Portfolio Management for Effective Resource and Project Planning – Pt. 3
This is Part 3 of a series on Portfolio Management from Nancy Ingalls at Ingalls Consulting. You can go back to start reading this series from Part 1.
We’ll continue our topic with this question in mind: What metrics are used in the implementation of Information Technology?
The business case development captures the risk and rewards for a proposal. A strong business case is more import than ever. Companies are moving to a model that relies more on the true Return on Investment (ROI) then ever. The supporting information behind a proposal determines how it will compete with the multiple information technology priorities.
In the CIO Magazine article “How to Make Your Best Case”, Lauren Gibbons Paul outlines five essential rule for creating the best case for a proposal.
- Rule One: Know you company’s needs. A strong business case must be supported by a business objective.
- Rule two: Partner with a business sponsor. The business case must be developed with the business management team. Debra Still, Executive Vice President and Chief Operating Officer for Pulte Mortgage, utilizes a team including an information technology representative, business representative and project manager for their business case development.
- Rule three: Build a rational cost-benefit picture. Define the type of project benefit that will be gained and drill into the detail for measurable returns.
- Rule Four: Don’t ignore soft benefits. Factors like brand image and customer satisfaction are difficult to measure, but they should not be left out even with a strong hard benefit case.
- Rule Five: Make the business partner own the benefits. To ensure that the benefit is realized, the business sponsor must agree and follow through on the business end. A project that promises to reduce headcount will only deliver the reduction through the business follow-through. This is “more art than science”.
Project Management Metrics
Project Portfolio Management metrics have been established by professional organizations evolved with business practice and converged with Six Sigma concepts. The PMBOK Guide was developed by the Project Management Institute as a standard for project management techniques. This guide is an accumulation of “generally accepted” project management practices. The guidelines can be adapted to fit different types of business applications. In more recent years these guidelines have been combined with the methods and tools of Six Sigma. This section will discuss the metrics from the PMBOK, Six Sigma and standard business practice.
The PMBOK guide recommends performance reviews at regular intervals throughout the project lifecycle. In Figure 3.1, a set of standard project performance metrics are displayed by project Work Breakdown Structure (WBS) Element or milestone. These analysis metrics can be grouped by variance, trending and earned value.
Figure 3.1
Variance Analysis utilizes comparisons between estimated and actual values. In the picture above, the cost and schedule variances are displayed by WBS element. The cost variance is calculated by subtracting the earned value by the actual cost. Earned value is equal to the budgeted cost of work performed (BCWP). This number is calculated by determining the cost of the work at a point in time based on the estimate. For example, the estimated cost at the end of the Pre-Project Plan is $58,000. The actual cost at this point in time is $62,500. Therefore the cost variance is negative reflecting that the project is likely to complete under budget. Schedule variance is calculated in a similar manor based on the estimated schedule versus the actual schedule.
Trending Analysis looks at the performance of the project over time to determine whether it is proceeding positively or negatively to plan. In the next picture, the actual cost and earned value are compared to the cumulative planned value over time. This example demonstrates a project that is trending poorly to the planned value. Adjustments will be required to bring the project back into alignment with the plan.
Figure 3.2
Earned Value Management (EVM) is a project performance method that utilizes the combination of scope, schedule and resources to determine project health. The three key values used for EVM are Planned Value, Actual Cost and Earned Value. These base measurements are used to calculate Cost Variance, Schedule Variance, Cost Performance Index (CPI) and Schedule Performance Index (SPI). CPI is a cost indicator and is calculated using Earned Value divided by Actual Cost. SPI is an indicator of the project schedule health and uses Earned Value divided by Planned Value.
As project portfolio management has evolved, the need to provide business savvy information on projects has grown. Measurement systems that provide the business with the information need to make corrective action on projects in the portfolio. This measurement system involves the creation of benchmarks to evaluate performance, comprehensive evaluation factor, informational data in business terms, alignment with stakeholders, clear and meaningful terminology, and established data collection periodicities. Providing the business with information in metrics that support the appropriate corrective action is critical to portfolio success. Financial performance, production and strategic goals are metrics best applied to the business customer.
Six Sigma methods are now converging with the Project Management methodologies. As Program Management Offices strive to improve quality, Six Sigma becomes an attractive tool for process improvement.
A member of the Executive Consulting Group for Robbins-Gioia and certified Six Sigma Master Black Belt, specializes in working with government agencies and private industry on the use of Lean Six Sigma Scorecards to evaluate and improve project investments. The question that they present to customers is “What do we see in return?” The measurement of “quantifiable and unquantifiable benefits” is critical to improving investments in the portfolio.
An important point that is focused on is that the tools don’t make the improvements. The decisions that are altered based on the availability of information generate improvements to the project management practice. Variations in project management process are the root of many defects. The organization must practice a consistent, structured process to reap the benefits of Six Sigma efficiencies.
Asset Management Metrics
If you don’t know what you have and how it’s being used, you can’t manage it. The Asset Portfolio does exactly that task. The first piece of measuring the asset environment is an inventory. The second step will be to identify key performance indicators, strengths and weaknesses. The third step is to refine the description and classifications of asset management. These steps lead to the creation of an Asset Portfolio.
Asset metrics are often difficult to collect. The total cost of ownership may be spread across several different sources of information. The Information Technology Portfolio Management Step-By-Step book recommends working with a baseline of information collected from key knowledgeable stakeholders and documentation at a high level.
A highly evolved organization looks to the next level of asset management. All of the following should be considered as part of the asset management evaluation process:
- “Overall strategic business objectives and current business requirements
- External developments and innovations in the IT marketplace
- IT developments and investments among competitors and other industry players
- Internal business and IT insights, recommendations, and requests pertaining to IT
- Seek cross-functional and cross-business unit IT investment opportunities that enable or strengthen the company’s competitive advantage
- Identify and recommend responses to external IT-based threats
- Recommend action on acquiring competitive-parity IT capabilities”
Asset Portfolio management goes beyond the inventory and service level agreements of yesterday’s Asset Management. CIO Magazine Executive Editor, asks the question, “How about starting with the business strategy of the company and proximity of customers to information products and services and working back to a number from there?”. Creating the Asset Portfolio is a step in that direction. The assets are classified into Strategic, Infrastructure, Transaction, or Informational. The decision to invest in any of these classifications must be tied to business objectives.
Data
Value and Risk are the two key elements in the evaluation of a business case. In this picture, a graphical representation of the breakdown by business objective is exhibited in a bubble chart format. In the evaluation of the information in this picture, the high priority on lowering cost is reflected in the types of proposals under consideration. The number of individual proposals and the funding, or sized, of the proposals both support cost reduction as the primary focus.
Figure 3.3
Looking at the risk and value bubble chart by asset classification will also provide insight to the decision making process. Transactional investments demonstrate a focus on reducing the cost of doing business. The majority of proposals fall into the classification of transactional. This phenomenon supports the goals and objects of the business for cost reduction. Had the results of the graph demonstrated a concentration in strategic classifications, a misalignment with goal and objects would be clear.
The size of the bubble represents the relative dollar amount of the proposal. Proposals that are of high value and low risk are the most desirable. Proposals that fall into the low value and high risk quadrant of the bubble chart will be highly scrutinized by the management review process. The other observation to note between the two bubble charts is that the proposal in the above picture is classified as innovation corresponds with this next picture under a strategic effort.
Figure 3.4
Project Management Metrics
The Project Management example data was based on both real life examples and test scenarios. During the time span of the portfolio management pilot, a six week Business Intelligence Assessment took place. This project was used as an example for execution and analysis of the project by the tool throughout the lifecycle of a project. The information in the live simulation will not be included due to company confidentiality. For example purposes, two earned value demonstrations were fabricated.
Earned Value Management is an important indicator of project health. In this Table, the values are listed for the Positive Earned Value Project. This example shows a project that has accomplished more value than the actual cost expenditure at this point in the project. Visibility to the under-run would allow funds to be reallocated to different investments early in the project instead of at the end of the lifecycle. The next chart plots the projected values and reflects a healthy completion under budget.
Figure 3.5
Figure 3.6
Earned Value will also allow for adjustment to the plan for recovery. In this Table, the values are listed for the Negative Earned Value Project. This example shows a project that was not performing well through the week of 01/30/06. Adjustments to the project made it possible to accomplish a recovery and complete the project under the projected cost. In the following chart it plots the projected values and reflects the budget by timeline.
Figure 3.7
Figure 3.8
Asset Management Metrics
Evaluation of assets for the Portfolio Management Pilot was performed at a high level. The total number of individual applications was too large to aggregate to a level that could be easily tied to financial information in the time frame for the pilot. In this picture, a graphical representation of the asset mix is represented. This graphic is a representation of the number of applications within each asset classification, not the dollar value.
The information to determine the total cost of ownership was not readily available. The process to develop this metric took several days and conversations with the application owners and business management representatives. The asset management information was not mature to the point that project information had achieved.
Figure 3.9
This representation can be compared the Information Technology Portfolio Pyramid for a Metal Manufacturing firm. The Informational Asset differential is driven by the unique reporting requirements enforced by the government. The Strategic Asset area is also limited due to the nature of the customer base and product line of this particular sector. Cost reduction and compliance are the priority to meet the goal of the business. These elements of the business environment create differences from a standard manufacturing company. The percentages in each asset classification are intended to serve as a baseline. Deviations for the standard should be explained by business goals.
In this next pie chart, is a representation of new projects by asset classification according to number count, not dollar amount. A dollar representation would be a more appropriate measure for real life analysis. The distribution between the percentages should be directly correlated with the goals and objective of the business. This distribution supports the goal of lowering cost by investing in Transactional Assets.
Figure 3.10
Analysis
The metrics collected to support the portfolio are critical to the success of the decision making process. From the development of the business case through project management to the creation of an asset, accurate information is the key to making the right choices. During the informational work sessions with each sector, a common concern was that one of these pieces was not important or necessary to the portfolio.
The business case is a mandatory set of information in the creation of the portfolio. Without these key elements, a selection based on facts instead of instinct is not possible. As we view the graphical representation of the risk and value bubbles, it is important to note that there is an underlying business case to support the size and position of each bubble. In addition to having a visual view of the charts, it is necessary to provide the drill down into more specific information to determine whether a proposal is truly the correct fit for the company and current business environment.
Project performance metrics demonstrate how the portfolio investments are performing. As with personal investments, once a stock has added to an investment portfolio, a continual evaluation process takes place and adjustments made based on the performance. The project portfolio must be managed in a similar fashion to optimize the existing investments and adjust for changes in priorities and poor performance.
The Asset Portfolio provides a view of the recurring budget spend for a company. This information is important to the evaluation of continuing current investments. The decision to retire an asset that is no longer providing the business value can be validated with hard metrics instead of a desire to update technology. This process is also dependent on the collection of metrics specific to the total cost of ownership information available by application.
The metrics that support the portfolio are the foundation of the process. The development of the portfolio takes many phases and experimentation with different data sources.
Join us for Part 4 of this series as we cover how Information Technology Portfolio Management affects asset and project planning.
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