By Don Creswell, SmartOrg
In last month’s ValuePoint, we discussed “Aligned Decision Forum,” the first of the Six Principles of Strategic Portfolio Management. In this issue we will discuss the second principle, “Value Creation Focus”.
Value creation focus is a strategy by which all stakeholders involved in decision making answer a simple question: how does everything we do contribute to creating economic value for my organization?
In an ordinary setting that lacks focus, peoples’ objectives tend to be driven by personal agendas, functional perspectives and individual biases. There is no structure–metrics and analytics are not clearly connected to value creation, or they are manipulated to advance personal agendas. Without a focus on value creation, information is more likely to be selected to support personal agendas or positions, resulting in the application of irrelevant information to arrive at decisions.
By focusing on value as a prime metric, when managing the strategic portfolio, we ensure that a forum is created to allow individuals and groups to think clearly about economic and strategic issues, and creatively about how to improve the value of their portfolio. In this scenario, metrics and analytics inform analysts, giving them an understanding of economic outcomes that drive universally beneficial choices. By focusing on value, all information needed to inform value creation is put on the table, both positive and negative, and is ultimately incorporated into neutral evaluations.
Let’s look at a case study involving too many projects and not enough resources–what would you do in this situation?
A high-tech packaging company that had built on tremendous innovation in materials and design over the decades was facing serious challenges. They were looking at a marked increase in global competition and an erosion of the advantage it had in the market. Its products were increasingly undifferentiated, their margins were dramatically eroding, and R&D and NPD had failed to produce anything really new and exciting in a while.
Their portfolio was choked with R&D and NPD proposals. The CEO was demanding more innovation, but cost reduction and incremental projects were inhibiting innovation, which created a lot of churn and debate. Projects started to struggle for resources, with over 70 projects on the table with only the resources to support about 15 of them.
They tried traditional evaluation approaches. The CFO created a business case in financial terms based on gathered relevant data, modeling it after a successful capital investment process. They used the project management approach, assigning clear project leadership responsibility, forming teams, creating plans with clear milestones and deliverables. They pursued the best plans and held people accountable.
They looked at their resource allocation, addressing the core issue that certain resources were oversubscribed. They created resource managers to assign key resources based on guidelines and situation specifics.
They created scoring rules by defining essential criteria, such as strategic fit, size of opportunity, technical difficulty and investment, and then they assigned a score for each project on a scale of 1-5 based on each dimension, taking the weighted average to get to the figure of merit.
None of these approaches worked.
Here are some quotes from the executives on how traditional approaches failed their business.
- “Business cases strongly favored incremental projects.”
- “Project management methods created more work on projects we would cancel.”
- “Resource allocation efforts abdicated the companies’ most important investment decisions to relatively low-level managers.”
- “Weighted scoring rules simply elevated politics to a new level of sophistication.”
Then they tried value-based evaluation and it worked.
- “When we got clear about value, many project leaders voluntarily cancelled their own projects; they realized they could better direct their efforts to higher-value projects.”
- “We reduced our portfolio from 70 to 20 projects, improving the return by more than 100%.”
Focusing players on identifying the relatively few factors that drive value is fundamental to developing value-based, believable business cases for the strategic management of projects and project portfolios.