Project Practitioners > Six Steps for Developing a Governance Model for Strategic Portfolio Management (Part 1)

Six Steps for Developing a Governance Model for Strategic Portfolio Management (Part 1)

By J LeRoy Ward

I started thinking about what it takes to build a governance model for strategic portfolio management more than 15 years ago, and I still haven’t stopped thinking about it because a governance model is never done. Let me tell you how it all started.

I was sitting in my office, minding my own business, when a colleague of mine walked in and said “LeRoy, we have a problem.” And by her tone, I knew she was serious. 

She said that our Vice President for Product Development, I’ll call her Finula, was struggling with the number of projects she was working on because everyone ranked theirs as Number 1 and she literally did not know which ones to do first; so she was trying to work on all of them at the same time. As you can imagine, this was placing Finula and her team under enormous pressure.

Finula tried to address the situation by rank ordering the projects according to the position of the requestor on the org chart. Well, this meant that all the execs got their projects done first, which from a political point of view wasn’t a bad strategy. But that meant that everyone else had to wait; and they weren’t happy. My colleague was afraid that Finula was going to burn out, and burn out fast, so something had to be done.

I called a meeting of the executive team, of which we were both members, to try to sort things out. I began by explaining the current situation and how, as a team, we really needed to find a solution to help Finula.

Everyone agreed that not every project could, or even should, be number one and we had to come up with a way to rank order them. Yet, when we started to go through the list of projects, many of which were initiated by the very people around that conference table, you can guess what happened: no one wanted theirs ranked anything lower than Number 1. And they had all kinds of reasons and justifications as to why. Sound familiar?

This was the very beginning of my establishing a Product Portfolio Committee in my former company, a Committee that has been meeting decisions now for more than more than 15 years.

If you want to establish, or improve, the level of process maturity and business decision making in portfolio management in your organization, then you’ve got to start with the Governance Model. That’s where it all begins. 

Here’s what I’m going to cover in this two part article:

First, we’ll look at the Governance Model as the “Engine room” of strategic portfolio management. Hey, a ship can’t go anywhere without an engine room, and your work in portfolio management can’t go anywhere without a governance model.

Next, I’ll discuss the 6 key questions you need to ask…and answer…to develop the best Governance Model for your organization. 

And, finally, while there are many ingredients to making a Governance Model work and work well, there’s one that stands head and shoulders above all others, and I’ll describe what that one is. 

Why is the Governance Model is the engine room of portfolio management? Because, when you think hard about it, the essence of portfolio management is decision-making. Each organization needs to decide what projects, programs and other initiatives to invest in to meet its strategic goals.  And, it needs to make these decisions in accordance with a structured and systematic set of rules and criteria so that they are made rationally and logically, based on data and not solely on “gut feel.”

Most importantly, in today’s business environment, we have to make decisions quickly to take advantage of such things as market-moving news and events, client requirements, new technology and other factors. In order to do all of this, you need a streamlined, customized approach that works with, and not fights against, your culture and best interests.

At the heart of all of this, controlling and driving this process forward is the Governance Model. That’s why I call it the engine room.  Without it, portfolio management can’t happen in any structured, purposeful way.

So, whether you’re just getting started in portfolio management, or you need to re-think your approach, the Governance Model is where you start. And you need to start by asking the following six questions.

Question Number 1: “What’s our purpose and what portfolios will we manage?”

This is important because it forms the basis for the existence of your portfolio group.  Will we be a decision-making or advisory body? What are the business outcomes we’re trying to achieve? For example, are you looking at cost reduction, new market growth, improved quality, or some combination of these and other outcomes? In other words, why are you establishing the portfolio process and what do you expect to gain from it?

Next we need to identify the portfolio or portfolios you’re going to manage. In any organization you can have more than one portfolio. But I advise my clients not to include every project and program in one very large portfolio.  Why? Because you’ll make better, faster decisions if you focus in on one portfolio at a time.

Let me give you an example of one of my clients who’s in the corporate training business. This firm’s portfolio includes initiatives such as new course development, assessment products, books, tools, games, and simulations. All these projects relate to their customer product set and form one of the company’s portfolios.

But it also has a second portfolio of other projects that focus on internal process improvement such as a new HR tool, a new CRM system, and moving a number of applications to the cloud. The reason my client manages each portfolio separately has to do with focus. They know that the decisions they need to make about their customer-facing product set include a different set of criteria, mix of resources, and risks than its  process improvement projects.

Also, if you include all projects in one portfolio, you’ll have a much harder time organizing meetings; and, when they do come, people will start losing interest when projects they’re are not involved in, or even care about, are discussed. They’ll start watching YouTube videos on their smartphones, have side-bar conversations, or just keep walking in and out the conference room to head down to the local Starbucks. It’ll be very disruptive. How many of these kinds of meetings have you been in lately? I bet quite a few!

So, having the right group of people around the table is extremely important because it will lead to better, faster decisions. And, the best way I know of to accomplish this is to discuss only those projects of mutual interest to all involved.

Question Number 2: “Who will manage the portfolio?”

Most organizations form committees to do this and they have a variety of names such as the Portfolio Review Committee, Product Portfolio CommitteeInnovation Board, or other similar names. Regardless of what you call the group the key question is “who should be on it”? It seems like such a simple question; however, the answer can be quite difficult for many reasons, not the least of which are the political ramifications that such a decision has.

Best practice suggests that we don’t want too many people on the  Committee because that will slow down decision-making and make the logistics of planning for, convening, and conducting meetings problematic. As anyone who has tried to plan meetings, we know it’s much more difficult to convene a meeting with twenty people than it is with ten.  And it’s not twice has hard; it’s four times as hard!

At the same time, we don’t want too few people on the Committee because we need to make sure we have a diversity of perspectives. Also, if the team is too small, it may be criticized for serving the narrow interests of its members themselves rather than the organization as a whole. 

I strongly suggest that the membership, or at least the “voting membership,” be made up of executives who are responsible for a large operational activity, such as a division or business unit, and especially those who manage a P&L. Why? Because it’s these folks whose performance is typically judged by the CEO and who have a vested interest in the makeup and successful execution of the portfolio.

Second, key executives who support the P&L leaders should also be included. Buy-in to the portfolio components is very important. These executives will have “skin in the game” and they’ll be more likely to provide the support necessary to get these projects done.

Some organizations include key technical personnel on the committee.  My view? Sure, put them on the committee but don’t let them “vote” as to the makeup of the portfolio.  Some of our more “technical” colleagues can sometimes become so enamored with the technology of a project they lose sight of the business side of things.

I once had a client whose Committee included key P&L executives, product executives, and technical folks. The Portfolio Manager complained to me that the technical experts were making decisions based largely on the technical issues at hand, rather than reviewing project proposals from a more business-focused perspective.

Therefore, I recommended that the membership remain as constituted, but that an “investment subcommittee” be formed whose members should only include the P&L executives who had the sole authority to make investment decisions. The change was made, and while the technical folks felt somewhat shunned at first, the change had the affect intended: implementation of a business-driven, not a technical-driven, decision process.

One of the toughest issues regarding membership is whether to include people based on political considerations. In such cases you have to use your own good judgment. My only caution again is that too many members will slow down decision-making so be careful.

I can however offer this advice. First, if a prospective member has influence or direct authority over the budget, personnel, or physical assets affecting your ability to execute the portfolio then that person’s involvement is generally warranted.  And second, you should never, and I do mean NEVER, include representatives out of professional courtesy, to be nice, or to make sure someone doesn’t feel “left out.” Meet with that person and explain why they were not asked to be involved. In most cases, once you explain it it’ll be fine. After all, I don’t know one person who wants to attend any more meetings than they have to!  Do you?

Question Number 3: “How will projects be selected for the portfolio?”

In fact, you can use a wide variety of criteria to select projects and they basically fall into two categories: quantitative and qualitative. The most common quantitative criteria are financial and include a number of financial analysis models such as, break-even analysis, payback period, internal rate of return, to name a few. 

Certain organizations establish a “hurdle rate” that a project must meet in order to be considered further for selection. And, many organizations use more than one financial model when evaluating a project. For example, they’ll use both net present value as well as benefit/cost ratio.

You can also use qualitative measures. Increase in customer satisfaction, employee morale, enhancement of good will, are a few examples. While best practice suggests that all benefits be quantified, there are occasions when this just isn’t possible or advisable. So, it’s very common to both quantitative and qualitative factors.

One other criterion for selecting projects has to do with regulatory compliance. For example, companies in the financial services industry, such as investment banks, hedge-funds, and commercial banks, are governed by a broad array of Federal and State regulations here in the U. S.  The European Union also has strict laws governing compliance. As new laws governing financial institutions are passed, new projects to satisfy these laws will be added to the portfolio. In these cases, the only decision to be made is “HOW” to do the project, and not whether it should be done because the law says you have to do it or else suffer the consequences.

You can see that the rules for defining the projects that will be in the portfolio can be as varied and unique as the organization itself. This is an important aspect of defining a Governance Model. Look at it this way, you can always change the rules at any time if, for whatever reason, the process is not achieving its intended results. While the 10 Commandments may have been etched in stone, your Governance Model doesn’t have to be.

Stay tuned! In Part 2 we’ll look at Questions 4-6 and that indispensable characteristic needed to pull the whole thing together.

Not all comments are posted. Posted comments are subject to editing for clarity and length.

Very clear and helpful in outlining how to operate a project portfolio system!

Re: regulatory compliance. Sometimes the Governance body may decide to accept the risk and not proceed with the project.

Anyway, a great article with the principle of needing one being the hardest part, especially when the Finance team want to run it all by their rules. :-)

More food for thought: How do we align governance across the PMO and IT? Which one should take the lead and why? Refer:

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