The principle behind portfolio management (of both projects and stocks) is that an organization has limited capital to invest and has to make sure that it’s put to the most productive use. Projects are investments and must provide the highest possible return relative to alternative uses of capital.
Just like stocks, projects need to be managed ‘as a portfolio’ — that is, in a coordinated way.
It’s hard to imagine a stock portfolio manager not managing investments on an overall strategic basis rather than individually. Stock managers continuously compare the value of each individual stock with other possible investments. However, it’s rare for an organization’s projects to be managed in the same sort of strategically coherent way.
The project portfolio management objective is to coordinate all project investments to maximize collective value. This is very logical and simple in theory but very difficult in practice.
Imposing portfolio management thinking implies that someone, or some segment of the organization such as the PMO, has central authority over all important projects. It means centralizing decision authority.
When it comes to stock portfolios, centralized authority is normal simply because there is usually only one decision maker (the owner or investor) who assigns responsibility for buying and selling stocks to a single broker or asset manager. This makes stock investment coordination easy through centralized decision making and unambiguous objectives (return on investment). Not so for project investments in a large organization.
When it comes to an organization’s projects, the situation is very complicated because projects (investments) are typically initiated by all levels of senior management. In effect, there are a number of investment managers deciding how to spend the organization’s capital. The result is inefficiency and conflict. Coordinating project investments across an organization means controlling the authority of all potential project initiators, which is not a simple task.
Brian Egan has graduate degrees in Oceanography (M.Sc.) and Finance (M.B.A.) as well as PMP certification. He has published numerous articles and manuals in the field of management science with particular emphasis on project management and decision making. Brian has been involved professional development training since 1999.
This article was originally published in Global Knowledge’s Project Management Blog. Global Knowledge delivers comprehensive hands-on project management, business process, and professional skills training. Visit our online Knowledge Center at www.globalknowledge.com/business for free white papers, webinars, and more.