Current project portfolio selection methods can be improved dramatically by applying techniques from operations research and financial engineering.
Current Project Selection Methods
Most project selection methods assume each project is selected on its own merit, without much regard to other funded projects. While this approach of ranking each project separately can lead to reasonable project portfolio performance, it exposes management to unnecessary risk.
Advanced Project Selection Methods
Project selection methods can be improved by applying operations research and financial engineering techniques, which treats the problem from the viewpoint of portfolio selection i.e. maximise benefits while minimising risk for given resource constraints. These techniques range from the reasonably straightforward ranking by multi-criteria to sophisticated mathematical programming.
All of the methods will, in general, produce portfolios that outperform their counterparts selected through non-portfolio type methods. Sometimes this advantage can be quite substantial depending on the variety of projects and the level of constraints that operate during the selection process.
Case for Advanced Project Selection Methods
While it is natural to argue current selection methods are successful without introducing new and complicated techniques, it can also be argued that no portfolio can depend on continued support from an organisation unless it uses its allocated resources as efficiently as possible.
As company portfolios mature, it is almost certain more benefits will be demanded using fewer resources, and with verification that their methods are financially sound. There is also an argument that portfolios should seek to continually improve, including their own portfolio and specifically in their less-than-optimal project selection methods.
Project portfolio selection emphasises financial payback, which is a purposeful bias that is critical for future business success. This strict requirement of verifiable financial impact is, unfortunately, receiving less and less emphasis in modern practice and if this trend continues, project portfolios may lose support and fall by the wayside.
There is little doubt that businesses need what successful project portfolios have to offer, and good managers will continue to demand more and more accountability in the use of limited resources to generate benefits. This blog is an attempt to put project selection methods on a sound financial basis so they will continue to be the ‘go-to’ approach far into the future.
Explanation of Advanced Project Selection Methods
Over the coming weeks, a series of blogs will be posted that extends the simple project selection multiple criteria method to analytic hierarchy analysis, data envelope analysis, mathematical programming, integer programming, multi-period and multi-divisional approaches, nonlinear programming and options pricing approach.
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