The Management of a Portfolio of Innovation Projects. A Research Report. Presented to. The Graduate School of Business.

Transcription

1 The Management of a Portfolio of Innovation Projects An Investigation into the approaches used by Mobile Technology Companies to manage their portfolio of innovation projects A Research Report Presented to The Graduate School of Business University of Cape Town In partial fulfilment Of the requirements for the Masters of Business Administration Degree By Erik K. de Waal December 2009 Supervisor: Associate Professor Eric Wood

2 This thesis contains no confidential information It may be freely used by the Graduate School of Business I acknowledge the co-operation of each company where the interviews were conducted. I also acknowledge the authors of all academic material used. Then, a special thanks goes out to my girlfriend for her enduring patience and understanding; Special thanks also to Eric Wood for his support and guidance; I would like to thank the admin staff for their helpfulness. And finally I would like to thank all MBA students in You have made it what it was. Your contributions, however small, are always appreciated. I certify that the thesis is my own work and that all sources referred to are to be found in the References Section: Signed: ERIK K. DE WAAL

3 MANAGEMENT OF A PORTFOLIO OF INNOVATION PROJECTS ABSTRACT The majority of companies that invest in innovation make some attempt to gauge the effectiveness of their efforts. However, these efforts are generally focused on actualizing and marketing the innovation. Few companies realise that the process of innovation from conception to solution is just as important as the actual innovation goal itself. This report explores how mobile technology-based companies in the ICT industry approach the management of their innovation project portfolio. In particular it focuses on how their objectives translate into a balanced portfolio, while managing this portfolio with the limited available resources. Particular emphasis is also placed on the comparison to established principles of project portfolio management. Since no previous published research has explored this question in the context of South African mobile technology companies, the research is based on the grounded theory approach in order to provide an unbiased framework for an actual approach to managing innovation projects among the sample companies. KEYWORDS: Innovation Projects, Mobile Technology Companies, Project Portfolio Management, Evaluation Criteria, Resource Allocation ii

4 1 LIST OF TABLES V 2 LIST OF FIGURES V 3 DEFINITIONS & ABBREVIATIONS VI 4 INTRODUCTION RESEARCH AREA AND PROBLEM RESEARCH QUESTION AND SCOPE RESEARCH ASSUMPTIONS AND ETHICS RESEARCH ASSUMPTIONS RESEARCH ETHICS 11 5 LITERATURE REVIEW Copyright LITERATURE REVIEW APPROACH 12 UCT 5.2 INNOVATION PORTFOLIO MANAGEMENT DEFINITION PROJECT PORTFOLIO MANAGEMENT PORTFOLIO MANAGEMENT PROCESS IMPLEMENTATION BENEFITS OF IMPLEMENTATION CONDITIONS FOR PPM DECISION MAKING ADOPTION LEVEL OF PPM CONCLUSION 29 6 RESEARCH METHODOLOGY RESEARCH APPROACH AND STRATEGY GROUNDED THEORY PROCESS RESEARCH DESIGN DATA COLLECTION DATA ORDERING AND ANALYSIS RESEARCH CRITERIA 35 iii

5 6.4 LIMITATIONS OF THE METHODOLOGY 36 7 RESEARCH FINDINGS, ANALYSIS AND DISCUSSION RESEARCH FINDINGS SMALL CASE STUDIES RESEARCH ANALYSIS AND DISCUSSION CROSS-CASE ANALYSIS MODEL FORMATION RESEARCH LIMITATIONS 76 8 RESEARCH CONCLUSIONS 77 9 FUTURE RESEARCH DIRECTIONS REFERENCES APPENDICES RESEARCH INSTRUMENTS INTERVIEW QUESTIONNAIRE QUOTABLE QUOTES 88 iv

6 1 LIST OF TABLES Table 5-1 PPM Activities in PPM Process 21 Table 5-2 PPM Adoption Maturity Levels 27 Table 5-3 PPM Characteristics at various Stages of PPM Implementation 28 Table 6-1 Grounded Theory Process 31 Table 6-2 Theoretical Sampling and its Reasoning 34 Table 6-3 Company Profiles 34 Table 7-1 Concepts of the Portfolio Focus 60 Table 7-2 Types of Innovation Projects and their Proportion in the Portfolio 60 Table 7-3 Concepts of the Portfolio Filter 64 Table 7-4 Comparison to Actual Selection Process 66 Table 7-5 Concepts of the Portfolio Focus 68 Table 7-6 Comparison with the Various Stages of PPM Elements 73 2 LIST OF FIGURES Figure 5-1 Risk-Reward Bubble Diagram 19 Figure 7-1 Model of Key Management Areas in a Portfolio Framework 74 v

7 3 DEFINITIONS 1 & ABBREVIATIONS INNOVATION MOBILE TECHNOLOGY PORTFOLIO PROJECT RESOURCE Introduction of either new products, improved products, processes or services Any form of cell phone technology A range of investments held by an Organisation An individual or collaborative initiative planned and designed to achieve a particular aim Money, Material or Staff that can be drawn upon by the Organisation Copyright ICT UCT IT NPD Information and Communications Technology Information Technology New Product Development PM PPM VASP WASP Portfolio Management Project Portfolio Management Value Added Services Provider Wireless Application Services Provider 1 Definitions extracted from the Literature Review vi

8 4 INTRODUCTION 4.1 Research Area and problem Mobile technology is becoming more prevalent, with mobile communications rapidly becoming an intrinsic part of everyday life. This has far-reaching implications for business as the industry changes, new trends emerge, technology develops and new markets open up. Companies whose core business is mobile technology will need to do more to remain competitive and establish themselves as industry leaders as newcomers flood the markets. As Steinbock (2005) points out: Whether driven by new technology or new markets, first-mover advantages do not suffice in and of themselves; they must be translated to sustainable competitive advantages. The winners will be those companies that can dynamically master new technologies, while pioneering new markets with new products and services. They know how to align mobility and more broadly, information technology with strategy. (Steinbock, 2005) For this reason, it is crucial for these companies to extract the maximum value from their innovation programmes. With such a rapidly growing industry, there will inevitably be many ideas but a lack of resources. The challenge is to not only invest in innovation, but also to do so with limited resources. As Steinbock (2005) further indicates, During the early phases of mobile transition or any new enabling technologies the first movers may well enjoy substantial superiority over competitors, through efficiency or differentiation or both (Steinbock, 2005) Much of mobile technology is based on software infrastructure. For this reason, any new product will be predominately software-based. Mobile technology companies that wish to stay abreast with the competition and changing consumer needs, will have to execute innovation projects to produce innovative products or services or to become more effective at what they are doing. These innovation projects inherently will contain some form of software development, and as such fall within the concept of IT projects. Where best practices for 8 of 90

9 managing an IT project portfolio have been adequately established however, managing a portfolio of innovation projects is not as straightforward. The challenge is to manage a selection of these innovation projects as a portfolio, for reasons that are explained below. Like any technological innovation, mobile technology innovation contains an element of risk and uncertainty, where IT projects contain a risk element of inadequacy after implementation (Labuschagne, Marnewick & Jakovljevic, 2003). Both types of project contain an actual implementation risk. The aim of the research is to understand how, in the light of established IT PPM practices, mobile technology companies manage a portfolio of innovation projects. There are two issues that this research aims to address. First the creation of value from a portfolio of projects, as referred to by Craig, Kanakamedala & Tinaikar (2006) with their similar focus on IT projects. This should be achieved by placing emphasis on innovation (Managing the Innovation Portfolio: Doing the Right Projects, 2007). The second issue is the fast-changing landscape of mobile industry with all its ancillary services. A new industry with as-yet many untested ideas puts pressure on companies to manage innovation effectively (Johnston & Bate, 2003). It becomes crucial not to allow uncertainty to detract from the goodwill and value that has already been established and to utilize resources effectively. Even as things stand, managing a portfolio of IT projects is difficult. Statistics indicate that 40% or more of IT projects will fail because they are late, go over budget and/or are of poor quality (D'Amico, 2005). A similar report from South Africa in 2003 revealed that only 43% of projects succeed (Labuschagne, Marnewick, & Jakovljevic, 2003). There is consensus that IT project management often have difficulties managing the complexities of multiple IT projects (Bonham, 2005). This often results from a focus on individual projects and their success, rather than on multiple projects and their overall portfolio success (De Reyck, Grushka-Cockayne, Lockett, Calderini, Moura, & Sloper, 2005), and has a detrimental effect on the investment in these projects. Even an attempt to focus only on worth while projects does little to ameliorate the problem. Companies usually don t have enough resources to allocate to all projects that seem worth pursuing and inevitably end up overstretching their resources. Ultimately this results in projects either barely succeeding or worse still, failing (Hunt & Killen, 2006). Therefore developing a holistic view on the projects and their requirements through a portfolio enables companies to be flexible and adapt projects to a changing IT 9 of 90

10 environment (Bonham, 2005), thereby taking control over their IT projects. This ultimately enhances the value created by the portfolio (D'Amico, 2005). Such a holistic view typically takes the form of a portfolio management system. Several experts on portfolio management such as Cooper, Edgett and Kleinschmidt (2001) argue that a project portfolio management (PPM) process is key to the success of such projects. Against this background, the aim of this research paper is to establish how effectively mobile technology companies manage their portfolios of innovation projects. The research also endeavours to establish how these companies approach the management of their portfolio of innovation projects, by understanding their challenges and success. 4.2 Research Question and Scope With this in mind, the question that this report will focus on is: How do mobile technology companies manage their portfolio of innovation projects? To better focus the research, the question is further divided as follows: How do they arrange their portfolio to reflect their innovation objectives? Does this arrangement of the portfolio bring about the intended outcome? How do they manage their resources across the portfolio of innovation projects? What are the typical challenges, given the structure of their portfolio management approach? How do these actual practices compare to formal PPM techniques? The answers to these questions should shed light on whether mobile technology companies actually make use of some form of a PPM approach, and how they manage their portfolios. 10 of 90

11 Also whether their portfolio success or failure is directly related to their choice of PPM process and which method or combination of methods appears to be most successful. 4.3 Research Assumptions and Ethics Research Assumptions First it is assumed that the companies will co-operate by full and frank disclosure during interviews and by allowing free access to project and resource data. As a mitigation strategy, companies enjoying existing relations to the GSB and that are willing to participate in academic research will be chosen. It is further assumed that irrespective of the size and stature of the company, they are involved in some form of innovation. Companies in the ICT sector that are involved in mobile technology will inherently be involved in software development, and as such they would have some form of portfolio of software development projects Research Ethics The requested Ethical Clearance has been completed and submitted. All interviews have been conducted on the basis of company data gathering, specifically project-related data and management opinion on project related activities. Interviews might require extracting sensitive information about the financial status of certain projects. For this reason a nondisclosure agreement will be signed and delivered to the company before the interview, and all data collected will be kept confidential and discarded on completion of the research. The names of companies and interviewees will be kept confidential if so desired by the parties concerned. 11 of 90

12 5 LITERATURE REVIEW 5.1 Literature Review Approach The literature encompasses three main focal points that in sequence, aim to clarify the theory and challenges in portfolio management, with emphasis on its application and thus its successes and shortcomings. The first section explores the concept of innovation projects and why companies typically invest in these. Understanding this will assist in understanding the objectives of the companies and their aim in establishing their portfolio of projects. The literature review aims to establish an understanding of the methods by which IT companies manage their projects in a portfolio, with the intention of developing an understanding of how mobile technology companies might be expected to manage their projects. Copyright In regards to software development, the approach taken by IT UCT companies to manage their projects contains many of the aspects that would be required by mobile technology companies. It is for this reason that IT PPM literature is explored, and thus the second section explains the concept and definition of portfolio management as well as the basic nature of project portfolio management as seen in the IT industry. This section aims to assimilate the literature on the nature of the portfolio management process in business, with particular emphasis on project portfolio management and to explain the benefits and limitations of each of the methods and techniques available. The last section deals with the implementation of a portfolio management system. In particular it focuses on project portfolio management, and how to identify differing levels of effectiveness in the implementation or adoption stages and why its implementation is expected to add value to the portfolio as well as to the company. 5.2 Innovation A quick look at the reason why companies pursue innovation shows that, as stated, new product development and innovation are in the very core of value creation (Hurmelinna- 12 of 90

13 Laukkanen, Sainio, & Jauhiainen, 2008:278). Companies invest in innovation to grow their investment. Innovation also helps companies not only to stay competitive but also to expand and grow in existing or new markets. As Lockett and Thompson (2001) point out, the innovativeness invested in products, services and processes enhances the potential for growth and profit making. Furthermore, according to a recent McKinsey survey, most executives see innovation as a top priority for driving growth (McKinsey Quarterly, 2007). As indicated by Sevenprophets (2009) there are four types of innovation, each of which has different objectives. They are operational, management, product and service innovation and finally strategic innovation. Operational innovation aims to make existing processes in an established market more effective. Product and service innovation are about taking existing products and services to the next level in the market. Management innovation changes the way managers operate, and hence improves organisational performance. Strategic innovation deals with new business models, new markets and increased value for customer and company. Strategic innovation is important as it focuses on developing long-term sustainability and growth. As pointed out by Johnston & Bate (2003), strategy innovation is shifting a corporation s business strategy in order to create new value for both the customer and the corporation (p.4). They point out that strategy innovation is a process of applying innovative thinking to the entire business model of a company, not just to its products or inventions (p.7). Thus longterm value creation results from focusing the innovation investment on strategic innovation. Finally, innovation projects are projects that entail the development of an innovation. They typically entail innovation types in those four quadrants of innovation. 5.3 Portfolio Management Definition Harry Markowitz laid down the basis of modern portfolio theory in 1952 providing for the determination of a specific mix of investments that would yield the greatest return with a given level of risk (Markowitz, 1991). 13 of 90

14 The concept of portfolio management as a financial investment tool, balancing the overall level risk with high- and low-risk investments while maximising value creation, also applies to the management of projects, with emphasis on balancing the risk while maximising their value creation (D'Amico, 2005). Selecting and focusing on the most appropriate projects and balancing high-risk, high-return with low-risk, low-return, produces a valuable portfolio of projects, especially through innovative new product development projects, which can significantly grows a company s worth (Cooper, 2006). The type of portfolio management used by organisations ranges from portfolio management of assets to activities, with assets typically comprising a selection of financial instruments with varying physical and intellectual properties. Activity portfolio management typically entails operational portfolios, being a collection of activities to support organisational value generation such as marketing, sales or maintenance. The activity portfolio management also entails project portfolios, being a collection of projects used to enhance or expand existing operational activities, such as process re-engineering or new product development (NPD) (StrategyDriven, 2008). Thus, portfolio management is also a system of suitably selected projects, appropriately allocated resources and a well-planned strategy (Cooper, Edgett, & Kleinschmidt, 2001a). It also entails a continuous process of screening and prioritizing projects and making decisions to suspend or de-prioritize, continue or cancel, depending on suitability. The latter is evaluated according to agreed decision criteria, such as strategic alignment, financial benefit, or any other criteria or combination of criteria (Cooper, Edgett, & Kleinschmidt, 2000) Project Portfolio Management The literature refers to innovation projects and product projects on an equal basis, which implies that any new development, whether process enhancement or product development is a project (StrategyDriven, 2008). PPM has emerged as a powerful process to shift the focus from doing projects right to doing the right projects (Cooper, Edgett, & Kleinschmidt, 2000); (Rajegopal, McGuin, & Waller, 2007). Too often much emphasis is placed on doing the projects right through the effective use of project management, or multiple projects through the use of programme 14 of 90

15 management (managing multiple related projects). However managing the entire range of projects of a company requires that portfolio management focus the company s objectives in prioritizing the right projects (Sanchez, Robert, Bourgault, & Pellerin, 2009). Hunt and Killen (2006) thus describe PPM as an ongoing decision process that oversees the composition of the project portfolio from the evaluation of newly proposed projects through to the monitoring of existing projects so that the organisation can gain the maximum value from the project portfolio (p.113). The reason is, as Hunt et al. (2006) further explain, that typically organisations rarely have sufficient resources to allocate to every viable project, and tend to spread their resources thinly over all active projects, resulting inevitably, in poor performance. Thus, the strategic allocation of resources to projects is a fundamental part of PPM. This resource allocation process takes shape through a rigorous process of screening projects at various stages in their life cycle, in order to assess their appropriateness based on their alignment with either the company strategy and/or according to the fit of financial models. Hunt et al. (2006) thus assert that PPM is not a specific process, but rather an activity that utilises methods from one pool. As Levine (2005) rightly explains, PPM is not as is commonly thought the management of multiple projects, but rather the management of the portfolio of projects as a whole so that these projects create optimal value. There is also the competitive edge that companies continually have to deal with. According to a study done by Cooper, Edgett and Kleinschmidt (2001), business leaders rate this as the primary reason for regarding portfolio management as so important. Especially in today s environment, companies have to do more with less to keep abreast of competition (Rad & Levin, 2006). In order to develop successful new products, a company should align its strategic market positioning with the NPD projects and thus select a portfolio of products to ultimately enhance its chances of success (Miguel, 2008). Allocating resources effectively across the portfolio of projects ensures that the product s time to market is minimized and that customer needs are adequately addressed (Schilling & Hill, 1998). Not only is the focus on gaining the competitive edge, but also in an industry as fast-growing as IT, where projects are steeped in change and uncertainty (Bonham, 2005:10), a company is required to remain agile and adaptable by placing a strategic focus on PPM (Rajegopal, McGuin, & Waller, 2007). 15 of 90

16 Establishing a successful IT PPM requires striking a balance between using PPM to support executives in valuing their IT portfolio and using PPM to monitor the health and strength of the portfolio (Bonham, 2005). In the light of this, Rajegopal, McGuin and Waller (2007) identified 8 key elements of PPM that have been shown to define the essence of PPM: 1. Centralized view of project portfolio: This entails having an inventory of current and proposed projects, maintained through a central area responsible for collecting, analysing and distributing project information 2. Financial analysis: A consistent application of financial methods such as internal rate of return, return on investment, net present value or economic value add 3. Risk analysis: Based on the Markowitz concept of a portfolio, a project portfolio should assess individual project risk, and balance between the risk of the portfolio and reward in the portfolio 4. Interdependencies: PPM reduces the interdependencies of projects with the result that fewer projects compete for the same resources. 5. Prioritization, alignment and selection: The portfolio comprises projects that align to the business strategy and that ensure that the portfolio is well-balanced with short- and long-term projects. 6. Constraints: In PPM there are four constraints that need to be managed. These include scarce human resources, staff capabilities, budgets and infrastructure. 7. Dynamic re-assessment of the portfolio: Tracking the performance of the project s measuring metrics allows for a quick decision about poorly-performing projects, and/or shift in priority. 8. Need for specialized software: Software is a time-saving device to continuously update the vast amount of data about each project. Companies that lack PPM processes and tools face four distinct problems (Kendall & Rollins, 2003). Firstly, there are too many active projects in the pipeline, secondly, there are many 16 of 90

17 projects that do not add any value, thirdly, some of projects may not be adequately aligned with the company s strategy and lastly, a portfolio that is not well-balanced with too many short-term problems, and few high-potential innovations. Further problems identified by De Reyck, Grushka-Cockayne, Lockett, Calderini, Moura and Sloper (2005) include late delivery of projects, lack of commitment from business leaders, conflicting project objectives and unexpected resource bottlenecks. However, these symptomatic problems are very similar to the problem categories identified by Kendall and Rollins (2003) Portfolio Management Process Portfolio Management Methods The typical problem areas in PM, as identified by Cooper et al (2000), can be divided into four problem areas. Resource balancing that stretches resources availability, prioritization of projects with too many projects passing the initial screening phase, decision support with often unreliable data presented to scrutinize projects and project proliferation with too may low-value projects using resources yet not adding significant value to the portfolio. These problem areas are interlinked and can be grouped into objectives that portfolio management aims to eliminate. According to Sanchez, Robert, Bourgault and Pellerin (2009) there are three such strategic objectives for which portfolio management tools are implemented, one being to maximize the portfolio value which would typically entail financial methods such as net present value, scoring models and productivity indices. Portfolio balance is a further objective that aims to balance the risk and reward of each project investment and usually incorporates methods such as bubble diagrams (Cooper, Edgett, & Kleinschmidt, 2001a), histograms and risk-reward maps. Finally, the strategic alignment objective aims to align the projects according to their particular fit with the company s strategy and in doing so gives priority in resource allocation to those that are better aligned. The methods used here are typically strategic buckets and scoring models (Cooper, Edgett, & Kleinschmidt, 2001a); (Archer & Ghasemzadeh, 1999); (De Reyck, Grushka-Cockayne, Lockett, Calderini, Moura, & Sloper, 2005). 17 of 90

18 Strategic Fit Strategic alignment in a portfolio of projects requires general approaches such as, building strategic criteria into project selection applying top-down strategy models (Cooper, Edgett, & Kleinschmidt, 2001a) According to Cooper, Edgett, & Kleinschmidt (2001a), an indication of poor portfolio management is that strategic criteria are not considered when projects are selected. As a result, the projects that are selected are often not aligned with the company s overall strategic direction, too many strategically unimportant projects are selected and funding is wasted on projects that add no benefit to the business strategy. Thus according to Cooper et al. (2001a), an important feature of portfolio management is that the portfolio supports the strategy. However, unlike financial portfolio theory, which is based on a bottom-up approach where investments are independently valued with regard to their value-add to the portfolio, project portfolio management follows a more top-down approach where project investments are driven by strategic objectives (Bonham, 2005). However, a pure top-down approach has its limitations in that projects that have potential value for new markets, from a financial or innovation point of view, might be cancelled if they do not fit in with the strategic objectives of the company (Bonham, 2005). Thus, Bonham (2005) argues it is important to have a mix of top-down and bottom-up approaches in IT projects, since the approach requirement will differ from industry to industry, depending on the specific situations. Furthermore, Archer and Ghasemzadeh (1999) argue that irrespective of the type of approach, the model used should incorporate suitable data. One such top-down approach is the use of strategic buckets to categorise project according to their strategic fit, be it according to a more process enhancement oriented strategy or more radical innovation strategy (Chao & Kavadias, 2008). In doing so, resources can be suitably allocated to the buckets that have greater strategic significance such as in the area of more radical innovative break-through. Thus, as indicated by De Reyck et al. (2005), the advantage of PPM is its ability to reduce inter-programme (multiple projects) competition for resources and turn overlaps into productive interdependencies. A proposition suggested by Archer et al. (1999) states that strategic decisions concerning portfolio focus and overall budget considerations should be made in a broader context that 18 of 90

19 takes into account both external and internal business factors, before that project portfolio is selected. This has the implication that projects should meet the company s objective without exceeding the resources or violating other constraints (De Reyck, Grushka-Cockayne, Lockett, Calderini, Moura, & Sloper, 2005) Balance According to Cooper et al. (2000), a desired balance of projects in the portfolio can be achieved through short-term projects (upgrades and enhancements or operational) and longterm projects (new product development) combined in a suitable mix, high-risk projects versus low-risk projects across various markets, technologies and project types. A balance entails strengthening the current strategic position as well as exploring future strategies, which would entail investment in NPD (Terwiesch & Ulrish, 2008). Cooper et al. (2000) furthermore mention that for this objective, methods to use include visual charts such as bubble diagrams that indicate degree of risk and rewards for all the projects. Figure 5.1 shows a typical layout of a bubble diagram that indicates four quadrants in which projects will be categorised. The balanced portfolio will try to maximize potential new Pearls and Oysters while still maintaining a solid Bread and Butter base.(cooper, Edgett, & Kleinschmidt, 2001a) Extracted from Cooper, Edgett and Kleinschmidt (2001b) Figure 5-1 Risk-Reward Bubble Diagram 19 of 90

20 Value Maximization In order to maximize the value created by individual projects, a bottom-up selection approach concentrates projects in the portfolio that will add most value (Cooper, Edgett, & Kleinschmidt, 2000). Tools that assist in this decision-making process includes financial models such as the net present value, which must exceed a defined minimum value, or the internal rate of return, which guides the decision on an acceptable minimum investment rate of return. Other tools include scoring models that rate projects based on a number of criteria defined by management and include metrics that extend beyond just the financial. However, as mentioned by Terwiesch et al. (2008), financial models such as the net present value tend be inadequate for advanced technology projects due to the long-term payoffs and high likelihood of project failure Screening and Selection The major part of a proper PPM process is the effective selection of projects. In order to follow the objectives of the PPM, projects need to be selected according to a defined set of criteria that varies from company to company. When and how these decision-making tools are used is a further point of contention in literature. Cooper et al. (2000), suggest the use of a stage-gate process, in which the project stages are linked through gates at which crucial project decisions are being made. Such decisions would include cancelling, holding or continuing projects based on a set of prioritisation criteria or resource allocation preference and also based on a prioritisation criteria set. Thus, the stage-gate system guides the process to continuously check the changing needs of the projects and demands of the customer. Archer et al. (1999) indicate that selection of project portfolio is a periodic activity involved in selecting a portfolio, from available project proposals and projects underway, that meets the organization s stated objectives in a satisfactory manner without exceeding resources or violating constraints. Furthermore, they assert that the process of portfolio selection consists of three phases: strategic considerations, individual projects evaluations and portfolio selection. 20 of 90

21 Archer et al. (1999) thus propose that a selection framework should be flexible enough so that stakeholders can choose particularly favoured techniques, in analyzing project data and choosing the type of projects at hand. This also helps to simplify the selection process, as it should be organized into stages, allowing decision-makers to move logically towards an integrated consideration of projects based on established theoretical models. Another proposition by Archer et al. (1999) asserts that when using such metrics for decision-making, they should be common to all projects, thus allowing equitable comparison of projects. And a further proposal states that the interdependencies or resource competition of projects must be considered for these decision-making criteria. A guide is proposed by Archer et al. (1999) to determine the activity required at a specific stage of portfolio selection. Table 5.1 indicates that there are three stages to this process, each of which has a set of activities and possible methods to execute these activities. Table 5-1 PROCESS STAGE Pre-Process Portfolio selection process PPM Activities in PPM Process SELECTION STAGE Strategy Development, methodology selection, development of strategic focus, resource constraints, choice of model techniques Pre-screening Individual project analysis Screening Portfolio selection Portfolio adjustment ACTIVITY Strategic mapping, portfolio matrices, cluster analysis, etc Rejection of projects which do not meet portfolio criteria Calculation of common parameters for each project Rejecting non-viable projects Integrated consideration of project attributes, resource constraints, interactions User-directed adjustments Post process Final portfolio Project development Extracted from (Archer & Ghasemzadeh, 1999) POTENTIAL METHODOLOGIES Manually applied criteria; strategic focus, champion, feasibility study available Decision trees, uncertainty estimates, NPV, ROI, etc, resource requirement Constrained optimization, scoring model, sensitivity analysis Matrix displays, sensitivity analysis Project management techniques, data collection 21 of 90

22 5.4 Implementation Effective portfolio management is a major business challenge (Cooper, Edgett, & Kleinschmidt, 2000). There are many pitfalls that require more focused attention. As indicated by Bonham (2005), successful project portfolios are never the result of a generic approach. Each company has its unique requirements. Often they found that such project portfolios contained projects that did not fit in with the company strategy, were duplications and competed for limited resources. Jeffery and Leliveld (2004) claim that there are three barriers to successful implementation of PPM. As they have shown in a survey, metrics and measurement process is a major challenge for IT companies, with 82% of the respondents claiming that the ability to estimate the benefits remains a challenge. Of these respondents, 33% never established a bench line to compare outcomes against previous successes. With skills and resources, Jeffery et al. (2004) claim that 46% of their survey respondents expressed the view that personnel working on software development projects lacked a basic working knowledge of financial concepts. The last barrier, they claim is the business alignment, with strained relations between IT and business executives. Cooper, Edgett and Kleinschmidt (2001b) state that portfolio management has three constituents that form the core of the managing process that needs to be addressed in the implementation of a portfolio management process. The first is strategy, to ensure that the portfolio process is anchored in the company s strategy, which would agree with the preprocess stage presented by Archer & Ghasemzadeh (1999). Stage-Gating helps establish decision-making points for projects to pass through in the process of evaluation and review, during which projects are assessed as a whole, comparisons drawn and priorities established. Cooper et al. (2001b) assert that the review stage for some companies is a minor check, whereas for others it is an important step in the portfolio management process. Depending on the decision-making framework in use, each company will have its own style of managing portfolio decisions. Jeffery et al. (2004) suggest four dimensions of PPM implementation for IT projects in general. First level exists in organizations, where the budgets are allocated to business units rather than the whole company. There is however evidence to the contrary. De Reyck et al. (2005) indicate that portfolio management helps overcome the silo effect, and thus gives an 22 of 90

23 umbrella view of all projects. Jeffery et al. (2004) also state that too many metrics potentially restrict the effective management of the portfolio, as summed up by the phrase analysis paralysis. The fourth dimension concerns the life cycle of the projects, with regard to which they explain that a well-balanced portfolio has distinct metrics for specific investments Benefits of Implementation Business that implements a systematic process for managing their project portfolios clearly outperform the rest, ongoing research reveals (Cooper, Edgett, & Kleinschmidt, 2001b) According to Datz (2003) there are three main benefits to implementing a PPM approach. The first is maximizing the value of the innovation investment in IT while minimizing the risk, second, improving communication and alignment between IT and business leaders and third, encouraging business leaders to co-operate as team players, which translates into more efficient resource allocation. In similar vein, Managing the Innovation Portfolio: Doing the Right Projects, (2007) states that companies that perform well on NPD have superior portfolio management practices and meet revenue goals as well as quality and time-to-market goals and cost targets Conditions for PPM According to De Reyck et al. (2005) to implement an effective PPM delivering such benefits, certain conditions should be taken into account. These include an organisational strategy with clear strategic objectives, which are transparent to all stakeholders and the involvement of business leaders so as to address the constant fight over resources and reprioritisations. Team skills also play an important role and the projects team needs to have the skills required to process the information from the models. Furthermore, Jeffery et al. (2004) also state that team skills play an important role in building the business case for a project and understanding the risks impacting on the project s returns. Another view that of Cooper et al (2001a) is that effective portfolio management requires that three elements be in place and that they work in harmony with one another: the business 23 of 90

24 strategy, the development process for new projects and the portfolio review with its various models and tools. However, Cooper et al. (2001b) indicate that several issues need to be addressed for a company to develop the management disciplines for portfolio management. All of the issues mentioned refer to the underlying objectives to be achieved by portfolio management. Managing the proliferation of projects in the pipeline is the first issue discussed and relates to the initial argument that resources are scarce and have to be allocated to only the most suitable projects. A further issue referred to by Cooper et al. (2001b), is the requirement to clarify the flexibility of decisions about resources. This is crucial so as to ensure that there is true commitment from senior management. Furthermore, Rajegopal et al. (2007) explain that there are 10 commandments for PPM that need to be understood in order to execute projects effectively, with the first three being most relevant to the discussion. The first of these states that projects are investments; like any other short- or long-term investment, projects are another form of investment that ultimately creates value. The second commandment maintains that PPM needs to be gradually deployed rather than in a big bang fashion. Furthermore, according to the third commandment, it is important to enhance the PPM visibility so that every project stakeholder has access to proper information at all times. With respect to the latter commandment, it is important to note that dealing with information is a difficult issue. As explained by Cooper et al. (2001b), poor information about matters such as the market is a leading cause of the failure of new products. Further important information concerns the manufacturing and operations, in order to understand the costs involved. Also of crucial importance is resource information. Even though, as explained by Cooper et al. (2001b), comprehensive resource planning remains elusive, companies have to have good estimates about time requirements Decision Making Portfolio management needs decision-making at various levels of the company or as Nelson, Gill and Spring (1999) state, decision-making is related to an organization s management levels. Decision-making also needs to occur at various stages of portfolio management. A 24 of 90

25 crucial part of selecting and prioritizing the right projects, hinges on proper decision-making. However, these decisions are based on supporting tools that provide sufficient information to assist the decision-making process. These decision-making levels include project level decision-making, stage-gate decision-making, portfolio decision-making and strategic decision-making (Dietrich, Poskela, & Artto, 2003) Cooper et al. (2000) define two types of decision processes, which, according to their dominance, determine how the stage-gate process is utilized. The first approach places emphasis on the stage-gate decision, arguing that if this works well, the portfolio will take care of itself. Decisions to continue or cancel as well as prioritization and resource allocation decisions at the gates provide an in-depth review of projects, one at a time. With this approach, the periodic portfolio review largely serves to ensure that decisions are good ones, by checking the balance and mix of projects, and whether they are strategically aligned. If the gates are functioning well, there is no need for corrective actions during the portfolio review, which then serves merely as a confirmation. Copyright The second approach of stage-gate decision-making as defined UCT by Cooper et al. (2000) provides a more dominant portfolio review orientation. The idea behind this approach is that every project must compete against others in the portfolio. Decisions to continue or cancel and prioritization decisions are made in the portfolio reviews. This review suits the fasterpaced companies, such as those in high-technology. However, according to Cooper et al. (2000) it requires stronger commitment from senior management. It would thus seem that in a fast-growing technology industry such as the mobile technology industry, companies would benefit more to use the second approach, giving them better control of high-risk innovation projects Adoption Level of PPM Companies will have differences on how to approach portfolio management, especially in regard to their collection of projects. Hence, depending on the approach used to manage the portfolio of projects from top down and thus the type of methods implemented, companies have varying levels of PPM adoption, as described below. 25 of 90

26 Berinato (2001) suggest that there are five levels of PPM adoption, ranging from the simplest to the most complex. Companies that have (1) a projects central database, (2) a prioritised projects database, (3) budget categories for projects, (4) automated information storage and (5) those that apply modern portfolio theory to their portfolio. A more rigorous study has established another form of PPM adoption levels. Jeffery et al. (2004) suggest a model of maturity that entails four stages of PPM adoption in companies. The first is a default stage if none of the others is applicable. 0. Ad hoc: At this stage, companies make decisions about their project investments in an uncoordinated way. 1. Defined: Companies at this stage have defined and documented the key components of their IT project portfolio and also have rough estimates of the cost and benefits of each project. Projects are prioritized and there is a central budget oversight. 2. Managed: Companies at this stage have regular (rather than annual) reviews of their portfolios with financial metrics helping to align their spending with their forecast. 3. Synchronized (Optimized): Companies at this stage distinguish themselves by their ability to align their portfolio with their business strategy. They use evolving metrics to measure project value throughout its life cycle. Here risks, such as overruns and delays, are continuously assessed. Table 5.2 shows how companies at various stages of PPM adoption address the crucial PPM elements as defined by Jeffery et al. (2004) similar to the elements shown in Section of 90

27 Table 5-2 PPM Adoption Maturity Levels FACTOR MATURITY STAGE Advanced Valuation Feedback Mechanism Benefits Measurement Active Portfolio Management Defined Managed Synchronized Inclusion of Qualitative options value in funding decisions; monitoring of projects earned value in deployment Feedback on alignment with strategy - score cards evaluate each project Tracking of project benefits after project development is complete, measurement of IT value through the full project life cycle Understanding of risk and return - portfolio weighted accordingly Strategic Alignment Financial Metrics Demand Management Centralization Standardization All projects in one database; all IT spending tracked centrally and rolled into one database; centralized project office monitors projects Applications and infrastructure are well defined Applications and Infrastructure are well documented Annual review sessions between business-unit heads and IT to discuss IT and strategy Use of financial metrics in prioritizing, such as NPV, ROI, IRR Well-defined scheme for screening, categorizing and prioritizing projects; portfolio management approach to rank projects for investments IT portfolio segmented in assets classes - for example, infrastructure, strategic projects Extracted from Jeffery & Leliveld (2004) Frequent review sessions with business unit to discuss strategy alignment (monthly or quarterly) Use of portfolio software - real-time updates on portfolio modifications, performance and health 27 of 90

28 De Reyck et al. (2005) list the nine key elements (again similar to the ones discussed in Section 5.2.2), with three stages of adoption for each of these elements. Their study shows that the level of adoption has a significant impact on the company. The higher the level, the more positive the impact. In the same study, De Reyck et al. (2005) have shown that the problems associated with a lack of PPM processes decrease with a higher level of adoption. Table 5-3 PPM Characteristics at various Stages of PPM Implementation PPM Elements STAGE I STAGE II STAGE III Centralisation of project control Financial analysis Most organisations have an inventory of projects and frequently use it, but project control is largely decentralised Some financial analysis is undertaken with special attention to Payback Period and ROI Occasionally risks are evaluated. In most cases the attentions is in financing/cash flow risks Frequently have a central point responsible for collecting, analysing and distributing project information in a common format Financial tools are frequently used to evaluate projects. The most utilised are ROI, Payback period, NPV and IRR All aspects of risks are to some extent considered. Most of the focus is in the complexity of the project and technology risk Almost always have a central point to control projects, which is extensively used The financial analysis is always done. Several tools are frequently used An extensive risk analysis is performed. Attention is devoted to project complexity, technological risks, team experience and cash flow risks Risk analysis Interdependencies Constraints Some consideration of overlaps and duplication of project results Little constraints analysis. The only exception is the control of the budget/financial capacity Cross-project dependencies and implementation bottlenecks are frequently considered Frequently evaluate budget/financial capacity and competition for scarce resources. Other constraints, such as, staff capabilities to implement projects are occasionally evaluated Interdependencies are frequently managed. Significant attention given to cross-project dependencies Budget/financial capacity constraints are always evaluated. Other aspects such as staff capabilities and competition for scarce resources are frequently managed Overall portfolio analysis Very little analysis at the portfolio level More concern about portfolio analysis. The portfolio financial analysis is frequently managed and risk vs. reward evaluation is occasionally undertaken Usually the portfolio is evaluated in terms of overall risk and financial value. Frequently portfolio diversification is considered Categorisation, selection, accountability and governance Optimisation Specialised software Occasionally have top management involved in project selection. Also some effort is spent in aligning the project portfolio to the organisation's strategy Very few processes to optimise the portfolio are in place. Some effort is spent in generating regular project portfolio reporting Not used More attention is devoted to the project portfolio alignment to strategy and IT structure. Also, there is frequent involvement of top management in the project selection process Frequently have regular project portfolio reporting and annually, or more frequently, the overall project portfolio is prioritised Occasionally use specialised software to manage the project portfolio Significant alignment of the portfolio to the organisation's strategy. Systematic review of projects at specific stages. Top management frequently involved in the project selection process and business leaders are accountable for project results In general, processes to optimise the portfolio are frequently applied. Project outcomes are always compared with the original targets and project benefits are frequently centrally tracked Use is more frequent than in the Stage II, but it is still occasionally employed Extracted from De Reyck, Grushka-Cockayne, Lockett, Calderini, Moura, & Sloper (2005) 28 of 90