstantaneous analysis of submissions, helping to identify data input errors (whichmay be prevalent at the beginning when people are still getting used to the newdata requirements). Quick analysis also allows for feedback in situations wherechanges in concept, scope, or workplan are needed to make a proposalcompetitive. Being able to quickly acknowledge, respond and provide guidanceto submitters helps establish the credibility of the PPM process.3. Capability to prioritize projects and identify value-maximizing choices. If yourproject proposals are independent from one another, in the sense that neither thevalue nor cost of any project depends strongly on what other projects areconducted, then you will want to prioritize projects based on the ratio of projectvalue to project cost. Again, if spreadsheets are adequate, you can easily add suchproject prioritization capability to your spreadsheet value model.4. Capability to collect and manage project documents. Projects typically generatelots of documentation (charters, plans, status reviews, reports, etc.). PPM is likelyto add to the burden because it generates more project information, especially thedocumentation of judgments about project consequences, and encourages greateruse of that information. The simplest approach is to organize all projectdocumentation into a big binder, but if your documentation is in electronic formyou should link the documents to the projects in your PPM database. In eithercase, you will need a process for on-going update and maintenance of yourproject documentation.5. Capability to track and report project/portfolio status. Managing the projectportfolio requires the ability to determine the status of projects at any point intime. You’ll need to be able to monitor and report where each project stands withrespect to the workflow process (proposal submitted, awaiting data verification,pending, approved, etc.). You will also need to track progress for those projectsthat are approved and underway (planned versus actual progress, spend rates,issues tracking, milestones, etc.). You’ll want a system that ensures that projectmanagers take responsibility for updating information in the project database.Again, spreadsheets may be adequate, but be sure to include dashboard views thatroll up and summarize project data to help identify where attention is needed.6. Capability to monitor, learn and improve. PPM’s promise is increased value fromproject investments. You’ll want to evaluate and measure the contributions ofprojects (Did the project complete on time and on budget? Did it produce theanticipated benefits?). You’ll also want to evaluate and critique the PPM process(Did the process work smoothly? What do participants think worked well and notso well? What can we do better next time?). Establish mechanisms andcapability to regularly mine the experience gained from applications both to refineand improve the project valuation framework and the PPM process.www.prioritysystem.com10c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio Management8. Follow a Roadmap for PPM ImplementationThe steps for successfully implementing PPM depend on your organization’s particularsituation. However, in many cases, I have found that the following sequence of 9 stepseffective: (1) assess your current capabilities, (2) analyze the stakeholders, (3) form teams, (4)develop a charter, (5) design your PPM approach, (6) pilot test the approach, (7) acquire orcreate a PPM tool, (8) roll it out, and (9) practice continuous learning.Figure 4: PPM implementation roadmap.Step 1: Assess Current CapabilitiesBegin with a gap analysis focused on your organization’s current capabilities with regard to theactivities addressed by PPM. Evaluate the current project portfolio and the methods used toselect projects. This information can be collected and documented through interviews,participation in meetings, reviewing documents, etc. The goal is to identify differences betweencurrent practices and what should be. The results will help you make the case for PPM anddetermine the PPM approach that will be appropriate for your specific situation. Also,understanding PPM maturity level is useful for designing effective implementation strategy.Step 2: Analyze StakeholdersIdentify all PPM stakeholders. Key stakeholders include corporate executives and seniormanagement responsible for business lines and support services that require projects either tosupport operations and/or to deliver products and services, program and project managers whopropose projects and compete for funding, middle-level managers who provide resources toplan and execute projects, and project managers who plan and deliver projects. Determine theirexpectations, needs, concerns, and level of acceptance. From this analysis, you can determinethe amount of education and selling required. Stakeholder interviews identify critical issues andcapabilities that help guide the design of the PPM approach. Also, understanding concerns canenable you to identify political conflicts that could occur as well as mitigation tactics.Step 3: Define PPM Implementation TeamsTo ensure buy-in, as well as to enable you to obtain full understanding of the issues, the PPMapproach should be designed as a collaborative effort. You will need a Core Team and CoreTeam Leader responsible for developing and implementing the approach. An ExecutiveSteering Committee should be established to provide leadership and policy-level inputs, and towww.prioritysystem.com11c 2007-2009Lee Merkhofer Consulting

Implementing Project Portfolio Managementapprove key design choices. You may also need to identify technical teams to help you toaddress specific, technical issues related to the design of the method you will use to evaluatecertain types of project benefits. Obviously, you should include critical stakeholders asmembers of your teams.At this stage you are essentially beginning the establishment of your PPM governance structure,since subsets of your Core Team and

Project Portfolio Management . Lee Merkhofer, Ph.D. Project portfolio management (PPM) is a tool-supported process for optimally selecting and managing the organization’s “portfolio” of projects. PPM can provide real value, but many organizations are finding implementing PPM difficult.