Project Portfolio Management

PROJECT
PORTFOLIO
M A N AG E M E N T
PRESENTED BY:
Dr. Prasad S. Kodukula, PMP, PgMP
September 10-13, 2012

Johannesburg
Copyright © 2012 by Kodukula & Associates, Inc.
All rights reserved.
No part of this document may be reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without
the prior written permission of Kodukula & Associates, Inc.
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PMI® is a registered service mark of the Project Management Institute.
PMP® is a registered service mark of the Project Management Institute.
PgMP® is a registered service mark of the Project Management Institute.
Kodukula & Associates, Inc.

140 S. Dearborn Street, Suite 411
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www.kodukula.com
S EM IN AR L E A DE R ’ S B IO GR APH Y
Dr. Prasad Kodukula, PMP, PgMP is an award- The Project Management Institute recognized
winning speaker, management coach, author, Dr. Kodukula as “Best of the Best in Project
and inventor with more than 25 years of Management” by honoring him with 2010 PMI
professional experience. He is President of Distinguished Contribution Award for his
Kodukula & Associates, Inc. “dedication to the profession and practice of
(www.kodukula.com), a project management project management and sustained
training, coaching, and consulting company performance and contribution to the
based out of Chicago, Illinois, USA. He has advancement of project management.” He was
spoken to audiences spanning 40 countries on a also recognized by the U.S. Environmental
variety of topics related to project, program, Protection Agency and Kansas Department of
and project portfolio management. Dr. Health and Environment for his outstanding
Kodukula has trained or coached several contributions in environmental science and
thousands of project and program managers at engineering. 2Ci, cofounded by Dr. Kodukula,
more than 20 Fortune 100 companies (e.g., was recognized by the State of Illinois as the
Abbott Labs, Boeing, Chrysler, Cisco, Corning, most innovative small business in the
Dow, IBM, Motorola, Sprint, UTC), the City of environmental category.
Chicago, the United States government, and
the United Nations. He presents keynote Dr. Kodukula’s educational background
speeches and conducts seminars for various includes baccalaureate degrees in chemistry,
professional and trade associations including biology, and education. He holds an M.S. in
the Project Management Institute. environmental science from Rutgers
University, an M.S. in environmental
A co-founder and President of 2Ci engineering from Cornell University, and a
(www.2ci.com), a Chicago-based biotechnology Ph.D. from the Illinois Institute of
company, Dr. Kodukula is also involved in Technology. He also has a Master’s
developing patented and patent-pending Certificate in project management from the
environmental and alternative energy George Washington University. Dr. Kodukula
technologies for commercial application. is certified as a Project Management
Previously, Dr. Kodukula held positions as R&D Professional (PMP®) and a Program
director at a bio-technology start-up, senior Management Professional (PgMP ®) by the
engineer at a global petrochemical corporation, Project Management Institute. He is a
and senior project manager at an international coauthor or contributing author of seven
engineering consulting firm. He also taught books and more than 40 technical articles.
senior/graduate courses at the Illinois Institute His latest book Project Valuation Using Real
of Technology, West Virginia University, and Options: A Practitioner’s Guide was
the University of Kansas. published in 2006. His next book on project
portfolio management is due for publication
in 2012.
PROJECT
PORTFOLIO
MANAGEMENT
HOW TO DESIGN, BUILD & MANAGE A PORTFOLIO
As organizations reach higher levels of maturity in managing projects individually, they shift their focus
to manage them collectively as project portfolios using project portfolio management (PPM) process.
This transition seems to occur when the organization realizes that projects are investments – not
expenditures – requiring justification that they are aligned with organizational goals and will create
value for the owners and other stakeholders of the organization. Managing project investments
collectively brings coherence to implementing the strategic as well as operational initiatives and helps
the organization create sustainable value in the long run. This course provides you with the tools,
techniques, and best practices for managing project portfolios. It offers a “how to” methodology to
design, build, and manage a portfolio.
Illustrate the role of a project portfolio in Identify, analyze, and manage portfolio risks.
translating strategy into desired results. Apply various techniques to prioritize
Delineate an overall project portfolio projects.
management (PPM) methodology. Build a business case for a project.
Align projects with organizational goals and Delineate criteria to determine when a
strategy. project no longer serves its purpose and
Discuss the key design requirements of a needs to be terminated.
portfolio. Discuss practical challenges and how to
Present quantitative techniques to assess a overcome them in executing PPM.
project for its own merit as well as its Present a practical methodology to create
relative merit against other projects. and manage a project portfolio that will
Illustrate the use of weighted scoring models maximize business value and return on
to quantify intangible benefits of projects. investment.
Evaluate decision techniques that clarify
choices involving both threats and
opportunities.
PORTFOLIO MANAGEMENT
TABLE OF CONTENTS
UNIT 1: INTRODUCTION 1-10
UNIT 2: PORTFOLIO MODEL 11-24
UNIT 3: BUILD FOUNDATION 25-44
UNIT 4: DESIGN PORTFOLIO 45-62
UNIT 5: CONSTRUCT PORTFOLIO 63-70
UNIT 6: MONITOR & CONTROL PORTFOLIO 71-98
UNIT 7: PPM TOOLS & TECHNIQUES 99-132
UNIT 8: PORTFOLIO RISKS 133-152
UNIT 9: REFERENCES 153-156
APPENDIX: CASE STUDY EXHIBITS
©2011 Kodukula & Associates, Inc., All Rights Reserved.

UNIT: 1
INTRODUCTION
OBJECTIVES
Define a project, program, and a project portfolio.
Introduce portfolio triple constraint.
Classify portfolios.
Discuss the significance of project portfolio management.

PORTFOLIO MANAGE MEN T
— UNIT 1: INTRODUCTION
Definitions
Project
The Project Management Institute (PMI), in its fourth and latest

edition (PMI, 2008A) of A Guide to Project Management Body of
Knowledge (commonly referred to as the PMBOK® Guide), defines
a project as a “temporary endeavor undertaken to create a
unique product, service, or result.”
Examples:
• Developing a new cell phone
• Creating a website to offer online training
• Holding a convention
Program
According to the second and latest edition of The Standard for

Program Management (PMI, 2008B):
“A program is a group of related projects managed in a

coordinated way to obtain benefits and control not available
from managing them individually. Programs may include
elements of related work (e.g., managing the program itself,
infrastructure needed to manage the program) outside of the
scope of the discrete projects in the program.”
Examples:
• Implementation of a new enterprise resource planning (ERP)
system
• Restoration of a large environmentally contaminated site
• Development of a new aircraft
2
Definitions ( co nt inue d)
Project Portfolio
According to the second and latest edition of PMI’s The

Standard for Portfolio Management (PMI, 2008C), a portfolio
is “a collection of projects or programs and other work that
are grouped together to facilitate effective management of
that work to meet strategic business objectives. The projects
or programs of the portfolio may not necessarily be
interdependent or directly related. These components are
quantifiable; that is, they can be measured, ranked, and
prioritized.”
According to the soon-to-be-published book by Prasad Kodukula

(Kodukula, 2012) on project portfolio management, a project
portfolio is a “collection of strategically aligned projects that
help achieve organizational goals by creating value.”
Value means benefit relative to cost including risk. It may be of

financial form or nonfinancial (customer, employee, social,
environmental, etc.)
Examples:
• Enterprise portfolio
• R&D portfolio
• IT portfolio
Note: Portfolio may consist of projects as well as programs, but,

for the sake of simplicity, the components of the portfolio are
simply referred to as projects in this manual.
©2011 Kodukula & Associates, Inc., All Rights Reserved 3

Project Portfolio Management
Project portfolio management (PPM) is tantamount to

management of project investments. Its objective is to help you
achieve the goals of the organization the portfolio is associated
with by allocating the required resources to the right projects. It
involves assessment, prioritization, and selection of the right
projects integrated with investment decision check points. The
check points include the initial invest/no-invest as well as the on-
going continue/cancel decisions (collectively called go/no-go
decisions) spanning the life cycle of each project in the portfolio.
Portfolio management is a balancing act between the

organizational goals, projects, and resources, collectively
referred to as the portfolio triple constraint. Resources include
both money and people. In order to achieve a given set of
organizational goals, you need sufficient and necessary projects
for which necessary organizational resources must be made
available. It is a dynamic system, where the goals can change
rapidly warranting the project investments and resource
allocations to shift accordingly. Similarly, as resources are
slashed and become limited, projects may need to be halted or
terminated and priorities for organizational goals may have to be
changed. All the three components must be kept in balance while
ensuring that they are strategically aligned.
4
Portfolio Classification
Classification of portfolios can be complex, because it can be
done in so many different ways. The larger the size of the
organization, the more the number of ways you can classify
them. There are basically two ways by which portfolios may be
classified:
• Organizational unit
• Project category
Organizational Unit: A portfolio may exist at every level of the

organization as shown in the figure below. Depending upon the
number of layers in the organization, you may have as many (or
even more) portfolios. The organization that sponsors and
supports the portfolio is called the portfolio supporting
organization (PSOs). Examples of portfolios classified based on
their PSOs are:
• Enterprise portfolio
• Business unit portfolio
• Divisional portfolio
• Functional portfolio

Portfolio Classification ( c ont i nued)
Project Category: A portfolio may be classified based on the

category or type of projects included in it. Projects in any given
category will have certain common characteristics and would
differ from other categories of projects in one or more of those
characteristics. Numerous project categories are possible
(discussed in more detail in Unit 4), but, to keep the PPM process
rather simple, you may want to avoid having too many
categories. Examples of portfolios that differ based on project
category are:
• Product Portfolio: A portfolio of projects dealing with products

offered by its PSO.
• Compliance Portfolio: A portfolio of projects that help you
meet regulatory requirements.
• M&A Portfolio: A portfolio of projects dealing with mergers and
acquisitions.
• Capital Portfolio: A portfolio consisting of capital projects that
involve construction of new facilities, renovation of existing
ones, or purchase of major equipment (assets).
• Operational Portfolio: An operational portfolio consists of
projects that are more operational and tactical in nature.
These types of projects are necessary to keep the operations
running.
6
Portfolio Classification ( c ont i nued)
Another example of project categorization may be based on the

type of value (that is, benefit) a project is expected to generate:
• Financial portfolio: Projects generate financial benefits and

ultimately increase the share price of the company or wealth
of the owners.
• Customer portfolio: Projects generate customer related

benefits such as increase in customer satisfaction and
customer loyalty.
• Business process portfolio: Projects generate cost

reductions through business process improvements.
• Employee portfolio: Projects generate employee related

benefits such as increase in employee morale and improving a
current skill set or acquiring a new one.
Project classification by categorization is arbitrary. Individual

portfolios containing different categories of projects can be
structured and managed as different portfolios, or they may be
combined into one larger portfolio in which each will represent a
project category and may even be referred to as a “sub-
portfolio.” In the example above, you may have four distinct
portfolios, each containing projects that generate a different
form of benefit or just one portfolio containing four categories of
projects.

Why Portfolio Management?
Achieve organizational goals through projects.
Create value for the stakeholders.
Ensure alignment between projects and organizational goals

and strategy.
Invest in the right projects that generate value.
Get bigger bang for the investment buck.
Make right mix of project investments to optimize risks and

maximize benefits.
Provide a balanced approach to project investments.
Create objective and uniform metrics to assess, rank, and

select the right projects for investment.
Utilize resources more effectively.
Improve communication between decision makers, project

sponsors, project managers, and project teams.
Encourage “holistic” organizational thinking rather than

functional “silo” thinking.
Create structure and criteria for terminating projects and

make it easier to cancel undesirable projects.
Avoid investing in redundant projects.
8
Discussion: PPM Obstacles & Challenges
What are the obstacles and challenges you are facing in

achieving effective portfolio management in your
organization?

Key Points
A project portfolio is a collection of strategically aligned projects

that help achieve organizational goals by creating value.
Project portfolio management (PPM) is tantamount to

management of project investments. Its objective is to help you
achieve the goals of the organization the portfolio is associated
with by allocating the required resources to the right projects.
PPM involves assessment, prioritization, and selection of the right

projects integrated with investment decision check points. The
check points include the initial invest/no-invest as well as the on-
going continue/cancel decisions (collectively called go/no-go
decisions) spanning the life cycle of each project in the portfolio.
Portfolios can be classified based on the organizational unit they

are associated with or category of projects they contain.
10
UNIT: 2
PORTFOLIO
MODEL
OBJECTIVES
Introduce funnels & filters® model representing project portfolios.
Review phase-gate model and describe its role in funnel & filters®.
Illustrate how financial portfolio principles can be applied to

project portfolios.
Introduce PPM methodology.

— UNIT 2: PORTFOLIO MODEL
Funnel & Filters ® : A Portfolio Model

“Funnel and filters ®” is a portfolio model that broadly
represents the end-to-end lifecycle of its component projects
in it.
Basically the funnel consists of three parts – the head, the

body, and the leg – that, respectively, represent three broad
phases of a product or service to be created by each
component project:
1. Assessment
2. Development
3. Production
Any new project idea enters the funnel at the front end and
moves through these phases. A project may involve
developing a new product or a service. At the front end, the
project is initiated and undergoes assessment as part of a
portfolio and is either selected or rejected for funding. The
selected projects go into the development phase, which are
collectively coordinated in the portfolio to achieve the
portfolio’s objectives. Each completed project results in
launching of its final deliverable (product or service) and goes
into the production (or operation & maintenance) phase. The
product or the service reaches “retirement” at the end of its
life.
12
Funnel and Filters ® : Phases

Assessment (Pre-project): The objective of this phase is to
decide whether or not to invest in a project based on its own as
well as relative merit against the competing projects. The initial
project assessment can be done in one or more steps, where
®
each step is represented by a filter in the funnel and filters
model. In the one-step process, a project proposal (also referred
to as project business plan) is evaluated once and a go/no-go
decision made. In a multiple-step process, the project proposal is
evaluated in a series of steps before the final investment decision
is made. Multiple step approach is preferred, because marginal
projects can be screened and rejected early on without spending
significant amount of organization’s resources in the business
case analysis and the subsequent evaluation process. Once a
project is selected for investment, it moves into the
development phase.
Development (Project): The objective of this phase is to
develop and launch the target product or service facilitated
by the project management process. The end of this phase is
marked by “launch.”
Production (Post-project): If the project results in a
product, you will make, sell, and support it in this phase. On
the other hand, if the project produces a service, this phase
may simply involve operations and maintenance support for
that service. At the end of the production phase, the product
or service becomes obsolete, is no longer sold or supported by
the organization, and “retires” from its lifecycle.
You may include a fourth phase, if the liquidation of project’s
assets is a long and costly process.
©2011 Kodukula & Associates, Inc., All Rights Reserved. 13

Funnel and Filters ® : Phases ( c ont i nue d)
In case of a product that is considered for improvement or

enhancement or takes a new form or version, it should be
identified as a new project idea and go through a new
lifecycle starting at the front of the funnel.
The three phases depicted by the entire funnel represent

portfolio management, whereas the second phase is
facilitated by project management.
The value of a project is assessed in the first phase and the

investment decision made based on its own as well as relative
merit against the competing projects. The value is developed
in the development phase and is typically realized in the
production phase after the product launch. The value
delivered in the production phase must be validated by
comparing it to what has been promised in the previous
phases.
1. Assessment (Value assessment)

2. Development (Value development)
3. Production (Value delivery and validation)
14
Role of Filters
The filters represent the decision processes associated with
portfolio management; hence the name “decision” filters. Both
the assessment and development phases in the funnel have
decision filters.
The filters in the assessment phase are for initial project

screening and go/no-go investment decision. This process may be
facilitated by three levels of assessment:
• Level 1: This is the initial screening of the project based on
preliminary information submitted by the project initiator.
The objective is to weed out marginal projects quickly
without having the initiators or the assessors spending a
significant amount of time preparing or assessing the business
case, respectively.
• Level 2: Once a project request passes the initial screening,

the project initiator presents a detailed Project Business Plan
(commonly referred to as “proposal”) for further
consideration. Level 2 assessment involves evaluation of the
project for its own merit. If it passes muster at this level, it
will go to the third level.
• Level 3: At this level, a project is assessed for its relative

merit against the competing projects in the portfolio funnel
by means of a prioritization process. The go/no-go
investment decision is made at this point. Projects that are
selected go to the development phase.
The subsequent filters in the body of the funnel are meant to

evaluate each project during its development phase and help the
management decide whether to continue to invest in it through
its remaining lifecycle, halt it temporarily, or terminate it
altogether. These evaluations include Levels 2 and 3 assessments,
where the ongoing projects are assessed based on their own
merit and relative merit, respectively.

Phase-Gates
The decision filters should not be confused with the so called
“phase-gates,” which are decision points specific to individual
projects in the portfolio whose objective is to control project
lifecycle from one phase to the next (e.g., from design to
build).
Phase - I G1 Phase - II G2 Phase - III G3 Phase - N GN
GN Gate Review
16
Phase-Gates (cont inue d)
At the gates of the phase-gates process, each project is evaluated

on its own merit to decide whether to terminate it or continue it
into the next phase. This evaluation is based on project’s
performance to date; its expected completion meeting the
scope, time, and cost targets in the development phase; and its
business case.
On the other hand, at the decision filters, a project is evaluated

for its relative merit as compared to the other competing
projects in the portfolio.
Individual project development cycles can be shortened by
integrating the phase/gate process into the funnel & filters ®
framework.

Portfolio Management Principles

Whereas project portfolio management as a discipline is
relatively new, financial portfolio management has been
practiced for several decades. There are many similarities as
well as differences between project and financial portfolio
management. A few basic principles of financial management can
be applied to project portfolios.
Let’s say you won a lottery of a few million dollars. After first
paying the government its portion as taxes and splurging on
the quick luxuries you always wished to enjoy, you decided to
invest prudently the remaining pot of gold (hopefully you
have some left!) to make it grow, so you and your family can
have a decent living for the rest of your lives – perhaps
without having to work like most people. Except for personal
checking, you never had any investment or retirement
accounts or any experience in personal investing. So you hired
a financial advisor to help you with managing your money.
The advisor will most likely use the following four key steps in
helping you manage your investment:
• Build the foundation for your portfolio by capturing your long
term financial vision, needs, and goals; income/expense
requirements; personal risk characteristics; and so on.
• Design a portfolio containing specific asset classes (cash,
treasuries, bonds, mutual funds, individual stocks, etc.) and
a specific “mix” of those classes (per cent investment
allocation for each class) that is expected to yield maximum
returns for you for the risk you are willing to take.
• Construct and initiate the portfolio by selecting and buying
the right assets within each asset class that fit your portfolio
design properties.
• Monitor the performance of the portfolio regularly and
control it by making changes (sell some assets and buy
others), as needed, in accordance with your investment
goals.
Once the initial portfolio has built, the portfolio management

process will be an iterative and ongoing, where the portfolio is
continuously monitored and controlled and the foundation and
design are revisited and revised periodically, as necessary.
18
PPM Methodology
Following the same financial portfolio process elucidated above,
here is a model to manage a project portfolio with four major
phases (also referred to as processes):
• Build Foundation.
• Design Portfolio.
• Construct Portfolio.
• Maintain & Control Portfolio.
Of the four phases, Construct Portfolio is a “one-time” process,

whereas the others are “ongoing,” as long as the portfolio is alive
and active. Each phase consists of several processes, which are
discussed in detail in the following chapters.

PPM Methodology (cont inue d)
The first phase of the methodology includes building the

organizational foundation that needs to be in place to begin with
before a portfolio is designed and constructed. It is a prerequisite
to the initiation of any portfolio management process in your
organization. The foundational requirements are not expected to
change often and are revised, only when there is change in the
strategy and goals of the organization sponsoring/supporting the
portfolio.
The second phase deals with the design of the portfolio. It

involves developing the portfolio design specifications (also
referred to as properties or characteristics). The design specifies
screening criteria for project candidates to become serious
contenders for the portfolio, investment benchmarks the projects
must meet to receive investment, project termination criteria,
and the desired balance between different project categories,
among others. The specifications, to a large extent, depend upon
the foundational aspects of the portfolio and should be revised
when the foundation changes.
The third phase involves the construction of the initial portfolio,

wherein the ongoing projects in the PSO are pooled together and
brought under the purview of the new portfolio. The initial
portfolio most likely does not reflect the design properties
identified in the design phase. But it will gradually evolve into a
“steady state” portfolio over time, as old projects are
completed/terminated and new ones are added. Steady state
portfolio is the ongoing portfolio that exhibits the desired design
properties.
20
PPM Methodology (cont inue d)
Once the initial portfolio is built, it moves into the monitoring

and control phase. From this point on, “Construct Portfolio” is no
longer part of the portfolio management process. PPM will be
now characterized by only three ongoing phases:
1) Build Foundation.
2) Design Portfolio.
3) Monitor & Control Portfolio.
The above three phases are ongoing and iterative. When PSO’s
strategy and goals change, the foundation shifts. As the
foundation or the external market conditions change, the
portfolio design specifications need to be revised. These changes
dictate many of the key processes that are integral part of the
portfolio monitoring and control phase.

Portfolio Methodology ( co nt inue d)
Monitor & Control Portfolio phase involves day-to-day, ongoing

activities of portfolio management. It includes many key
processes as shown in the figure below. In this phase ongoing
projects are either completed or terminated, new projects
evaluated and initiated, portfolio rebalanced, portfolio
performance assessed, and so on.
Assess and Select

New
Projects
Categorize
New Projects
Review Ongoing
Projects
Monitor &
Identify
Control New Projects
Portfolio Prioritize New &
Ongoing
Projects
in Each Category
Assess Portfolio
Rebalance
Portfolio
Authorize Final
Go/No-Go for
Projects
22
Discussion: PPM Best Practices

How does the approach to managing portfolios discussed so far
compare with what you have in your organization?

Key Points
Funnels & filters® model represents portfolio management, which
facilitates decision making related to project investments. As
competing projects move through the funnel, filters help the
management make go/no-go decisions.
Phase-gates is a project lifecycle model, wherein projects go

from one phase to the next with go/no-go decisions made at
the gates. The decisions are made based on individual
project’s merit. In funnel & filters ® model, decisions are
made at filters, where projects compete with each other on
their relative merit.
Notwithstanding the differences, basic principles of financial

portfolio management can be applied to project portfolio
management.
Once a portfolio is built, the overall portfolio management

can be divided into three broad iterative and ongoing phases:
1) Build Foundation.
2) Design Portfolio.
3) Monitor & Control Portfolio.
Monitor & Control Portfolio phase involves day-to-day,

ongoing activities of portfolio management. It includes new
project identification, categorization, assessment, and
selection; review of ongoing projects; ranking of new and
ongoing projects; rebalancing the portfolio; making the
project no/go decisions; and portfolio assessment.
24
UNIT: 3
BUILD
FOUNDATION
OBJECTIVES
Discuss why foundation is needed before the portfolio is

designed and constructed.
Illustrate strategic framework.
Introduce strategy development techniques.
Describe balanced scorecard framework.
Define portfolio governance.
Discuss portfolio infrastructure.

— UNIT 3: BUILD FOUNDATION
Portfolio Design Processes
Once the portfolio foundation is built, it provides direction

for the design. The key design processes are:
• Delineate strategic framework.

• Define governance.
• Build portfolio infrastructure.
26
Strategic Framework
Strategic framework refers to the organizational big picture.

It can be described in terms of the organization’s mission,
vision, and strategy. Definition as well as the “hierarchy” of
these terms vary depending on the organization.
Every organization must have a reason to exist, and that may
be represented by its mission.
Based on the mission, the vision for the future of the

organization may be defined. The essence of the vision is
what the organization wants to be in the long term (5-10
years).
The vision leads to the formulation of strategy which is

typically developed annually by the executive team. Strategy
is a high level framework of how you will accomplish
organization’s vision and mission. It describes how you will
get from “as is” baseline state to “to be” finish line state.
Organizations also delineate “values” which are principles

and behaviors that guide the realization of their mission and
vision. (These values are different from the “values”
mentioned earlier in the context of value creation, which
mean benefits.)
Mission
(Why do we exist?)
Vision
(What do we want to be?)
Values
(Guiding Principles)
Strategy
(How will we achieve mission and vision?)

Strategic Goals and Objectives
Organizational strategy translated into a plan commonly

referred to as, “strategic plan,” which outlines long-term
organizational goals—also called strategic goals—that help the
organization achieve the expectations of its owners. It also
contains high level plans showing how those goals will be
achieved.
Strategic goals are high level, long-term, and qualitative.

They do not change considerably over short periods of time.
Significant changes are typically made when external business
conditions shift dramatically or because of change in
leadership at the helm of the organization.
Each goal should be translated into corresponding objectives

that are specific, measurable, agreed-to, realistic, and time
bound (SMART.) This will help you objectively monitor the
organizational performance and measure whether the goals
have been met.
28
Strategic Alignment
In a large enterprise comprising of many business units, each unit

may define its own mission, vision, strategy, values, goals, and
objectives, which must directly align with those of the
enterprise.
Furthermore, moving down the organizational hierarchy, any

organizational unit may define its own strategic framework linked
to that of its “parent” unit and ultimately to that of the
enterprise. For example, an individual function (say, IT) may
develop its own strategic framework in accordance with that of
its parent unit, ultimately aligning with that of the enterprise up
through the organizational hierarchy.

Strategic Alignment (continued)
Thus, starting at the highest level of the enterprise, strategic

framework must be developed at every level of the organization
by a cascading process making sure that there is alignment up
and down and across the entire enterprise.
Most effective organizations are strategically aligned and strive

to achieve their goals and objectives with laser-like focus. Their
executive team clearly defines the organizational strategy, goals,
and objectives and communicates them effectively throughout
the organization.
If the strategic framework of a given organizational unit is well

defined and made available, you can invest in projects that
directly align with the unit’s goals, which are presumably linked
to the enterprise goals. Without such framework, a portfolio has
no direction, and the selected projects may not lead to
achievement of organizational goals.
The key to portfolio success is that projects in any given unit’s

portfolio are aligned with that very unit’s strategy and goals
defined in its strategic framework. Presumably, the unit’s
strategic framework is aligned to that of the enterprise up
through the organizational hierarchy, thereby linking the projects
in its portfolio to the enterprise’s strategic goals.
Therefore, a portfolio is most effective in terms of achieving

enterprise goals, when there is strong alignment not only
between its projects and its PSO’s goals but also between the
strategic frameworks of the PSO and the enterprise itself.
30
Strategy Development
Formulation of enterprise strategy is a highly creative exercise

that involves intense effort by the executive team. Various
tools and techniques have been developed over the years for
strategy formulation and hundreds of books and thousands of
articles have been written on the topic.
Of the many strategy development tools and techniques available

in the literature, the most common ones are:
• Competitive analysis (Porter, 1998)
• SWOT (Originated by Albert Humphrey at Stanford in the late
1960’s)
• Balanced scorecard (Kaplan and Norton, 1996)
Strategy formulation is a complex process and will require many

additional tools than those mentioned above. A detailed
discussion of this process is outside the scope of our seminar. But
balanced scorecard framework is briefly described in the
following pages, because it easily lends itself to establishing a
project portfolio that can be tied to the scorecard.

Balanced Scorecard
Balanced scorecard (BSC) framework, developed by Robert

Kaplan and David Norton (1996), challenges the traditional view
that a profit-based organization’s sole purpose is to create
financial value or wealth for its owners or shareholders. It is built
on the premise that aiming to maximize shareholder value tied to
financial success likely causes management to focus on the short
term profitability at the expense of long term competitiveness.
Therefore, it offers a framework where organizational strategy
and goals are formulated to deliver other forms of value also to
other stakeholders. Thus, BSC presents four domains or
perspectives:
• Financial
• Customer
• Internal business process
• Employee learning & growth
Each perspective corresponds to a different form of value or

benefit accounting for not only the financial but also customer,
business process, and employee related benefits.
Whereas Kaplan and Norton identified these four domains as

critical to the success of any organization, you may add more (or
consolidate them into two or three) as you deem fit for your
organization.
BSC provides a comprehensive framework that translates an

organization’s mission and vision into a coherent set of goals and
objectives in the four key dimensions. It also includes a
quantitative approach to measure, monitor, and manage
organizational performance using outcome measures and
performance indicators corresponding to the goals/objectives.
Financial measures related to shareholder value include

operating income, return on capital, economic value added, etc.
Examples of customer related measures are customer
satisfaction, customer retention, new customer acquisition, and
market share. Internal business processes may be unique to each
industry or business, but generic measures in this domain include
time to market, throughput, procurement, order fulfillment,
project management, etc. Employee learning & growth
perspective measures may include employee satisfaction,
employee retention, and employee skill set.
32
Balanced Scorecard (continued)
If the organizational performance is measured and managed only

by financial metrics, a project portfolio would invest in only
those projects that expect financially attractive returns
accordingly. Projects that show promise in enhancing customer
satisfaction, process improvements, employee learning and
growth, and other areas may be rejected, as they do not align
with organizational value priorities and cannot compete with
projects that demonstrate financial merit.
On the other hand, if your organization adopts the balanced

scorecard approach with focus on multiple domains, the portfolio
must select projects in all those domains based on the relative
priorities for each domain. This lends to a balanced portfolio, a
portfolio where a balance is created with respect to the type of
value or benefit to be generated by a given project.
If your organization is already using the balanced scorecard

approach, PPM would be an excellent fit, because BSC articulates
the strategic framework effectively with goals and objectives
clearly defined forming the foundation required for alignment of
projects in the portfolio. Plus, four (or whatever the number may
be) value forms are already identified as critical to the
organization’s success, which can be used as project categories
in the portfolio to reflect the same balance as required by the
balanced scorecard (illustrated more in Unit 4).
Even if your organization does not use balanced scorecard

framework, categorizing the projects in a portfolio based on the
value form is still an effective approach to create a balanced
portfolio.

Case Study Exercise 1: Goals & Objectives
Please read Exhibit 1 about GeneMatrix (GMX), a genomics-based

biotechnology company located in San Diego, California. Exhibit 2
provides you the latest information on the company’s plans and
outlook.
Please describe, in your own words, GMX’s strategic framework.

Also, please articulate the company’s strategic goals along the
four perspectives of the balanced scorecard framework. Finally,
select one of the goals and develop two corresponding
objectives. Make sure the objectives are specific, measurable,
agreed-to, realistic, and time-bound.
34
Portfolio Governance
Portfolio governance is the process that ensures that the

portfolio’s policies, processes, and practices are implemented
properly in order to achieve the portfolio’s objectives.
As part of the governance, the following have to be clearly

defined:
• Decision making framework (e.g., funnel & filters® process)

• Overall PPM process to be followed by the portfolio team
• Escalation procedures especially related to decisions
regarding resource priorities
• Communication protocols
• Risk management processes and procedures

Portfolio Infrastructure
• The objective of building the portfolio infrastructure is to

facilitate the initial implementation of the PPM as a formal
standardized process as well as its on-going operation and
maintenance, once it is in place. The key elements of the
infrastructure include:
• Organizational structure
• Measurements & metrics
• Tools & techniques
Organizational structure simply involves PPM stakeholders and

their roles and responsibilities.
PPM’s success depends heavily on measurements and metrics.

These include project assessment criteria, project performance
measures, and portfolio performance measures, among others.
The most important tools and techniques used in PPM are for
assessing and prioritizing projects in the portfolio. Since vast
amounts of data are generated relating to numerous projects in
the portfolio, there is a strong need for data visualization tools as
well. Unit 7 is dedicated to PPM tools and techniques.
36
Organizational Structure
Several critical functions are associated with portfolio

management, which require people with different
roles/responsibilities and skills/competencies. Depending upon
your organization, you may use a different organizational
structure for managing your portfolio. Typical elements of an
organizational structure are shown below (not necessarily in any
hierarchical form), as an example.

Roles & Responsibilities
Executive Board consists of senior/executive managers with the

authority and control over the investment funds. They are
responsible for making the initial go/no-go decisions on new
project opportunities as well as the continue/cancel decisions
related to on-going projects.
Project Initiators submit proposals for new projects to be

considered for investment by the portfolio. As part of the
proposal process, their responsibility is to analyze the project for
its merit, often referred to as business case analysis, and provide
the required information using the appropriate format. These
initiators may already have the funds available to sponsor the
project, if approved by the portfolio’s Executive Board. In some
cases they may be seeking investment funds from elsewhere in
the organization.
Project Sponsors are those that provide investment funds for the
projects in the portfolio and work closely with their respective
project managers in ensuring that the projects are performing
according to the specifications and completed successfully.
Typically they are also Project Initiators.
Portfolio Review Team plays a critical role in the PPM process. It

is responsible for reviewing the new project proposals, evaluating
the performance of on-going projects from the portfolio
perspective, prioritizing them, and formulating recommendations
to the Executive Board regarding go/no go decisions. This team is
cross-functional, typically consisting of subject matter experts in
finance, marketing, engineering, R&D, IT, operations, etc. They
may be an integral part or extension of the core portfolio
management team. Depending upon the size of the portfolio,
they may be full-time in this position or part-time with other
responsibilities.
38
Roles & Responsibilities (Continued)
Portfolio Manager is the focal contact for the Executive Board,

Portfolio Review Team, Project Managers, Project Sponsors, etc.
He/she and his/her Team have the primary responsibility of
executing the PPM processes. Specifically, their responsibility is
to:
• Collect and organize the project proposal information from
the Project Initiators and the performance data of on-going
projects from the Project Managers and submit them to the
Portfolio Review Team in the right format.
• Assist the review team with the tools and techniques they
need.
• Collect and formalize portfolio performance information.
• Gather lessons learned and facilitate their use to improve the
PPM process.
• Serve as the focal contact point for the portfolio.
Portfolio Management Office can serve many functions including
administrative support, building the portfolio infrastructure,
establishing the information systems, and so on. In many
organizations these functions are housed in what is generally
called the Project or Program Management Office.

Measurements & Metrics
PPM process is driven by measurements and metrics that are key

in facilitating the decision making process. These have to be
defined in advance before a new portfolio is constructed. Proper
infrastructure needs to be established, so that the right
measurements and metrics are used effectively. This may involve
information management systems as well as personnel with the
right expertise in the area of analytics.
A measurement represents an attribute you want to measure and

metric is what you use to measure. For example, say, you want
to assess the financial merit of a project. One of the
measurements you can use is financial benefit, and one of the
metrics to measure the financial benefit is net present value
(NPV).
Measurements and metrics are to be identified before placing the

very first project in the portfolio, so that they are used the same
way consistently on all the competing projects. The whole
purpose of comparison and ranking of projects is lost, if you use
different measurements/metrics to evaluate competing projects.
Proper infrastructure should be put in place for whatever

measurements and metrics are used in the portfolio construction
and control phases.
40
Tools & Techniques
PPM tools and techniques can be grouped under two areas:

• Project prioritization
• Project assessment
Unit 7 is dedicated to the most commonly used PPM tools and

techniques. This unit also includes PPM measurements and
metrics.

Discussion: Portfolio Foundation
What organizational unit in your enterprise is supporting your

portfolio?
What are the high level strategic goals of your organizational

unit?
What is the organizational structure of your portfolio team?
42
Key Points
Before a portfolio is designed and constructed, foundation needs

to be built which involves three key processes:
• Delineate strategic framework.
• Define governance.
• Build portfolio infrastructure.
Strategic framework involves defining the organizational big
picture including the mission, vision, strategy, goals, and
objectives. The framework must be in place in advance, so that
the portfolio can select only those projects that align with
organizational strategy and goals.
Portfolio governance is the process that ensures that the

portfolio’s policies, processes, and practices are implemented in
order to achieve portfolio’s objectives.
Portfolio infrastructure includes portfolio organizational

structure, measurements & metrics, and tools & techniques.
This must be put in place first before a formal portfolio is
built.

UNIT: 4
DESIGN
PORTFOLIO
OBJECTIVES
Delineate portfolio design processes.
Discuss the significance of portfolio balancing.
Define project categorization and category allocation.
Outline project assessment criteria and their relative

weightage factors.
— UNIT 4: DESIGN PORTFOLIO
Portfolio Design Processes

Portfolio design is tantamount to developing a blue print for the
portfolio. The portfolio will be constructed and controlled based
on the design principles established in this phase.
The quality of your portfolio design—and ultimately the
performance of your portfolio—is dependent on the foundation
built in the first phase of the PPM process. To recap, before you
start designing the portfolio:
• Your organizational strategic framework, including its goals
and objectives, must be well articulated to ensure that the
portfolio invests in only those projects that are aligned with
organizational strategic framework.
• Project governance that dictates the portfolio policies,
processes, and practices including, most importantly, the
decision making framework must be established.
• The infrastructure needed to initiate, construct, and manage
the portfolio must be in place. This includes definition of the
portfolio organizational structure and measurements/metrics
and tools/techniques to be used.
The portfolio design phase involves creating the design of the
portfolio. The design includes the specifications and properties
that the portfolio should adhere to. The individual projects in the
portfolio and their relative mix should meet the design criteria
specified in this phase. The assessment, prioritization, and
selection of projects for the portfolio during the portfolio
construction and control phases must be based on the
specifications developed in this phase.
There are two processes that are critical to the portfolio design:
• Establish benchmarks.
• Identify design requirements.
• The design of the portfolio is not expected to change as long as

its foundation remains the same. Major changes in the foundation
are not expected to be frequent, but important shifts can take
place as a result of change in management, economic
catastrophes, rise of fierce competition, and so on. When the
foundation shifts, it will likely warrant changes in the portfolio
design.
46
Benchmarks
Benchmarks are standards and guidelines that the portfolio team

needs to follow in designing and managing the portfolio. They
must be established in this phase before a new portfolio is
initiated. Depending upon the organization and the nature of the
projects in the portfolio, the benchmarks may differ, but the key
areas where they are needed include:
• Portfolio entry criteria

• Portfolio exit criteria
• Discount rates
• Risk contingencies
The benchmarks must be revisited periodically (at least annually)

and revised as necessary. The revisions will be dictated by
external market and economic conditions and any major changes
in the strategic direction of the enterprise.

Portfolio Entry Criteria

As mentioned in Unit 2, project assessment process may be
carried in three steps referred to as Level 1, 2, and 3
assessments. Level 1 is an initial screening step where a project
is evaluated based on “portfolio entry criteria.” This eliminates
the need for the project initiators to perform a detailed business
case analysis and put together an elaborate project business
plan. Furthermore, the time and effort by the portfolio team to
conduct a detailed review is also minimized. A simple one or two
page Project Request Form by the project initiators may
facilitate the Level 1 assessment process.
Portfolio entry criteria are the benchmarks that a new project
candidate must meet before a detailed project business case
analysis and business plan are requested from the project
initiator to facilitate subsequent Level 2 and 3 assessments.
These assessments are for evaluating the project for its own and
relative merit compared to the competing projects, respectively.
If a project candidate does not meet the entry criteria, it will be
rejected without further evaluation; if it does, it will then go
through Level 2 assessment.
Examples of entry criteria include:
• Project Size. Projects requiring an investment that is below
a “threshold” may not need to be considered by the
portfolio. These are relatively small projects that may need a
significant effort for portfolio consideration compared to
their required budget. The rigorous analysis required by the
portfolio may be superfluous considering the project size.
(Alternatively, you may create separate categories for
different project sizes and have different levels of
documentation and assessment requirements. As the project
size increases, more information will have to be submitted
about the project’s business case, and the evaluation will
need to be more rigorous.)
• Project Alignment. An important criterion for any project to
be considered for the portfolio must be if and how well it
aligns with organizational strategy and goals. Therefore, if a
candidate is not strategically aligned or does not serve
organizational goals, it should not be considered further. In
addition, you may establish a “minimum acceptable score”
on a rating system using a scoring model (discussed later in
Unit 7) that the new projects must meet before they are
approved to go on to Level 2 assessments.
• Project Value. A project may not be considered for the
portfolio, if it does not demonstrate the potential to
generate acceptable levels of value. For projects that
generate financial value, you may use investment
benchmarks such as, return on investment, internal rate of
return, benefit/cost ratio, payback period, etc. For non-
financial value projects, you may use “minimum acceptable
scores” mentioned above.
48
Portfolio Exit Criteria

A project in the portfolio should exit the portfolio either because
it is completed or terminated. The criteria for project
completion should be negotiated between the project
manager/team and the project sponsor. These will typically
include completion of all the deliverables and meeting the
sponsor requirements.
However, the criteria for termination must be pre-defined by the

portfolio in its design phase. Without clearly defined exit
criteria, termination decisions on poorly performing projects will
be difficult and could become more political and less rational.
Continuation of unworthy projects is a waste of organizational
resources.
A project may be terminated for two basic reasons: 1) It no

longer shows strong enough business case by its own merit. 2)
Even if it has strong business case, it cannot compete with the
other projects in the portfolio and is not as attractive based on
its relative merit. The termination criteria for the first reason
must be identified in the design phase.
Any ongoing project in the portfolio must be tested against the

portfolio entry criteria, which are the “minimum” benchmarks it
is expected to meet. If it does not, the portfolio team must
evaluate it further to consider whether that project should
continue to receive funding or be scaled-down, terminated, or
halted temporarily for possible future consideration.
A list of critical factors should be identified that the portfolio

team must evaluate before recommending the project for
termination. General reasons why a project should be terminated
include:
• It no longer fits with the organization’s strategic framework.

• It no longer has a valid business case.
• It is no longer attractive because of higher completion costs
compared to the benefits.
• Technology is no longer relevant.
• Competition has beaten you to the punch.
• Regulations have changed.
• Markets or economic conditions have changed for the worse.

Discount Rates
As discussed in detail in Unit 7, the “discount rate” used in
financial calculations plays a key role in assessing a project’s
merit. This key rate is used in calculating the net present value
(NPV) of the project. The higher the project’s risk, the higher the
discount rate. It is paramount that these rates are specified in
the design phase. (When the NPV is calculated using an
“adjusted” discount rate, the resulting NPV is called risk-
adjusted NPV.)
You may describe the level of risk in either ordinal (e.g., low,
medium, or high) or cardinal scale (e.g., a scale ranging from 1
to 10) and select an appropriate discount rate corresponding to
different risk levels.
The discount rates to be used depend on a number of internal

and external factors and must be revised periodically as the
relevant conditions change.
50
Portfolio Contingencies
Contingencies, also called reserves, are meant to cover cost
impacts caused by materialization of project threats. In a broad
sense, there are two types of threats, namely, known and
unknown. The former are those that have been identified by the
project manager/team as part of project risk management
process, whereas the unknown threats are those that are not
identified.
Contingencies established to address known and unknown threats

are called project and management contingencies, respectively.
Project contingencies are part of the project budget, and the
project manager has the authority to utilize them as known
project threats are materialized. Management contingencies are
held by the management at the portfolio level, and management
approval is needed to expend them when unknown threats are
materialized.
Whereas your project management process may define how to

calculate and manage the project contingencies, PPM is
responsible for the management contingencies. Guidelines must
be provided in the portfolio design process as to how to estimate
the management contingencies to be held at the portfolio level.
There is no systematic method to calculate management

contingencies for a project, considering that it is difficult to
identify the level of overall unknown threat for that project.
Typically a certain percentage of the total investment allocated
for all the ongoing projects in the portfolio is set aside as
management contingency on an annual basis. This percentage
number may be identified arbitrarily (for example, between 5
and 15%) or based on historical experience.

Design Requirements
The portfolio design requirements specify the desired portfolio
balance and characteristics of projects in the portfolio.
There are two types of portfolio balance that are key to long
term portfolio success:
• Project category balance
• Portfolio triple constraint balance
The first one refers to the balance to be kept between the

different types or categories of projects (e.g., low vs. medium
vs. high risk projects; financial vs. customer vs. employee value
generation projects). The other balance refers to maintaining
the balance between the three triple constraint components,
namely, organizational goals, projects, and resources.
Accordingly, development of the design requirements involves

the following steps:
1. Establish project categories and sub-categories into
which the candidate projects will be placed for ranking
to create the portfolio balance.
2. Determine the relative proportions of available
investment to be allocated to each project category.
3. Identify the project characteristics you want to use to
assess projects in each category. Assign weightage
factors to each criterion to reflect its relative
importance compared to the other criteria.
4. Develop a standard (benchmark) for each characteristic
identified in the above step. Express, in words alone
or, preferably, in combination with a numerical value.
5. Ensure that the projects in the portfolio are sufficient
and necessary to meet the organizational goals, and
resources (money and people) are efficiently allocated
according to the project priorities with no excess or
waste.
52
Project Categorization Balancing
It is just common business sense that, in order to gain and

maintain long term competitive advantage in the market place,
any organization must invest in “diverse” projects. Diversification
creates a balanced portfolio that will help you mange risks
effectively.
A balanced portfolio consists of projects of different categories,

where the category represents a particular project
characteristic. The available investment is split between the
categories according to a pre-determined proportion. Therefore,
project categorization and category allocation are two important
steps in the design requirements process.
Depending upon the type of portfolio, you may use the

organizational goals, project value form (financial, customer,
business process, employee) or some other project characteristic
to create project categories. Project characteristics may include
investment size, development time, markets, geography, product
line, technology, risk level, etc. You may even create sub-
categories within each category. For example, a portfolio may be
categorized based on the project value form at the first level,
and sub-categorized based on the investment size at the next
level.
If your organization is adapting balanced scorecard framework for

strategic management, it is fitting to use the four BSC domains
(the value forms) for the first category level.
There are no hard and fast rules as to how many category levels
are optimum. The more the category levels, the more complex
the portfolio becomes making the project assessment selection
process increasingly difficult. On the other hand, only one level
may not give you the opportunity to balance enough project
characteristics. Two levels are probably optimum.



Category Allocation

Category allocation refers to the relative proportions by which
the available investment money is split among the different
project categories in a portfolio and must be identified as part of
the design requirements. The relative proportions are
determined by a number of external as well as internal factors.
• External factors include overall economy, general industry

conditions, competition, customer needs, regulatory
atmosphere, etc.
• The internal conditions include, among others, growth

phase, strategic framework, and organizations resource
capacity.
The relative allocations are to be revised only when there are

major changes to any of the factors mentioned above. These
allocations are to be determined by the portfolio Executive
Board with input from the Portfolio Manager and revised when
there is a major change in the strategic framework, which
may, in turn, be influenced by many external and internal
conditions.
Financial
5% Employee
Growth
Internal Processes
Customer
54

Project Assessment Criteria

There can be a long list of project assessment criteria to be used
as design requirements, but simply you may choose a maximum
of five or six criteria. At minimum, you should include the
following vital three:
• Alignment
• Potential to generate value
• Risk characteristics
Alignment. This refers to how well a proposed project is aligned

to the PSO’s strategy and organizational goals. A key factor in
determining a project’s merit is how effective it will be in
helping its PSO achieve its goals. Furthermore, it should also
demonstrate that it fits with PSO’s strategy and strategic
framework. It is not sufficient to show just one or the other. For
example, a project may be ineffective if it helps with revenue
generation, say, one of PSO’ goals, but does so by means not
supported by the PSO’s strategy or its values (guiding principles).
Alternatively, a project may demonstrate strategic fit but does
not help the PSO achieve any of its goals articulated in its current
plan. Therefore, assessing project alignment must include two
criteria:
• Strategic fit
• Goal alignment
Potential to generate value. Every project should exhibit

potential to generate value for it to be considered in the
portfolio. The value may be:
• Financial
• Non-financial

Project Assessment Criteria (continued)
Risk Characteristics. Risks, by definition, can be either negative

or positive, referred to as, respectively:
• Threats
• Opportunities
For the purpose of project assessment for investment

considerations, the focus should be on both threats and
opportunities during the production phase of the funnel & filters®
model. More attention should be paid to the market and business
related threats rather than “project threats” tied to completing
the project meeting the scope, time, and cost targets. The
opportunities you must assess include those that the project
deliverables may create in the market place for the organization.
They do not refer to the value per se expected to be created by
the deliverables.
The project assessment criteria must be the same for the

projects within a category but different from those of other
categories. The weightage factors for the assessment criteria
for different categories can also be different.
The list of criteria should remain the same for the initial go/no-
go as well as later continue/cancel decisions on project
investments.
56
Assessment Criteria Standards
Here are a few examples of how the design requirements for the
project assessment criteria can be stated in words:
• Alignment. Every project in the portfolio must be aligned to

the PSO’s strategy and its goals.
• Potential to generate value. Every project in the portfolio

must show potential to generate value for the organization
either in a financial or non-financial form.
• Risk characteristics. No project in the portfolio should have

unacceptable threats. If a project shows potential for
opportunities, they must be identified.

Assessment Criteria Standards (continued)
Here are examples of how design requirements can be stated for

the project assessment criteria using numerical standards:
• Alignment. You may use simple scoring model (with a scale
of 1-10, where 1 represents no alignment and 10 maximum
alignment) to evaluate the degree of alignment for a given
project and identify a minimum acceptable score (MAS).
Projects with scores less than the MAS will not be considered
for investment.
• Potential to generate value. You may measure financial

value using various financial models and non-financial value
with a scoring model. Numerical investment benchmarks
(e.g., payback period, BCR, ROI, etc.) can be used for
financials and MAS can be identified for non-financials. If a
project does not meet these benchmarks, the project will not
be selected for investment.
• Risk characteristics. For threats, an aggregate score based

on a scoring model can be obtained to evaluate the degree of
negative risk associated with a project. You may identify a
maximum threat score as a design threshold. If the project
threat score is greater than the threshold, the project is
considered unacceptable for investment, unless the threat is
mitigated to bring the score down. Similarly, an aggregate
score can be developed for the opportunities as well. You
may or may not require a minimum score for the
opportunities as a design requirement.
Either unweighted or weighted scoring models (discussed in more

detail in Unit 7) can be used in assessing projects. If latter
models are used, you will need to assign weightage factors to
each one of the project assessment criteria, which must be
identified in the design phase.
58
Portfolio Triple Constraint Balancing

There is no quantitative design standard or benchmark to

describe the balance between the organizational goals,
resources, and projects of the portfolio triple constraint. It is
rather a qualitative design criterion that is required of the
portfolio.
Balancing of the portfolio triple constraint requires that you have

sufficient as well as necessary projects in the portfolio being
funded to achieve every single organizational goal and the
resources are optimally allocated to the projects based on their
priorities.
Resources are of two types, namely, money and people, and

portfolio balance must be achieved relative to both.

Case Study Exercise 2: Portfolio Design

Your team has been asked by GMX’s executive management to
initiate a new PPM process in their organization. Based on the
information provided so far on GMX, develop the preliminary
design for a new enterprise portfolio. Your assignment involves
the following tasks:
• Categorize the projects in the portfolio along the four

perspectives of the balanced scorecard framework.
• For each project category, specify target percent investment

allocation.
• For each project category, list assessment criteria that will

be used to evaluate and select projects for investment.
• For each assessment criterion, specify a weightage factor.
• For each project category, identify entrance criteria, which

the project candidates must meet to be considered for the
portfolio.
• For each project category, identify exit criteria, which will

determine when a project must be terminated.
• Identify discount rates to be used in calculating the NPV of

projects based on their threat characteristics.
• Recommend management contingencies to be held at the

portfolio level.
60
Key Points
There are two processes that are critical to portfolio design:

• Establish benchmarks.
• Identify design requirements.
Benchmarks must be established in these areas:

• Portfolio entry criteria
• Portfolio exit criteria
• Discount rates
• Risk contingencies
Portfolio design requirements to be specified in the design phase

include:
• Establish project categories to create portfolio balance.
• Identify % investment allocations for each project category.
• Identify project characteristics that are important for project

assessment.
• Develop standards for those characteristics.
• Ensure portfolio triple constraint is balanced.

UNIT: 5
CONSTRUCT
PORTFOLIO
OBJECTIVES
Outline major processes involved in constructing a new

portfolio.
Illustrate how to build the initial portfolio.
Discuss how to calibrate the initial portfolio and transform it into

a “steady state” portfolio.
— UNIT 5: CONSTRUCT PORTFOLIO
Portfolio Construction Processes

The objective of portfolio construction phase is to place all the
ongoing projects within the purview of the PSO in the new
portfolio and purge those that do not meet the portfolio design
requirements through a “calibration” process.
The calibrated portfolio moves into the next PPM phase, Monitor
& Control Portfolio, where you balance the portfolio to enter the
“steady state” condition.
Calibration refers to keeping those projects that meet the

individual project assessment criteria, terminating those that do
not, and consolidating the redundant projects. A portfolio is
considered to be in steady state when it exhibits the design
properties. The figure on the next page shows the characteristics
of the portfolio, as it goes through calibration in Construct
Portfolio phase and balancing in Monitor & Control phase.
Portfolio construction consists of two steps:

1.Build initial portfolio.
2.Calibrate portfolio.
64
From Initial to Steady State Portfolio
Initial Portfolio
Does not meet all design
requirements.
Not all projects are aligned.
Some do not meet portfolio
benchmarks.
Some have unacceptable
risk characteristics.
Project categories do not
meet design balance.
Portfolio triple constraint is
not in balance.
Calibration in
Construction Phase
Calibrated Initial Portfolio

Meets many of the design
requirements.
Projects are aligned.
They meet portfolio benchmarks.
They do not exhibit unacceptable
risk.
Project categories do not meet
design balance, but current
balance is identified.
Portfolio triple constraint is not in
balance, but gaps are identified.
Balancing in
Control Phase
Steady State Portfolio
Meets the design requirements.

Projects are aligned.
They meet portfolio benchmarks.
They do not exhibit unacceptable
risk.
Project categories meet design
balance.
Portfolio triple constraint is in
balance.

Building Initial Portfolio
Building the initial portfolio involves making an inventory of

ongoing projects and categorizing them:
• Identify projects that are supported by the PSO and,

therefore, supposed to be in the new portfolio.
• Collect business case analysis data for each project.
• Categorize them into categories (and subcategories)

identified in the design phase.
Typically you will find either no business case or one that is

poorly done. Benefit-cost analysis (especially on the benefit side)
will be lacking. Available documentation will likely be limited
and different from what the new PPM requirements call for (for
example, Project Business Plan). Project sponsors and teams may
be resistant to “retroactively” create the required business case
and the documentation. However, the portfolio team must be
insistent in making the right information available.
66
Calibrating Portfolio
The initial portfolio is unlikely to reflect the desired design

requirements of the portfolio. Adjusting the initial portfolio to
match the desired design is called portfolio calibration. It
involves the following processes:

• Check each project within each category group for its
alignment with the current PSO goals. From the time a given
project was initiated, the PSO goals may have changed
altering the degree of fit. Place those projects that no longer
align with the PSO goals (or show poor fit) on a list of
projects to be terminated.
• Look for project redundancies and put together a list of

redundant projects and identify ways they can be
consolidated.
• Analyze each project for the portfolio “exit” criteria (as

discussed in Unit 4), identify those that do not meet the
benchmarks, and place them on the list of projects to be
terminated.
• Assess the risks of each project and recommend those with

unacceptable risks for mitigation action. If the risk level
cannot be brought down to an acceptable level, place that
project on the termination list.
• Make recommendations to the portfolio executive team as to

which projects should be terminated or consolidated.
• After the consolidation/termination decisions have been

finalized, rank the projects in each category based on their
relative merit.
• Compute the value of investment required for each project

for the remainder of the fiscal year and add up those values
within each project category. Calculate the relative
proportions of investment required for the categories in the
portfolio. In this calculation, you should consider the
investment required for the remainder of the fiscal year
rather than remainder of the project (that, is, cost to
complete), because portfolio budgets are typically approved
on an annual cycle. Furthermore, projects have different
development cycle times, and if you use the cost-to-
complete, in the long run you will end up tilting the balance
in favor of projects with longer time frames compared to the
design balance.

Calibrating Portfolio (continued)
• Identify the difference—it’s unlikely there will be no

difference—between the current category proportions and
the design proportions. (This gap will gradually be closed in
the next phase, as the ongoing projects are completed and
new projects come in, to achieve the balance with project
mix.)
• Compare the current organizational goals vs. the surviving

projects in the calibrated portfolio and identify project gaps,
that is, goals that are not addressed or only partially
addressed by the projects. Also, compare the human resource
needs of the remaining projects for the next planning horizon
(say, a quarter) vs. the available resources and identify the
resource gaps. (These project and resource gaps will have to
be closed in the next phase to achieve the balance around
the portfolio triple constraint.)
• By this point, you have built and calibrated the initial

portfolio except for category balancing and portfolio triple
constraint balancing.
68
Case Study Exercise 3: Building Initial Portfolio
The first two phases of the PPM methodology for GMX’s strategic
portfolio have been completed: The foundation has been placed,
and you have developed the design characteristics for the
portfolio in the previous exercise. As part of the third phase, i.
e., portfolio construction, all the ongoing projects and the
pending new project requests that are supposed to be included in
the portfolio have been identified and listed in Exhibit 3. The
exhibit also provides preliminary information on project business
case and status. In order to build the initial portfolio and
calibrate it, please perform the following tasks:
• Categorize the projects into the main categories you

identified in the previous exercise.
• Assess each project for its alignment with GMX’s strategy and
its strategic goals. Trace and identify the exact goal each
project is aligned with, if you see alignment to begin with.
• Based on their alignment as well as potential to generate

value and risk characteristics, evaluate the projects and
recommend which ones can be consolidated and which ones
terminated. Justify your recommendations.

Key Points
Portfolio construction consists of creating the initial portfolio

and calibrating it to meet the portfolio design properties.
Initial portfolio construction involves identifying and categorizing

the ongoing projects to be placed in the new portfolio.
Portfolio calibration refers to keeping those projects that meet

the individual project assessment criteria, terminating those that
do not, and consolidating the redundant projects.
Once a portfolio achieves the desired design properties, it is

considered to have reached the steady state. Steady state is
reached in the Monitor & Control Portfolio phase.
70
UNIT: 6
MONITOR &
CONTROL
PORTFOLIO
OBJECTIVES
Identify and discuss Monitor & Control Portfolio processes.
Highlight key functions of portfolio monitoring and control.
Discuss how to rebalance the portfolio.
Identify portfolio performance and outcome measures.

— UNIT 6: MONITOR & CONTROL PORTFOLIO
Monitor & Control Portfolio
The objective of the portfolio monitoring and control phase is to

maintain a steady state portfolio that consistently delivers value
in the long run.
When the initial calibrated portfolio enters this phase, most

likely it is not in steady state. The reason is that it is not
balanced in terms of either the project categories or the
portfolio triple constraint, although it may meet the other design
requirements.
Initial portfolio balancing will be achieved over a period of time

by placing in the portfolio right proportions of projects in the
right categories, as the on-going projects are completed or
terminated.
It may not be possible to arrive at the exact desired category

proportions due to “indivisibility” of project budgets, but an
approximation will be adequate.
The gaps related to the portfolio triple constraint that have been
identified in the previous phase must also be closed, as the
calibrated portfolio enters this phase.
After the calibrated portfolio reaches the steady state, it must

be maintained by consistently rebalancing the portfolio over its
lifetime.
New projects New projects

enter the enter the
portfolio portfolio
Portfolio is
Calibrated initial Steady
Portfolio is balanced in terms of continuously
portfolio enters state
project categories and portfolio rebalanced to
“monitor & control portfolio
triple constraint maintain steady state
portfolio” phase is formed
over the long run
On-going projects On-going projects

are completed or are completed or
terminated and terminated and
leave the portfolio leave the portfolio
72
Portfolio Monitor & Control Processes
As mentioned in Unit 2, Monitor & Control Portfolio phase

involves the day-to-day, ongoing activities of portfolio
management. It includes several key processes shown in the
figure below.
This phase continues as long as the portfolio is active and alive.

The processes in this phase are performed at regular intervals.
The shorter the average life time of the projects in the portfolio,
the higher the frequency. This gives a better control over making
timely project go/no-go decisions.
Assess and Select

New
Projects
Categorize
New Projects
Review Ongoing
Projects
Monitor &
Identify
Control New Projects
Portfolio Prioritize New &
Ongoing
Projects
in Each Category
Assess Portfolio
Rebalance
Portfolio
Authorize Final
Go/No-Go for
Projects

Project Identification
The objective of the project identification process is to identify

and document the project candidates as well as those projects
that are going through various phases of their life cycle within
the portfolio. The key documentation associated with this
process includes:
• Project Inventory of the Portfolio (PIP)
• Project Request Form (PRF)
• Project Business Plan (PBP)
74
Project Inventory of the Portfolio
A PIP contains the following:

• Project requests submitted for Level 1 assessment
• Project requests rejected/accepted after Level 1 assessment
• Project business plans submitted for Level 2 and 3
assessments
• Projects rejected/accepted after Level 2 assessment
• Projects rejected/selected after Level 3 assessment
• Projects on plan
• Projects off plan
• Troubled projects
• Terminated projects
• Postponed projects
• Completed projects
A PIP is a “living” document, which is constantly revised as

new candidates/projects are added to the list.

Project Request Form

A Project Request Form may contain the following basic
information that will enable the portfolio review team to
perform Level 1 assessment:
• Background and summary
• Business objectives
• Justification (How the project fits into the organizational
strategy and serves the organizational goals)
• Development time
• Development cost
• Value to be generated (financial/customer/business
process/employee)
• Expected financial benefits (NPV, ROI, payback time, etc.)
• Expected cost savings
• Expected non-financial benefits
• Major threats
• Major opportunities
A Project Request Form does not require detailed analysis.

The information provided is preliminary. You do not need to
provide any supporting documentation.
76
Project Business Plan
The project assessment results should be documented in a

formal report called the Project Business Plan (PBP), which is
often called the project proposal. It defines the business case
and serves the purpose of “selling” the project to senior
management. It is akin to the business plan of a start-up
company.
An entrepreneur most likely will not be able to get seed
capital for his start-up company without a business plan.
Prospective investors will not even want to talk to the
entrepreneurs, unless they have a business plan to begin with.
Similarly, a Project Business Plan must be made an essential
component of go/no-go decisions on selecting projects for
funding.
• PBPs should be kept “green” with periodic updates providing

relevant project progress information as well as any new
financial, marketing, production, risk, and other data. The
updated PBP should form the basis for project
continue/cancel decisions.
• Updated PBPs would provide critical information that

portfolio teams can use to evaluate projects at decision
filters during the development phase. Projects can be
reprioritized and funded to continue their life cycle or
terminated because of poor performance, limited resources,
changing market conditions, more attractive competing
projects, and so on.

Project Business Plan (continued)
In addition to summarizing the results from financial and

other modeling exercises and risk assessment, the PBP, at
minimum, should address the following questions:
• Does the project align with the organization’s strategy?
• What organizational goals does it serve?
• How does it fit with the organization’s business
objectives?
• What business objectives does it serve?
• What project category/sub-category does it belong to?
• What market sector does it belong to?
• What form of value would it deliver?
• What are the expected benefits?
• What are the development schedule and cost?
• What is the cash flow profile?
• What is the long term financial viability of the project?
• What will be the market for the project deliverables
(product/service)?
• How will they stand the competition?
• What value would they provide to the customer?
• What are the risks associated with the project?
• Can we afford to take the risks?
• Can we afford not to take the risks?
• Do we have the right technology?
• Do we have the right skills?
• Do we have enough resources?
• Do we have enough time-to-market?
• What is the probability of completing the project on
target time and budget?
• How does it impact our other projects?
• How does it impact our current business?
• What if we didn’t do it?
78
Project Categorization
After the new projects have been identified, and before the
assessment begins, there is an important step that involves
categorizing the projects.
As mentioned before, your primary categorization can be based

on the BSC domains or the form of value to be generated by the
project. Further sub-categorization is also possible.
One of the challenges you may face here is as to how to account

for multiple values a project may offer. For example, a
“customer value” project that is expected to enhance customer
satisfaction may also generate financial benefits. To keep the
categorization and subsequent prioritization process simple, it is
recommended that every project be assigned to a primary
category, where it will compete with other projects belonging to
the same category. It can perhaps receive extra “points,” as it is
compared to other projects, to account for its additional value
offered through another category.
Depending upon the type of portfolio, you may choose a project

characteristic other than the BSC domains as the basis for
categorization.

Assessing and Selecting New Projects
As a new project candidate is considered for the portfolio, it is

subjected to Level 1 assessment as mentioned in Unit 2. This is
the initial screening of the candidate, wherein it is tested against
the portfolio entry benchmarks. If it passes the screening, it will
then go through Level 2 assessment.
Level 2 assessment involves a detailed evaluation of the

candidate’s business case. The key questions to be addressed in
Level 2 assessment relate to the portfolio design requirements
for project characteristics from the design phase:
• How well does the project fit with the PSO strategy?
• What is its degree of alignment with organizational goals?
• What is the risk profile of the project?
• Does the project’s benefit-cost relationship meet the
investment benchmarks?
Level 1 assessment is facilitated by the Project Request Form and

Level 2 assessment by the Project Business Plan.
The frequency at which Level 1 and 2 assessments are done

depends on a number of factors. Level 1 assessments should be
done more frequently than Level 2s. The former may be
performed as soon as or within a short period (say, one week)
after a Project Request Form has been submitted. This will
facilitate a faster overall go/no-go decision process. Level 2
assessments should be performed at lest quarterly, if not more
often.
If the candidate project is deemed to exhibit merit and meets

the project investment benchmarks, it will move on to the next
process in the Monitor & Control Portfolio phase, which is
prioritization along with the other new and ongoing projects that
also have received green signal at Level 2 assessment.
Those project candidates that do not pass Level 2 assessment are

rejected from further consideration.
80
Review of Ongoing Projects
The objective of reviewing ongoing projects is to decide

whether to continue to invest in the project or terminate it. If
the project still holds strong business case and meets its
investment benchmarks, you may decide to continue to invest
in the project as planned or in some revised fashion. Otherwise
you may terminate it.
The decision making in this regard is facilitated by Level 2

assessments. These assessments are typically represented by
gates in the phase-gate process.
Ongoing projects that pass Level 2 assessment move on to the

next step, which is ranking them along with the new projects
that also have passed Level 2 assessment.
Projects that fail Level 2 assessment will need to be

terminated.

Project Termination: Sunk Cost
Termination of projects, even when they are failing, is not

easy. As much as you try to make the over all PPM process
quantitative and objective, there are always political and
emotional considerations that make it excruciatingly difficult.
Even experienced senior managers and decision makers

frequently make arguments that a seemingly failing project
should continue especially because a significant investment
has already been made. The idea is that why waste all the
investment that has already been made on the project.
Sunk cost of a project is the cost that has already been

incurred and cannot be recovered. Sunk cost is called the
“actual cost” in project management lexicon (in contrast,
cost-to-complete [CTC] is the remaining cost required for
project completion.)
Sunk Cost Fallacy. Economic theory says that sunk cost

should not play a role in financial decisions. Only the project
merit should be considered. It would be irrational to consider
sunk cost in investment decisions. However, behavioral
economics suggests that people’s decisions in real world are
influenced by the sunk cost. This phenomenon is caled sunk
cost fallacy.
Sunk Cost Dilemma. Avoiding sunk cost fallacy may lead to

sunk cost dilemma. You may make a rational decision (without
considering the sunk cost) at every decision point to continue
a project but may end up finishing the project in a loss with
total cost exceeding the expected benefit. So the dilemma a
deciiosn maker faces repeatedly is: When is the right time to
terminate the project?
82
Overcoming Sunk Cost Dilemma
Be realistic in estimating project costs and benefits. Don’t be too

over optimistic. Use risk management tools to understand and
analyze the uncertainty associated with the benefit/cost
equation.
Be prepared to kill projects early, when they do not meet

milestones or show consistent cost overruns.
Avoid “all or nothing” situations (where benefit is realized only

after all the project cost is sunk) on heavy investment projects.
Structure projects into phases, where each phase can deliver
incremental benefit.
Create low cost exits by making smaller initial commitments,

including escape clauses in contracts. Predefine “points of safe
return” on project investments beyond which the project will be
cancelled.
Use real options methodologies to defer decisions until a later

time when uncertainty is diminished on benefits and costs.
When comparing projects, make sure the level of analysis is the

same. Make appropriate adjustments to normalize assessment
criteria, such as risk, so that you are making “apples vs. apples”
comparison.

Project Prioritization
The objective of project prioritization is to rank the surviving

projects from Level 2 assessment within each project category,
so that high ranking projects can be selected to receive funding
in accordance with the portfolio balancing requirements. Ranking
should include both new and ongoing projects that have passed
Level 2 assessment. These are the projects that show strong
business cases.
The ranking of the competing projects is facilitated by Level 3

assessments, which involve comparing the projects for their
relative merit. The information needed for these assessments is
provided in the Project Business Plans for the new projects and
updated PBPs and project progress reports for the ongoing
projects.
Several quantitative as well as qualitative techniques are

available for this purpose. Prioritization will be easier with the
former techniques.
Prioritization of projects in the financial value category may be

done using the efficient frontier principle. When quantitative
data is not available for ranking purpose, forced ranking, paired
comparison, and weighted scoring models can be used. These
techniques are described in unit 7.
Ranking of both new and ongoing projects together is not an easy

task considering the fact that these projects are at various stages
of their development life cycles and the business case data may
be at different levels of detail. To minimize this difficulty:
• Terminate poorly performing projects early on in their life

cycle to avoid “sunk cost” fallacy, as discussed earlier in this
unit.
• Insist on the same level and rigor of detail in presenting the

business case analysis for every project.
• Ensure that the business case is revisited and updated

periodically, as a project goes through its life cycle.
The next process following prioritization is portfolio rebalancing.
84
Portfolio Rebalancing
When a project is completed or terminated and leaves the

portfolio, the per cent investment allocation for its category
will decrease with a corresponding increase in other
categories, thereby shifting the portfolio balance with respect
to project categorization.
Furthermore, when organizational goals change or the

resource availability changes, the portfolio triple constraint
goes out of balance.
Therefore, the portfolio has to be continuously rebalanced

with respect to both project categorization and portfolio
triple constraint. In theory, rebalancing maybe a simple
principle but, in practice, is highly complex because of the
dynamic nature of the portfolio. It is an iterative process
through which you reconcile as to the projects you will keep
in the portfolio vs. out of the portfolio.
Portfolio rebalancing involves three steps:

• Project categorization balance
• Portfolio triple constraint balance
• Portfolio reconciliation

Project Categorization Balance
Project categorization balance is dictated by:

1) Financial and human capacity available for the projects
in the portfolio, which are determined by the annual
budgeting process and operational resource planning.
2) The relative allocation of the capacity to each project
category in the portfolio, which is defined in the
portfolio design phase.
Financial and human capacity measurements are typically

done in terms of money and “full time equivalents”(FTEs),
respectively. But the two can be summed together as an
aggregate measure in monetary terms by assigning an
approximate monetary value to an average FTE. Thus, the
total investment capacity (including financial and human) in
monetary terms can be estimated.
The total investment can then be split among the project

categories in the portfolio in accordance with the relative
allocations defined in the portfolio design phase.
Knowing the allocation for a project category, you can

identify projects for funding starting at the top of the ranked
listing and going down the list until no more funds are left for
that category. Thus, a line is drawn on the prioritized list to
separate the projects that will receive resources from those
that will not.
This process becomes tricky, because the planning cycles for

financial and human capacity on the supply side and for
projects on the demand side are often different:
• Financial capacity planning in most organizations is

performed on an annual cycle for each fiscal year as
part of the budgeting process.
• Human capacity planning is typically done in “rolling

waves” of quarters. That is, you plan the next
immediate quarter at a relatively high level of detail
and the subsequent quarters at decreasing levels.
• For a project, depending on its size, you may plan the

resource needs in detail for its entire life cycle or in
“rolling wave” phases that may cut across quarter and
fiscal year boundaries.
86
Project Categorization Balance (continued)
To circumvent the above problem related to the planning

cycle times, you may use the same planning period for both
the supply and demand sides. You may select either the next
quarter or the remainder of the year, depending upon your
portfolio.
As it should be evident from the above discussion, effective

portfolio rebalancing requires detailed plans regarding the
available portfolio budget, resource capacity, and project
resource needs.
In summary, rebalancing can be achieved by the following

steps:
• Determine the total investment available (financial and

human) for the next quarter.
• Divide it among the project categories of the portfolio

according to the design specifications to arrive at
maximum allocations for each category.
• Allocate resources to the projects on the ranked list for

each category, starting at the top of the list and going
down the list until no more investment is left for that
category. Thus, draw a line on the prioritized list to
separate the projects that will receive resources from
those that will not.
At the end of this process, you will have a tentative list of the
projects that you have selected for making final go/no-go
decisions.

P o r t f o l i o T r i p l e C o n s t r a i n t B a l a n c e
By this point, you have matched the projects on the ranked list
with the available resources, but not verified whether the
projects above the “separator line” will help you achieve all the
current organizational goals. In other words, the portfolio triple
constraint may not be in balance.
As part of balancing the triple constraint, you will examine the

projects above the “separator line” and compare them with the
current organizational goals to ensure that there are sufficient
and necessary projects corresponding to achieve those goals.
There should not be any unnecessary projects, that is, projects

that do not align with the current organizational goals, because
presumably they have been removed form the project list at the
end of Level 2 assessments. If there are not sufficient projects to
achieve the current goals, those gaps should be identified.
88
Project Reconciliation
In order to fill the project gaps identified in the previous step,

you may reexamine the projects that are below the “separator
line.” If you find the “right” project(s), you may need to obtain
extra resources to move that project(s) above the separator line.
Alternatively, you may switch priorities with another project(s)
that is above the line. If neither action is possible, or there is no
project on the list to fill the gap in the first place, the time line
for the corresponding organizational goal may have to be
extended.
The additional resource requirements and project gaps need to

be communicated to the portfolio executive board to facilitate
further action.
After reconciliation of the projects through this iterative process,

you will have a list of high priority projects that will receive
authorization to proceed to their next phase and a list of low
priority projects that will need to be halted until further
consideration in the future or terminated altogether.

Final Go/No-Go and Project Authorization
If a new project candidate has survived all three levels of

assessment (including the portfolio balancing), it is recommended
to the portfolio executive board for final “go” decision. Once the
board authorizes the project, the project sponsor can prepare a
project charter, appoint a project manager, and begin the next
phase of its life cycle.
Ongoing projects receiving “go” recommendation will also move

forward to their next life cycle phase.
90
Project and Portfolio Reviews
As the projects are moving through the monitoring and control

phase, several reviews need to take place to facilitate various
processes discussed heretofore.
Project Progress Reviews. The objective of these reviews is

to monitor the project performance relative to the triple
constraint. Forecasting is also made on the time, resources,
and cost required to complete the project. The reviews are
for each individual project. They are typically done in the
form of meetings, weekly or every other week. Project
progress reports are presented. The project manager and
team participate, and the sponsor may also be involved.
Portfolio team generally does not attend the meetings but
reviews progress reports. No major decisions are made in
these meetings. These meetings/reviews are part of the
project management process.
Level 1 Assessment Portfolio Reviews. The objective of these

reviews is to screen new project candidates that show marginal
or no value. The review is commonly performed by the portfolio
manager followed by go/no-go decisions with help from the
subject matter experts, who are part of the portfolio team.
Project Request Forms facilitate these reviews. The reviews and
decisions are performed within a week or two after the project
request has been received. If the candidate makes the cut, it
moves on to Level 2 assessment.

reviews is to assess projects (new and ongoing) and select (or
reject) them for further consideration. New project assessments
are performed by the portfolio team and facilitated by the
Project Business Plan. The ongoing project assessments are done
by the portfolio team and the project steering committee and
facilitated by project progress reports and the updated Project
Business Plans. Ongoing projects are evaluated based on their
performance to-date and expected future performance relative
to the project triple constraint as well as their updated business
cases at the time of the reviews. These reviews are made
quarterly or less frequently, depending on the need. Go/no-go
recommendations are made by the portfolio team. If a project
gets a green signal at this review, it will be considered for the
Level 3 assessment.

Project and Portfolio Reviews (continued)

reviews is to assess the surviving new and ongoing projects for
their comparative merit, rank them, balance their mix, and make
final go/no-go decisions. Project Business Plans are used for
project assessment. Go/no-go recommendations are made by the
portfolio team but the final authorization comes from the
portfolio executive board. The reviews are done on a quarterly
basis or less frequently depending on the need. Projects that pass
this review will receive authorization to move forward to the
next phase in their life cycles.
Portfolio Resource Planning Reviews. The objective of these

reviews is to prioritize project human resource needs for the
immediate following weeks. It is to ensure that projects with
high priority have resources available, so that no critical
timelines are missed on those projects. The portfolio manger and
the project managers participate in these reviews. Only the
resource needs and plans for the immediate future are discussed,
and no decisions are made relative to project go/no-go. These
reviews are more frequent than the Level 3 Assessment Portfolio
Reviews. Typically these are working meetings held weekly or
every other week.
92
Portfolio Assessment
The objective of overall portfolio assessment is to:
• Ensure that the portfolio is in a steady state, meeting the

desired design requirements.
• Validate that the organizational goals are achieved through

the portfolio.
• Capture and apply lessons learned to continuously improve

the PPM process.
The true success of a portfolio is revealed by measuring the value

generated by the deliverables of the projects in the portfolio
over their respective life times. The effectiveness of investment
decision making can be tested by examining the success rate
relative to actual value generation of projects from the portfolio.
Another facet to be studied includes how effective are your value

generation estimates. This involves comparing the actual value
generated by the project deliverables vs. the promised value.
Although the effectiveness of today’s PPM processes may not be

known until “after the fact” well into the distant future,
portfolio performance indicators must be identified and
measured to gauge the future portfolio success.
The performance and final outcome of the portfolio can be

monitored and assessed through a framework of clearly defined
measurements and metrics. Such a framework may include
outcome measures (OMs) and performance measures (PMs).

Outcome & Performance Measures

Outcome measures, are “after the fact” measures and reveal
whether success has been achieved. Therefore, they are also
called “lagging indicators.” They assess whether an objective
has been achieved based on the performance to-date.
Performance measures, also referred to as performance

indicators, are “during the fact” and indicate whether the
corresponding success outcome will be achieved ultimately.
They are indicators that drive future performance and help
achieve the objectives in the long run. They are also called
“leading indicators,” because they help you monitor the
performance and give you early warning, so that adjustments
can be made to achieve the desired success.
For a project, the OMs are completion of scope requirements on

time and under budget. Performance measures are completion of
milestones, schedule variance, and cost variance.
Identification of portfolio measures is more complex. The

ultimate portfolio outcome success is determined by the actual
delivery of value by the portfolio as a whole and achievement of
organizational goals. Performance indicators include whether
each portfolio component is on track to deliver promised value,
as it goes through the development phase.
94
Portfolio Outcome Measures
The objective of measuring portfolio outcomes is not only to

ensure that the portfolio is successful but also to capture and
apply lessons learned to continuously improve the PPM process.
The true test of portfolio success lies in the realization of

financial and business outcomes and ultimately the
organizational goals. This requires value validation, which is
the comparison of the actual value delivered vs. the value
promised. This is a very complex and challenging task. The
most important portfolio outcomes are:
• Achievement of organizational goals of the PSO
• Creation of value for the stakeholders
The success of achieving these outcomes can be assessed only far

into the future, after the project deliverables have been
completed. This is not an easy task and requires a systematic
method where you must:
• Define clearly the organizational objectives using SMART

framework especially using value based metrics.
• Measure the outcomes of these objectives, again using value

based metrics, during specified time intervals (quarters
suggested).
• Measure the value generated by each project in the portfolio

(using the same value metrics as in organizational
objectives).
• Link the value generated by the projects to the value

realized at the organizational level.

Portfolio Performance Measures
Although the true portfolio success can be measured only “after

the fact” far into the distant future, several performance
indicators can be monitored to gauge the portfolio health while
the projects are going through the development phase in the
portfolio:
• Total value of a portfolio at any time, represented by

the total net present value to be generated by the
projects going through development phase in the
portfolio (NPV can be replaced by an equivalent
measure for projects generating non-financial value.)
• Percent portfolio return as characterized by the

expected benefit from the on-going projects in the
portfolio vs. the total investment required to complete
these projects
• Total amount of investment required to complete the

projects in the portfolio
• Percent of the total funded projects in the portfolio

that are completed each year
• Percent of the total projects in the portfolio that have

been initially funded but terminated before their
completion
• Percent of the total funded projects in the portfolio

that are completed under target time and budget
• Percent of the proposed projects that are funded
• Correlation between the desired vs. actual percent

category allocations to maintain a balanced portfolio
96
ase Study Exercise 4: Portfolio Balancing

C

In the previous exercise you built the initial portfolio for GMX and
started the calibration process. Assuming that your
consolidation/termination recommendations have been
authorized by the executive team, please perform the following
tasks:
• Compute how much total investment will be needed to

complete the projects in each category.
• Calculate the relative percent investment needs for each

category.
• How is the current relative category allocation different from

the design requirement?
• Are the projects in the portfolio necessary and sufficient to

achieve the organizational goals?
• What actions would you recommend to make it a balanced

portfolio that would be effective in achieving GMX’s goals?

Key Points
Portfolio monitoring and control consists of several key

processes including project identification, categorization,
assessment, and selection of new projects; review of ongoing
projects; ranking of new and ongoing projects; and
rebalancing the portfolio.
Key documentation for project identification includes Project

Inventory of the Portfolio, Project Request Form, and Project
Business Plan.
A portfolio must be rebalanced at regular intervals in order to

maintain the desired balance, both in terms of project
categorization and portfolio triple constraint.
Projects must be terminated when they no longer meet the

benchmarks or cannot compete with other projects in the
portfolio. Sunk cost must not be considered in termination
decisions.
Outcome and performance measures must be identified at

project and portfolio level and tracked regularly.
Portfolio metrics should be monitored regularly for

benchmarking purpose and continuous improvement.
98
UNIT: 7
PPM TOOLS &
TECHNIQUES
OBJECTIVES
Discuss different project prioritization and assessment tools.
Outline a scorecard approach that integrates various tools and

metrics related to different portfolio processes.
Present different models for evaluating a project’s financial

viability.
Review commonly used non-financial models including

weighted scoring models.
— UNIT 7: PPM TOOLS & TECHNIQUES
PPM Tools & Techniques

Portfolio management tools and techniques are used for two
basic purposes:
1. Project prioritization
2.Project assessment
Efficient frontier method, forced ranking, paired comparison, and

weighted scoring models are some of the common techniques for
prioritization of projects.
Project assessment tools may be grouped under two categories:

A) Assessing tangibles and B) Assessing intangibles.
• The tangibles associated with projects are monetary in

nature and basically include costs and benefits. These can be
measured and evaluated using quantitative financial models.
In lieu of (or in addition to) such models that can require
significant time and effort, you may also use simple scoring
models to assess the financial merit of projects.
• Intangibles cannot be seen, touched, or measured and are

non-monetary. Tools to assess intangibles are primarily
scoring models that can be used to assess any project
characteristic, including, as mentioned above, financial
merit.
100
roject Prioritization Techniques

P

There are several techniques available for project prioritization.
If you’re using financial techniques to evaluate a project’s merit,
you can rank the projects based on a given metric (e.g., NPV,
IRR, payback time, BCR, etc.).
Ranking the projects based on their BCRs can be used to generate

the “efficient frontier,” as discussed on the next two pages.
Other models commonly used for project ranking are:

• Forced ranking
• Paired comparison
• Weighted scoring model

Efficient Frontier
Efficient frontier principle is part of the Modern Portfolio Theory

introduced in the early 1950’s by Henry Markowitz that laid the
foundation for today’s financial portfolio management. He and
others that further developed the theory won a Nobel Prize in
economics in 1990 for their groundbreaking work. The efficient
frontier principle can also be applied in a limited fashion to
project portfolios.
Let’s say you have 10 projects in your portfolio that are being
evaluated for their merit for investment, and you want to
determine what mix of projects will give you the highest financial
return. For this:
• Identify how many possible portfolios are theoretically

possible (210, that is 1,024) and what projects are in the
mix for each one of those portfolios.
• Plot the investment cost of portfolio (sum of costs of

projects in the portfolio) vs. risk adjusted net present
value (NPV) of the portfolio (sum of risk adjusted NPVs of
projects in that portfolio).
• “Efficient frontier” consists of the portfolios that are

expected to yield maximum value. Knowing how much
investment is available, you can select the portfolio with
the right mix of projects located on the efficient frontier.
Efficient Frontier
Risk
Adjusted
NPV
Cost
Portfolio
102
Efficient Frontier Calculation: Project Portfolio
The number of theoretically possible portfolios with every

possible combination of projects increases exponentially with the
number of projects to be considered. A computer can generate
the efficient frontier curve, analyzing the numerous possible
portfolio costs and corresponding benefits, expressed as risk-
adjusted NPV.
The efficient frontier curve can also be manually created for

relatively small number of projects:
• Estimate the cost and the risk-adjusted NPV (benefit) for
each component project of the portfolio.
• Compute the benefit/cost ratio (BCR) of each project.
• Rank the projects starting from the highest BCR to the
lowest.
• Add the BCRs cumulatively, one project at a time, from the
top to the bottom of the list. Each cumulative BCR represents
the total benefit corresponding to a group of projects in a
portfolio.
• Similarly, add the cost of the projects cumulatively, one
project at a time, from the top to the bottom of the list.
Each cumulative cost represents the corresponding total cost
of the component projects in a portfolio.
• Plot the cumulative BCRs against the corresponding
cumulative project costs. The resulting curve is the efficient
frontier representing portfolios containing projects with the
highest BCRs.

Efficient Frontier Example
Project Descending Cumulative Cumulative

ID Cost Benefit BCR Cost BCR
11 557,657 2,284,584 4.10 557,657 4.10
1 546,846 2,124,381 3.88 1,104,503 7.98
6 473,533 1,801,917 3.81 1,578,036 11.79
20 465,502 1,501,761 3.23 2,043,538 15.01
17 373,138 1,195,650 3.20 2,416,676 18.22
19 732,088 2,338,347 3.19 3,148,764 21.41
7 547,635 1,744,401 3.19 3,696,399 24.60
15 372,350 1,171,577 3.15 4,068,748 27.74
16 850,940 2,244,128 2.64 4,919,689 30.38
13 869,969 2,254,094 2.59 5,789,658 32.97
14 711,566 1,717,228 2.41 6,501,224 35.38
23 725,401 1,654,142 2.28 7,226,624 37.66
9 1,279,143 2,278,628 1.78 8,505,767 39.45
18 1,514,746 2,559,467 1.69 10,020,514 41.14
22 1,249,797 2,104,847 1.68 11,270,311 42.82
21 906,649 1,512,290 1.67 12,176,960 44.49
10 1,318,790 1,952,749 1.48 13,495,750 45.97
25 1,381,673 1,704,111 1.23 14,877,423 47.20
5 1,320,046 1,619,634 1.23 16,197,468 48.43
12 1,011,730 1,227,030 1.21 17,209,199 49.64
2 1,481,124 1,691,119 1.14 18,690,322 50.78
24 1,311,985 1,438,845 1.10 20,002,307 51.88
4 1,058,819 1,039,880 0.98 21,061,127 52.86
8 1,193,978 1,053,459 0.88 22,255,105 53.74
3 1,665,676 1,267,437 0.76 23,920,781 54.51
60
50
Cumulative BCR
40
30
20
10
0
0 5 10 15 20 25
Total Investment Cost, $'s in millions
104
Case Study Exercise 5: Efficient Frontier
Please read Exhibit 4, which provides assessment information

including benefits/costs for the projects (in the financial value
category) in the new portfolio. Develop the efficient frontier for
these projects and rank them.

Forced Ranking
In a forced ranking method, a group of experts (or decision

makers) independently ranks all the projects under
consideration giving them numerical values 1, 2, 3, and so on,
starting from the most attractive one. On each project, the
rankings from each member of the group are summed up and
the projects are re-ranked based on their rank sums.
Ranking Person Total Project

Project ADE RCS PDS ROL CFK Score Rank
A 3 1 5 2 2 13 2
B 8 7 9 8 10 42 9
C 4 6 2 5 4 21 5
D 9 10 8 7 5 39 8
E 1 2 7 4 6 20 4
F 6 8 4 9 8 35 7
G 10 9 10 10 9 48 10
H 7 5 6 6 7 31 6
I 2 4 3 1 1 11 1
J 5 3 1 3 3 15 3
106
Paired Comparison
In this method every project is compared with every other

project as a pair. The better project between the two under
consideration receives a score of 1 while the other 0. The scores
for each project are added. The projects are ranked in the
descending order with the project having the highest total score
ranked as No. 1.
Project A B C D E F G H I J Sum Rank
A 0 0 1 0 1 1 1 1 1 6 3
B 1 1 1 1 0 1 1 0 1 7 2
C 1 0 0 0 0 1 0 0 1 3 8
D 0 0 1 1 1 1 0 1 0 5 4
E 1 0 1 0 1 0 1 0 1 5 5
F 0 1 1 0 0 0 0 0 0 2 9
G 0 0 0 0 1 1 1 0 1 4 6
H 0 0 1 1 0 1 0 0 1 4 7
I 0 1 1 1 1 1 1 1 1 8 1
J 0 0 0 0 0 1 0 0 0 1 10
Paired comparison is a simplified version of a complex decision-

making technique, called Analytic Hierarchy Process (AHP), which
was developed by Thomas Saaty in the 1970s.

Scoring Models
Scoring models can be used in assessing any characteristic of a

project, whether it is tangible or not. It simply involves rating of
the project on selected project characteristics.
Different “weights” or weightage factors can be assigned to the

characteristics, depending upon the relative importance of each
characteristic. A weighted aggregate score can be obtained to
represent the project’s investment worthiness. These models are
called weighted scoring models.
A weighted aggregate score for a project is obtained as follows:
• Identify major criteria (that is, project characteristics) to be

used to evaluate the project.
• Give % weight to each criterion, so that the total weight will

add up to 100. Typically financial criteria are given at lest
60% weight.
• Score the project on each criterion on a scale of 1-10 (10

representing the most desirable score in project’s favor).
• Multiply the criteria scores by their corresponding weights.
• Add up the scores to obtain the aggregate score that

represents the attractiveness of the project. The higher the
score, the more attractive the project is.
108
Weighted Scoring Model
Criteria(%Weightage)
Value
Goal Generation Sumof
Strategic Alignment Potential Threats Opportunities Weighted
Project Fit (5%) (10%) (65%) (10%) (10%) Scores Rank
Score* 8 2 8 5 7
A 5
Weighted Score 0.4 0.2 5.2 0.5 0.7 7.0
Score 8 3 8 7 3
B 6
Weighted Score 0.4 0.3 5.2 0.7 0.3 6.9
Score 8 6 8 8 6
C 3
Weighted Score 0.4 0.6 5.2 0.8 0.6 7.6
Score 6 4 4 6 5
D 9
Weighted Score 0.3 0.4 2.6 0.6 0.5 4.4
Score 3 6 5 8 5
E 8
Weighted Score 0.15 0.6 3.25 0.8 0.5 5.3
Score 5 7 9 9 6
F 1
Weighted Score 0.25 0.7 5.85 0.9 0.6 8.3
Score 7 4 8 5 6
G 4
Weighted Score 0.35 0.4 5.2 0.5 0.6 7.1
Score 10 5 9 6 7
H 2
Weighted Score 0.5 0.5 5.85 0.6 0.7 8.2
Score 5 8 7 8 4
I 7
Weighted Score 0.25 0.8 4.55 0.8 0.4 6.8
* On ascale of 1 - 10

Case Study Exercise 6: Project Ranking
Please rank business process and employee value projects within

their respective categories using two different ranking techniques
as shown below:
Category Ranking Technique

Business process value Paired comparison
Employee value Forced ranking
110
Project Assessment Tools & Techniques
The key project assessment characteristics as discussed in unit 4,

are:
• Alignment
− Strategic fit
− Goal alignment
• Value creation potential

− Financial value
− Non-financial values
− Threats
− Opportunities
Among these characteristics, financial value is considered
tangible and the rest intangible. Various financial models are
available to measure the tangibles. Scoring models are the most
common tools to measure the intangibles. The following pages
describe these tools and techniques.

Assessing Strategic Fit
Strategic fit is an intangible, and there are no quantitative means

to measure it. Scoring models are the most appropriate
techniques.
The measurement can be facilitated by strong foundation

involving a clear definition of the strategic framework of the PSO
and the entire enterprise.
Furthermore, a thorough description by the project initiators of

how the proposed project fits with the strategic framework of
the PSO can help the PPM team with its assessment process.
Graphical linkages and if-then statements discussed later can be

used to describe the strategic fit.
112
Assessing Goal Alignment
Goal alignment is an intangible that can be measured by a scoring

model. To facilitate this measurement, the portfolio team must
make available the PSO’s organizational goals and objectives,
and project sponsors or initiators must provide their projects’
goals and business objectives as part of the Project Business Plan:
• Goals of the organization supporting the portfolio. These

goals must be articulated based on the strategic framework
of the PSO that should be in alignment with that of the
enterprise.
• Objectives corresponding to each organizational goal.

These objectives must be SMART and should be expressed
in terms of value metrics (financial, business process,
employee growth, etc.)
• Project Goal. Project goal must be expressed as tangible

deliverables (products, services, results) to be produced by
a specified date and within a specified budget.
• Project “business” objective(s) corresponding to the

project goal. This objective(s) must be SMART and should
be expressed in terms of value metrics based on the value
the project deliverables are expected to generate.
With the above information, the Project Business Plan can

demonstrate how the project under consideration is aligned with
PSO’s goals and objectives using graphical linkages and If-Then
statement.

Goal Alignment: Graphical Linkages
Goal alignment may be described through a structured framework

involving:
1. Graphical presentation of linkages connecting the project

objectives to organizational objectives. These linkages will
show what project objectives will contribute towards
achieving what organizational objectives. If a given project
objective is expected to help achieve multiple
organizational objectives, multiple linkages can be shown
accordingly.
Strategic Framework
Organizational Goal 1 Organizational Goal 2 Organizational Goal N
OG1 OG1 OG1 OG2 OG2 OG2 OGN OGN OGN

Objective 1 Objective 2 Objective N Objective 1 Objective 2 Objective N Objective 1 Objective 2 Objective N
PG1 PG1 PG1 PG2 PG2 PG2 PGN PGN PGN

Objective 1 Objective 2 Objective N Objective 1 Objective 2 Objective N Objective 1 Objective 2 Objective N
Project Goal 1 Project Goal 2 Project Goal N
Project
114
Goal Alignment: If-Then Statements
2. “If-then” statements linking project objectives and goals to

organizational objectives and goals. These are descriptions
of how the project will help the organization in achieving
its goals. Multiple if-then statements may be needed to
represent various scenarios through which multiple
organizational goals may be achieved.
Below is a simplified example illustrating goal alignment process:

• Example of an organizational goal: Future net revenue
growth
• Example of a corresponding objective: Increase in net profit
by 15% each year over the next three years.
• Example of a project goal: Launch the new product on time
that would generate a positive cash flow with acceptable
returns on investment.
• Example of a corresponding project objective: Complete
the project on time and under a development cost of $X and
launch the new project one year from now to generate a net
revenue of $Y in the following two years.
• Example of an if-then statement to describe goal
alignment: If the project is completed on time and under
budget and the new product is launched one year from now
producing a net revenue of $Y in the following two years,
then it will directly contribute towards an increase in the net
profit of the organization in those two years.

Case Study Exercise 7: Goal Alignment
Please read Exhibit 5 regarding a technology breakthrough

coming from the R&D team at GMX.
Please identify the project’s goal and prepare a corresponding

objective. Second, develop a graphical presentation of linkages
connecting the project goal and objective to PSO’s goals and
objectives. Third, prepare two if-then statements to describe the
alignment of the proposed project to PSO’s goals.
116
Assessing Financial Value
Before discussing the financial models used in assessing a

project’s tangible benefits and costs, it is important to review
some basics, keeping in mind the three broad project life cycle
phases from funnel & filters® model:
• Cost (cash outflow) incurred during the assessment phase is

generally considered overhead and is not included in a
project’s financial analysis.
• Cost of project during the development phase is the

investment cost. If investment takes more than a year, future
costs (in future dollars) are first estimated and then
translated to present values (today’s dollars) using the
equation shown below. Present value is today’s valuation of a
future cash flow.
PV = FV/(1+i)n
where: FV = Future value

PV = Present value
i = Interest (discount) rate per time period
n = Number of time periods
Project
Phase 1 Phase 2 Phase 3

Assessment Development Production
Assessment
Investment Pay Off
Cost
Cash Flows
In Each
Phase
-
Time, Months or Years

Assessing Financial Value (continued)
Revenues (cash inflows) are typically generated during the

production phase after the project deliverables are launched.
Annual free cash flows during this phase are calculated by
starting with the gross profit, which is the difference between
gross revenue and the cost of production/sales.
Net profit (also referred to as payoff) is then calculated from

gross profit after accounting for depreciation, interest, and
taxes.
For all these calculations first you start with future values and
then convert them to present values using the equation on the
previous page.
118
Financial Models: NPV
Net present value is the difference between the present

values of expected cash inflows and outflows over the
project life cycle.
NPV technique is also called discounted cash flow (DCF)

analysis, because it involves discounting of future cash flows to
today using an appropriate discount rate.
The rate to be used is a function of the project risk; the higher

the risk, the higher the rate.
Higher discount rate adjusts the NPV for higher risk and makes
the NPV lower, which is referred to as the risk-adjusted NPV.
This approach presumably normalizes the risk associated with
the projects, so that they can all be compared on a uniform
basis.

Case Study Exercise 8: NPV
Using the information provided in Exhibit 6 and assuming an

annual discount rate of 10% for the investment cost and 20% for
the revenues, what is the net present value for the proposed
project?
120
Other Financial Models
Return on investment (ROI) is basically a measure of net

profit as a percentage of a project’s investment on “per
year” basis. Several different formulas are used to calculate
ROI.
Benefit cost ratio (BCR) is the ratio of the benefit to the

cost of the project. The benefit is the net revenue from the
production phase (sometimes represented as the present
value) and cost is the investment. BCR is also called
profitability index.
Payback period is the time expected to recover your initial

investment. The point in time when that occurs is called the
“break even point.”
Internal rate of return (IRR) is the discount rate at which

the present value of the cash inflows is equal to the present
value of the cash outflows.

Case Study Exercise 9: Other Financial Models
Using the cash flow data provided in Exhibit 6, please calculate

ROI, BCR, payback period, and IRR for Project Omega.
122
Challenges in Financial Modeling
The biggest challenge with any of the financial models is the

estimation of input data. Measures need to be taken to
increase the validity and the accuracy of the decision
variables.
Input data is most often represented by single figures which

assume “certainty.” However, many input variables such as
revenues and costs are random variables rather than fixed
constants. Therefore, make sure to account for uncertainty
using proper tools such as those discussed earlier.
The cash outflows are typically underestimated and inflows

overestimated. For better estimates, first develop
comprehensive plans of project activities covering the end-to-
end life cycle. Include details of development, testing,
marketing, design, engineering, manufacturing, finance, etc.
Include representative project personnel from all facets of

the end-to-end project life cycle.
Use peer reviews to increase the quality of the estimates.

Assessing Non-Financial Value and Risk
There are several forms of non-financial value that projects

deliver. Examples include customer value, business process
value, employee value, social value, etc. These are intangibles
and are commonly measured using scoring models.
Risk consists of both threats and opportunities, which are also

intangibles that are measured with scoring models.
As mentioned before, in a scoring model, an intangible project

characteristic is rated on a scale of 1-10, where 1 may represent
the most negative and 10 the most positive about the
characteristic.
In one of the common variations of this model, called weighted

scoring model, a characteristic is represented by several
attributes that are assigned different weights, depending upon
their importance. Each attribute is rated individually, and using
the weightage factors, a weighted aggregate score for the whole
characteristic is calculated.
124
Case Study Exercise 10: Scoring Model
Based on the information given to you so far, prepare a list of

opportunities and threats for Project Omega and rate them using
a scoring model.

C a s e S t u d y E x e r c i s e 1 1 : W e i g h t e d S c o r i n g M o d e l

Based on the information available on Project Omega, derive a
weighted average score using the scoring model with pre-defined
criteria and weights you developed in the design phase (Case
Study Exercise 2).
126
PPM Scorecard (PSC)
PPM scorecard (PSC) can simply be a weighted scoring model

with a list of projects in the portfolio rated on pre-defined
criteria with weightage factors.
This scorecard can be made as simple or as sophisticated as

you want it to be depending basically upon the level of
analysis that goes into the assessment of each project in the
portfolio. In its simplest form, the scoring is done by just one
person based on limited amount of information available on
each project. On the other hand, the input can be obtained
from a large team of people based on a rigorous analysis of
project components and the scoring done by another team.
In its sophisticated form, PSC synthesizes and integrates

numerous and complex tools and metrics of portfolio
management into one final template. It ties the tools related
to the three basic groups of criteria which form the basis for
screening, ranking, and project selection:
• Alignment
− Strategic fit
− Goal alignment
• Value creation potential

− Financial value
− Non-financial values
− Threats
− Opportunities

PSC Template
The scorecard below combines the goal alignment and financial

and non-financial measures into one final template. This is the
same as the weighted scoring model presented earlier.
Criteria(%Weightage)
Value
Goal Generation Sumof
Strategic Alignment Potential Threats Opportunities Weighted
Project Fit (5%) (10%) (65%) (10%) (10%) Scores Rank
Score* 8 2 8 5 7
A 5
Weighted Score 0.4 0.2 5.2 0.5 0.7 7.0
Score 8 3 8 7 3
B 6
Weighted Score 0.4 0.3 5.2 0.7 0.3 6.9
Score 8 6 8 8 6
C 3
Weighted Score 0.4 0.6 5.2 0.8 0.6 7.6
Score 6 4 4 6 5
D 9
Weighted Score 0.3 0.4 2.6 0.6 0.5 4.4
Score 3 6 5 8 5
E 8
Weighted Score 0.15 0.6 3.25 0.8 0.5 5.3
Score 5 7 9 9 6
F 1
Weighted Score 0.25 0.7 5.85 0.9 0.6 8.3
Score 7 4 8 5 6
G 4
Weighted Score 0.35 0.4 5.2 0.5 0.6 7.1
Score 10 5 9 6 7
H 2
Weighted Score 0.5 0.5 5.85 0.6 0.7 8.2
Score 5 8 7 8 4
I 7
Weighted Score 0.25 0.8 4.55 0.8 0.4 6.8
* On ascale of 1 - 10
128
Radar Charts
Radar charts (also called spider charts) are visual and easy-to-
understand tools that depict ratings on key factors of an
individual project. They clearly show the areas of strength
and weakness for the project.
In the example below, the project opportunity seems

attractive on several factors, except that its potential to
generate value is small.
Strategic Fit
9
8
7
6
Opportunities
5
9
4
8
7
3
6
5
2
4
3
1
2
1 Goal
1 2 3 4 5 6 7 8 9
Alignment
1
1
2
2
3
3
4
4
5
6
5
7
6
8
7
9
Threats
9
Value Generation
Potential

Bubble Diagrams
Bubble diagrams show the relative merit of different projects

with respect to several factors using visual and easy-to-
understand charts. One key advantage is that you can
compare several projects on the same chart.
130
Dashboards
Dashboards are tools that synthesize enormous amounts of

complex information and display it in terms of a handful of
most critical high level indicators using simple, easily
understandable, and visually appealing graphics for senior
management review.
The portfolio dashboard can include a commonly used traffic

light system of green-yellow-red lights indicating the
performance of a given project at any time relative to key
criteria such as cost and schedule.
Dashboards have become increasingly popular in management

circles in recent years because of their simplicity and visual
appeal. Many portfolio software applications incorporate the
models, scorecards, and dashboards presented herein.

Key Points
Efficient frontier method can be used for ranking projects for

which benefit-cost information is available in monetary
terms.
Forced ranking, paired comparison, and weighted scoring

model are ranking techniques commonly used on projects
where quantitative data is not available.
Certain financial models (payback period, BCR, ROI) are

meaningful for short-term investments, whereas NPV and IRR
would be better suited for longer range projects.
Scoring models are simple and particularly valuable when the

project benefits are intangible, project characteristics and
decision criteria are difficult to measure, and little time and
resources are available for detailed assessment.
Scorecards are effective tools that synthesize and integrate

the numerous, complex metrics related to different portfolio
management processes into one framework.
Dashboards are perhaps the most simple and high level tools
that display complex information in the form of just a few
vital indicators in a visually appealing fashion for easy
management review.
132
UNIT: 8
PORTFOLIO
RISKS
OBJECTIVES
Define uncertainty and risk.
Differentiate project vs. portfolio risks.
Identify approaches to reduce portfolio risks.
Illustrate the use of various tools to analyze uncertainty.

— UNIT 8: PORTFOLIO RISKS
Decision Making
Portfolio Management is about decision making. You invariably
make decisions based on uncertain information. As you
implement the decisions, you face consequences. There is also
uncertainty about the consequences. They can be either
positive or negative and vary in magnitude. There are two
phenomena that managers must understand in making
decisions, namely, uncertainty and risk.
Uncertainty Uncertainty
Information Decision Action Consequence
Uncertainty and risk have been defined in the literature in

many different ways. For our purpose, the following
definitions will apply:
• Uncertainty. Uncertainty exists when the information is
not certain, definitive, or perfect. You can measure
uncertainty in terms of probabilities.
• Risk. Risk is an uncertain consequence which can either
be positive or negative, resulting in gains or losses,
respectively. Risk can be measured as a set of events,
each with quantified impacts and probabilities.
134
Project Risks & Portfolio Risks
Risks can be broadly classified into two groups:
• Project Risks
• Portfolio Risks
Project risks are associated with the development phase of

the project and affect the project triple constraint. The
project manager and team are responsible in identifying,
analyzing, and mitigating these risks. Project risks ultimately
impact portfolio risks.
Portfolio risks are much broader. They are associated with the
funnel & filters ® decision making process. They are about the
consequences of right and wrong decisions made in selecting
the projects for the portfolio.

Reducing Portfolio Risks
Analyze and understand uncertainty. The decision making

process can be improved by analyzing and understanding the
uncertainty associated with the input information, particularly on
the financial analysis of projects. Several tools exist that can
help you with this process:
• Decision tree analysis
• Scenario analysis
• Sensitivity analysis
- One dimensional analysis
- Multi-dimensional analysis
- Monte Carlo simulation
• Real options analysis
136
Reducing Portfolio Risks (continued)
Decrease uncertainty. Through “active learning,” that is, by

actively spending upfront time and effort, you may reduce the
uncertainty and improve the accuracy of information by:
• Market research
• Prototype testing
• Statistical modeling
• Peer Review
Select “stronger” projects. You may select projects that are
significantly more attractive and have higher confidence of
success by incorporating:
• Higher screening thresholds for project approvals
• Higher weighted average cost of capital
Create and maintain a balanced portfolio. Through
“diversification,” the overall portfolio risk can be minimized.
Create project categories and sub-categories to differentiate
projects based on specific characteristics. Identify and
consistently maintain percent investment allocations for each
category.
Establish management contingencies. As discussed in Unit 4,
create contingencies for unknown project threats at the portfolio
level, so that adequate funds are promptly available, when such
threats are materialized. These contingencies may not reduce
the actual threats but help you manage them more effectively.

Decision Tree Analysis
NPV approach, as discussed in Unit 5, is deterministic. It does not

take into account managerial flexibility in changing the course of
the project by making contingent decisions, as it goes through
different phase-gates.
Decision tree analysis (DTA) is a more sophisticated tool and

offers value when a project is multi-phased and contingent
decisions are involved. It can be applied effectively especially
when a phase-gate process is used as part of project governance.
A decision tree is a graphical portrayal of alternative decisions,

their costs, their possible outcomes, and the probabilities and
costs of the outcomes.
Decision trees use “expected values” in solving the go/no-go

decision problems. An expected value, EV, (also referred to as
expected monetary value, EMV) is simply the product of a cash
flow and its probability. For example, if there is only a 70%
probability that a cash flow of $100 will be realized, the
expected value is $100*0.7 = $70. Cash flow can be either a cost
or a revenue.
138
Decision Tree: Example
TerminaTerror, Inc. (TTI) is a start-up company involved in

developing technologies for homeland security applications.
One of their new patent-pending products is an early warning
system that detects poison that may have been introduced by
terrorists into municipal drinking water supplies and
distribution systems. The technical effectiveness of the
product has to be first proved through development effort
which is expected to cost $1 million and take one year.
Successful development will be followed by commercialization
of the technology which is estimated to take an additional
year and cost $2 million. DCF analysis shows a project payoff
of $15 million over the project horizon. Although this payoff
is attractive compared to the investment costs, TTI is not
certain about the technical and commercial success of the
project, because the respective success probabilities are
estimated to be 0.5 and 0.7. Please build the decision tree
and derive go/no-go decisions for the two phases of the
investment. For the sake of simplicity, assume all the cash
flows are present values and ignore discounting.

Decision Tree: TerminaTerror
Success
70% Payoff
$15M
Launch, -$2M
Success
50%
D2
Failure
30%
Develop, -$1M
No Launch
Failure
50%
D1
= Terminate Project
Not Develop
140
Decision Tree: Solution
The expected value calculations and the recommended decision

choices are presented below.
Decision
Alternatives EV Calculations Total EV Choice
Point
Launch $15M(0.7) + $0M(0.3) - $2M $8.5M

D2 Launch
No Launch $0 $0
Test $8.5M(0.5) + $0M(0.5) - $1M $3.25M

D1 Test
No Test $0 $0

Case Study Exercise 12: Decision Tree Analysis
Exhibit 7 presents information on chances of technical and

commercial success for the nano gene sequencer. Using the cost
and payoff estimates from the NPV exercise (Exercise 8), build a
decision tree and calculate expected monetary values for each
path. Please identify whether the decision tree would suggest
that GMX move forward with the development of the sequencer
or terminate the project at this time.
142
Scenario Analysis
While DTA offers some advantages over the deterministic

techniques, further analysis of the financial information can
provide you with key insights into the financial merit of a
project.
You may perform a scenario analysis where you assume certain

“best” and “worst” case conditions and estimate how the target
variable varies. For example, you may say that the best and
worst cases are represented by 150% and 50% of the NPV
calculated deterministically.

Sensitivity Analysis
Any financial estimates related to the project business case

are influenced by several input variables. For example, NPV is
impacted by project cost, sales revenue, cost of sales,
discount factor, etc. In fact, each one of these variables, in
turn, is impacted by other variables. For instance, sales
revenue is influenced by selling price, sales volume, profit
margin, and so on. Among all these input variables, there may
be just a few that have the highest impact on what you are
trying to estimate. The question here is what are the input
variables that the output variable is most sensitive to.
Sensitivity analysis can show what variables have the highest

impact on the project. It indicates the impact of a given
variable on the project outcome when all the other variables
are held at their respective “baseline” levels.
144
Sensitivity Analysis Techniques
One dimensional sensitivity analysis. You may perform a simple

one-dimensional analysis, where you change one of the input
variables and see what the impact would be on the output
variable.
Multi-dimensional sensitivity analysis. This is an extension of

the one-dimension analysis. It involves studying the effect of four
or five most important input variables on the output variable.
The results are generally shown in the form of a tornado diagram.
Monte Carlo simulation. When you perform scenario or

sensitivity analyses, you are investigating the effect of only a few
variables. Although these techniques help us gain better insight
in to our estimates, their effectiveness is limited because there
are countless number of combinations of input variables. Monte
Carlo simulation technique can account for all those possibilities.

Monte Carlo Simulation

The input variables to financial models are typically used as
“single figure” estimates making the models deterministic,
although they have uncertainty associated with them thereby
making the models rather probabilistic.
Using Monte Carlo technique, numerous possible values of

each input variable are simulated to generate numerous
corresponding outputs.
The results of the simulation show the likely distribution of

output variables such as project cost and schedule. The
examples from Monte Carlo simulations on the next page
indicate:
• While the probability of completing the project under an

average cost of $200,000 is only 50%, you would have to
be prepared to spend $225,000 for 75% confidence level.
• For 90% probability of meeting the project schedule, you

would need 220 days, whereas 200 days would suffice for
50% confidence level.
Simulations coupled with sensitivity analysis yield powerful

information for decision making process.
146
Monte Carlo Simulation (continued)

Real Options Analysis
Real options analysis (ROA) is a new, novel technique that

accounts for the future uncertainty related to the project
success and quantifies the value of flexibility the
management has in changing the project course. This
flexibility is created by the availability of contingent
decisions such as the termination, continuation, contraction,
expansion, or delay of the project.
Rather than assuming a fixed path as in the case of NPV, ROA

accounts for the value of the future contingent decisions that
the management would presumably exercise as the project
uncertainty is cleared. For example, the uncertainty may be
cleared by simply the passage of time or by deliberate action
by the management such as technology testing, product
introduction on a small scale, and an initial market survey.
ROA is based on Nobel prize winning financial options

valuation framework developed by three MIT economists in
1973:
• Fisher Black
• Myron Scholes
• Robert Merton
While being highly complex in theory, ROA:

• Accounts for uncertainty.
• Considers managerial flexibility.
• Builds on NPV and decision trees.
• Uses risk free rate.
• Can differentiate projects with similar NPV.
148
Case Study Exercise 13: Sensitivity Analysis

Using the information from Exercise 8 and Exhibit 6, change the
investment cost, revenue discount rate, peak annual investment
cost and peak annual revenue by +/-20% one at a time and
calculate the ranges of NPV for each scenario. Plot the results in
the form of a Tornado Diagram.

Case Study Exercise 14: Project Assessment
Based on your analysis so far, do you believe Project Omega

holds merit to be considered for investment? Please justify
your answer.
150
Discussion: Action Plan
Moving forward, based on what you have learned in this

workshop, what specific actions will you take to improve your
portfolio?

Key Points
Portfolio risks are broader and are associated with the project
decision making process. They are about the consequences of
right and wrong decisions made in selecting the projects for
the portfolio.
Portfolio risks can be reduced by several means:

• Analyze and understand uncertainty.
• Decrease uncertainty.
• Select “stronger” projects.
• Create and maintain a balanced portfolio.
• Establish management contingencies.
Decision tree analysis, scenario analysis, sensitivity analysis,

and real options analysis are some of the tools that are used
in analyzing and understanding uncertainty with projects.
152
UNIT: 9
REFERENCES
— UNIT 9: REFERENCES
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References (Continued)
G.I. Kendall and S.C. Rollins, 2003. Advanced Project

Portfolio Management and the PMO: Multiplying ROI at
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W. Chan Kim and R. Mauborgne, 2005. Blue Ocean Strategy:

How to Create Uncontested Market Space and Make the
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Program, & Portfolio Management. John Wiley & Sons, Inc.,
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Maturity Model. Center for Business Practices, Havertown,
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Management: Conquering the Top 10 Risks that Threaten
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156
Portfolio Management
APPENDIX
CASE STUDY EXHIBITS
Exhibit 1: GeneMatrix Profile
GeneMatrix (GMX) is a San Diego, California-based biotechnology company founded
by two MIT molecular biology PhDs, who met at Stanford while doing their executive
MBA’s. The founders’ mission is to save lives and improve quality of life through
human genomics, a relatively new science, sparked by the “human genome” project
and exponential growth of computing power. They envision GMX to become the most
innovative company in this space. The guiding principles of the company are product
innovation, technology excellence, and customer focus. GMX was started in 2000
with seed capital from “angel” investors and in the last few years received a series of
investments from venture capitalists. This year it is expected to make operating
revenues of about $15 million. The company is contemplating an initial public
offering (IPO) in the next few years, while a major player in this industry attempted
an unsuccessful acquisition last year.
GMX’s core competence is development of products related to DNA microarray

technology. It owns a few key patents in this area with many others pending. The
products sold by the company are marketed under two different divisions, namely,
Arrays and Reagents. The former includes various models of DNA microarrays, also
known as gene chips. Each array is similar to a tray, where test samples that have
been treated with special reagents are placed and processed by an instrument,
known as DNA sequencer. While GMX has so far worked with third party sequencer
manufacturers through strategic partnerships, recently there has been debate within
the upper management about entering the sequencer market itself. GMX’s flagship
product is AcuChip 1000, a state-of-the-art “low density” array with the highest
market share in its product class with a list price of $20,000. Variations of this model
are available to fit sequencers made by different vendors and for different
applications by ultimate end users. Other arrays (mid-density and high-density) with
far superior processing speed and throughput compared to AcuChip 1000 are under
development. GMX’s arrays are manufactured at a highly advanced, robotics-
controlled facility in China using their patented technology.
GMX’s second division offers several reagents needed to prepare the samples before
loading them using the arrays. The reagents are made at a plant in San Diego,
California. The list price of reagents is approximately $250 per “kit.” A kit contains a
few different reagents needed for a given array.
A third division of the company, Info Tech, is responsible for software application
development, implementation, and customer support associated with the arrays. The
primary software product, known as AcuTrack (current version 2.0), allows you to
store, retrieve, download, upload, report, and track massive amounts of data related
to AcuChip. It is flexible and scalable and can easily be configured to a variety of
customers’ systems. Info Tech houses a call center with 10 highly skilled
biotechnologists on the staff, who can help the customers with genome-based data
analysis, presentation, and reporting. It owns most of the hardware, networks, and
the storage required to support AcuTrack users. GMX is also capable of providing
access to public as well as commercial genome databases through its licensing
agreements with vendors carrying such databases. Although AcuTrack application
was created for GMX’s own arrays, it has been so successful that customers have
recently made requests for its use with products from other array makers.
©2011 Kodukula & Associates, Inc., All Rights Reserved

Technology Description
DNA microarrays or gene chips are a revolutionary technology that is transforming

molecular biology. A typical array consists of a plastic tray (e.g., 3” x 3”) made of
three parts: A barcode that identifies the tray, a spare area that is left “blank” for
future use, and a sample area that carries an array of “dots.” Each dot contains a
well to hold the test sample. The larger the number of dots, the more samples you
can run through the sequencing instrument. (AcuChip 1000 has 1,000 dots and is
considered a “low density” array.)
Microarray technology helps you determine the exact composition of genes, which
carry the information to build and maintain an organism’s cells and pass it on to the
next generation. Genes consist of DNA molecules, which in turn are made up of the
building blocks named nucleotides. There are four nucleotides (A, C, T, and G) that
are arranged in a unique sequence in each DNA molecule. It is this unique sequence
that makes a particular gene exhibit certain characteristics, which manifest as
specific “traits” in living organisms.
A typical test to determine the sequence involves:
1. Prepare the test sample using the necessary reagents for the extraction of
DNA, which is then chopped into pieces with the help of enzymes.
2. Add the chopped DNA pieces to the arrays.
3. Run the arrays through a gene sequencing instrument, which reads the
sequence of A, C, T, and G nucleotides.
4. Analyze the data using advanced software tools.
A deluge of information is generated, as you use this technology for various

applications, creating a need for its storage, organization, and indexing. The theory
and practical aspects of analysis and management of this information evolved into a
new area of science called bioinformatics.
Technology Applications
Knowing the sequence of the building blocks of the DNA molecules and the
composition of genes not only unravels the mystery of life but can also provide cures
to many of our health problems. A few examples, among numerous applications of
gene chip technology, are:
1. To identify the genome of humans, plants, and animals for research.

2. To detect the presence of a mutation responsible for a specific disease (e.g., a
particular type of cancer).
3. To evaluate a subject’s response to a drug including its side effects.
4. To develop customized therapies based on the genome of a person.
5. To develop “preventive care” habits in accordance with a person’s genome.
6. To test unknown samples against known DNA to determine if someone was
present at the scene of a crime and responsible for the crime.
7. To set up a genetic clock to identify when various traits emerged; along the
same lines, to predict when an organism first appeared on the earth and what
it looked like at various points in its evolutionary lifetime.
8. To test material from outer space for life.

Exhibit 2: GeneMatrix’s Future Plan
The executive team of GeneMatrix recently met at a retreat for their annual strategy
planning. At this meeting, the owners reiterated the company’s focus on its core
competence involving product innovations in the microarray technology, strategic
partnerships with current and new third party sequencer makers, and seamless
integration of GMX’s products with sequencers. It was revealed at the meeting that a
few prospective acquirers had contacted GMX’s owners, who apparently are still
interested in an IPO in the near future.
As part of strategic planning, with help of an outside consultant, the team first
performed SWOT analysis (results shown below). It also identified major goals for
the near future: Expansion of revenue streams through new product development
and entry into emerging markets, increasing customer satisfaction, improving
current business processes, and enhancing skills of project and product managers.
Strengths Weaknesses
Technical excellence Crisis management
Intellectual property Weak business processes
Motivated staff Poor project management
Capital funding Slow decision making
Opportunities Threats
Expanding markets Growing domestic competition
Emerging countries Low cost competition from China and
New technologies India (especially for reagents)
High revenue growth Fast growing technology
Regulations

Exhibit 3: Project Listing
Project New/
ID On-going Project Name Project Description Benefit1
1 O "All-in-one" reagent mix Develop and launch "all in one" cocktail mix that can be used with GMX's flagship product AcuChip 1000 (low density array, 1000 $10.0
dots) as well as the new MDA 2500 currently under development. This mix will save the users a significant amount of time and
effort in preparing the test samples.
2 O AcuTrack 100K Develop the software application that will be used with the new HDA 100K currently under development. This software will support $12.0
the high density/low cost array with the capability of incorporating all elements of automation as would be expected in a high end
hospital lab environment that processes 1000s of samples a day.
3 O AcuTrack 2.5 Upgrade AcuTrack 2.0 software that is originally designed to work with AcuChip 1000 to support the new MDA 2500 under $6.0
development.
4 O Ambient shipping Switch to "ambient temperature" shipping of the reagents, which are currently shipped using the cold packs. Preliminary stability
studies for most of the consumables indicated that the reagents are stable at room temperature for several days. Need to perform -
confirmatory studies before formally switching to ambient shipping.
5 O Business ethics training Train all employees in business ethics. Mandatory training needed once every two years.
-
6 N cGMP certification A growing trend in the biotechnology community is the increasing regulation and the need for quality. To lure customers in the
diagnostics and pharmaceutical arenas and gain credibility, it is important that GMX's manufacturing facilities are cGMP (curent
Good Manufacturing Practices) certitified. -
7 N CLIA Lab Open a CLIA (Clinical Laboratory Improvement Amendments) certified lab, where GMX would offer testing services for a fee using $26.0
its own products. Service lab is a competitive, low margin business but can provide more traction for GMX's products, bring
additional revenues, and prevent third parties from taking its business.
8 O Consolidating supply Consolidate the existing suppliers and enter into multi-year supply agreements with top ones to reduce costs.
chain -
9 O Data storage Provide "cloud" based data storage solutions through third party vendors. Customers can store their data after they have $5.0
outsourcing completed their testing with GMX's products. The service will offer speed, reliability, ease of use, and security to retain and attract
customers.
10 N Fit for health Help employees lead more healthy lives. This will be done by a third party that will lead employee health assessments and roll out
incentives for employees to pursue better health. Employees will be given health points, which they can cash in to get discounts
on their insurance. Ultimately this project is anticipated to result in fewer doctor's visits, less insurance costs, and more -
productivity.
11 N Green packaging Switch to green packaging involving biodegradables instead of the aluminum sachets and cardboard boxes currently used to
package and ship the reagents and chips. -
12 O High density array (HDA Develop, test, and launch high density array that will provide 100,000 dots. With the rapid decline of gene sequencing costs, it $40.0
100K) has become a necessity in the market place to develop higher throughput chips to remain competitive.
13 N Licensing program Out-license GMX's IP (intellectual property) related array and software technology to other companies. $7.0
©2011 Kodukula & Associates, Inc., All Rights Reserved Page 1 of 4

Project New/
ID On-going Project Name Project Description Benefit1
14 N Life Mix Develop new reagents that will help NASA with testing of materials from other planets for life. This could give high visibility to $3.0
GMX and can be good for public relations.
15 O Mid density array (MDA Develop, test, and launch mid-density array that will include 2500 dots. This product will target the hospitals and diagnostic $40.0
2500) testing labs and compete with its counterpart recently introduced by GMX's major competitor.
16 N Multi-platform AcuTrack Convert AcuTrack 2.0 to a multi-platform application, so that it will be compatible with arrays and sequencers of competitors. $5.0
17 O Nanopore array Develop, test, and launch novel, patent-pending gene chip technology that is based on nanometer-sized pores in a silicon chip. It $60.0
holds the promise of far greater throughput, speed, and scalability compared to the state of the art. It can potentially reduce the
cost of whole human genome sequencing to less than $1,000.
18 N PMP training Offer Project Management Professional (PMP) certification training to help project managers become PMP certified and ultimately
avoid or decrease project cost overruns. -
19 O Project Portfolio To introduce project portfolio management (PPM) as a formal business process in order to streamline GMX's project investment
Management decision process and improve the success of achieving its strategic goals. -
20 N SalesForce.com Provide the right tools to the sales people, so that they can improve their job effectiveness and close more deals faster and
cheaper. This is a well-proven popular application for sales people in many industries. -
21 O Sample Prep 1-2-3 Develop and launch a new instrument that makes preparation of test samples as easy as 1-2-3. It is an instrument that will work $25.0
with HDA 100K.
22 N Six Sigma training Provide six sigma training to the product development scientists and engineers to obtain "Black Belt" and "Green Belt"
certifications. -
23 N Social media training Provide one-day class (two sessions) for all the interested employees to train them on social media tools including LinkedIn,
Twitter, and Facebook. -
24 N Supervisory training Train all supervisors on supervisory skills in a two-day seminar offered twice during the year.
-
25 O Upgrading sales To upgrade the original, internally developed sales software application tool to make it more easily accessible, user friendly, and
systems effective for the sales people. -
26 N Web interface Upgrade GMX's website, so it can become a powerful interface for the savvy customer, who can order chips, reagents, and other
GMX products via the web. The current website is not intuitive and user friendly for customer search and buying needs.
-
27 O Web-based AcuTrack Convert AcuTrack 2.0 to a web-based application. This will offer "cloud" services, wherein customers can not only use GMX's data $9.0
analysis, visualization, and presentation tools in a "software as a service" (SaaS) model but also rent server space for storage of
their data.
1
In Millions
2
On a scale of 1 to 10 from lowest to highest
3
From today

Project New/ Initial Budget Actual Cost Cost to Threat Completion

ID On-going Project Name Estimate1 To-date1 Complete1 Rating2 Date3 Comments
1 O "All-in-one" reagent mix $5.0 $1.0 $4.5 3 1 yr It is the juice for the arrays. Following the
investment for development, the profit margins
are high. Risk is low as formulations exist.
2 O AcuTrack 100K $5.0 $4.0 $1.5 6 1.5 yr This is linked to high density array.
3 O AcuTrack 2.5 $2.0 $1.0 $1.5 3 1 yr This is required for the mid-density array.
4 O Ambient shipping $2.0 $1.0 $1.0 4 1 yr Payback is in less than a year. Long term savings.
GMX can score points on sustainability.
5 O Business ethics training $0.2 $0.1 $0.1 2 1 yr On-going. CEO's pet project.
6 N cGMP certification $2.0 $0.0 $2.0 3 2 yrs This is a labor intensive project that will require
senior level QA managers from the lab. Regular
operations and new product releases can be
affected.
7 N CLIA Lab $12.0 $0.0 $12.0 3 1 yr A major initiative. GMX will be competing for
business with its busines partners.
8 O Consolidating supply $0.3 $0.1 $0.2 2 6 mos Payback is within a year. It's just a question of
chain allocating enough resources.
9 O Data storage $2.0 $1.5 $0.5 7 6 mos Evolving "cloud" based service. Security can be an
outsourcing issue just like with any cloud-based service.
10 N Fit for health $0.2 $0.0 $0.2 2 6 mos Pet project of the Human Resources VP. Saves
healthcare costs in the long run.
11 N Green packaging $2.0 $0.0 $2.0 4 1 yr Saves costs in the long run. Good for public
relations.
12 O High density array (HDA $20.0 $5.0 $22.0 6 1.5 yr Due to lack of resources, not only had a late start,
100K) but experienced several schedule slippages.
Original cost estimates were low. Not sure if the
demand for high density array would be strong in
view of the nanopore technology.
13 N Licensing program $2.0 $0.0 $2.0 6 6 mos Not much capital needed. Need new hires
(licensing person, legal person, IP agent). Payback
will be in less than a year.

Project New/ Initial Budget Actual Cost Cost to Threat Completion

ID On-going Project Name Estimate1 To-date1 Complete1 Rating2 Date3 Comments
14 N Life Mix $3.0 $0.0 $3.0 2 1 yr Can leverage some of the research from "All-in-
one" mix, but some customization for NASA will be
necesssary.
15 O Mid density array (MDA $15.0 $10.0 $8.0 4 8 mos Mid-density aray is the next major product for
2500) GMX. It slipped two major milestones but is on
track for release in eight months.
16 N Multi-platform AcuTrack $2.0 $0.0 $2.0 5 1 yr Open platform is the buzz of the day.
17 O Nanopore array $25.0 $10.0 $20.0 8 1.5 yr It is a novel technology. It could be a huge
success, if it works. Risk is high due to uncertainty
with the technology.
18 N PMP training $0.2 $0.0 $0.2 2 2 yrs Project managers are very interested. Many
managers think it is an overhead expense.
19 O Project Portfolio $1.0 $0.4 $0.6 3 6 mos Project is on track. Consultant is on board. License
Management was purchased for the PPM tool.
20 N SalesForce.com $0.1 $0.0 $0.1 2 6 mos Commercially available software. Not much capital
involved, if you use software as a service in a
"cloud" model.
21 O Sample Prep 1-2-3 $10.0 $2.0 $8.0 4 1 yr Project is on track.
22 N Six Sigma training $0.3 $0.0 $0.3 2 3 yrs Manufacturing and process teams highly
interested in this. ROI is being questioned by the
management.
23 N Social media training $0.08 $0.0 $0.1 2 6 mos Senior personnel are especially interested. There
have been a lot of requests for this training.
24 N Supervisory training $0.2 $0.0 $0.2 2 1 yr First time any GMX supervisor has received formal
supervisory training.
25 O Upgrading sales $0.3 $0.1 $0.2 3 6 mos An operating necessity for the sales people.
systems Current system is antiquated and slow.
26 N Web interface $0.5 $0.0 $0.8 2 8 mos Low risk. Only a matter of doing it.
27 O Web-based AcuTrack $3.0 $2.0 $1.0 7 1 yr Security can be a concern. But this seems to be an
industry trend.
1
In Millions
2
On a scale of 1 to 10 from lowest to highest
3
From today

Exhibit 4: Projects in Financial Value Category*
Actual
New/ Initial Cost Initial Cost Cost to Current
Project
No. Ongoing Name Estimate Benefit** BCR (to‐date) Complete BCR
1 O "All‐in‐one" $5.0 $10.0 2.0 $1.0 $4.5 2.2
reagent mix
3 O AcuTrack $2.0 $6.0 3.0 $1.0 $1.5 4.0
2.5
13 N Licensing $2.0 $7.0 3.5 $0.0 $2.0 3.5
program
15 O Mid density $15.0 $40.0 2.7 $10.0 $8.0 5.0
array (MDA
2500)
17 O Nanopore $25.0 $60.0 2.4 $10.0 $20.0 3.0
array
27 O Web‐based $3.0 $9.0 3.0 $2.0 $1.0 9.0
AcuTrack

* Costs and benefits are in millions of dollars.
** Current and initial estimates are same.
T ©2011 Kodukula & Associates, Inc., All Rights Reserved

Exhibit 5: Nanopore Technology &
Next Generation Sequencer
There has been a lot of excitement lately at GMX, especially in its product
development group, about a breakthrough technology. GMX recently applied for a
patent for a chip containing “nanopores” that makes sequencing of genes faster and
cheaper by several orders of magnitude, compared to the state-of-the-art. The
development process started about a year ago and was expected to take a total of
two years. Since it has missed a few key milestones, its launch was extended by six
months. Although the new chip offers fast throughputs that could not even have
been imagined before, there are no compatible sequencing instruments in the
market today. However, third party sequencer manufacturers recognize the power of
nanopore technology and are already gearing up to develop next generation
products.
Whereas GMX’s core competence has been development and marketing of cutting-
edge microarrays, there has been some talk among the senior managers about
entering the gene sequencing instrumentation market. Currently GMX does not make
any sequencers but works very closely with third party manufacturers through
strategic partnerships. The product development team at GMX sees an opportunity in
the next generation sequencer (NGS) and is interested to explore entry into this
market. A multi-disciplinary team consisting of managers from product development
and marketing, among others, has been formed to put together the business case for
developing the NGS. Code named Omega, the project is off to a great start!

Exhibit 6: Project Cash Flows
As part of the business case analysis for the Omega project, GMX’s R&D team, with
assistance from their colleagues in marketing, performed preliminary cash flow
analysis. Investment cost includes $75 million spread over two years for
development and $8 million for the launch, as shown in the table below. Free cash
flow (net revenues after accounting for depreciation, interest, taxes, etc.) projections
for the first five years after the launch of the new product are also given in the table.
Year
0 1 2 3 4 5 6 7
Investment (millions) $35 $40 $8
Net revenue (millions) $40 $80 $150 $100 $60

Exhibit 7: Project Success Probabilities
At a high level meeting, GeneMatrix’s R&D revealed that the nanopore gene chip
development process ran into an unexpected technical snag. Project Omega team
learned that this could potentially impact the technical feasibility of the gene
sequencer. After talking to technology experts and performing initial market
research, the team estimated that the technical feasibility of the new sequencer is
70%, whereas the probability of commercial success is around 60%.

Project Portfolio Management

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PROJECT

Dr. Prasad S. Kodukula, PMP, PgMP

September 10-13, 2012

Kodukula & Associates, Inc.

UNIT 1: INTRODUCTION 1-10

UNIT 2: PORTFOLIO MODEL 11-24

UNIT 3: BUILD FOUNDATION 25-44

UNIT 4: DESIGN PORTFOLIO 45-62

UNIT 5: CONSTRUCT PORTFOLIO 63-70

UNIT 6: MONITOR & CONTROL PORTFOLIO 71-98

UNIT 7: PPM TOOLS & TECHNIQUES 99-132

UNIT 8: PORTFOLIO RISKS 133-152

UNIT 9: REFERENCES 153-156

APPENDIX: CASE STUDY EXHIBITS

©2011 Kodukula & Associates, Inc., All Rights Reserved.

 Define a project, program, and a project portfolio.

 Introduce portfolio triple constraint.

 Discuss the significance of project portfolio management.

The Project Management Institute (PMI), in its fourth and latest

According to the second and latest edition of The Standard for

“A program is a group of related projects managed in a

According to the second and latest edition of PMI’s The

 According to the soon-to-be-published book by Prasad Kodukula

 Value means benefit relative to cost including risk. It may be of

Note: Portfolio may consist of projects as well as programs, but,

©2011 Kodukula & Associates, Inc., All Rights Reserved 3

Project Portfolio Management

 Project portfolio management (PPM) is tantamount to

 Portfolio management is a balancing act between the

 Organizational Unit: A portfolio may exist at every level of the

©2011 Kodukula & Associates, Inc., All Rights Reserved 5

Portfolio Classification ( c ont i nued)

 Project Category: A portfolio may be classified based on the

• Product Portfolio: A portfolio of projects dealing with products

Portfolio Classification ( c ont i nued)

 Another example of project categorization may be based on the

• Financial portfolio: Projects generate financial benefits and

• Customer portfolio: Projects generate customer related

• Business process portfolio: Projects generate cost

• Employee portfolio: Projects generate employee related

 Project classification by categorization is arbitrary. Individual

©2011 Kodukula & Associates, Inc., All Rights Reserved 7

Why Portfolio Management?

 Achieve organizational goals through projects.

 Create value for the stakeholders.

 Ensure alignment between projects and organizational goals

 Invest in the right projects that generate value.

 Get bigger bang for the investment buck.

 Make right mix of project investments to optimize risks and

 Provide a balanced approach to project investments.

 Create objective and uniform metrics to assess, rank, and

 Utilize resources more effectively.

 Improve communication between decision makers, project

 Encourage “holistic” organizational thinking rather than

 Create structure and criteria for terminating projects and

 Avoid investing in redundant projects.

Discussion: PPM Obstacles & Challenges

 What are the obstacles and challenges you are facing in

©2011 Kodukula & Associates, Inc., All Rights Reserved 9

 A project portfolio is a collection of strategically aligned projects

 Project portfolio management (PPM) is tantamount to

 PPM involves assessment, prioritization, and selection of the right

 Portfolios can be classified based on the organizational unit they

 Introduce funnels & filters® model representing project portfolios.

Define a project, program, and a project portfolio.

Introduce portfolio triple constraint.

Discuss the significance of project portfolio management.

According to the soon-to-be-published book by Prasad Kodukula

Value means benefit relative to cost including risk. It may be of

Project portfolio management (PPM) is tantamount to

Portfolio management is a balancing act between the

Organizational Unit: A portfolio may exist at every level of the

Project Category: A portfolio may be classified based on the

Another example of project categorization may be based on the

Project classification by categorization is arbitrary. Individual

Achieve organizational goals through projects.

Create value for the stakeholders.

Ensure alignment between projects and organizational goals

Invest in the right projects that generate value.

Get bigger bang for the investment buck.

Make right mix of project investments to optimize risks and

Provide a balanced approach to project investments.

Create objective and uniform metrics to assess, rank, and

Utilize resources more effectively.

Improve communication between decision makers, project

Encourage “holistic” organizational thinking rather than

Create structure and criteria for terminating projects and

Avoid investing in redundant projects.

What are the obstacles and challenges you are facing in

A project portfolio is a collection of strategically aligned projects

Project portfolio management (PPM) is tantamount to

PPM involves assessment, prioritization, and selection of the right

Portfolios can be classified based on the organizational unit they

Introduce funnels & filters® model representing project portfolios.

Illustrate how financial portfolio principles can be applied to

Introduce PPM methodology.

Basically the funnel consists of three parts – the head, the

In case of a product that is considered for improvement or

The three phases depicted by the entire funnel represent

The value of a project is assessed in the first phase and the

The filters in the assessment phase are for initial project

The subsequent filters in the body of the funnel are meant to

At the gates of the phase-gates process, each project is evaluated

On the other hand, at the decision filters, a project is evaluated

Once the initial portfolio has built, the portfolio management

Of the four phases, Construct Portfolio is a “one-time” process,

The first phase of the methodology includes building the

The second phase deals with the design of the portfolio. It

The third phase involves the construction of the initial portfolio,

Once the initial portfolio is built, it moves into the monitoring

Monitor & Control Portfolio phase involves day-to-day, ongoing

Phase-gates is a project lifecycle model, wherein projects go

Notwithstanding the differences, basic principles of financial

Once a portfolio is built, the overall portfolio management

Monitor & Control Portfolio phase involves day-to-day,

Discuss why foundation is needed before the portfolio is

Illustrate strategic framework.

Introduce strategy development techniques.

Describe balanced scorecard framework.

Define portfolio governance.

Discuss portfolio infrastructure.

Once the portfolio foundation is built, it provides direction

Strategic framework refers to the organizational big picture.

Based on the mission, the vision for the future of the

The vision leads to the formulation of strategy which is

Organizations also delineate “values” which are principles

Organizational strategy translated into a plan commonly

Strategic goals are high level, long-term, and qualitative.

Each goal should be translated into corresponding objectives

In a large enterprise comprising of many business units, each unit

Furthermore, moving down the organizational hierarchy, any

Thus, starting at the highest level of the enterprise, strategic

Most effective organizations are strategically aligned and strive

If the strategic framework of a given organizational unit is well

The key to portfolio success is that projects in any given unit’s

Therefore, a portfolio is most effective in terms of achieving