Approving projects without assessing their resource requirements is like driving without a fuel gauge. You know you'll run out of resource for your projects at some point in time…you just don't know when.
Alarmingly, MOST companies don't integrate resource planning with their project portfolio planning cycle and are effectively driving blind!
Three Goals of Effective Portfolio Management
- The primary goal of portfolio management is value maximization.
- The second goal is to achieve portfolio balance by having an appropriate selection of projects which will deliver both short term and long term value.
- The third goal relates to having a strategically aligned portfolio which accommodates the requirement for non-economic factors to influence project selection.
Across all three goals there is an underlying requirement to quantify the VALUE of projects in the portfolio.
Value (or relative worth) is a productivity measure and is calculated as the ratio of monetary inputs to monetary outputs. For innovation projects, input costs can include the costs of market research, technical development, design, development, production trials and capital expenditure. In addition to capital, resource cost is a significant element of the total input cost for most development projects and is often the primary constraint.
Determining the output value of a project requires a measure of its benefit or return and is typically calculated as net present value (NPV) over a defined time period such as three years.
By measuring the ratio of input to output costs, alternate opportunities within the innovation portfolio can be ranked. This ratio is referred to as the productivity index and is used to assess the relative merit of possible investments or the “Bang for the Buck” on alternate innovation projects. Given scarce resources and the opportunity cost of backing poor projects, the productivity index provides a sound economic rationale for determining the optimal portfolio of innovation projects for any business.
The challenge for most companies is that the cost of gathering the input costs is often perceived as out-weighing the benefits. There are several possible approaches which can lighten the load and reduce the cost of defining these inputs including the three methods which will be discussed in subsequent posts about constraint management, project classification, and resource profiling.