DTU ProjectLab - User contributions [en-gb]

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-30T21:03:41Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common (which from now on are referred as traditional methods) are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcomes, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section ''Related Material'').

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, developed, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is almost never available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle part of the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with users interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and [http://apppm.man.dtu.dk/index.php/Category:Portfolio_Management portfolio management] are still under research, since one of their most important factors for success is technology development. A greater processing capacity in computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI, the portfolio management process is a series of interrelated processes, as shown in Figure 2 <ref name= "PMI" />. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The ''Standard for Portfolio Management'' for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is required to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential to both support the achievement of strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that influence project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (all of them can be used by themselves, but it is also common to use them in combination with a quantitative method).

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons. Through this article, only the internal dependencies are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: costs, resources, outcome, and impact dependencies. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome Dependency===

This interaction occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that will make it more attractive to another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some original buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

New methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of a better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among them for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes:
* '''Independent portfolio attributes''': those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* '''Interrelated portfolio attributes''': those to which the contribution of the projects are interrelated.
* '''Synergistic portfolio attributes''': these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> was created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by admitting a wide range of project dependencies, among other changes <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criterion. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* '''Budget constraints''': include costs of the individual projects and the available total budget. In case of projects that deliver savings, then these are included as negative costs.
* '''Logical constraints''': are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* '''Positioning constraints''': are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for strategy X.
* '''Threshold constraints''': ensure that the portfolio meets minimum requirements, like a determined payback period or utilizing all available workforce.
* '''Dependency constraints''': are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming. For further reading on examples and applicability of RPM, please refer to the ''Related Material'' section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''], published by the PMI, goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio with dependencies. This case study works as a good guideline in order to better understand the topics covered in this article.

''Chien's Portfolio-Evaluation Framework'' <ref name= "Chien" /> is explained in Chien's article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study (consult the ''References'' section).

Finally, for a better understanding of ''Robust Portfolio Modeling'' consult [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''], which gives a more detailed explanation of this framework, and shows a list of both publications related to the model and the past and on-going research projects. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article (both traditional and newer ones) have inherent strengths and weaknesses.

===Traditional Methods===

The '''strengths''' of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* When combined, they cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important '''weaknesses''' <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the newer models previously presented for the formation of the optimal portfolio have some '''strengths''' that attack some of the traditional models' weaknesses:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main '''weaknesses''' that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even these metrics are frequently not used in the right situations. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* NPV: should be used to generate portfolios with long term and positive cash flow streams for companies in high growth industries.
* Internal Rate of Return and the Profitability Index: should be used to generate higher return on capital investment. It is recommended for companies competing in slow growth (but large revenue) industries, where capital efficiency is the key to success.
* Adjusted Payback Period: should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies competing in shrinking industries.

In a similar way, every method, tool or technique commented throughout this article is better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-30T10:29:42Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,500, but after getting rid of some very detailed information, I managed to make an article of about 3,600 words, without the table of contents and references (which is about 900 less words than before). However, even if its a little bit over 3,500, I think that the information that it contains right now is important and relevant for the topic'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

== Reply to kikigaga ==

'''Hello, thank you very much for your feedback. I've found it interesting and relevant for improving my article. I know that it was quite long, so I've taken that into consideration for only including the most relevant parts. I will go through every bullet point to reply each of your suggestions. I include my comments in bold and yours in italics.'''

''Hi, as a product engineer I think the subject is interesting. So great:) I believe that the article might be too long compared to the content, but what do I know..''

'''Thanks! I'm glad that you found it interesting. I have shortened my article a little bit to make it more entertaining to read and to help the readers to go through it in a more natural way.'''

''Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.''

* ''Clarify the introduction so that the user knows what he/she is reading about.''
** ''As i said, it is interesting but the long introduction made me almost give up.''

'''I agree with it. I've tried to highlight in some way the purpose of the article and to help the reader understand from the beginning what he/she is reading about. At the same time, the introduction was reduced in 150 words, so now it only contains the most relevant information. '''

* ''Gramma fails in some sentences''
** ''Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.''

'''I've gone though the whole text taking this into consideration to avoid repetition of ideas or referring to sentences before.'''

* ''Refer to the models or keep them out''
** ''As i could see non of the figures are referred to?''

'''Now the text include references to the figures. I think now it is easier to relate to them to have a better idea of what the text is about.'''

* ''There are 4 major sources of internal dependencies – Says who?''
** ''Make it clear: When is it your voice and when the references? (The implementation advice e.g.)''

'''I've now clarified correctly that point. Actually, I read a couple of articles about dependencies, and I saw that they could be grouped in 4 categories. Now, I think that it could be easily seen if that is mine or someone else's idea'''

''Thank you, and good luck:)''

'''Once again, thanks for your feedback. I think that now I have an easier to read article and it is better formatted than before. Good luck to you as well.'''

happy to hear it :) good luck for the final and with your rest exams,

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-30T10:27:49Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common (which from now on are referred as traditional methods) are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcomes, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section ''Related Material'').

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, developed, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is almost never available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle part of the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with users interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and [http://apppm.man.dtu.dk/index.php/Category:Portfolio_Management portfolio management] are still under research, since one of their most important factors for success is technology development. A greater processing capacity in computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI, the portfolio management process is a series of interrelated processes, as shown in Figure 2 <ref name= "PMI" />. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The ''Standard for Portfolio Management'' for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is required to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential to both support the achievement of strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (all of them can be used by themselves, but it is also common to use them in combination with a quantitative method).

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons. Through this article, only the internal dependencies are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: costs, resources, outcome, and impact dependencies. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome Dependency===

This interaction occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that will make it more attractive to another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some original buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

New methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of a better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among them for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes:
* '''Independent portfolio attributes''': those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* '''Interrelated portfolio attributes''': those to which the contribution of the projects are interrelated.
* '''Synergistic portfolio attributes''': these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> was created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by admitting a wide range of project dependencies, among other changes <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criterion. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* '''Budget constraints''': include costs of the individual projects and the available total budget. In case of projects that deliver savings, then these are included as negative costs.
* '''Logical constraints''': are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* '''Positioning constraints''': are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for strategy X.
* '''Threshold constraints''': ensure that the portfolio meets minimum requirements, like a determined payback period or utilizing all available workforce.
* '''Dependency constraints''': are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming. For further reading on examples and applicability of RPM, please refer to the ''Related Material'' section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''], published by the PMI, goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio with dependencies. This case study works as a good guideline in order to better understand the topics covered in this article.

''Chien's Portfolio-Evaluation Framework'' <ref name= "Chien" /> is explained in Chien's article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study (consult the ''References'' section).

Finally, for a better understanding of ''Robust Portfolio Modeling'' consult [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''], which gives a more detailed explanation of this framework, and shows a list of both publications related to the model and the past and on-going research projects. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article (both traditional and newer ones) have inherent strengths and weaknesses.

===Traditional Methods===

The '''strengths''' of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* When combined, they cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important '''weaknesses''' <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the newer models previously presented for the formation of the optimal portfolio have some '''strengths''' that attack some of the traditional models' weaknesses:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main '''weaknesses''' that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even these metrics are frequently not used in the right situations. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* NPV: should be used to generate portfolios with long term and positive cash flow streams for companies in high growth industries.
* Internal Rate of Return and the Profitability Index: should be used to generate higher return on capital investment. It is recommended for companies competing in slow growth (but large revenue) industries, where capital efficiency is the key to success.
* Adjusted Payback Period: should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies competing in shrinking industries.

In a similar way, every method, tool or technique commented throughout this article is better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-30T10:26:22Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common (which from now on are referred as traditional methods) are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcomes, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section ''Related Material'').

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, developed, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is almost never available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle part of the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with users interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and [http://apppm.man.dtu.dk/index.php/Category:Portfolio_Management portfolio management] are still under research, since one of their most important factors for success is technology development. A greater processing capacity in computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI, the portfolio management process is a series of interrelated processes, as shown in Figure 2 <ref name= "PMI" />. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The ''Standard for Portfolio Management'' for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is required to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential to both support the achievement of strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (all of them can be used by themselves, but it is also common to use them in combination with a quantitative method).

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons. Through this article, only the internal dependencies are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: costs, resources, outcome, and impact dependencies. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome Dependency===

This interaction occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that will make it more attractive to another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some original buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

New methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of a better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among them for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes:
* '''Independent portfolio attributes''': those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* '''Interrelated portfolio attributes''': those to which the contribution of the projects are interrelated.
* '''Synergistic portfolio attributes''': these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> was created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by admitting a wide range of project dependencies, among other changes <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criterion. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* '''Budget constraints''': include costs of the individual projects and the available total budget. In case of projects that deliver savings, then these are included as negative costs.
* '''Logical constraints''': are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* '''Positioning constraints''': are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for strategy X.
* '''Threshold constraints''': ensure that the portfolio meets minimum requirements, like a determined payback period or utilizing all available workforce.
* '''Dependency constraints''': are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming. For further reading on examples and applicability of RPM, please refer to the ''Related Material'' section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''], published by the PMI, goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio with dependencies. This case study works as a good guideline in order to better understand the topics covered in this article.

''Chien's Portfolio-Evaluation Framework'' <ref name= "Chien" /> is explained in Chien's article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study (consult the ''References'' section).

Finally, for a better understanding of ''Robust Portfolio Modeling'', consult [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''], which gives a more detailed explanation of this framework, and shows a list of both publications related to the model and the past and on-going research projects. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article (both traditional and newer ones) have inherent strengths and weaknesses.

===Traditional Methods===

The '''strengths''' of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* When combined, they cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important '''weaknesses''' <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the newer models previously presented for the formation of the optimal portfolio have some '''strengths''' that attack some of the traditional models' weaknesses:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main '''weaknesses''' that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even these metrics are frequently not used in the right situations. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* NPV: should be used to generate portfolios with long term and positive cash flow streams for companies in high growth industries.
* Internal Rate of Return and the Profitability Index: should be used to generate higher return on capital investment. It is recommended for companies competing in slow growth (but large revenue) industries, where capital efficiency is the key to success.
* Adjusted Payback Period: should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies competing in shrinking industries.

In a similar way, every method, tool or technique commented throughout this article is better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T16:08:50Z

Dnhr0: /* Implementation Advice */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and [http://apppm.man.dtu.dk/index.php/Category:Portfolio_Management portfolio management] are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems. However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make it more attractive in order to reach another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

New methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of a better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among them for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes:
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by admitting a wide range of project dependencies, among other changes <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criterion. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then these are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''], published by the PMI, goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio with dependencies. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* NPV: should be used to generate portfolios with long term and positive cash flow streams for companies in high growth industries.
* Internal Rate of Return and the Profitability Index: should be used to generate higher return on capital investment. It is recommended for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* Adjusted Payback Period: should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies competing in shrinking industries.

In a similar way, every method, tool or technique commented throughout this article, is better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:56:39Z

Dnhr0: /* Development History */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and [http://apppm.man.dtu.dk/index.php/Category:Portfolio_Management portfolio management] are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems. However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make it more attractive in order to reach another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

New methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of a better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among them for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes:
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by admitting a wide range of project dependencies, among other changes <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criterion. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then these are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''], published by the PMI, goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio with dependencies. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:55:02Z

Dnhr0: /* Reply to kikigaga */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,500, but after getting rid of some very detailed information, I managed to make an article of about 3,700 words, without references (which is about 800 less words).'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

== Reply to kikigaga ==

'''Hello, thank you very much for your feedback. I've found it interesting and relevant for improving my article. I know that it was quite long, so I've taken that into consideration for only including the most relevant parts. I will go through every bullet point to reply each of your suggestions. I include my comments in bold and yours in italics.'''

''Hi, as a product engineer I think the subject is interesting. So great:) I believe that the article might be too long compared to the content, but what do I know..''

'''Thanks! I'm glad that you found it interesting. I have shortened my article a little bit to make it more entertaining to read and to help the readers to go through it in a more natural way.'''

''Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.''

* ''Clarify the introduction so that the user knows what he/she is reading about.''
** ''As i said, it is interesting but the long introduction made me almost give up.''

'''I agree with it. I've tried to highlight in some way the purpose of the article and to help the reader understand from the beginning what he/she is reading about. At the same time, the introduction was reduced in 150 words, so now it only contains the most relevant information. '''

* ''Gramma fails in some sentences''
** ''Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.''

'''I've gone though the whole text taking this into consideration to avoid repetition of ideas or referring to sentences before.'''

* ''Refer to the models or keep them out''
** ''As i could see non of the figures are referred to?''

'''Now the text include references to the figures. I think now it is easier to relate to them to have a better idea of what the text is about.'''

* ''There are 4 major sources of internal dependencies – Says who?''
** ''Make it clear: When is it your voice and when the references? (The implementation advice e.g.)''

'''I've now clarified correctly that point. Actually, I read a couple of articles about dependencies, and I saw that they could be grouped in 4 categories. Now, I think that it could be easily seen if that is mine or someone else's idea'''

''Thank you, and good luck:)''

'''Once again, thanks for your feedback. I think that now I have an easier to read article and it is better formatted than before. Good luck to you as well.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:54:42Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,500, but after getting rid of some very detailed information, I managed to make an article of about 3,700 words, without references (which is about 800 less words).'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

== Reply to kikigaga ==

'''Hello, thank you very much for your feedback. I've found it interesting and relevant for improving my article. I know that it was quite long, so I've taken that into consideration for only including the most relevant parts. I will go through every bullet point to reply each of your suggestions. I include my comments in bold and yours in italics.'''

''Hi, as a product engineer I think the subject is interesting. So great:) I believe that the article might be too long compared to the content, but what do I know..''

'''Thanks! I'm glad that you found it interesting. I have shortened my article a little bit to make it more entertaining to read and to hel the readers to go through it in a more natural way.'''

''Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.''

* ''Clarify the introduction so that the user knows what he/she is reading about.''
** ''As i said, it is interesting but the long introduction made me almost give up.''

'''I agree with it. I've tried to highlight in some way the purpose of the article and to help the reader understand from the beginning what he/she is reading about. At the same time, the introduction was reduced in 150 words, so now it only contains the most relevant information. '''

* ''Gramma fails in some sentences''
** ''Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.''

'''I've gone though the whole text taking this into consideration to avoid repetition of ideas or referring to sentences before.'''

* ''Refer to the models or keep them out''
** ''As i could see non of the figures are referred to?''

'''Now the text include references to the figures. I think now it is easier to relate to them to have a better idea of what the text is about.'''

* ''There are 4 major sources of internal dependencies – Says who?''
** ''Make it clear: When is it your voice and when the references? (The implementation advice e.g.)''

'''I've now clarified correctly that point. Actually, I read a couple of articles about dependencies, and I saw that they could be grouped in 4 categories. Now, I think that it could be easily seen if that is mine or someone else's idea'''

''Thank you, and good luck:)''

'''Once again, thanks for your feedback. I think that now I have an easier to read article and it is better formatted than before. Good luck to you as well.'''

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:51:55Z

Dnhr0: /* Related Material */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems. However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make it more attractive in order to reach another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

New methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of a better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among them for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes:
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by admitting a wide range of project dependencies, among other changes <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criterion. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then these are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''], published by the PMI, goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio with dependencies. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:50:09Z

Dnhr0: /* Methods for the Formation of the Optimal Portfolio */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems. However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make it more attractive in order to reach another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

New methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of a better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among them for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes:
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by admitting a wide range of project dependencies, among other changes <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criterion. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then these are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:45:05Z

Dnhr0: /* Dependencies */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems. However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

Some authors have identified different types of dependencies <ref name = "Chien"/> <ref name = "Blau"/> <ref name = "Feys"/> , which can be summarized in 4 major sources: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio (as displayed in Figure 4) due to some degree of resource sharing <ref name= "Blau" /><ref name= "Fox" />, e.g. a project may require using a new machine, but it is possible to share it with other projects or with ongoing operations.

===Resources Dependency===

This dependency is more related to the time that a certain project may require. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This type of dependencies are common in software or hardware development, like the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. Obviously, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make it more attractive in order to reach another demographic group. If both projects are implemented, then the net total sales may be lower than the sum of the individual sales figure, since some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:28:42Z

Dnhr0: /* Reply to kikigaga */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,500, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

== Reply to kikigaga ==

'''Hello, thank you very much for your feedback. I've found it interesting and relevant for improving my article. I know that it was quite long, so I've taken that into consideration for only including the most relevant parts. I will go through every bullet point to reply each of your suggestions. I include my comments in bold and yours in italics.'''

''Hi, as a product engineer I think the subject is interesting. So great:) I believe that the article might be too long compared to the content, but what do I know..''

'''Thanks! I'm glad that you found it interesting. I have shortened my article a little bit to make it more entertaining to read and to hel the readers to go through it in a more natural way.'''

''Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.''

* ''Clarify the introduction so that the user knows what he/she is reading about.''
** ''As i said, it is interesting but the long introduction made me almost give up.''

'''I agree with it. I've tried to highlight in some way the purpose of the article and to help the reader understand from the beginning what he/she is reading about. At the same time, the introduction was reduced in 150 words, so now it only contains the most relevant information. '''

* ''Gramma fails in some sentences''
** ''Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.''

'''I've gone though the whole text taking this into consideration to avoid repetition of ideas or referring to sentences before.'''

* ''Refer to the models or keep them out''
** ''As i could see non of the figures are referred to?''

'''Now the text include references to the figures. I think now it is easier to relate to them to have a better idea of what the text is about.'''

* ''There are 4 major sources of internal dependencies – Says who?''
** ''Make it clear: When is it your voice and when the references? (The implementation advice e.g.)''

'''I've now clarified correctly that point. Actually, I read a couple of articles about dependencies, and I saw that they could be grouped in 4 categories. Now, I think that it could be easily seen if that is mine or someone else's idea'''

''Thank you, and good luck:)''

'''Once again, thanks for your feedback. I think that now I have an easier to read article and it is better formatted than before. Good luck to you as well.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:28:25Z

Dnhr0: /* Reply to kikigaga */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,500, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

== Reply to kikigaga ==

'''Hello, thank you very much for your feedback. I've found it interesting and relevant for improving my article. I know that it was quite long, so I've taken that into consideration for only including the most relevant parts. I will go through every bullet point to reply each of your suggestions. I include my comments in bold and yours in italics.'''

''Hi, as a product engineer I think the subject is interesting. So great:) I believe that the article might be too long compared to the content, but what do I know..''
'''Thanks! I'm glad that you found it interesting. I have shortened my article a little bit to make it more entertaining to read and to hel the readers to go through it in a more natural way.'''

''Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.''

* ''Clarify the introduction so that the user knows what he/she is reading about.''
** ''As i said, it is interesting but the long introduction made me almost give up.''

'''I agree with it. I've tried to highlight in some way the purpose of the article and to help the reader understand from the beginning what he/she is reading about. At the same time, the introduction was reduced in 150 words, so now it only contains the most relevant information. '''

* ''Gramma fails in some sentences''
** ''Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.''

'''I've gone though the whole text taking this into consideration to avoid repetition of ideas or referring to sentences before.'''

* ''Refer to the models or keep them out''
** ''As i could see non of the figures are referred to?''

'''Now the text include references to the figures. I think now it is easier to relate to them to have a better idea of what the text is about.'''

* ''There are 4 major sources of internal dependencies – Says who?''
** ''Make it clear: When is it your voice and when the references? (The implementation advice e.g.)''

'''I've now clarified correctly that point. Actually, I read a couple of articles about dependencies, and I saw that they could be grouped in 4 categories. Now, I think that it could be easily seen if that is mine or someone else's idea'''

''Thank you, and good luck:)''

'''Once again, thanks for your feedback. I think that now I have an easier to read article and it is better formatted than before. Good luck to you as well.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:27:43Z

Dnhr0: /* Reply to kikigaga */ new section

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,500, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

== Reply to kikigaga ==

'''Hello, thank you very much for your feedback. I've found it interesting and relevant for improving my article. I know that it was quite long, so I've taken that into consideration for only including the most relevant parts. I will go through every bullet point to reply each of your suggestions. I include my comments in bold and yours in italics.'''

''Hi, as a product engineer I think the subject is interesting. So great:) I believe that the article might be too long compared to the content, but what do I know..''
'''Thanks! I'm glad that you found it interesting. I have shortened my article a little bit to make it more entertaining to read and to hel the readers to go through it in a more natural way.'''

''Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.''

* ''Clarify the introduction so that the user knows what he/she is reading about.''
** ''As i said, it is interesting but the long introduction made me almost give up.''

'''I agree with it. I've tried to highlight in some way the purpose of the article and to help the reader understand from the beginning what he/she is reading about. At the same time, the introduction was reduced in 150 words, so now it only contains the most relevant information. '''
* ''Gramma fails in some sentences''
** ''Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.''

'''I've gone though the whole text taking this into consideration to avoid repetition of ideas or referring to sentences before.'''

* ''Refer to the models or keep them out''
** ''As i could see non of the figures are referred to?''

'''Now the text include references to the figures. I think now it is easier to relate to them to have a better idea of what the text is about.'''

* ''There are 4 major sources of internal dependencies – Says who?''
** ''Make it clear: When is it your voice and when the references? (The implementation advice e.g.)''

'''I've now clarified correctly that point. Actually, I read a couple of articles about dependencies, and I saw that they could be grouped in 4 categories. Now, I think that it could be easily seen if that is mine or someone else's idea'''

''Thank you, and good luck:)''

'''Once again, thanks for your feedback. I think that now I have an easier to read article and it is better formatted than before. Good luck to you as well.'''

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:22:24Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
any isolated criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems. However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

Some authors have identified different types of dependencies <ref name = "Blau"/> <ref name = "Chien"/>, which can be summarized in 4 major sources: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. T

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio, as displayed in Figure 4. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:20:42Z

Dnhr0: /* From Project Evaluation and Selection to Balancing the Optimal Portfolio */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects, as well as the dependencies that impact project selection.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because of their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account factors that quantitative methods cannot. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems. However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

Some authors have identified different types of dependencies <ref name = "Blau"/> <ref name = "Chien"/>, which can be summarized in 4 major sources: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. T

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio, as displayed in Figure 4. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:16:39Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,500, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:10:48Z

Dnhr0: /* Acceptance and Use */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the PMI <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management-

The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them, in order to facilitate the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business strategy, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio (expert judgement may be used for this activity).

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process a decision-maker should be able to form the best portfolio. However, the PMI does not explain how to use most of the tools mentioned; nonetheless, a large number of articles and books regarding these topics have been available for some decades. Furthermore, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio, as displayed in Figure 4. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:05:47Z

Dnhr0: /* Development History */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism publishes the most common best practices in project and portfolio management.

Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio, as displayed in Figure 4. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:04:34Z

Dnhr0: /* Application Context */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for supporting every idea. Nevertheless, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio, as displayed in Figure 4. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T15:00:29Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes''
'''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes''
'''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:55:37Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to develop
more innovative products. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. This point is crucial, since the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time.

This article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio, as displayed in Figure 4. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:43:03Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes''
'''Check'''

* ''Is it clear which one of the four “content categories” the article belongs to? --> yes''
'''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes'' '''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes'' '''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:42:06Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes'' '''Check'''
''
Is it clear which one of the four “content categories” the article belongs to? --> yes'' '''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes'' '''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes'' '''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:41:17Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

* '' Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''

'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

* '' Does the article clearly relate to a project, program or portfolio management topic? --> Yes'' '''Check'''
''
Is it clear which one of the four “content categories” the article belongs to? --> yes'' '''Check'''

* '' Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

* '' Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes'' '''Check'''

* '' Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

* '' Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

* '' Are all main points illustrated with an appropriate figure?''

* '' Are the figures free of formal errors--> yes'' '''Check'''

* '' Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

* '' Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

* '' Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:40:13Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

''* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''

'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

''* Does the article clearly relate to a project, program or portfolio management topic? --> Yes'' '''Check'''
''
Is it clear which one of the four “content categories” the article belongs to? --> yes'' '''Check'''

''* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

''* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes'' '''Check'''

''* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

''* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

''* Are all main points illustrated with an appropriate figure?''

''* Are the figures free of formal errors--> yes'' '''Check'''

''* Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

''* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

''* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:39:20Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

'''First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading. Your comments are in italics, while mines are in bold.
'''

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

''Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''

'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

''Does the article clearly relate to a project, program or portfolio management topic? --> Yes'' '''Check'''
''
Is it clear which one of the four “content categories” the article belongs to? --> yes'' '''Check'''

''Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

''Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes'' '''Check'''

''Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

''Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

''Are all main points illustrated with an appropriate figure?''

''Are the figures free of formal errors--> yes'' '''Check'''

''Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

''Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

''Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:38:33Z

Dnhr0: /* Reply to Saeh0803 */

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading.

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 150 words shorter, keeping the most relevant content.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

''Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''

'''I've taken your point in consideration. I guess it's difficult to say if it is interesting or not, since maybe the topic per se is not interesting for you, but it may be for another person. However, I agree with the fact that keeping it simpler may be a better approach to try to engage the readers.
'''

''Does the article clearly relate to a project, program or portfolio management topic? --> Yes'' '''Check'''
''
Is it clear which one of the four “content categories” the article belongs to? --> yes'' '''Check'''

''Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, I managed to make an article of about ____ words, without references.'''

''Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes'' '''Check'''

''Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

''Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

'''As stated before, I've gone through all the text to look for this type of sentences. '''

''Are all main points illustrated with an appropriate figure?''

''Are the figures free of formal errors--> yes'' '''Check'''

''Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

''Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

''Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Talk:Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:29:13Z

Dnhr0: /* Reply to Saeh0803 */ new section

== reviewed by Saeh0803 ==

1. Very long summary, maybe you can make it a bit short and interesting for reader

2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".

* Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..

* Does the article clearly relate to a project, program or portfolio management topic? --> Yes

* Is it clear which one of the four “content categories” the article belongs to? --> yes

* Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..

* Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes

* Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..

* Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations

* Are all main points illustrated with an appropriate figure?

* Are the figures free of formal errors--> yes

* Are the figures referenced in the text? --> the first figure is not referenced in the text

* Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see

* Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes

as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)

== Reviewed by kikigaga==

Hi, as a product engineer I think the subject is interesting. So great:)
I believe that the article might be too long compared to the content, but what do I know..

Some short comments, since the other reviewer went through all the points I will only go through the ones i thought was standing out.

*Clarify the introduction so that the user knows what he/she is reading about.
**As i said, it is interesting but the long introduction made me almost give up.
*Gramma fails in some sentences
** Maybe it is because of sentences referring to the sentence before all the time, it is hard to read.
*Refer to the models or keep them out
** As i could see non of the figures are referred to?
*There are 4 major sources of internal dependencies – Says who?
**Make it clear: When is it your voice and when the references? (The implementation advice e.g.)

Thank you, and good luck:)

== Reply to Saeh0803 ==

First of all, thanks for your feedback, I found it very useful.

I went through each of the points, so I will paste here the bullet points in order to facilitate the reading.

''1. Very long summary, maybe you can make it a bit short and interesting for reader''

'''Actually, the summary is in the order of 500 words, that was the recommended size of the abstract. Anyway, I think that you are right, since it is quite long as an introduction and there is information that may not need to be there (I think that the illustration may also have an impact on the perceived size of this part). Finally, I managed to make it 100 words shorter.'''

''2. you didn't referenced the first figure in the text, you also not referenced the figure number two on the text, I know you explain the points from figure, but you need to write something like "..as it shown in figure X".''

'''You are right, this point has been addressed throughout the article'''.

''Is the article interesting for a practitioner? --> I think it is a bit boring, it is maybe the way of writing.. (long explanations and long sentences ) but over all I think it is a good article and you have all main points, but if I search for this topic at google and want to read about it, then I will chose one, which is short and precis.. because you have write it in too many details..
''
''Does the article clearly relate to a project, program or portfolio management topic? --> Yes'' '''Check'''
''
Is it clear which one of the four “content categories” the article belongs to? --> yes'' '''Check'''

''Does the length of the article seem appropriate? Does it contain less relevant passages or excessive details? Does it miss critical details? (The suggested length is “on the order of 3500 words”. Articles can be longer or shorter if it makes sense to do so in order to deliver a quality argument.) --> I think this articles is more in 3500 words, I can't see it on WIKI, but it seems to be more than 3500..''

'''You are correct. It was in the order of 4,300, but after getting rid of some very detailed information, i managed to make an article of about ____ words, without references.'''

''Is there a logical flow throughout the article? Are the parts “tied together” through a red thread? --> I think yes'' '''Check'''

''Is the article free of grammatical, spelling and punctuation errors--> I think yes, I have difficult to understand,maybe because my English is not so good, but its really difficult to understand and readers may read one sentence more than one time to understand it..
''

'''Thanks, I've considered your comment in order to go through the text and try to make every sentence a little bit clearer.'''

''Is the article written in an engaging style, e.g. short, precise sentences instead of long winded, hard to follow mega -sentences? --> Puhaaa, I think it is difficult to understand and follow, you both have long sentences and many explanations''

''Are all main points illustrated with an appropriate figure?''

''Are the figures free of formal errors--> yes'' '''Check'''

''Are the figures referenced in the text? --> the first figure is not referenced in the text''

'''As stated before, this mistake has already been corrected.'''

''Does the author have the copyright or right to use the figures (e.g.through Creative) common Non-Commercial share Alike attribution?) --> maybe, can't see''

'''I draw all of the images by myself in order to avoid this point, and I made reference to the only one that I more or less took from other sources.
'''

''Is the article formatted properly, i.e. are the typical Wiki-features such sub-headings, proper bullet-point list and Wiki-style references used? are graphics, videos ect. integrated correctly? --> Yes
'' '''Check'''

''as I wrote, overall your article is good, try to change the sentences, so its understandable, maybe make it shorts and use some every days words, so everyone can understand what they are reading about :)

I hope you can use my comments and best of luck :)''

'''Thank you very much for your feedback; it was really useful. Sometimes, when you are writing, you don't know if you are being clear enough or if you are including enough detail, or too much of it. I think that with your feedback I've been able to improve my article, from format to the actual structure of the sentences.'''

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:23:02Z

Dnhr0: /* Cost Dependency */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
new projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Furthermore, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Figure 4. Cost Dependency: the sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio, as displayed in Figure 4. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:22:33Z

Dnhr0: /* Traditional Methods for Project Evaluation & Selection */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
new projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Furthermore, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Figure 3. Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection (Figure 3):

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:22:00Z

Dnhr0: /* Acceptance and Use */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
new projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Furthermore, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Figure 2. Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio, as shown in Figure 2. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:19:45Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
new projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Furthermore, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. Figure 1 shows how the ''best portfolio'' may not include the ''best projects''. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:18:42Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|Figure 1. From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
new projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Furthermore, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed (Figure 1). The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-26T14:18:00Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
new projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Furthermore, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies that may exist between the projects. The most common of them are related to cost, resources, outcome, and impact <ref name="Blau" />. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies. In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Talk:Analysis of the current state

2014-11-25T20:56:44Z

Dnhr0: /* Feedback from Dnhr0 */ new section

== Article review by student: ==

*Nice overall structure, easy to follow
*Nice idea to include a discussion section at the end
*I recommend getting the text proofread by a native English speaker, frequent grammatical errors can be found throughout the text.
*Check capital spelling of titles
*'Situation analysis' is probably not the right title if the article focuses on analysis of current state only, as sit. analysis/ would include task analysis/future state and summary as well.
*The analysis of the current state would further include analysis of strength & weakness of the system and cause effect analysis
*In both abstract and introduction the first sentence explains what is part of what. Maybe it might sense to talk about the content of the article in the abstract (analysis of current state, what it is, what it contains, what its used for) and then in the introduction clearly describe the bigger picture (context) including solution analysis and the relation to the problem solving cycle.
* I suggest to structure the chapter ‘analysis of the current state’ according to the tools presented e.g.
**Short introduction
**Demarcation of system
**Adopting different point of views (information, energy etc.)
**Black boxing
**Add analysis of strength & weakness of the system and cause effect analysis as mentioned above
**Maybe include stakeholder map here instead of the discussion part.
*Underneath the demarcation picture you talk about five terms → there are six
* I would move the tools you mention in the discussion part into the chapter above and than relate to it as you describe a step-by-step approach on how to conduct the analysis of the current state
*In the summary/conclusion you could reflect whether the analysis has to be adapted to any project specific or if its generic tool or something alike.
* I hope this helped a bit, sorry for little positive feedback

== Feedback from Dnhr0 ==

Hello! I enjoyed reading your article and I found a couple of good points on it that make it entertaining to read:
* There is a nice, natural flow in the content. At the same time, it seems intuitive the way it is organized.
* The figures clarify the content and are helpful.
* The references used throughout the text are from reliable sources. At the same time, the way references are inserted in the text is very nice.

At the same time, I think there are some things that you may want to go through again in order to consider my opinion (if you find it useful). Some of my recommendations are:
* Spelling and Grammar: I could find a repetitive grammar mistake, which is the use of the verb “to be”. There were some cases where I could see using “are” instead of “is”. Another recurrent mistake is between the use of plurals and singulars, which may be related to the one discusses before. I recommend you to ask for a grammar review from a native speaker or any other fellow student that may help you to point out some mistakes that may go unnoticed by you. Here is a list with some other concerns regarding spelling and grammar. Feel free to go through and change only what you consider relevant.
** Abstract:
*** beneficial instead of “bene-ficial”
*** “The tool is used” or “The tools are used” instead of “The tool are used”
*** “This article considering the analysis of the current state that are a part of the situation analysis”. I would write it “This article considers the analysis of the current state, which is a part of the situation analysis”.
** Introduction:
*** “and is used to formulate” instead of “and are used to formulate”
*** “The problem solving cycle is constructed” instead of “The problem solving cycle are constructed”
** Analysis of the current state:
*** Current instead of cur-rent
*** “…ensure the project group is working” instead of “…ensure the project group are working”
*** “If the situation is unknown…” instead of “If the situation are unknown”
*** “An example” instead of “A example”.
*** “Environment is that part of the surrounding system that is relevant to the problem itself” instead of “Environment is that part of the surrounding system that are relevant to the problem it selves”.
*** “Area of effect is the area where effects” instead of “Area of effect is the area that where effects”
*** “information” instead of “ in-formation”
*** “The type of connection and element depends on” instead of “The type of connection and element is depending on“.
*** “One system can contain more than one point of view that are interesting”
** Black boxes and system hierarchy:
*** “If the system consists “ instead of “If the system consist”.
*** “Instead, a black box could be used” instead of “Instead could be used a black box”
** Discussion:
*** “Stakeholders” instead of “stake-holders”
*** “conditions” instead of “condi-tions”
* In the abstract, you mention that: “Using system demarcation, it is possible to get an overview of complex structures, bene-ficial for project and program management and people in project groups”. It would be helpful for the reader to list or mention some of the benefits expected from this perspective. I am afraid that it could not be that clear to the readers.
* Under the section “Analysis of the current state”, you say: “The five important terms are described below”, but you are describing 6 terms. Furthermore, I think it may be a good idea to describe them just above the picture, when you first list them in bullet points. That way, the reader may understand what the picture is about once he goes through it.
* I am not sure if the stakeholder’s part should be included under Discussion. To me, it seems like the stakeholders analysis (or mapping) is part of the analysis. I may be wrong, but I think you could make a stronger statement of why you choose to include the stakeholders under this section.
* I consider that it could be interesting to point out the differences between the types of flows (information, material and energy). What is considered to be inside each of them? Again, I think it could be helpful to use an example to illustrate what every type of flow means.
* Don’t forget to reference the figures in the text (i.e. Figure 1). They are very useful, so it could be even better if the text guides you through them.
* I think we do not have a specific referencing format, but it would be better for your article if they were written in the same style.
* It would be nice if the figures could have colours as well, in order to make it more appealing and easier to identify the components. In the first figure, you have changed the type of line, which is also helpful, but I think it may be difficult for the reader to quickly know what is under which area.
* You could consider talking about an actual example to illustrate how these concepts and tools relate to a real life case. Even though you have the charts, it is not completely understandable how it would work. In my opinion, getting an example and going through all the content with it could be very helpful for the reader.
* As discussed in class, I think it could be nice if you were able to insert some links to other relevant pages for the Wiki of the course. For example, there are a couple of articles about Stakeholders; maybe you can find one that is related to your topic.
* I think you should consider using more references. Even though they are good quality sources, the content may still be enhanced with new information.

I hope that my comments could help you with the writing of the article, keep the good work!

Talk:Life Cycle Model

2014-11-25T19:02:44Z

Dnhr0: /* Feedback from Dnhr0 */ new section

== Feedback from Dnhr0 ==

Hello! I enjoyed reading your article and I found a couple of good points on it that make it easy and nice to read:
* There is a nice, natural flow in the content. It was quite easy to structure and picture in my mind what I was reading.
* It was understandable, with a good use of vocabulary and, of course, examples.
* The figures clarify the content easily, and are quite interesting.
* It was nice to go through the text and see that some key words were linked to other articles in the Wiki. It is very helpful when trying to get more in-depth knowledge about a certain topic.
* The references used throughout the text are from reliable sources.
* I think the length of the article is fine, since you talk about the important things of this topic.

At the same time, I think there are some minor things that you may want to go through again in order to consider my opinion (if you find it useful). Some of my recommendations are:
* Spelling:
** Abstract: framework instead of frame work.
** Historic Background: article instead of articel.
** The Life Cycle Phases
*** Whether instead of wether (also in Development Phase).
*** “As suggested here” instead of “as suggest here”.
*** “As an activity” instead of “as a activity”.
*** In Main study: sufficiency instead of sufficiently (that is the idea I got but maybe the meaning is different).
*** Case Example Development Phase: through instead of trough.
*** Realisation Phase: tasks instead of task ?
*** Utilisation Phase. Its instead of it’s, and “performance is monitored” instead of “performance monitored”.
*** Activity Cycles within Individual Life Cycle Phases: Another instead of “an other”.

* Grammar: You may want to review these sentences:
** Under Detailed study: “Within this phase detailed studies of the subsystems and their interrelation, which lead to detailed information about each sub solution and gives advice towards the implementation of the Engineering System.” It seems that there is a missing verb (or a part of the sentence).
** Under Realisation Phase: “Examples are the production of machinery or in case of IT and service systems the full documentation of the system. The system is ready to be implemented.” The first one I would add some commas: ““Examples are the production of machinery or, in case of IT and service systems, the full documentation of the system”. However, it looks like there is a link missing between the first and the second sentences.

* In the abstract or summary, it could be a good idea to state the four phases of the life cycle model before referring to them. You start talking about these phases in the third line of the paragraph; however, you mention them until the end of it. It might be the case that you do not want to mention them before, but it was quite complicated to know what I was reading about without knowing these phases. It may also be a good idea if you state more clearly in this part what the reader is going to read in the article (explanation of the four phases, examples, variations of the model, etc.).
* Don’t forget to reference the figures in the text. They are very useful, so it could be even better if the text guides you through them.
* It could be useful to mention (before explaining the four phases) why you have decided to take these four phases and not others. It is not clear if this is the way Rainer Züst and Peter Troxler do it, or if you got the idea from other sources. This also affects the figure with the life cycle phases and decision gates.
* I consider it important to mention what you consider throughout the article as “Systems Engineering”. You could go into small detail, probably referencing a couple of sources. I think that it might be useful to divide the background in to sections: Main Concepts and Historical Background. That way you may be able to clarify this concept and probably make explicit the relationship between this topic and project/portfolio/program management.
* You may want to make the bullet points under the Development Phase in bold letters; however, it is just a suggestion, it may not be that relevant.
* The figures could be shown a little bit bigger. As they currently are, the reader needs to click on them to actually read the content.
* The second figure may need to add a label on the Y-axis to clearly state that it reflects influence (very helpful chart).
* It could be nice to contrast in some way the Life Cycle Model to the variations shown in the last section. You could discuss some advantages and disadvantages that this model may have, and how the other variants help or fail to address some of the disadvantages. This might not be the case if they are suitable for different circumstances.
* I think we do not have a specific referencing format, but it would be better for your article if they were written in the same style.

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T19:11:20Z

Dnhr0:

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Selection]]
[[Category:Portfolio Evaluation]]
[[Category:Project Dependencies]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:59:15Z

Dnhr0: /* Development History */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

The current state of project and portfolio management development is quite different. In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:58:22Z

Dnhr0: /* Development History */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:58:09Z

Dnhr0: /* Development History */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.
In one hand, [http://apppm.man.dtu.dk/index.php/Category:Project_Management project management] has been widely studied during the last decades, and few new methods, tools or techniques are still being developed; on the other hand, program and portfolio management are still under research, since one of their most important factors for success is technology development. A greater capacity for computers is fundamental in developing and using new software and models that allow a more efficient and faster portfolio management.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:45:55Z

Dnhr0: /* Application Context */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available. In part, [http://apppm.man.dtu.dk/index.php/Risk_management_in_project_portfolios risk management] helps to handle the uncertainty; however, challenges will always exist.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:44:33Z

Dnhr0: /* Implementation Advice */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discussed in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. These approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be ideal for companies that are competing in shrinking industries or aiming to eliminate a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:36:41Z

Dnhr0: /* Acceptance and Use */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and [http://apppm.man.dtu.dk/index.php/Bubble_Diagram bubble diagrams]) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discusses in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. Thezse approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be the required approach for companies that are competing in shrinking industries or aiming to phase out a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:33:25Z

Dnhr0: /* Traditional Methods, Tools and Techniques for Project Selection and Evaluation, and Portfolio Balancing */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and bubble charts) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods for Project Evaluation and Selection===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discusses in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. Thezse approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be the required approach for companies that are competing in shrinking industries or aiming to phase out a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:32:33Z

Dnhr0: /* Related Material */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and bubble charts) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some standards are generally consulted. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

Chien's Portfolio-Evaluation Framework <ref name= "Chien" /> is explained in his article through an example of the National Cancer Institute on the American Stop Smoking Intervention Study. Consult the References section for the article's reference.

Finally, for a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods, Tools and Techniques for Project Selection and Evaluation, and Portfolio Balancing===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discusses in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. Thezse approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be the required approach for companies that are competing in shrinking industries or aiming to phase out a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T17:26:46Z

Dnhr0: /* Methods for the Formation of the Optimal Portfolio */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and bubble charts) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade that go further in the evaluation and selection of projects for the formation of better -optimal- portfolios. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio-Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade-offs among the portfolio attributes for the construction of the optimal portfolio. There are the three main phases involved:
* Identifying the portfolio objectives and selecting the associated portfolio attributes.
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

These attributes, which are identified for the ''ideal'' or ''desired'' portfolio, should guide the decision-maker in order to reach the objectives of the company. In consequence, the attributes considered in portfolio formation would not be the same as the ones used for project selection. In order to choose the correct attributes, this framework proposes a new taxonomy of portfolio attributes: independent, interrelated and synergistic portfolio attributes.
* Independent portfolio attributes: those to which the contribution of each project is independent of other projects. Then, for obtaining an evaluating measure for the portfolio, the measure for each project should be linearly added together.
* Interrelated portfolio attributes: those to which the contribution of the projects are interrelated.
* Synergistic portfolio attributes: these are the holistic contribution of the selected projects, and can only be measured when considering preferences among alternative portfolios.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some publications, like articles and books, are standards within managers. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

For a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods, Tools and Techniques for Project Selection and Evaluation, and Portfolio Balancing===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discusses in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. Thezse approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be the required approach for companies that are competing in shrinking industries or aiming to phase out a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T16:58:12Z

Dnhr0: /* Traditional Methods for Project Evaluation & Selection */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and bubble charts) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been considered relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear, non-linear, integer, goal seek, dynamic, and stochastic programming, as well as fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad-hoc models: models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, quantitative methods are often supplemented with qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade offs among the portfolio attributes. There are three main phases involved:

* Identifying the portfolio objectives and selecting the associated portfolio attributes (that may be independent, interrelated or synergistic portfolio attributes).
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some publications, like articles and books, are standards within managers. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

For a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods, Tools and Techniques for Project Selection and Evaluation, and Portfolio Balancing===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discusses in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. Thezse approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be the required approach for companies that are competing in shrinking industries or aiming to phase out a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T16:08:43Z

Dnhr0: /* Dependencies */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and bubble charts) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been regarded as relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear programming, non-linear programming, integer programming, goal seek, dynamic programming, stochastic programming and fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad hoc models: unstructured models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, narrowly focuses quantitative methods are often supplemented with broader qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of analytical and judgmental tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are affected in by the selection (or rejection) of another project. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since the external ones are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar products (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria. This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade offs among the portfolio attributes. There are three main phases involved:

* Identifying the portfolio objectives and selecting the associated portfolio attributes (that may be independent, interrelated or synergistic portfolio attributes).
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some publications, like articles and books, are standards within managers. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

For a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods, Tools and Techniques for Project Selection and Evaluation, and Portfolio Balancing===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discusses in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. Thezse approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be the required approach for companies that are competing in shrinking industries or aiming to phase out a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

<references>
<ref name = "Ashrafi"> Ashrafi, Maryam, Hamid Davoudpour, and Mohammad Abbassi. "Developing A Decision Support System For R&D Project Portfolio Selection With Interdependencies." AIP Conference Proceedings 1499.1 (2012): 370-378. Academic Search Premier. </ref>
<ref name = "Chien"> Chien, C. "A Portfolio–Evaluation Framework For Selecting R&D Projects." R&D Management 32.4 (2002): 359-368. Business Source Premier. </ref>
<ref name = "Blau"> Blau, Gary E., et al. "Managing A Portfolio Of Interdependent New Product Candidates In The Pharmaceutical Industry." Journal Of Product Innovation Management 21.4 (2004): 227-245. Business Source Premier. </ref>
<ref name= "Ghapanchi"> Ghapanchi, A.H. ( 1 ), et al. "A Methodology For Selecting Portfolios Of Projects With Interactions And Under Uncertainty." International Journal Of Project Management 30.7 (2012): 791-803. Scopus®. </ref>
<ref name = "PMI"> Project Management Institute, Inc. "The Standard for Portfolio Managements." (2006). </ref>
<ref name = "Iam"> Iamratanakul, S. ( 1 ), P. ( 2 ) Patanakul, and D. ( 3 ) Milosevic. "Project Portfolio Selection: From Past To Present." Proceedings Of The 4Th IEEE International Conference On Management Of Innovation And Technology, ICMIT Proceedings of the 4th IEEE International Conference on Management of Innovation and Technology, ICMIT (2008): 287-292. Scopus®.</ref>
<ref name = "Tham"> Thamhain, Hans J. "Assessing The Effectiveness Of Quantitative And Qualitative Methods For R&D Project Proposal Evaluations." Engineering Management Journal 26.3 (2014): 3-12. Academic Search Premier. </ref>
<ref name = "Fox"> Fox, G. Edward, Norman R. Baker, and John L. Bryant. "Economics Models For R And D Project Selection In The Presence Of Project Interactions." Management Science 30.7 (1984): 890-902. Business Source Premier. </ref>
<ref name = "Feys"> Feyz, A. ( 1 ), and H. ( 2 ) Iranmanesh. "Using Robust Portfolio Modeling To Selecting Of New Product Development Projects: A Case Study." IEEM 2007: 2007 IEEE International Conference On Industrial Engineering And Engineering Management IEEM 2007: 2007 IEEE International Conference on Industrial Engineering and Engineering Management (2007): 979-983. Scopus®. </ref>
<ref name = "Cooper"> Cooper, Robert, Scott Edgett, and Elko Kleinschmidt. "Portfolio Management For New Product Development: Results Of An Industry Practices Study." R&D Management 31.4 (2001): 361. Business Source Premier. </ref>
<ref name = "Vitolo"> Vitolo, Guilherme, and Flavio Cipparrone. "Strategic Implications Of Project Portfolio Selection." Accounting & Taxation 6.2 (2014): 11-20. Business Source Premier. </ref>
<ref name = "Smith"> Smith, Daniel, and Richard Sonnenblick. "From Budget-Based To Strategy-Based Portfolio Management. (Cover Story)." Research Technology Management 56.5 (2013): 45-51. Business Source Premier. </ref>
<ref name = "Liesio"> Liesiö, J., P. Mild, and A. Salo. "Robust Portfolio Modeling With Incomplete Cost Information And Project Interdependencies." European Journal Of Operational Research 190.3 (2008): 679-695. Scopus®. </ref>

Project Evaluation and Selection for the Formation of the Optimal Portfolio

2014-11-23T11:30:23Z

Dnhr0: /* Acceptance and Use */

[[File:ProjectstoPortfolios4.jpg|frame|200px|text-bottom|right|From Projects to Portfolios. Due to dependencies or strategy alignment, selecting the best projects does not necessarily result in the best portfolio]]

The increasing intensity of competition and fast technology changes have pushed firms to look for the
development of more innovative products. In order to keep up with market trends and to stand
out from competitors, most of the companies in technological fields turn to the development of
R&D projects. Generally, these are risky due to the uncertainty surrounding its technological
feasibility and its future commercial success, which make their evaluation and selection difficult to
achieve. Nevertheless, the survival of an organization is highly correlated with correct project
selection and management <ref name="Ashrafi" />. A wide diversity of approaches have been developed and
used throughout recent years in order to cope with this problem, each of them with its own
advantages and disadvantages. The most common, which from now on are referred as traditional methods, are quantitative, qualitative and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one kind of method is used during
the evaluation process.

Even if the projects are correctly evaluated separately, this does not guarantee that the best
portfolio can be formed. The best portfolio is the one that maximizes the probabilities of achieving
the goals set by the company <ref name="Chien" />. Its formation is not just about evaluating independent
projects; it is about evaluating the whole portfolio itself. Choosing the best projects based on
financial or any other criteria may not result in the best portfolio due to dependencies or
interrelations that may exist between the projects. The most common of them are related to cost,
resources, outcome and impact dependencies <ref name="Blau" />. The problem of evaluating and selecting projects and scheduling them is
complicated further by their presence. These dependencies add
complexity to the decision that needs to be taken, since the decision-making process becomes less
straightforward, causing the impossibility of using some quantitative methods, like linear programming. A good example of this is the case of a decision maker that has to choose projects taking into account monetary units. Under this perspective, an increase in this resource may have an impact in more than one project, making it impossible to use simple linear programming anymore because the additive restriction does no longer exists. In consequence, there is a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />. This difference may be even greater since it may also happen that the objectives that are considered when evaluating portfolios are different than those used when selecting individual projects.

If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time
required would be unmanageable. With only a set of 10 projects, the decision-maker would need
to evaluate 1024 portfolios <ref name= "Ghapanchi" />, which would be impossible for most of the companies (the possible combinations of projects equals 2 to the x power). In
consequence, newer methods, like Chien's Portfolio Evaluation Framework and Robust Portfolio Modeling, have been developed to assist with choosing the best portfolio within a shorter time. Therefore, this article focuses on describing and commenting about both traditional methods and the newer, more integrative ones, in order to offer enough information for understanding their use, advantages and disadvantages. Their utilization and in-depth analysis does not form part of this article (for more information, consult the section Related Material).

=Background=
==Application Context==

Resource allocation and project portfolio selection are focal decisions in public administration and industrial firms <ref name = "Liesio"/>. Every organization has a specific business strategy that will facilitate reaching its long-term goals. In consequence, ideas and concepts are developed, and products and services are designed, produced, manufactured and sold. However, companies need to take decisions along this path, since they do not have unlimited resources for pursuing every single idea. Furthermore, every one of them has a benefit accompanied by a certain degree of risk. Nevertheless, frequently, both benefits and risks are difficult to measure, since perfect information is not always (almost never) available.

Selecting the best projects (according to different criteria, like expected benefits, risk, investment, return, among others) is a common practice among many enterprises, no matter the industry they belong to. At the same time, projects can be of very different origin. Some of the most discussed in the literature are R&D projects, New Product Development, marketing campaigns, among others internal activities. However, selecting the ''best'' project in order to form the optimal portfolio is not an easy task.

According to the [http://www.pmi.org/ ''Project Management Institute''], a portfolio is "a collection of projects and/or programs and other work that are grouped together to facilitate the effective management of that work to meet strategic business objectives. The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized" <ref name= "PMI" />. In that way, the optimal portfolio would be the one that, given a determined array of components, yields the maximum benefits and best meets the company's objectives.

==Development History==

The Project Management Institute (PMI) was founded in 1969 in the United States. This organism is in charge of publishing, by different means, the most common best practices in project and portfolio management.
Even though some standards and recommendations exist, few project selection models are being used by decision makers in practice. The number of selection models, along with user interest in applying them, grew exponentially in the 1950's and 1960's; however, this trend has reversed since the mid-1970's <ref name= "Chien" />.

==Acceptance and Use==

[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration <ref name= "PMI" />]]

According to the Project Management Institute <ref name= "PMI" />, the portfolio management process is a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project) or the whole portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections have been recognized as good practices in the discipline of portfolio management, which would lead to the formation of the best portfolio among a set of projects.
The PMI defines the '''Evaluation''' phase as the process for gathering all relevant information to evaluate components (projects, tasks, etc.), with the purpose of comparing them in order to facilitate the selection process. The PMI recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level of accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are:
* Evaluate each component with a scoring model with weighted criteria. The criteria may be related to business, financial benefits, risk, legal/regulatory compliance, human resources, marketing and technical criteria (See The Standard for Portfolio Management for a complete list of criteria).
* Produce graphical representations (comparison grids, histograms, pie charts, line charts, and bubble charts) to facilitate decision-making.
* Make recommendations for a project, a category or the entire portfolio based on the value of each component or a group of them. Expert judgement may be used for this activity.

Once the Evaluation phase has been completed, it is necessary to move to the '''Selection''' phase. During this process, a short list of components based on the evaluation recommendations and the organization's selection criteria is produced. There are two main outputs for this phase:
* A list of categorized, evaluated and selected components, which can be compared by category or for the entire portfolio.
* Recommendations list: can include prioritization, acceptance, or rejection of a component based on their analysis.
The most popular tools and techniques to ensure that the most desirable components are selected include human, financial and asset capacity analysis, which aim is to understand the capacity of the organization in term of these resources in order to be able to execute the selected projects. Also, expert judgement is used to asses the inputs needed to select the components.

Next, the objective of the '''Prioritization''' phase is to generate a list of prioritized components within each strategic category with its relevant information. The most used tools are single and multiple weighted ranking, scoring techniques and expert judgement.

Finally, the '''Portfolio Balancing''' phase aims to develop the portfolio component mix with the greatest potential, to both support the company's strategic initiatives and achieve strategic objectives. The selection of the mix of components should also take into account similarities and synergies that exist between projects (dependencies). The most used tools, methods and techniques include, among others, cost benefit, quantitative, scenario, and probability analysis, as well as graphical analytical methods and expert judgement.

Following the recommendations for this part of the process, and taking into account the rest of the steps, a decision-maker should be able to form the best portfolio. However, the PMI does not show a clear way to deal with key aspects of the decision process. In its publication, it does not explains how to use most of the tools mentioned; however, a large number of articles and books regarding this topic have been available for some decades. Nevertheless, even though it states that dependencies should be assessed, it does not explain how to do it, while it is not a topic as widely explored as the techniques and methods for evaluating, selecting and prioritizing individual projects.

=From Project Evaluation and Selection to Balancing the Optimal Portfolio=

In order to understand the process of the formation of the optimal portfolio, it is important to know the methods, tools and techniques that exists for the individual selection of projects. At the same time, understanding what dependencies are and how they impact project selection is relevant for this topic.

==Traditional Methods for Project Evaluation & Selection==

[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]]

Three schools of thoughts have been identified <ref name= "Ashrafi" /> on how to classify the approaches for project portfolio evaluation and selection:

* '''Quantitative Methods''': these approaches, both for project selection and resource allocation, have been greatly developed since the early 1990's, but some of them have been around for more decades. However, they have been often criticized because their focus on numerical information, even though tacit knowledge and qualitative information have also been regarded as relevant. Generally, they can be classified in six dimensions <ref name= "Iam" />:
** Benefit measurement methods: Comparative models, scoring models and analytic hierarchy process. Here, five measures are particularly popular <ref name= "Tham" />: Net Present Value, Return on Investment, Cost-Benefit, Pay-Back Period and Pacifico and Sobelman Project Ratings.
** Mathematical programming approaches: linear programming, non-linear programming, integer programming, goal seek, dynamic programming, stochastic programming and fuzzy mathematical models.
** Simulation and heuristic models: Monte Carlo simulation, heuristic modeling and system dynamics simulations.
** Cognitive emulation approaches: decision-tree, game-theoretical approaches, statistical approaches and decision process analysis.
** Real options: approach that incorporates both uncertainty and the active decision making required for a strategy to succeed.
** Ad hoc models: unstructured models built for specific purposes.

* '''Qualitative Methods''': their focus is to take into account those factors that quantitative methods cannot. For project evaluations involving complex sets of business criteria, narrowly focuses quantitative methods are often supplemented with broader qualitative methods. Some of the most used are bubble diagrams, sensitivity analysis, benchmarking, check-lists, user centered design, group decision techniques and expert systems (Delphi, nominal group technology, focus groups). However, all of them can be used by themselves to determine the best, most successful or most valuable project.

* '''Hybrid (Mixed) Methods''': they are the most common methods for evaluating and selecting projects nowadays <ref name= "Tham" />. To qualify as a hybrid approach, the project evaluation and selection process has to contain a fairly balanced array of both classes of analytical and judgmental tools and techniques. Some good examples are graphical methods, conjoint analysis, data envelopment analysis and scenario planning.

==Dependencies==

The methods discussed in the previous section, even though they are widely used, frequently do not lead to the formation of the optimal portfolio by themselves, since there are some factors that regularly are not taken into account. These factor are called interactions or dependencies, which have two main causes: internal and external factors. The former arises when the resource requirements and/or benefits of one project are significantly affected in magnitude and/or timing by the selection or rejection of one or more of the projects in the set. On the other hand, the external interactions are those that arise over time from social and economic changes which have effects over subsets of the project set <ref name= "Fox" />. Through this article, only the internal interactions are going to be discusses, since those externals are impossible to know/quantify beforehand by the decision-maker.

There are 4 major sources of internal dependencies: Costs dependency, (non-monetary) resources dependency, outcome or technical dependency, and impact or benefit dependency. Some of them may overlap in scope, but are different in essence. These dependencies may imply that two or more projects, when developed together, create synergies, while it can also be the case that they are mutually exclusive because of different reasons.

===Cost Dependency===
[[File:CostDependency2.jpg|frame|text-top|right|Cost Dependency. The sum of the cost of the projects is lower than the total cost of the portfolio.]]

It is also called resource-utilization dependency. This dependency arises when the sum of the costs of two or more projects within a portfolio is not the same at the total cost of the entire portfolio. This happens because there is some degree of resource sharing, like labor, utilities, machinery and tooling, among others <ref name= "Chien" /><ref name= "Blau" /><ref name= "Fox" />. A project may require using a new machine, but its capacity is higher than the utilization required by this project, so it is possible to share it with other projects or with ongoing operations. However, if it is not used for something else, then the dependency does not exist. On the other hand, the appropriate portion of the cost of this machine is difficult to estimate, since it would be necessary to have an overview of the rest of the projects, some of whom might come in the future.

===Resources Dependency===

It is more related to the time that a certain project may require. It differentiates from the cost dependency because its focus is not the money employed, but the available time for its development. Its root cause is the learning curve derived from the employees' experience. A good example is that of the reduction in development times of two similar drug types (probably the second one will require less time because of the experience acquired during the development of the first one).

===Outcome or Technical Dependency===

This type of interactions occurs when the probability of success of a given project depends on the outcome (success or failure) of one or more of the other projects <ref name= "Chien" /><ref name= "Fox" />. The problem for the decision-maker arises when trying to translate this situation to numbers or comparable criteria.
This could be compared to decision-tree analysis: if an specific project fails, then the next project cannot be developed and vice versa. This type of dependencies are common in software or hardware development. A good example could be the case of a new printer that requires the development of a new technology for printing with twice the speed as the previous model. In this case, the printer cannot be released to market if the printing technology has not been successfully developed.

===Impact or Benefit Dependency===

An impact or benefit dependency may occur when the impacts of payoffs of the projects are not additive. In this case, projects may be said to be complementary or competitive, e.g. what happens with cannibalism. A good example for this dependency is what happens when a company decides to introduce a new product to a specific market segment, successfully increasing the overall sales. At the same time, another project's objective is to add a special feature that may make more attractive this same product in order to reach a different demographic group, which will also increase sales. If both projects are implemented, then the net total sales may be lower than the expected individual sales figure for each project. Since the product now has a scope for two markets, then some buyers may not consider it attractive anymore <ref name= "Fox" />.

==Methods for the Formation of the Optimal Portfolio==

Some new methods have been developed during the last decade. Their advantage over the traditional tools, methods and techniques is that they do consider dependencies.

===Chien's Portfolio Evaluation Framework===

This framework guides the construction of measuring scales of the various portfolio attributes and facilitates trade offs among the portfolio attributes. There are three main phases involved:

* Identifying the portfolio objectives and selecting the associated portfolio attributes (that may be independent, interrelated or synergistic portfolio attributes).
* Selecting or constructing scales for measuring portfolio attributes.
* Measuring the alternative portfolios by aggregating attributes.

===Robust Portfolio Modeling===

Robust Portfolio Modeling (RPM) <ref name= "Feys" /> is a model created in 2007 for determining an optimum project portfolio. Originally, RPM was a framework for project portfolio selection with independent projects and fixed budget; however, it was later extended by: admitting a wide range of project dependencies, modeling incomplete information about project costs, and considering variable budget levels <ref name = "Liesio"/>.

Under this framework, determined amounts of projects are evaluated with regard different criteria, assigning a score for every one of them. In consequence, a score matrix is created and an overall value for each project is obtained by taking into account weights depending on the importance of each criteria. As a result, a project is preferred to another if it has higher overall value.
RPM establishes that a project portfolio is a subset of available projects; and all the possible portfolios is given by 2^x, while the overall value of a portfolio is the sum of the overall value of its projects.
In RPM, the possible portfolios should be defined by a set of linear inequalities. At the same time, the following types of constraints are considered and should be modeled:

* Budget constraints, which include the costs of the individual projects and the available total budget. In case of projects that deliver savings, then this are included as negative costs.
* Logical constraints, which are used to model mutually exclusive and time-dependent projects, e.g. project B can only be included if project A is or has already been chosen.
* Positioning constraints, which are in charge of ensuring alignment with the strategic requirements, e.g. a minimum number or projects is required for entering new markets.
* Threshold constraints, which ensure that the portfolio meets minimum requirements, like a determined payback period, utilizing all available workforce, among others.
* Dependency constraints, which are used to include any kind of dependency among projects. These can only be included as linear constraints with dummy projects.

This transformation and manipulation of constraints allows using linear programming by taking into account dependencies. For further reading on examples and applicability of RPM, please refer to the Related Material section.

=Related Material=

For more in depth analysis and understanding of the portfolio management process, some publications, like articles and books, are standards within managers. For example, the [http://www.amazon.com/Standard-Portfolio-Management-Project-Institute/dp/1935589695 ''Standard for Portfolio Management''] is published by the Project Management Institute, and it goes deeply into the steps, tools and outcomes that every phase of the portfolio management process requires.

On the other hand, a case study is presented by Smith and Sonnenblick (2013) <ref name= "Smith" />, where a pharmaceutical company, HealthPharma, faces the problem of project evaluation, selection, prioritization and portfolio management. The article shows different phases of portfolio management and the decisions that should be taken internally in order to construct a better portfolio. This case study works as a good guideline in order to better understand the topics covered in this article.

For a better understanding of Robust Portfolio Modeling, consult the [http://rpm.aalto.fi/ ''RPM - Aalto University's webpage''] dedicated to this topic, which gives a more detailed explanation of the framework, and shows a list of both publications related to the model and the past and on-going research projects in which RPM has been used. Some of the applications has been observed on companies and government agencies like Nokia, Tekes, The Finnish Forest Industries Federations and the Finnish Defense Forces, among others.

=Discussion=
==Strengths and weaknesses==

The models presented in this article, both for the individual project evaluation and selection, and for the optimal portfolio formation have inherent strengths and weaknesses.

===Traditional Methods, Tools and Techniques for Project Selection and Evaluation, and Portfolio Balancing===

The strengths of the methods, tools and techniques for the traditional project evaluation and selection are:

* There has been a constant and vast research surrounding their use and application in case companies.
* Most of them are easy to understand and to explain, so communication and training within a company is facilitated.
* Cover both quantitative and qualitative aspects of projects.
* Different criteria can be used to evaluate and select taking into account different perspectives.

However, they do also have some important weaknesses <ref name= "Chien" />:

* The treatment given to evaluation criteria may not be appropriate, and this can be intensified by the presence of dependencies.
* There may be problems with handling non-monetary aspects, as it can be diversity of required time among projects.
* There is no recognition and incorporation of the experience and knowledge of the decision makers.
* Some managers have stated that they do not rely in these methods because, historically, they have not seen an improvement in the results of their choices.
* The go/kill decision points are generally weak and decisions are not taken in the right moment.

===Models for the Formation of the Optimal Portfolio===

On the other hand, the models previously presented for the formation of the optimal portfolio have some strengths that attack some of the weaknesses addressed before:

* They take into account dependencies among projects.
* They can consider different criteria, even if they are interrelated.
* The experience of the decision makers is relevant for its proper utilization.
* Guarantees that the project mix is indeed the optimal one.
* Takes into account the strategy and other criteria at the same time.

Nevertheless, it has two main downsides that are quite evident:

* Their research and development is in course, so there are not as many articles and books that explain how they should be used.
* The level of sophistication is higher, so it may prevent people from using them.
* Even if the decision maker understands and correctly applies the method, communicating and explaining the results to other people may be a challenge.

However, investing time and resources in leaning how to use these techniques may lead to a better portfolio formation.

==Relationship to other Material==

Understanding these methods will eventually result in a better portfolio formation. However, this process should beforehand be aligned with the ''resource allocation process'', since it is a basic constraint that limits the number of projects that a company can develop. At the same time, portfolio management have a very tight link to ''business strategy'', since it is by this mean that the company accomplishes its objectives. In consequence, the portfolio management process is iterative, allowing and demanding for changes when the goals are achieved, so new projects and portfolio are formed in order to reach higher benefits, markets or reputation.

==Implementation Advice==

It should be noted that the methods discusses in this article vary on its degree of easiness of implementation. Some of them do not require any strong formal formation or education, nor having previous experience with similar tools. Quantitative methods, especially those related to financial indicators, are the most spread and used among industries for portfolio management and project selection <ref name= "Cooper" /> ; however, even this metrics are not used in the right situation. Some recommendations for when and why using them are <ref name ="Vitolo" />:
* The NPV criterion should be used to generate portfolios with long term, large and positive cash flow streams, which could help companies to grow when competing in high growth industries.
* The Internal Rate of Return and the Profitability Index criteria should be used to generate higher return on capital investment, which drives capital efficiency. Thezse approaches are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is the key to success.
* The Adjusted Payback Period criterion should be used to generate portfolios whose focus is on short term returns, which may be the required approach for companies that are competing in shrinking industries or aiming to phase out a specific business line.

Similarly, most of the methods are better suited for specific situations, industries and objectives. It is imperative to understand when a certain technique is recommended and when a different approach should be used; however, boundaries are not always clear and the decision may be difficult to make, since most of the decision makers tend to stick with only a couple of methods.

[[Category:Portfolio Management]]
[[Category:Project Evaluation and Selection]]
[[Category:Portfolio Evaluation]]

=References=

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