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Mgt 613 - Project Portfolio Management and the PMO Module 3 - Portfolio Risks & Balancing Dr. Alan C. Maltz Howe School of Technology Management Stevens Institute of Technology [email protected] 1 © Alan C. Maltz, Ph.D, 2014 Portfolio balancing To develop the portfolio component mix with the greatest potential, to collectively support the organization’s strategic initiatives and achieve strategic objectives; balanced against risks. 2 © Alan C. Maltz, Ph.D, 2014 Why we need a balanced portfolio.. • Most NP portfolios are unbalanced; they feature the wrong mix of projects. • Most are too heavily weighted toward the short-term, with a noticeable lack of visionary projects. • Certain markets or business arenas of the company are receiving a disproportionate amount of resources, far greater than seems sensible in light of the business opportunities. Portfolio balance is also important in order to manage risk. So, if attaining the correct risk profile in your portfolio is an objective, then the balance of projects in terms of risk and reward is an important dimension of portfolio balance. (Cooper, Edgett et al. 2001) 3 © Alan C. Maltz, Ph.D, 2014 What methods are available? Charts are the most popular way to display balance in new product portfolios Charts are favored for their ability to visually display the balance of projects in the portfolio Visual representations include the popular portfolio maps of bubble diagrams 4 © Alan C. Maltz, Ph.D, 2014 Bubble diagrams (PMI 2013) 5 © Alan C. Maltz, Ph.D, 2014 Portfolio balance – often discussed, poorly defined .. Bread and ButterRye Akoya Pumpernickel Pearls Mabe Sourdough Tahitian Confused Biwa Pearl Bay Abalone Babar Malaspina Dumbo Jumbo Kumamoto Royal Myagi White Elephants Oysters Attributed to A.D. Little and SDG 6 © Alan C. Maltz, Ph.D, 2014 A Commercial System – Balancing Risks 7 Powersteering© by UPLAND © Alan C. Maltz, Ph.D, 2014 Bubble diagrams ((Cooper, Edgett et al. 2001) 8 © Alan C. Maltz, Ph.D, 2014 A Commercial PPM System – Project Selection Powersteering© by UPLAND 9 © Alan C. Maltz, Ph.D, 2014 A Commercial PPM System – Top Down Governance Obtain top-down visibility into all IT work & investment to improve alignment with business strategy. Optimize IT delivery by balancing work requests & proposed projects vs. the active portfolio. Roll-up data without requiring granular tracking of all resources & tasks. Drill into details of underlying portfolios & projects at a click. 10 Powersteering© by UPLAND © Alan C. Maltz, Ph.D, 2014 25% LOW RISK & LOW VALUE PROJECTS 25% LOW RISK & HIGH VALUE PROJECTS 25% RESOURCES ALLOCATED TO LOW RISK & LOW VALUE PROJECTS 25% RESOURCES ALLOCATED TO LOW RISK & HIGH VALUE PROJECTS 25% GROWTH EXPECTED FROM LOW RISK & LOW VALUE PROJECTS 25% GROWTH EXPECTED FROM LOW RISK & HIGH VALUE PROJECTS 25% GROWTH EXPECTED FROM HIGH RISK & LOW VALUE PROJECTS 25% GROWTH EXPECTED FROM HIGH RISK & HIGH VALUE PROJECTS 25% RESOURCES ALLOCATED TO HIGH RISK & LOW VALUE PROJECTS 25% RESOURCES ALLOCATED TO HIGH RISK & HIGH VALUE PROJECTS 25% HIGH RISK & HIGH VALUE PROJECTS 25% HIGH RISK & LOW VALUE PROJECTS LOW PROBABILITY OF SUCCESS HIGH Portfolio balance – often discussed, poorly defined .. LOW VALUE HIGH 11 © Alan C. Maltz, Ph.D, 2014 The success of PPM depends on strategic and business alignment.. STRATEGIC PLAN INPUTS & OUTPUTS Strategic orientation Growth objectives Scenario analysis PORTFOLIO PLAN INPUTS & OUTPUTS Scenario analysis Portfolio analysis Portfolio recommendation(s) BUSINESS PLAN INPUTS & OUTPUTS Portfolio recommendation(s) Investment strategy Portfolio execution 12 © Alan C. Maltz, Ph.D, 2014 Which dimensions to consider? Fit with business or corporate strategy (low, medium, high) Inventive merit Strategic importance to the business (L,M,H) Durability of competitive advantage (short, medium, longterm) Reward based on financial expectations (modest to excellence) Competitive impact of technologies Probabilities of success (technical and commercial success as percentages) R&D cost to completion ($) Time to completion ($) Capital and marketing investment required to exploit ($) 13 © Alan C. Maltz, Ph.D, 2014 How about components of scoring models? 14 © Alan C. Maltz, Ph.D, 2014 How about components of scoring models? • Management interest • Customer interest • Sustainability of • X: Value to the company • Profitability (0.66) • Competitive advantage (0.34) competitive advantage • • • • Technical feasibility Business case strength • Y: Probability of success Fit with core competencies • Customer interest (0.25) Profitability and impact • Technical feasibility (0.50) • Fit with core competencies (0.25) 15 © Alan C. Maltz, Ph.D, 2014 Also, look at the balance across… Markets or market segments (market A, B, etc.) Product categories or product lines (product line M, N, etc.) Project types (new product; product improvement; extensions and enhancements; maintenance and fixes; cost reductions; and fundamental research) Technology or platform types (technology X, Y, etc.) 16 © Alan C. Maltz, Ph.D, 2014 Bubble diagrams (PMI 2013) 17 © Alan C. Maltz, Ph.D, 2014 Risks and Uncertainties… “Reports that say there's -- that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things that we know that we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know.” U.S. Secretary of Defense Donald Rumsfeld, 2002 18 © Alan C. Maltz, Ph.D, 2014 Definitions of risk, uncertainty and outcomes.. RISK – The likelihood of occurrence of one or more unfavorable outcomes (e.g. weather catastrophe) defined by a probability of such occurrence and a measure of its magnitude MITIGATABLE RISK – Risk that is largely controllable (e.g. engineering specifications) and which, over time, can be lessened or nullified with adequate resources UNCONTROLLABLE RISK – Risk that is largely uncontrollable (e.g. drug efficacy) and which, despite the provision of adequate resources, may not be lessened or nullified UNCERTAINTY – The range of possible outcomes associated with an event (often stemming from a decision); such outcomes may be discrete (e.g. product label) or continuous (e.g. market share) in nature OUTCOMES – Ranges of possible states of nature (e.g. resource estimation) which can be defined by a distribution and in which each state is characterized by a likelihood of occurrence 19 © Alan C. Maltz, Ph.D, 2014 Portfolio risk process.. Define Framework For Risk Management Embed & Review Identify Assess Effectiveness Ownership & Allocation Implement Actions Evaluate Plan Mitigation Actions 20 © Alan C. Maltz, Ph.D, 2014 All risks are not created equal.. CAUSES OF RISK PRIVATE EXTERNAL OPERATIONAL OTHER 21 © Alan C. Maltz, Ph.D, 2014 Project level risk – Expected Monetary Value can be calculated EMV = (0.15*75) + (0.85*-8) = 4.45 22 © Alan C. Maltz, Ph.D, 2014 Depending on your choice of strategy, a Project, Program, or Portfolio may have different risks RACE CAR STRATEGY STRATEGIC ALTERNATIVES $$$$; $$$; High Risk; Dev. Time MOTOR CYCLE STRATEGY $$$; $$; Moderate Risk; Dev. Time BICYCLE STRATEGY $$; $; Low Risk; Dev. Time © Alan C. Maltz, Ph.D, 2014 23 Project level risk – determined by simulation using distributions of payoffs and payouts 24 © Alan C. Maltz, Ph.D, 2014 Portfolio level risk – determined by simulation using distributions of payoffs and payouts 25 © Alan C. Maltz, Ph.D, 2014 Portfolio level risk simulations.. 26 © Alan C. Maltz, Ph.D, 2014 Class exercise Develop a portfolio balancing procedure for your organization Justify why you propose such a method, including its elements 27 © Alan C. Maltz, Ph.D, 2014 Thank You - Questions? Alan C. Maltz, Ph.D. Howe School of Technology Management Stevens Institute of Technology Castle Point on the Hudson Hoboken, NJ 07030 Phone: +1 (561) 632-4848 E-mail: [email protected] Web: http://www.stevens.edu/ 28 © Alan C. Maltz, Ph.D, 2014