When prioritising projects, particularly in the face of limited resources, it's always a good idea to give equal weight to their alignment to corporate strategy and their impact on the organisation's financial goals.
Right?
"Wrong!" says Dr Richard Bayney, founder of US consulting firm Project and Portfolio Value Creation and an adjunct faculty member at the University of Pennsylvania, where he lectures in Project Portfolio Management.
According to Bayney, the world of portfolio selection does not allow for multiple desirable, but mutually exclusive alternatives.
"A portfolio selected on the basis of maximising strategic intent will yield some financial value, and a portfolio selected on the basis of maximising financial value will yield some strategic intent. However, the former will not maximise strategic intent, and the latter will not maximise financial value," he says.
That's because when portfolio selection is conducted on the basis of strategic or financial considerations alone, these considerations have to be weighted at 100%.
"However, when both strategic and economic considerations are utilised for portfolio selection, neither set of considerations can be weighted at 100%. Consequently, if strategy is given more importance (or weight), then economics is given less. Similarly, the more importance you give to strategy, the less financial value you are able to extract from your portfolio."
How, then, can one obtain the best strategic and the best financial advantages when prioritising portfolio selection?
Bayney maintains that as long as these two value objectives are seen as being in competition with each other, it comes down to personal preference as to which plays a more substantive role.
"This will likely differ from one company to another, based on cultural predispositions as well as financial promises made to shareholders," he says.
The problem is that defaulting to a 50% strategic/50% economic `portfolio balance' means that a portion of the portfolio value will be lost. It is thus essential to determine precisely what this loss would be before taking the decision to go the 50/50 route.
"Few would argue that if you lose your strategic intent, you would be faced with a futile task of keeping your business healthy and profitable in the long term. However, using strategy as an unqualified decision-making attribute without quantifying its financial impact on the business could be equally damaging. It could also open the decision-making door to politics, and advocacy," he says.
Bayney stresses that trying to maximise the value of competing objectives (strategic value vs financial value) could result in considerable monetary loss that few organisations can afford.
However, this does not imply that strategy is unimportant to portfolio selection.
He recommends employing strategy as a `pre-filter' only in the selection process. Thereafter, only financial decision criteria should be used in the portfolio selection framework.
"In this way, projects deemed to be truly strategic become policy decisions, and should therefore be funded without playing an active part in the prioritisation framework. Otherwise, you risk funding a 'more strategic project' that is below the resource constraint line in favour of a 'less strategic project' that is legitimately above the line," he concludes.
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