Companies today have a lot of projects they could be working on but a limited amount of resources. Instead of just trying to figure out how to get through as many of them as quickly as possible, organizations can use Project Portfolio Management (PPM) to prioritize those projects.
There are many methods to achieve this goal, varying from financial models to scoring models. Each method has its strengths and weaknesses. All these methods produce a prioritized list of projects to execute. The projects to be implemented are the ones at the top of the list, scoring highest in terms of achieving the objectives set by the company.
Net Present Value (NPV)
Generally speaking, the Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Net present value in project management is used to determine whether the anticipated financial profit of a project will exceed the present-day investment.
So, the simplest approach to determine which projects are worth undertaking is essentially to evaluate the NPV of each project and then rank all projects according to their NPV. By using this method it is possible to keep adding projects down the list until resources run out.
One the downsides of this method is that it assumes that financial projections are accurate when everybody knows that they usually are not. In addition, it ignores probabilities and risks and it assumes that only financial goals are important.
Expected Commercial Value (ECV)
Expected commercial value (ECV) is a method that companies use to maximize the value of the assets by staying within the limits of budget constraints. The projected value of the portfolio in the market is known as the expected commercial value of that portfolio. The objective of this method is to maximize the commercial worth of the project portfolio, under certain budget constraints by considering risks and probabilities.
To define a prioritized list of projects, the ECV of each project is determined by taking into account the future stream of earnings from the project, the odds of commercial and technical success, along with commercialization and development costs. Then, it is important to take the ratio of what you are trying to maximize (ECV) divided by the constraining resource. By doing so, it is possible to rank all projects according to this ratio until the total budget limit is reached.
This model ensures that the ECV is maximized, for a given budget. To do this it is important to have precise estimates for all projects’ future stream of profits, for their costs, and for probabilities of success. Unfortunately, it often happens that estimates are unreliable or not available during the first stages of a project.
Portfolio Scoring Model
Sometimes companies want to quickly come up with an ordered list of projects and apply simpler approaches to prioritize work. One of the best tools for consistent project prioritization is a portfolio scoring model.
Scoring models have long been used for making Go/Kill decisions at gates. At the same time, they also have been used for project prioritization. Projects are scored on a number of criteria by management. Typical main criteria include:
- Strategic alignment: to measure the strategic alignment of each project with organization strategy
- Financial value: to measure quantitative financial value for each project
- Risk level: to evaluate the overall level of risk associated with a project
- Market attractiveness: to measure the potential market value for each project
Once each project has its own score, it is possible to develop an ordered list of projects from which companies can choose the ones to define the portfolio, until budget or resources run out.
Studies report that scoring models produce a strategically aligned portfolio and one that reflects the business’s spending priorities. In addition, they yield effective and efficient decisions, and create a portfolio of high value projects.
Keep in mind
Organizations can use Project Portfolio Management (PPM) to create a portfolio of high value projects. In addition to the methods we have seen so far, there are many other methods that help companies select the best projects to achieve their objectives, such as payback period, internal rate of return and many others.