TalentAllianz Management & Technology Co. Ltd.
翰联世纪企业管理技术(北京)有限公司
Project Portfolio Management
An Introduction
李俊伟
November 2002
Beijing
项目管理者联盟,
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The Emergence of Project Portfolio Management
1952, Modern Portfolio Theory (MPT), Harry Markowitz, Journal of Finance, Portfolio Selection
1990, Harry Markowitz shared Nobel Prize, dominant approach used to manage risk and return within financial markets
1981, McFarian, Portfolio Approach to Information Systems, HBR, to employ a risk-based approach to the selection and management of IT projects.
1990s, a broader use of ideas of portfolio management
1998, John Thorp, The Information Paradox. Portfolio management was used to manage risk and maximize return along a number of dimensions.
Present, portfolio management as central elements of good investment management
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Portfolio Management, the overall picture
Focus
(Strategic
Planning )
Source: PM Solutions, Portfolio Management, Dianne Bridges
Select
(Portfolio
Management)
Manage
(Project
Management)
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The Old Philosophy about Portfolio
Risk aversion seems to be an instinctive trait
in human beings.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Return and Risk in Financial Market
expected return
standard deviation (%)
capital appreciation
growth
of income
0 6 12 18 24 30 36
20
18
16
14
12
10
8
6
4
2
0
income
inflation
T-bills
intermediate-term
government
bonds
long-term
government bonds
long-term
corporate bonds
large company stocks
small
company
stocks
stability
of principal
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The Role of Combining Securities
The expected return of a portfolio is a
weighted average of the component expected returns.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The Role of Combining Securities
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The total risk of a portfolio comes from the
variance of the components and from the relationships among the components.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The Role of Combining Securities
expected return
risk
better
performance
A portfolio dominates all others
if no other equally risky portfolio has a higher expected return, or if no portfolio with the same expected return has less risk.
The point of diversification is to achieve a
given level of expected return while bearing the least possible risk.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The Efficient Frontier :
Optimum Diversification of Risky Assets
expected return
risk
(standard deviation of returns)
impossible
portfolios
dominated
portfolios
efficient frontier
The optimal combinations result in lowest level of risk for a given return
The optimal trade-off is described as the efficient frontier
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The Efficient Frontier vs Naive Diversification
As portfolio size increases,
total portfolio risk, on average, declines. After a certain point, however, the marginal reduction in risk from the addition of another security is modest.
total risk
Non-diversifiable
risk
number of securities
Naive diversification is the random selection
of portfolio components without conducting any serious security analysis.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Risk Reduction with Diversification
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Market or systematic risk: risk related to the macro economic factor or market index
Unsystematic or firm specific risk: risk not related to the macro factor or market index
Total risk = Systematic + Unsystematic
Components of Risk
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Two-Security Portfolios with Different Correlations
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Relationship depends on correlation coefficient
< < +
The smaller the correlation, the greater the risk reduction potential
If= +, no risk reduction is possible
Portfolio Risk/Return, Correlation Effects
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Structuring a Portfolio : Asset Allocation
individual choice asset class mix investment results
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
What is project portfolio management
Portfolio Management is the project selection process and involves identifying opportunities: assessing the organizational fit; analyzing the costs, benefits, and risks; and developing and selecting a portfolio.
The art of project portfolio management is: doing the right thing, selecting the right mix of projects and adjusting as time evolves and circumstances unfold.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Portfolio Management is:
Defining goals and objectives – clearly articulate what the portfolio is expected to achieve
Understanding, accelerating, and making tradeoffs – determine how much to invest in one thing as opposed to something else
Identifying, eliminating,minimizing, and diversifying risk – select a mix of investments that will avoid undue risk, will not exceed acceptable risk tolerance levels, and will spread risks across projects and initiatives to minimize adverse impacts
Monitoring portfolio performance – understand the progress that the portfolio is making toward the achievement of the goals and objectives
Achieving a desired objective – have the confidence that the desired outcome will likely be achieved given the aggregate of investments that are made
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Portfolio Management is Not
Doing a series of project – specific calculations and analyses, such as return on investment, benefit-cost analysis, net present value, payback period, rate of return, and then adjusting them all to account for risk. – these are project specific
Collecting after-the-market information on projects to produce a report that the organization hopes will satisfy some organizational reporting requirement.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
The benefits of Portfolio Management
Having a structure in place to select the right projects and immediately remove the wrong projects
Placing resources where it matters, reducing wasteful spending
Linking portfolio decisions to strategic direction and business goals
Establishing logic, reasoning, and a sense of fairness behind portfolio decisions
Establishing ownership amongst the staff by involvement at the right levels
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Project Portfolio Management, Process & Technique
Four steps
Project Evaluation Matrix
Evaluation Criteria
Examples
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Step 1: Define the Portfolio
First, establish the overall portfolio mission. This mission statement will be used to initially determine what projects are in or out of the portfolio.
The mission statement can be simple, like:
The Intranet Portfolio covers all projects to be deployed on the corporate intranet.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Step 2: Gather the Projects
Now, gather all the projects together that you think might be in the portfolio.
This may not be the list you already have. Some projects, including duplicate efforts, may be underway in other parts of the organization.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Step 3: Begin Weeding
Once the project list is established, begin weeding the list down. Remove projects that:
Are duplicate efforts. Here is an opportunity to save money by pooling two or more efforts into a single project.
Do not meet the mission area. Some projects may be under your wing but do not fit in the mission area. Remove them from your portfolio and place them elsewhere.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Step 4: Begin Evaluating
Once the portfolio list is set, begin evaluating each project to determine what the overall portfolio will look like.
Using the four-quadrant matrix here, evaluate the projects against two major criteria:
What are the potential risks in implementing this project?
What are the potential benefits in implementing this project?
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Project Evaluation Matrix
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Using the Matrix
The matrix is used as a scoring tool to map projects against the evaluated level of risk and the evaluated potential beneficial impact of a project.
Projects are evaluated on both risk and benefit from low to high using a series of questions and scores.
Projects are then evaluated in the worksheet and decisions made for inclusion and balancing the portfolio.
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Matrix Decision Regions
Projects to remove from the portfolio
Projects to keep in the portfolio
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Evaluation Criteria
The Evaluation Matrix uses two basic criteria: Risk and Benefit.
Five sample risk areas:
Risk of Completion On Time (Schedule Risk)
Risk of Managing Multiple Organizations (Organizational Risk)
Risk of Technologies Used for the Application (Technological Risk)
Risk of Not Proceeding with the Project (Risk of Not Doing It)
Projects Implementation and Maintenance Costs
Five sample benefit areas:
Number of potential groups or users needing application
Projects Impact on Cross-Functional Activities
Projects Impact on Improving Internal Culture
Projects Impact on Improving External Customer Service
Estimated Benefit/Cost Ratio (Potential Savings or Profits)
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Risk Assessment Scorecard- illustration
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Risk Category Weighted Scale Example Low Risk Project Score High Risk Project Score
Schedule Risk Assessment 25% 1 5
Organizational Risk Assessment 20% 2 4
Technological Risk Assessment 20% 1 7
Risk of Not Doing Project 25% 4 1
Project Support Costs 10% 1 4
TOTAL RISK SCORES 100% 9 26
TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Benefits Assessment Scorecard - illustration
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Benefit Category Weighted Scale Example Low Benefit Project Score High Benefit Project Score
Potential User Base 20% 2 5
Cross-Functional Improvements 10% 1 6
Improving Corporate Culture 20% 2 6
Improving Customer Service 25% 0 5
Benefit/Cost Ratio 25% 1 5
TOTAL RISK SCORES 100% 6 27
TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Plot the Project on the Matrix
Our Low Risk/ Low Benefit Project Might Be Rejected or Delayed
Our High Risk/ High Benefit Project Might Be Approved
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
What is the difference
Portfolio Management in the financial market
Project management
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Questions and Answers
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TalentAllianz Management & Technology Co. Ltd. 翰联世纪企业管理技术(北京)有限公司, George Lee
Thank You!
李俊伟
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