Introduction to Project Portfolio Management

In this first section, I set the foundation for an exploration of project portfolio management. While everyone knows what a project is, not everyone may understand that not all projects should come under the purview of the portfolio management process. Defining the types of projects that will be considered for the project portfolio is a very basic tenet for every portfolio. You need to have a clear understanding of what a portfolio is, and in some situations more than one portfolio is advised. I want to make sure everyone is on the same page before I launch into the depths of a portfolio management discussion. In this section, I present a conceptual overview of the portfolio management process. Subsequent sections describe each part of the process in detail.

I first want to take another look at the idea of a project. The definition of a project comes from earlier discussions in this book, but not all projects belong in the portfolio. The word portfolio probably conjures up several different ideas. I have a simple definition that will put everyone on the same page.

What Is a Portfolio Project?

In Chapter 1, I defined a project in the following way:

This is a technical definition, and it tells you quite a bit about the type of work that can legitimately be called a project, but when you are dealing with a portfolio, it doesn't tell the whole story. Because you are constructing a portfolio of projects, you need to define the types of projects that qualify for inclusion in the portfolio. Not all projects will be managed as part of a portfolio. What about small, routine projects that are done as part of normal business operations within a single department or business unit using its own people resources? Certainly they will not fall under the enterprise portfolio management process, but they might be part of the business unit's portfolio and, hence, follow some defined process for inclusion. They are already included in the operations budget of their respective business units. Conversely, how big, complex, and expensive does the project have to be before you will consider it for the portfolio? No matter how specific you are in establishing the qualification criteria, a certain amount of subjectivity will be involved. For example, consider complexity in the case of the selection and purchase of a desktop computer. If you are technically savvy, the purchase of the computer is a simple task and would not be considered a project. If you are technically challenged, however, then the purchase of a computer clearly is a project and, at least for you, a complex one at that.

That said, it seems clear that you would want to set a minimum effort, cost, and even value to those projects that will be considered for inclusion in the portfolio. These are certainly subjective calls on your part, but you must be able to make a case for a project that will be proposed for the portfolio and one that won't.

What Is a Project Portfolio?

The simple definition of a project portfolio is as follows:

The operative phrase here is “share some common link to one another.” I want to explore that idea in more detail. The previous note about capital budgets described one example of projects that share a common link. That link could take many forms. At the enterprise level, the link might be nothing more than the fact that all the projects belong to the same company. Although that may be true, it is not too likely the kind of link you are looking for. Some more effective and specific links might be the following:

• The projects may all originate in the same business unit or functional area (such as IT).
• The projects may all be new product development projects.
• The projects may all be funded out of the same budget or from the same resource pool.

Whichever way you choose to define the link, one thing is almost certain: Whatever resources you have available for those projects will not be enough to meet all project requests. Some choices have to be made, and that is where project portfolio management takes over.

To further complicate the situation, you might need to establish different types of portfolios. For example, all of the capital projects with a value above $500 could form a portfolio. More specifically, the portfolio could cover only technology capital projects above $500. Systems development projects longer than six months with a total cost above $500,000 might be another type of portfolio. At this point in the discussion, you can see that whatever portfolios you choose to establish, they will consist of projects that share similar characteristics.

What Is Project Portfolio Management?

Credit for establishing the field of modern portfolio theory belongs to Henry Markowitz, an economist at Baruch College, City University of New York. He first presented his theory in the Harvard Business Review in 1959. In later years, he was awarded the Nobel Prize in Economics for his discoveries. It wasn't until the 1990s that his theories were extended from the investment portfolio to the project portfolio. Many of the approaches I talk about later in this chapter have their conceptual roots in his earlier works.

The working definition of project portfolio management for this book is as follows: