Studies report that most firms, especially private ones, are usually focused on increasing their profit over time. At the same time, these companies need to achieve their strategic goals by relying on a limited amount of resources. Medium and large organizations generally implement their strategies by executing projects and programs in their business lines. Project Portfolio Management can help companies reach their goals by selecting the most valuable projects and assigning them to different project portfolios. In this article, we will discuss the steps to creating a project portfolio.
Type of companies
Public companies select their goals and objectives differently than private companies. Public companies consider safety and customer satisfaction as two key goals. Whereas private companies usually pay more attention to increasing their profit over time. Private companies need to achieve their strategic goals by relying on a limited amount of resources.
In addition, when it comes to big private companies, it is important to share that they need to diversify their strategies in order to create a competitive advantage and beat the competition. To reach this goal, medium, and large private companies generally implement their strategies by selecting projects and programs that they assign to different project portfolios.
By doing so, they have the opportunity to keep the project portfolios’ value high and, at the same time, to reduce the risk of possible failures. In general, we can say that the type of company (public or private) can influence the definition of its goals; at the same time, similar companies (public or private) from different industry sectors tend to have similar goals and objectives.
How to create a project portfolio
The most important goal of creating a project portfolio is to reach the organizational goals.
To create a project portfolio is to identify the project types and portfolio categories available in the company. Researchers report that owner and contractor companies categorize their projects and portfolios differently. Owner companies usually group their projects based on their types or on their sizes, whereas portfolio categories are arranged differently; the business lines are at the top level of the hierarchy. Contractor companies usually define project portfolio categories based on their business lines, customers, and geographical locations. Basically, they usually put business lines or customers at the top level. In general, project portfolio classification and project types vary among organizations. One of the advantages of defining project types is that they help individuals in an organization better communicate with each other and monitor them in different phases (Crawford et al., 2005).
To create a project portfolio is to allocate the budget based on project type or portfolio category. For example, companies could use the weight factors method to determine the budget allocation to project type or portfolio category. In this case, if weights are assigned to portfolio categories and the budget is allocated at the top portfolio level, the budget allocation is top-down. In contrast, if weights are assigned to project types, the budget is allocated by using a bottom-up procedure.
Afterward, companies need to assign candidate projects to their related project types and portfolio categories. Companies need to prioritize projects and choose the most valuable ones from the list of candidate projects due to resource limitations. There exist different criteria for evaluating and prioritizing the candidate projects. As candidate projects can be from different business lines, the suggestion is to use various criteria in order to select the most beneficial projects.
Once projects have been evaluated, the top-ranked projects from different project types can be selected to form the portfolios by considering available resources. Usually, the selected projects are better aligned with the strategic objectives to form the portfolios. Of course, the selected projects should add value to the organization.
To create effective project portfolios, companies should take into consideration the risk factor, which may include different types of risks such as financial, economic, industry, contract, and resource risks.
Keep in mind
The project portfolio formation has a dynamic nature because organizations are working in an environment where the relative importance of their strategies may keep changing (Houben et al., 1999). As a result, there will be some projects that will go on, some others that will end, and new projects that will be added to portfolios. For this reason, the suggestion is to review the projects’ ranks every six or twelve months. Finally, it is important to remember that companies can use different criteria to identify the projects that are the most beneficial to them.
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.