By Don Creswell, SmartOrg
Value-Based Project/Portfolio Management
Business exists to create value for a multitude of stakeholders–customers, investors, employees, suppliers and the community in which it dwells. To serve these often demanding constituencies companies must innovate, compete and grow, often facing disruptive change brought about by technology, global economics, environmental impacts, government regulations, geopolitical instability and other areas over which you have little or no control. 2016 looks like a challenging new year! To cite a few examples: the threat to the European Union from the mass migration of people fleeing war-torn countries; oil prices that some say may drop into the high $20/barrel during 2016; the Chinese economy; crashing commodity prices and terror-threats on U.S. soil. The one constant: uncertainty.
Uncertainty is a prime reason for considering Value-Based Project/Portfolio Management (V-BPPM) processes and tools. (I like “value-based” rather than “strategic.”) Value-based as a metric to evaluate new product and cost-reduction projects is particularly effective when these activities have a measurable impact on the top line (revenue growth) or the bottom line (profit).
Value-based PPM complements typical project/portfolio management process and software. V-BPPM entails evaluation of comprehensive business models that encourage consideration of alternative approaches and that support development of “expected NPV” (eNPV: net-present value adjusted for risk/uncertainty).
V-BPPM analytics and software produce evaluations of technical feasibility, cost, time and economic factors. V-BPPM process involves important stakeholders and decision makers. Rather than isolate analysis from the decision process, stakeholders need to be involved in developing inputs to computer models, often within a collaborative setting. The computer does the “heavy lifting.”
Unlike conventional PPM software, the output from V-BPPM applications is designed to engage decision makers in understanding where there are opportunities to add value while avoiding potential risks. The goal is to improve project selection and develop a portfolio that achieves an appropriate balance of risk vs. reward.
V-BPPM is a dynamic process, the results of which ideally parallel various stages within a phase-gate or like process. This assures that the assumptions in the business plan hold up as time progresses, allowing adjustments as necessary when conditions change that could have a material effect upon achievement of projected eNPV.
One SmartOrg client, a company that operates a global portfolio 24/7, provides a good illustration of an active process. The company uses outputs directly from its computer models during management reviews and has significantly reduced dependence on PowerPoint and Excel presentations. One executive estimated that by eliminating preparation time and slide presentations the company has saved more than five man-years annually. Meeting time has been reduced by as much as fifty percent.
While software-support tools are vital given the amount of data and analysis requirements, these are only tools. A sound business process, involvement of the right people and governance need to provide a firm foundation to support effective value-based decision making.