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Project Prioritization - The Cost Of Strategy

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While almost everyone wants a portfolio that is rich in strategic and financial value, portfolios are often selected without quantification of the financial implications of strategy.

Publié dans : Santé
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Project Prioritization - The Cost Of Strategy

  1. 1. 1 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © PROJECT PRIORITIZATION – THE COST OF STRATEGY (OR, THE MORE OF EVERYTHING YOU WANT, THE LESS OF ANYTHING YOU’LL GET) PROJECT & PORTFOLIO VALUE CREATION
  2. 2. 2 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Decision-making for portfolio selection – Is it always objective, rational, and defensible? “This platform is absolutely crucial to our company; without it, we can kiss our future goodbye” “I know the NPV doesn’t add up but this project is filled with strategy” “We must be able to afford this project; let’s just cut every other project investment by 10%” “You know who will be most upset if we don’t select and prioritize this project” “I’m really not interested in how much financial value we forego if we selected this highly strategic project” “If you don’t say anything negative about my project, I promise I’ll reciprocate” “We have a great portfolio; that’s why everything is a priority” “No-one can argue that this project is a sure bet; let’s just do it”
  3. 3. 3 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Value Creators ‘R’ Us – the company wants to maximize value by selecting projects with the highest strategic and financial value GOAL: MAXIMIZE STRATEGIC & FINANCIAL VALUE STRATEGIC VALUE (50%) LEADERSHIP DIFFERENTIATION & COMPETITIVE ADVANTAGE FINANCIAL VALUE (50%) NPV
  4. 4. 4 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Strategic and financial value are equally weighted criteria – categorical descriptors and numerical values for each project  The company has a need for $200M to fund all of its projects in 2016 but it has a limited budget of $125M. So, Value Creators ‘R’ Us wants to prioritize its projects on the basis of strategic and financial value for portfolio selection
  5. 5. 5 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Non-linear ascending utility functions for both strategic and financial decision criteria
  6. 6. 6 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Strategic and financial value are equally weighted criteria – conversion to raw utility scores
  7. 7. 7 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Strategic and financial value are equally weighted criteria – conversion to weighted utility scores
  8. 8. 8 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Based on maximizing strategic and financial value, the top 5 projects can be funded until the budget constraint is met  Prioritization based on strategic and financial decision criteria results in a portfolio that is worth $9.479 B in NPV
  9. 9. 9 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Value Creators ‘R’ Us – What happens if the company maximizes value by selecting projects with the highest financial value only? GOAL: MAXIMIZE FINANCIAL VALUE FINANCIAL VALUE (100%) NPV
  10. 10. 10 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Based on maximizing financial value only, the top 5 projects can be funded until the budget constraint is met  Prioritization based on financial decision criterion alone results in a portfolio that is worth $13.012 B in NPV (NB: If prioritization is based on NPV – and not on NPV utility – the order of the bottom 3 projects would be A, E, I)
  11. 11. 11 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Caveat emptor! – strategy is not unimportant but make sure you quantify how much financial value you are willing to forego  Few would argue that if you lose your strategic intent, you could end up with a Sisyphean task of keeping your business healthy and profitable  But, to blindly use ‘strategy’ as an unqualified decision-making attribute without quantifying its business impact, could be equally deleterious  Moreover, this generally opens the decision-making forum to politics, advocacy, and nitpicking  The case study of Value Creators ‘R’ Us demonstrates the following:  Trying to maximize the value of everything (e.g. strategic and financial value) generally forces you to accept sub-maximum value of anything (e.g. financial value)  The difference in financial value (NPV) between a portfolio selected on the basis of strategic and financial value $(9.5 B) and one selected on the basis of financial value alone ($13.0 B) is $3.5 B. Can your organization forego this type of financial value?  How do most (but certainly not all) of your stakeholders assess your performance – on the attainment of strategic or financial goals?  Recommendation: In order to obviate the impact of politics during your portfolio selection, use ‘strategy’ as a pre-filter and then prioritize your projects on financial decision criteria alone  Projects deemed to be truly ‘strategic’ should become policy decisions – and therefore funded – without becoming an active part of the prioritization framework  Otherwise, you risk funding a ‘more strategic project’ that is below the budget line at the expense of a ‘lesser strategic project’ that is legitimately above the budget line  Lastly, minimize the impact of politics, advocacy, and nitpicking on your decision-making.
  12. 12. 12 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Value Creators ‘R’ Us – a recommended approach to maximizing financial value GOAL: MAXIMIZE FINANCIAL VALUE SUBJECT TO PRE- DETERMINED STRATEGIC CONSIDERATIONS FINANCIAL VALUE (100%) NPV
  13. 13. 13 Copyright 2016 Project & Portfolio Value Creation. All rights reserved. © Decision-making for portfolio selection – striving to make it more objective, rational, and defensible “If this platform is absolutely crucial to our company; let’s make it a policy decision” “I know the NPV doesn’t add up but strategy won’t necessarily make it a better financial contributor” “We must be able to afford this project; but cutting every other project investment by 10% can harm some projects irreparably” “You know who will be most upset if we don’t select and prioritize this project but we have to defend our recommendations” “Before deciding on this highly strategic project, I’d really like to know how much financial value we forego if we select it” “If I say something negative about any project in the portfolio – including mine – it’s because I want what’s best for the portfolio” “We have a great portfolio; but everything can’t be a priority” “No-one can argue that this project is a good bet; I just can’t predict if it will succeed”

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