Companies can maximize project benefits and minimize overall project risks by balancing project portfolios. Executives have to analyze and balance the portfolio to reach these goals. The objective is to fund worthy efforts in order to produce the highest payback from each investment. A project portfolio can be considered as an investment fund, where the fund manager tries to create the best investment portfolio by choosing the most appropriate stocks (high-risk stocks and blue-chip stocks) to reach the goal.
A standard scoring model for project selection should consider different factors, here are some of the most relevant:
- Payback period: shows how long it takes for a business to recover an investment. The number of years needed for the cumulative cash flow to match all cash costs expended prior to the start-up date.
- Strategic alignment: shows how well the program fits with the strategy of the company. Aligning projects with the strategic goals of the company is critical for project success and to obtain a return on investment.
- Product duration: this is the life of the product in the marketplace expressed in years. How long the cycle in which the product goes from introduction to withdrawal or eventual dismissal.
- Market opportunity: the probability for the company to satisfy a market need by creating a specific product or service that customers want.
- Level of competition: how strong or intense the competition is. How many competitors are in the market and which products and services they are offering.
- Level of expertise: the presence of skills within the company to execute the project to create a specific product. Each project requires different types of skills and knowledge.
- Probability of success: the probability of technical and commercial success. Technical success means reaching the goals of a project. While commercial success means achieving a profitable market.
Executives score each factor on a scale of 1-10 per project. Then, these factors are used to create a project attractiveness score. This score is used to make Go/Kill decisions and is also used to rank the order of projects – from best to worst.
It is useful to use visual charts to display the balance in new product project portfolios. These visual representations can include portfolio maps or bubble diagrams.
The most popular bubble diagram is a variant of the risk-return chart: the risk-reward chart.
One approach is to use a qualitative estimate of rewards, ranging from “modest” to “excellent” and the probability of overall success (commercial success and technical success). It is important to say that counting too much on financial analysis can do serious damage, especially in the early stages of a project.
Francesco Pecoraro, PMP, PSM, PSPO, SSYB, SSGB, SSBB, CL, CC is the founder of francescopecoraro.com where he shares useful and practical information about project management, program management, project portfolio management, and agile methodology. Francesco has extensive experience as a project, program and portfolio manager, project management officer (PMO), digital transformation and strategic consultant. He is also considered a communication, public speaking, and leadership expert. Francesco writes about project methodologies, program, and portfolio management.