If resources and funding are not constrained then an organisation would put every candidate project into its portfolio. However, resources and funds are not limitless so decisions have to be made about which project portfolio management tools to maximise value (or return on investment) from the available resources and funds.
For example, if there are 6 candidate projects then there are 64 potential portfolio options and the number of combinations rises quickly as the number of projects increases.
Is your portfolio delivering maximum value to the business?
There are many different combinations of the candidate projects that could make up the portfolio, ranging from just one of the projects through any number of them right up to all of them, however many that may be.
What is the optimum portfolio?
In order to determine the optimum portfolio it is necessary to consider the risk-adjusted total value and cost of the different combinations of the candidate projects in the potential portfolios. This can be represented graphically as shown below where each diamond marker is the total value return and cost for each different viable portfolio combination.
Please note that each diamond marker is a viable portfolio made up from a different combination of the candidate projects.
Where is the greatest return?
Focusing in on the portfolios with the greatest return for the given level of budget available provides a smaller selection of potential portfolios to choose from, as shown below.
To narrow the selection further it is necessary to look closer at the business cases of the individual projects in relation to the other projects in the highlighted portfolios to see if there are any synergies or knock on impacts that weren’t identified in the individual business cases that now need to be considered. It might also be necessary to sub-optimise an individual project in order to maximise the portfolio overall. Once this analysis has been undertaken it should be possible to select the portfolio with the highest value return for the given level of cost and be confident the portfolio is robust.
What is the Portfolio Efficient Frontier Analyser tool?
CITI has developed a toolkit (PEFA™) to help organisations to determine the optimum portfolio of candidate projects. The toolkit looks at the relationship between the business cases of the candidate projects including synergies and dependencies, the resource and funding constraints in the organisation together with the cost and benefit risks. From this it then models the different portfolio combinations to identify all viable options before identifying the ‘efficient frontier’ of the most valuable portfolios for different levels of cost. Finally, it then homes in on the optimum portfolio for a particular budget.
What are the advantages of using a Portfolio Efficiency approach?
- Maximise the absolute return for a given level of resource and funding
- Identify the portfolios with the highest rate of return
- Prioritise the most beneficial projects
- Re-assure stakeholders that the optimum portfolio has been chosen
- Facilitate the alignment of project outcomes to strategic aims
- Justify discarding low value projects and if necessary culling in flight projects
- Consciously manage the portfolio’s risk profile.
Where is the greatest return?
If you answered mainly yes to the checklist questions your portfolio is in a good positon to deliver maximum value to the business. If you answered mainly no it may be time to overhaul your portfolio structuring.
Please contact CITI if you would like to discuss any aspects of structuring your portfolio.
