Strategic Context of Project Portfolio Management

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Volume 2. Number 2. 2016. Strategic Context of Project Portfolio Management ... objective of this study is based on the systematization of the results of ... Management (A Guide to the Project Management Body of Knowledge Fourth Edition -.
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Journal of Innovations and Sustainability

Volume 2 Number 2 2016

Strategic Context of Project Portfolio Management Nedka Ivanova Nikolova1

Technical university – Varna, Bulgaria Abstract In 2014 Bulgaria entered its second programming period (2014-2020) which opened a new stage in the development of project management in our country. Project-oriented companies are entering a new stage in which based on experience and increased design capacity they will develop their potential and will accelerate growth. This poses new challenges for science and business to identify strategic opportunities and formulation of project objectives, programs and portfolios of projects that will increase the competitive potential of companies and the economy as a whole. This article is an expression of the shared responsibility of science to develop the scientific front to solve methodologically difficult and practically new tasks that are derived from the needs to increase the competitive potential of the business-based project approach. The main objective of this study is based on the systematization of the results of theoretical research and development of methodology of Project Portfolio Management to explore the opportunities for its application in Bulgarian industrial companies. Key words: project management, project portfolio management.

INTRODUCTION Bulgaria finished the first programming period (2007-2013) with conflicting results and findings on the volume and effectiveness of utilized funds. Questionnaire and empirical studies of project-oriented organizations show that only 61% of managers believe that their projects have achieved their objectives, 82% say they have encountered substantial difficulties in the development, presentation, negotiation

1

Corresponding author: 1, Studentska str., NUK, office 426, Varna 9010, Bulgaria

E-mail: [email protected]

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and implementation of their projects, 32% of the projects are not completed. Over 70% of managers say they do not feel sufficiently prepared for the development and implementation of projects and they are willing to be trained in order to improve their competence in project management. These results raise complex methodological, legal, regulatory and practical issues related to the development and implementation of project approach in our country. In 2014 Bulgaria entered its second programming period (2014-2020), which opened a new stage in the development of project management in the country. A special feature of the new financial framework (2014-2020) is that it is entirely oriented towards the implementation of the strategic plan "Europe 2020". Smart, sustainable and inclusive growth is the top priority that determines the overall structure of the tasks and the costs of their implementation. The funds are directed primarily towards research and innovation, education, information and communication technologies, building the necessary infrastructure and the fight against climate change. In this context, the basic principles of the new financial framework are targeted to the European added value, focusing of funded projects on the impact and the results, achieving mutual benefits for the whole EU. The main task of Bulgaria is through the integrated efforts of national, regional and company level to ensure maximum design capacity for effective absorption.

METHODOLOGY Methodological basis of this study is the theory and the methodology of Project Management (A Guide to the Project Management Body of Knowledge Fourth Edition PMBOK Guide) and Project Portfolio Management. The recruitment of primary information was conducted through surveys of project-oriented organizations from Varna region. Statistical database of the National Statistical Institute of Bulgaria and EUROSTAT are used as well as interim and final reports of the first programming period Bulgaria (2007-2013).

GENESIS

AND

DEVELOPMENT

OF

THE

PROJECT

PORTFOLIO

MANAGEMENT By increasing the number of project-oriented organizations and increasing their design capacity increase is observed in the number of projects implemented simultaneously. Multiproject management is a new concept of project management

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that extends its active application globally. This poses a number of methodological and practical problems associated with its successful application. In the scientific literature and in practice there is no clearly accepted definition of multiproject management. The closest to our understanding is the definition of Jack Meredith & Samuel Mantel (2014): multiproject management is the management of a set of interrelated projects implemented within a management system in order to receive additional benefits that are unattainable in self isolated realization of individual product (Meredith & Mantel, 2014, p. 34). Project Portfolio Management is the current version of multiproject management. The concept of portfolio management is not new for strategic management. Its principles were first formulated by Henry Markowitz, professor at Baruch College, City University of New York in the article "Portfolio Selection" in Journal of Finance (1952). The full systematization of the theory is presented for the first time in Harvard Business Review (1959). For its discovery Henry Markowitz was awarded the Nobel Prize in Economics (1990). In its original form the theory was developed and successfully applied in the management of portfolios of financial assets. In the basis of the proposed model is standing the principle of effective diversification displayed in “efficient set theorem”. The theorem in its essence defines the model of investment behavior in the process of formation of the portfolio: the investor chooses its optimal portfolio from many portfolios each of which: 1) provides maximum significance level of expected return at any given level of risk; 2) provides a minor risk in any particular meaning to the expected profitability (Markowitz, 1952, p. 72). The set of options of portfolios providing specified performance is defined by the term "efficient set”. The portfolio is considered to be efficient if it dominates all portfolios for a given level of one of the selected indicators. The totality of all efficient portfolios forms the bodere of the efficient set known as the "Markowitz efficient frontier” described in Figure 1.

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Level of portfolio profitability

efficient set

Level of portfolio risk Fig. 1. Graphic pattern of choosing the optimal investment portfolio

To determine the optimal portfolio we should analyze the curves of indifference (L1, L2, L3) which are the geometric expression of possible combinations of investor preferences. The selection of the portfolio implies the investor has previously determined the preferred level of expected return and risk. Then the only point (F) which expresses this combination will lie both on the two curves (L2 and AD). The two curves have no intersection, so the optimal portfolio is located in the tangent point E. The modern theory of portfolio is a system of principles, approaches, methods and procedures to optimize the dynamiccally shaping ollection of investment assets based on the application of mathematical methods of set criteria for the ratio between the expected level of income and risk, taking into account the correlation of profitability (return) between the elements of the portfolio (Nikolova, 2013, p. 49). Occurred in the 50s of XX century the modern portfolio theory marks the intensive development over the past two decades. In the course of its evolution some areas have been identified that continue their own and interrelated development. The advent of Project Portfolio Management refers to the beginning of the 90s of XX century when the principles of the theory of portfolio were transferred to project management.

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THE PORTFOLIO OF PROJECTS AS AN OBJECT OF MANAGEMENT In the theory of Project Management there is no single opinion about the nature of the term "portfolio of projects". Depending on the purpose of research a number of approaches are formed: the first approach defines and examines the portfolios in terms of the combination of the individual elements (Haugen, 2004); second approach explores the relationship of portfolio investment risk (Schuyler, 2011); third approach focuses research on the specific method of portfolio management (Wysocki et al., 2013). Therefore, the term "portfolio of projects" is a complex, multifaceted category, which defines a specific type of investment - an alternative to the "single investment" in a separate project taken at a certain level of a separately taken resource. The portfolio of projects is a specifically formed and structured, dynamically changing set of assets whose management requires a complex consideration of all the factors that determine the optimal ratio between profitability and risk. In the process of forming the project portfolio a new investment quality is provided at set parameters, such as the desired ratio return / risk. The main objective of the investment portfolio is the dynamic optimization of the relationship between selected parameters. There is an increasingly strong belief that portfolio investment is to increase the efficiency of the investment resource by achieving such investment qualities that are only possible with the combination of certain investment projects (projects and / or programs) and unattainable by investing in a separate taken object. The project portfolio is a specific form of investment that the investor provides the desired level and stability of income at minimum risk. It is an appropriately formed and structured set of a new investment quality whose effect is an aggregated value that is greater than the simple sum of the effects of individual components. The portfolio of projects is a combination of different investment values by which a specific investment objective is achieved. Forming the portfolio, the investor proceeds from its investment priorities and constraints of financial resources. The most characteristic feature of specific objectives in the formation of the investment portfolio is their alternative character. For example, providing the shortest turnaround can be achieved with a higher value. The dynamics of various factors can change investment preferences and investment motives of the investor. Alternativeness in the formation of the investment portfolio determines the differences in the strategy of the selection of items and combining them in a portfolio.

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Therefore, the portfolio of projects is a specific type of investment that has specific core features that distinguish it from other types of investments: 1) The portfolio is made up of multiple assets with different maturities, profitability and risk; 2) The portfolio is a dynamically changing set of assets which is in a continuous transformation and this process has no a strictly determed law; 3) The portfolio is characterized by a specific level of overall risk which unlike the risk of other types of investments reflects the risk of a specific structured dynamic set (a diversified risk). A current priority research in recent years is the relationship of the investment portfolio with the strategic management of the company. In this regard, the portfolio of projects and programs is defined as a set of investment initiatives realizable or planned in connection with the strategic objectives of the organization. This set is not just a juxtaposition of investment components - it involves establishing strategic priorities, preparation and making strategic investment decisions and allocation of resources of the organization in connection with the strategic plans (Wysocki et al., 2014).

PROJECT PORTFOLIO MANAGEMENT INTO THE SYSTEM OF THE STRATEGIC MANAGEMENT OF THE COMPANY Project Portfolio Management is a centralized and systematic management of one or more portfolio and it includes the determining of the components of the portfolio (projects, programs and other related), establishing priorities among them, authorization, coordination and control components of the portfolio in order to achieve strategic objectives of the organization (The Standard for Portfolio Management, 2008). In essence, the Project Portfolio Management combines: 1) organizational efforts to ensure compliance of selected components in the portfolio of strategic development of the organization and 2) efforts in the management of project-oriented activities to effectively achieve the results of the components in the portfolio - projects, programs and other investment activities in accordance with accepted earlier plans and budgets. Therefore, management of project portfolios is closely related to the strategic management of the organization and provides an ongoing review of the composition of the portfolio and its balance taking into account changes in the strategy of the organization and dynamics of portfolio risks. Figure 2 shows the common relationships between strategic and tactical management

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processes of the organization, as well as the palce of the Project Portfolio Management in the mechanism of strategic management.

Vision

Mission Strategy and targets

Strategic planning and management

Management of current operations

Portfolio management

Management of initiated projects and programs

Resources of the organization

Fig. 2. The location of the Project Portfolio Management in the mechanism of strategic management

On top of the management pyramid are presented elements of the strategic position of the organization (mission and vision) that allow long-term goals and objectives to be identified (strategy and targets). These three elements determine all further organizational actions and initiatives. The arrows mark general directions of the processes and the context within which the elements of strategic and tactical management interact. The figure reflects both the organizational and the project aspect of the organization in their common connection and interaction. The ongoing operations (the operational aspect) occurring within the organization are regularly recurring processes or functional tasks that are components of the projects or programs or independent production and management operations aimed at funding sources to support activities within projects and programs or to ensure the effective management of the organization. The overall consistency of the decisions and priorities linking portfolio management with tasks of strategic and tactical level are described in Figure 3.

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Process of strategic planning of the activity of the organization

Management of the contents of the portfolio

Identification

Monitoring and control on the portfolio components

Management of separate projects

Setting priorities

Current strategic plan Determining strategic goals and tasks Key indicators for results Production capacity planning

Categorizatio n

Processes of portfolio management

Assessment of portfolio state and accountability

Balancing of portfolio

Assessment Management of strategic changes

Authorizatio Selection no

yes

Portfolio management processes

Fig. 3. The conceptual model of the processes for portfolio management

In theoretical sources some authors (such as Kloppenborg & Plath, 2001) examined Project Portfolio Management as one of the subsystems of the general governance of the organization. The term "governance” is used in the theory and the practice of the management of the largest businesses - holding companies, joint stock companies and others, established on the principle of the sharing. This concept is similar but not identical to the content of the term "management" and it is identified with the creation and the use of a certain system for planning, organization and execution of management tasks in a coherent, science-based mode that allows effective achievement of objectives. In other words, the term "governance" includes common strategic tasks in the creation and development of the management of the organization. Very often the governance is defined as "political" or "philosophical" aspect of management which provides for the establishment of borders and the balance of power in organizations, mechanisms for decision-making and coordination of interests. Concentrating on higher levels of management the governance integrates all levels of the management pyramid, providing the required level of consistency.

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Within the overall system of management of the organization the Project Portfolio Management is a business process that occurs regularly within a specific business cycle, typically in one calendar year. It does not have an exactly determed life cycle, analogous to individual projects and programs, because the components in the portfolio are a dynamic combination and they can constantly change their composition and duration. It is more correctly to define the Project Portfolio Management as a process-oriented activity corresponding to the regular processes of strategic management of the organization and as a key component of the systems of project-oriented management of the organization. That is why modern approaches to portfolio management do not use the model of the life cycle, but specific descriptions of the individual business cycle, considering it as a regularly repeated sequence of processes and operations. The analysis of the processes of Figure 3 shows that we can differentiate two groups of processes: 1) processes for management of portfolio content - through these processes procedures are prescribed for determining components of the portfolio (projects and programs), their identification, categorization, uniting in groups and management; 2) processes for monitoring and control - these processes regulate the implementation of the monitoring components in the portfolio according to some predetermined metrics and indicators, providing consistency of components with the strategic goals and objectives and the implementation of changes in the portfolio in the course of the completion of the individual components. The technology of the Project Portfolio Management as described in The Standard for Portfolio Management (2008) embraces a total of 14 processes grouped into two process areas of knowledge: 1) portfolio management and 2) management of portfolio risk. Other elements show how the portfolio management interacts with the strategic management of the organization and the subsystems of management of projects and programs. In the scientific literature there is a dispute regarding the name and content of the different stages of the technological cycle. Despite the differences, we can differentiate the following processes: Identification process which is aimed at creating an updated list of ongoing and new strategic initiatives (components of the portfolio). The main contents of this process are the following operations: 1) comparing the current components and new proposals with the formulated strategic expectations and key indicators; 2) study of the deviations of the components that do not comply with the strategic expectations and indicators; 3) classification of the identified components in groups - projects, programs, current operations and others.

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Categorization process by which unification of selected components in relevant business groups is achieved. This is based on some predefined criteria and indicators aimed at further promoting the balance of the portfolio. Categories of the individual components are determined in relation to the priorities of the strategic plan of the organization and are usually associated with the defined strategic business areas. The process involves three actions: 1) identification of strategic categories of the components of the portfolio in line with the strategic plans; 2) comparison of the identified components with the criteria for categorization and 3) grouping of components by category. Assessment process within which information is collected necessary for evaluation and analysis of the components of the portfolio and general conclusions about each componentare made. The information collected (quantitative and qualitative) is summarized for each component of the portfolio. Key operations in this process are: 1) assessment of the components of the portfolio based on the application of models for comparisons using the assessment criteria and weight factors; 2) creation of presentation and analytical materials needed to make decisions for each component and 3) preparing recommendations for the selection of the components. Selection process (selection) of the components that will be included in the portfolio is a key phase in the technological cycle which aims to identify those components that would provide the highest efficiency of resources invested at a preferred level of risk. Elements are chosen that best suit all or the most predefined criteria. Important in the selection are the results of SWOT analysis of the organization and the opportunity the selected components to connect with the mission, objectives, strategies and strategic plans. Process of defining priorities which consists of ranking priorities within the strategic categories following the specified characteristics of the content (innovation, costs reduction, market share increase or productivity), time, risks, general orientation, interests of the stakeholders and others. The key operations in this process are: 1) development and validation of classification of components (projects and programs) to strategic plans; 2) determining the quantitative indicators on individual characteristics; 3) setting priorities. The process of balancing the portfolio is directed towards integrating a set of components that provide the maximum potential of the investment and sustainability of results obtained in the long term, optimal risks, support of all key stakeholders, and ultimately – achievement of the strategic goals of the organization. Key operations in this process are: 1) adding new components in the portfolio and their authorization

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in order to provide the required balance; 2) determining new (potential) components; 3) removal of components that do not comply with the most important criteria. In a research the consulting company Deloitte Consulting (McIntyre, 2014) found that only 34% of surveyed organizations managed to achieve this common value that the project can add to the organization's strategy. Deloitte Consulting formulates the following major symptoms of ill-balanced portfolio: 1) presence of a large number of projects, most of which are derived from the strategic priorities of the organization; 2) contradictory determination of the effect of the competing components regardless of tax effects; 3) presence of "interesting" projects that do not contribute to the realization of the strategy or the costs are greater than the contribution, but they have a social importance for the organization; 4) presence in the portfolio of projects or programs with high risk or no risk studies. Authorization process by which an official status of the components of the portfolio is obtained and the necessary financial, human, information and other resources are determined. The process includes the following key operations: 1) communications on the portfolio contents between key stakeholders; 2) acquisition of a formal status of approved components and suspension of work on the other; 3) allocation or reallocation of resources by components; 4) final consideration and discussion with stakeholders of the expected results (budget, risks, time schedules, etc.). The process of evaluation of portfolio and accountability lies in gathering information on indicators for the components of the portfolio, development of project reports, conduction of interim and final analyzes of the progress of implementation in specified intervals to ensure consistency of the results with the strategies of the organization. The process includes the following key operations: 1) analysis of the correspondence of the activity of the components of the portfolio with the requirements established in the standards; 2) analysis of priorities, relationships, content, risks, outcomes and financial performance of components based on a comparison with the control criteria and expectations of the strategic management of the organization; 3) impact analysis of the components of the portfolio on economic forecasts, the established resource constraints and established performance indicators; 4) development of proposals for the management of the portfolio as a whole. Dynamic changes in an increasingly complex global environment in which the organizations operate impose the need of management of the strategic changes in the organization. This process should provide flexible adaptation of the portfolio to changes in the development strategy of the organization. The spurious changes in

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strategy are not usually included in the process, but are controlled within the amendments to the strategic criteria and quantitative indicators of strategic goals. The most significant strategic changes, however, suggest dramatically changes in the overall direction of the activities, objectives, strategies, composition of structural subdivisions. This process includes steps of determining the nature and the importance of strategic changes and hence the need for a transition to change the portfolio. The complex nature of the Project Portfolio Management involves the active interaction between the processes for portfolio management and the strategic management of the organization. Such interaction is achieved within all groups of processes - initiation, planning, execution, control and completion, and involves not only implementing these processes within the individual components in the portfolio, but also on the strategic organizational level.

CONCLUSIONS (1) Project Portfolio Management is an effective tool for strategic management of the organization. Its popularity is growing along with the increasing in the number and capacity of project-oriented organizations and the level of competence of management. (2) In Bulgaria the Project Portfolio Management is a new, still less popular and insufficiently studied in a practical term approach. Its promotion and active application into practice presume the active deploy of the scientific front for the development of methodological problems for its use in conditionss of Bulgarian companies as well as intensive training of a new generation of managers in strategic management of companies. (3) It is necessary the Project Portfolio Management to be included in the curricula of universities preparing specialists and experts on strategic and project management.

REFERENCES EU structural funds. Single Information Web Portal: http://eufunds.bg/. Europe 2020 Startegy: http://ec.europa.eu/europe2020/index_en.htm/. Eurostat: http://ec.europa.eu/eurostat/. Harvard Business Review: https://hbr.org/. Haugen, R. A., Modern Investment Theory, Prentice-Hall, Forth edition, 2004.

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Kloppenborg, T.J., Plath, D.A., Effective Project Management Practices during Expert Systems Implementation, Project Management Journal, December 2001. Markowitz, H., Portfolio Selection, Journal of Finance, March, 1952. McIntyre, J., The Right Fit, PM Network, November, 2014. Meredith, J., Mantel, S., Project Management: A Managerial Approach, John Wiley and Sons, 2014. National Statistical Institute: http://nsi.bg/. Nikolova, N., The investment strategy of the company: management of the financial investment

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