Is it enough to think of projects ‘like‘ an investment else should they be considered ‘as‘ an investment, and is an investment portfolio necessary? 5 min read.
SME vs Manager Project Viewpoint
It is probably fair to say, most subject matter experts think of projects as activities and not as investments. Consequently, they tend to emphasise the potential of the improvement and the technical difficulties associated with the achievement over the actual financial payback that is achieved. On the other hand, senior managers think of projects like an investment that tie up limited resources and hopefully yield gains and benefits. They tend to focus on the constraints of money, time and resources rather than on the sheer technical potential.
Project Investment Frame of Reference
Both viewpoints are valid but the primary view is to treat projects as an investment. Once this is accepted, it is easy to demonstrate that the best way to select projects is to consider them as an integral part of a coordinated project portfolio.
A project investment is to purchase a capability for the purpose of obtaining a future benefit, the amount or timing of which can be more or less certain.
Business and Project Portfolio Alignment
In most companies, project selection is made in support of a business plan. Such a plan assesses customer and business needs, translates them into doable internal activities and then allocates resources for their execution. Often this plan is coordinated across functional entities and through several planning periods so it can be quite complex and constrained. But once general targets are set, the selection of actual projects is often made in a less than integrated manner.
Sub-Optimal Project Portfolio
Specifically, in companies in which projects are the fundamental driver of investments, it is common to view projects as separate, independent activities that need only minimal cross-coordination. In those cases, in which project coordination is attempted, it tends to be somewhat subjective and can fail to be as effective as it could be. This is not to disparage current methods since it can be argued that to date they have been effective most of the time.
Optimal Project Portfolio
Instead, it can be construed that this approach is dangerous ongoing as companies demand more and more justification for expenditures. This suboptimality can be quite severe for companies that have minimal or inadequate resources. Instead, by improving project selection methods, project funding becomes more accessible i.e. success breeds success. Consequently, a well-coordinated portfolio will always outperform a typical disjointed portfolio. Performance improvement can be as much as 50 per cent in realistic situations, which could very well spell the difference between death and success of a company.
Project portfolio investment optimises benefits and minimises risk in the context of limited resources by selecting which investments to fund and which investments to stop funding.
Few managers doubt there is great importance in choosing projects wisely. Unfortunately, appetite to extend beyond what is currently tried and tested is inhibited by the fear of the unknown. Fortunately, advanced project selection methods are well documented and have proven successful in multiple, diverse fields of application over many years.
Future blogs will introduce and demonstrate a wide variety of advanced methods, including approaches to balance multiple objectives, determine efficient horizons and choose optimal portfolio’s through linear and integer programming.
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