Project Portfolio ROI—Missing in Action. Our PMO leaders and executive stakeholders tend to focus heavily on the mix of projects (asset mix), on the probability of success/failure of projects (risk posture), and on how well our pet projects are faring, but rarely ask about ROI. Worse, most project management literature uses terms like “benefits realization” in lieu of ROI, as if such benefits are to be measured independently of the amount invested to realize those benefits. Worse still, we in the PM community have adopted a blindly binary, “success-or-failure” mentality when we talk about project portfolio performance, rarely asking any ROI-oriented questions about our projects.
Think about it—when was the last time you heard a PMO leader ask a PM, “How else might we maximize ROI on this project?” Much more likely, the last 100 questions you’ve heard sounded more like, “How well are we executing within scope, schedule, and budget?” But what if it were your money funding the project portfolio? You might be glad to hear that most projects are tracking within plan, but wouldn’t you be much more interested in knowing whether such disciplined execution was likely to generate an exceptional ROI? After all, what good is executing within planning constraints if our project investments end up failing to generate anything close to the hoped-for returns?
The 4 Highest-Impact Drivers of Project Portfolio ROI
Once we accept ROI—measured in whatever “bang-for-the-buck” terms are most meaningful to each portfolio’s key investors/stakeholders—as the primary indicator of project portfolio performance, we can much more easily focus our efforts on the most critical drivers of ROI. Here they are in order of impact, along with our supporting rationale:
1. Portfolio Throughput—how many projects get completed in a given time period. If we assume that a typical project in your portfolio generates an average return of, say, $10M upon completion, and we further assume that your resource pool (investment cost) is fixed at, say, $5M/yr, then we know that a portfolio throughput of 1 project completion per year will generate a 100% ROI ($5M net gain on a $5M investment). If we can double that throughput to 2 project completions per year, without adding resources, your ROI will jump up to 300% ($15M net gain on a $5M investment). If we triple throughput with no additional resources, your ROI will be 500% ($25M net gain on a $5M investment). You can see why portfolio throughput earns the top spot as the highest-impact performance driver.
2. Portfolio Reliability—the percentage of projects that are delivered at or above expected ROI. Note that the usual definition offered for portfolio reliability is “the percentage of projects that are delivered within plan,” as if delivering within plan were tantamount to delivering the expected ROI. As a result of this misplaced emphasis, we are aware of no industry studies that attempt to measure portfolio reliability in ROI terms. So, let’s assume for a moment that “delivering within plan” is the same thing as “delivering at or above expected ROI;” in other words, let’s assume that all approved projects were selected due to their expected ability to achieve a given ROI, and that the value side of the equation for each project stays the same during the course of project execution. (Not that either of these has ever happened in the history of projects, but go with me here…) Leading industry surveys tell us that typical portfolio reliability is in the 60-65% range—in other words, fewer than 2/3 of projects are completed within plan. What if we can boost reliability by ~50%, from the low 60s to the low 90s? All other factors being equal, we can reasonably assume that portfolio ROI will go up by 50% as well.
3. Project Selection—selecting the highest-ROI mix of projects within affordability and capacity constraints. While project selection may always be subject to organizational political whims, most organizations exacerbate this unnecessarily by failing to adopt ROI as a guiding metric. As a result, the debates about which projects merit funding have much more to do with the power of the person making the argument than with any logically consistent value assessment. Making matters worse, few organizations have adequate understanding of what their capacity constraints really are, and as a result, tend to overload themselves with more projects than they can execute effectively. We believe that the room for improvement here is huge—one case study, for example, shows that improving project prioritization can easily deliver a 30% gain in ROI. We believe that the room for improvement here is even bigger, but let’s conservatively assume that adopting ROI as a guiding metric for project selection decisions would improve ROI by a modest 25%, and that adopting methods to execute projects within capacity constraints—such as staggering projects according to the capacity of the most constrained resources—yields another 25% improvement in ROI. This would result in a combined ROI improvement of 50 percent, putting Project Selection on par with Portfolio Reliability for ROI impact.
4. Project Portfolio ROI Engineering—the ability to engineer a maximum-ROI outcome for each project, and for the portfolio as a whole. Compared to most other types of investments, project investments offer a wonderfully unique advantage—the possibility of engineering maximum ROI as we invest. For example, we might get halfway through a project and suddenly obtain competitive market information indicating that delivering 1 month earlier than planned would likely yield 20 times more value than if we delivered on schedule, while perhaps costing us only 10% more to achieve the desired schedule acceleration. Or maybe we realize that persistent schedule delays and budget overruns have created a situation in which the project can no longer achieve the organization’s minimum ROI threshold, and thus calls for termination. Both scenarios offer us opportunities to engineer maximum value—one by exploiting the possibility of greater-than-expected returns, the other by cutting our losses early. Again, we believe that the ROI upside potential here is enormous—likely double or more. Think about it—how often does your organization even ask ROI-engineering questions during project execution? How often have you seen marginal-ROI projects stumble through overrun after overrun, wasting way more investment dollars than any rational investor would ever consider prudent? We think it’s reasonable to presume that ROI Engineering could easily help most organizations achieve another 50% improvement in portfolio ROI.
Getting to 10X
So after Portfolio Throughput, we have a 3-way tie for second place among Portfolio Reliability, Project Selection, and ROI Engineering. Taken together, these “Top 4″ ROI drivers have the potential to improve portfolio ROI by 10X or more, especially when you consider that they each have a compounding beneficial effect. Using the original example above, if a $5M net gain on a $5M investment can be improved to $15M by doubling Portfolio Throughput, and then by another 50% by improving Portfolio Reliability (to $22.5M), and then by another 50% by improving Project Selection (to $33.75M), and then by another 50% by improving ROI Engineering, this brings our total net gain to over $50M, or 10X the original return.
Are Such Big Improvements Realistic?
The question, of course, is How realistic is it to expect such big improvements in these 4 ROI drivers? Using methods such as Critical Chain, as well as techniques from Agile and Lean, many organizations have improved their Portfolio Throughput and Reliability metrics to the levels mentioned above. We have less hard data on the benefits achieved through ROI-based Project Selection that also takes into account capacity constraints, but almost every PMO executive we speak with agrees that there is huge potential here. Also, a leading vendor of software to help make more disciplined value-driven project selection decisions (TransparentChoice) regularly sees impressive jumps in portfolio performance among its customers. They even offer a useful guide on how to prioritize projects. Similarly, we have seen some impressive results from ROI Engineering—especially when applying critical path drag and related techniques—and believe that the potential is likely much higher than that shown here. (For an excellent read on ROI Engineering techniques, check out Steve Devaux’s latest book, Managing Projects as Investments (2014), as well as our recent review of it.)
If you’re still skeptical, consider this—if project success rates really are stuck in the 60% range as so many studies suggest, this means that over 1/3 of projects in the average project portfolio produce a negative ROI. Even if we assume that many such “failed” projects deliver at least some value, they also burn at least some investment dollars, so the ROI generated from them is likely no better than zero. So, if a third of the average project portfolio delivers zero ROI at best, the other 2/3 must commonly deliver exceptional ROI for the project portfolio to make up for it and be worth investing in. As most experienced project professionals can attest, the value generated by “the other 2/3″ is done in spite of slow and unreliable execution, poor project selection, and almost zero discipline in ROI engineering. So is a 10X improvement in project portfolio ROI really so difficult to imagine? If it were your money being invested, wouldn’t you at least be intrigued to explore these 4 major drivers of project portfolio ROI?
We’ve developed a Project Portfolio ROI Calculator that you can use to run your own scenarios using whatever assumptions you believe realistic—join us on April 4th and we can work through your scenarios.
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