The importance of Organizational Structures in Portfolio Management

Developed by Anne Kiesbye Dittmann (s144038)

Abstract

The success of any organization – being a commercial company, public or non-profit organization – is highly dependent on the level of alignment the organization is able to execute on. The mission and vision statements of an organization express the end goal – the North Star. In order to achieve these goals, a strategy – the game plan of how to get there – is formulated. In order to execute on the strategy, a carefully selected collection of capabilities that suits and enables the strategy must be established - the organizational setup and design is critical. The success criteria, and the ability, of the organization to execute the right projects are closely linked to their capability to design and structure the organization. The purpose of introducing Project Portfolio Management (PPM) is to establish and formalize an entity, that provides insight and transparency for the senior management to constantly align the activities (projects) with the strategy and thereby utilize the limited economic and human resources of the organization in the best possible way.

The introduction of PPM as a collection of business practices impose complexity onto the organization which cannot be accommodated by the classical organizational structures. The purpose of this article is to address and stress the importance of organizational design - including organizational structures needed for a PPM organization to be effective in and co-exist with a classical line organization - for the enterprise to become successful. The article addresses the important concepts and the application of how to obtain an optimal organizational design which is needed in order to execute on the strategy of the organization. It provides the tools and accumulated experience to become a good and successful practitioner.

Background - Managing portfolios

Project Management is a mature discipline with a great variety of tools supporting the project manager and team to deliver the right product or service timely at the right level of quality; however, the real value is only harvested when the completion of the project benefits the business and improves the competitive position. The rapid changes in the competitive landscape require constant alignment with the strategic direction of the enterprise. Projects not being constantly monitored and assessed with focus on benefit, risk, and alignment with the overall strategy of the enterprise tend to fall short and potentially drain the organization of financial and human resources at the expense other more beneficial projects. One way of dealing with the increase in complexity and the significant increase in the use of projects as a method to deal with challenges is to introduce the business practice of PPM.

In the highly recommendable book on Project Portfolio Management by Levine, PPM is defined as “Project portfolio management is a set of business practices that brings the world of projects into tight integration with other business operations. It brings projects into harmony with the strategies, resources, and executive oversight of the enterprise and provides the structure and processes for project portfolio governance” (Levine, 2005, p. 1). The successful implementation of PPM requires a transformation of the organization involving significant changes to the roles and responsibilities of not just the upper management level but to the entire organization - a new organizational design is needed.

Organizational structures

An organizational structure is a formal visualization of a system of tasks and the reporting relations, which coordinate and motivate the employees, enabling them to work together efficiently and to achieve the goals of the organization. Having an organizational structure can help the organization improve efficiently by balancing the influencing factors such as external environment, strategy, technology, and human resources. There are several types of organizational structures and these will be listed and elaborated on below. It can be a comprehensive task to select and design a proper structure for an organization, which cater for the desired increase in efficiency and effectiveness of the organization. Organizational structuring is in essence about placing your resources and getting the most out of them as possible. The organizational structure should be perceived as a dynamic tool to optimize the business. Adaptions and changes must be executed when needs occur. However, it is important to notice that changes will create uncertainty among the employees and will result in resistance – transparency and open communication is perceived as one of the most effective measures to minimize the resistance.

The success of any organization – being a commercial company or a non-profit organization – is highly dependent on the level of alignment which the organization is able to execute on. It is therefore important to focus on the structure of the organization and make a virtue of designing the best possible structure that suits the organization and its goals. If the organizational structure is not in alignment with the strategy of the organization, it will create friction which shows the inability to mobilize resources right, the decision-making and information flow lacks, and the execution of the strategy becomes ineffective.

Differences in structures

As mentioned above, there are several types of organizational structures. Below is a short description of the different main types of structures including the advantages and disadvantages of these. The structure can be selected and designed in order to fit your organization – there is no “one-size-fits-all” structure. The following structures have been selected as relevant for this article.

Functional structure

Figure 1 illustrates a visualization of the functional structure. The figure is created by the author of this article and based on information given/showed in

The functional structure is the structure of an organization composed of departments, which are required to fulfill the services and/or manufacturing of an enterprise. In this context, the function is a grouping of employees, who hold the same knowledge or field of work. The functional organization structure is typically the first option, that the manager looks into and subsequently he/she groups jobs into departments. The individual department usually works independently and isolated from the other departments. The employees of a department report to a functional manager. The functional managers are the ones in control of project budgets and allocation of resources, which means that the project managers will have limited authority and they act as coordinators rather than ‘leaders’.

Advantages of a Functional organization:

• Good for small teams or projects since the functional manager has control over the team members and resources required.
• Easy access to “experts” - since they are in the same functional unit.
• Easy and quick to gather people when needed (e.g. to resolve project related problems).
• Relatively small and simple teams and communication system.
• Centralized resources – it ensures sustainability in the organization (the knowledge remains in the individual department).

Disadvantages of a Functional organization:

• The organizational structure is primarily applicable for ongoing operations rather than projects
• The work is kept to the individual functional division and isolated from the others.
• Project management is usually underestimated and is reflected in the success of projects.
• Project managers have no or very little authority - the employees in each function report to the functional manager, and the project manager therefore lose authority on the project team.
• The people on the project team may be more loyal to their own department rather than the work in the project teams – this creates conflicts.
• No real opportunities to network across the functions.

Matrix structure

Figure 2 illustrates a visualization of the matrix structure. The figure is created by the author of this article and based on information given/showed in

The matrix structure is a structure that groups people and resources by function and by product. This means that the employees of the organization are grouped by their function in order to become more skilled and learn from each other. Furthermore, they are also grouped in project or product teams in order to create a diverse group with different skill sets and functions that shall develop a specific product. This creates a higher complexity within the reporting network but gives the matrix structure flexibility.

Advantages of the Matrix structure:

• Allows managers to make flexible choices.
• Authority to both project managers and functional managers – building a strong culture within the teams across divisions.
• Very flexible – resources are used more efficiently since it can be moved between project as needed.
• Employees work on different things in parallel.
• Team members maintain “a home” – when a project is finished and they are released, they return to their department and focus on their “business-as-usual” assignments.

Disadvantages of the Matrix structure:

• Two bosses/managers
• Conflicts (e.g. resource conflicts, between projects, etc.) between project and functional managers can easily occur.
• Conflicts between “business-as-usual” assignments and project work for the individual – functional managers are likely to have different priorities than project managers.
• Extensive policies and procedures.

Projectized structure

Figure 3 illustrates a visualization of the projectized organizational structure. The figure is created by the author of this article and based on information given/showed in and

The projectized structure is a structure that groups people and resources by project or product teams. This gives the project manager complete authority of the project and the resources. The projectized organization rarely has a functional manager. This structure works by arranging the different projects into programs or portfolios and executing on them as projects. This structure is primarily found in consultancy companies.

Advantages of a Projectized structure:

• Efficient project organization – all resources are focused and dedicated to the project assignments. This also eases the scheduling of work.
• Loyalty to the project and the project manager – the team only needs to focus on the team’s goals; they do not have other assignments than the project related ones.
• More effective communication than in the functional structure – the project team usually works in the same location (or room) which increases the efficiency of communication significantly.
• The project manager is in control.

Disadvantages of a Projectized structure:

• No “home” when a project is finished – if there is not a new project after the project has reached its end, the resources are released. Closing a project can mean losing your job.
• Lack of professionalism in disciplines – the above mentioned disadvantage can result in lack of professionalism, because when an employee is released, the person’s “know-how” and experience will be lost as well.
• Repetition of facilities and job functions – the resources and tools only belong to one project in the organization at a time.
• Less efficient use of resources – the resources are dedicated to one project only and they cannot be allocated to another task, which creates inefficiency.
• Project managers also do line management in this structure – this means spending time and effort on human resource tasks.

Creating the optimal Project Portfolio Management organizational structure

Figure 4 illustrates portfolio management elements. The figure is created by the author of this article and inspired by

The introduction of PPM is a cultural transformation that requires strong top-level management commitment – walks the talk – and a few highly skilled, respected, and committed “ambassadors”, who can drive this cultural transformation. However, culture and cultural changes are not a design parameter that can be demanded, it is the outcome of an organizational design . The scope of PPM begins with preparing the proposed projects (options) against a set of well-defined selection criteria and making sure that only relevant project are ranked and presented. It is of significant importance that the PPM organization has the right information to be able to determine which projects that will enter the next stage and which ones that will be trashed. The PPM organization must liaise and connect the project with the business. The evaluation is determined based on strategic fit, risks/uncertainties, and benefits for the corporation; it is essential for optimal utilization of the financial and human resources of the enterprise. When a project is approved and it moves to the active stage, the project enters performance monitoring where the task of the PPM is to evaluate the project against the selection criteria and the project goal. This phase will clarify project uncertainty that along with performance deficiencies could result in postponement, re-shaping, or even termination of the project. The “tail” of the project tends to be underestimated, but this is where the project spend is transformed into business opportunities – the product enters the finalization and maintenance phase (project excellence). Depending on the type of enterprise/organization, e.g. pharmaceuticals, software, or public service, the steps and procedures are often governed by a stage gate control model adapted to the nature of the projects being executed.

The portfolio management office hosts and provides infrastructure for the portfolio management teams, i.e. providing standard operating procedures for the tracking, reporting, and managing activities in a unified and comparable way. In contrast to the functional organization structure applied in many companies, the portfolio management office, including the portfolio and project managers, has a fairly small number of permanent staff members. It relies on the ability to set up projects and manage the project team composition as the projects move through the different stages. The different stages are industry dependent in terms of complexity and timeline – e.g. significant differences can be observed between consumer electronics and pharmaceuticals. In the ideation phase, it is all about managing uncertainty – potentially having limited knowledge about the market, the technology, the resources required, and the organization. The composition of the project team will change as the project progresses towards hand over to the company’s delivery organization and the uncertainty is transformed into risk management, i.e. time and expenditures.

The governance board/council is the gatekeeper; it secures the alignment and applies near “real time” priority of all active projects. The governance board is composed of senior representatives of the business function - the receiving business - which owns the project result. It is ultimately responsible for the business fit and project results. The success of introducing PPM is highly dependent on transparent and “fair” criteria, i.e. the criteria are predefined and decisions are based on comparing metrics/KPI’s against those criteria. Thus, strong sponsors, territorial protectionism, and gut feelings must be avoided and should not be tolerated.

Figure 5 illustrates an example of a Project Portfolio Management Organizational Structure. The figure is created by the author and inspired by

Schedule, cash flow, financial outcome, and related metrics/KPI’s are all determined by the governance board/council and changes to the metrics must be approved by the governance board. Active projects that progress within the boundaries determined by the governance board will report “progressing as planned”. However, if the project is deviating from the schedule, budget or other significant metrics – the project management office must be notified or detect the deviation and report it to the governance board.

In case the organization does not have employees/managers who possess the required knowledge and expertise, an advisory board to the governance board can be a good and flexible solution. If the market insight is insufficient or product features are deemed unknown, a panel of lead users could be established . Input from academia might be of great value in case new technology is essential for the development of a product or service. In situations where new materials are considered, suppliers of components and manufacturing facilities will be able to contribute with valuable knowledge. The primary contribution of the members of an advisory board is to reduce the uncertainty in the ideation phase and reduce risk in the project execution phase.

The organizational structure will vary from enterprise to enterprise, but figure 4 indicates the typical elements of PPM organization structure.

Applicability – In Summary

Figure 6 illustrates a hybrid between classical functional and project oriented organization structure. The figure is created by the author of this article and inspired by

The introduction of Project Portfolio Management is to a great extend a cultural transformation. Culture is perceived to be the most difficult attribute of an organization to change and requires significant management attention over a very long period of time – often years .

PPM has successfully been applied in IT and software development companies with a strong need for continued alignment and where product life time is often very short. The age profile and educational background is perceived to contribute to less resistance. The success of a change management processes is highly depended on the ability to establish a trust full working environment. PPM will fail if the management does not walk-the-talk.

The ability to adapt quickly to changes in the business environment - it being a technology, regulatory or customer preference - cannot be accommodated by a classical organizational setup. Operational excellence is an important capability to master, but it is insufficient – on its own – to cope with a portfolio of projects and making sure that they are all aligned with the dynamics of strategies. PPM - when correctly implemented - is a very strong business operating model that can make the difference between success and failure.

The PPM method relies heavily on the ability to compose a team of highly motivated employees from an internal resource pool. It is important establish a “home” for these employees allowing these resources to focus on the current project and not being on the outlook for “something to do when this project is completed”.

The change management process requires strong managers with earned respect along with “ready for change” ambassadors who can establish “buy-in” at the rest of the organization. Initially this change might require external facilitation assistance.

The literature provides great insight, compelling arguments and a step-by-step guideline for implementing a PPM organization. However, the standards provided as readings in class only very briefly address the PPM (Management of Portfolios ) and the “real” challenges associated with applying PPM could be elaborated more. PPM is a supplement to the current project management standards, but not a replacement.

Annotated Bibliography

Jones, G. R. & George, J. M. (2015). Essentials of Contemporary Management(5th edit.). New York: McGraw-Hill Education, Chapter 7.

To learn more about the basics of management, the Essentials of Contemporary Management is a good read. Chapter 7 describes the design of organizational structures from an organizational management point of view; including a more in-depth elaboration on each of the structures and the choices of why a certain structure is chosen by the managers. The book provides a good knowledge base on the subject of Organizational Management including advantages/disadvantages and examples.

Kates, A. & Kesler, G. (2011). Leading Organization Design: HOW TO MAKE ORGANIZATION DESIGN DECISIONS TO DRIVE THE RESULTS YOU WANT (1st edit.). San Francisco: Jossey-Bass. The book addresses the subject of leading organizational design and how to drive the organization in the wanted direction. It gives an introduction to how you can, on the basis of certain criterias and demands, lead and design organizations. It gives a guidance to the necessary steps, you must take into consideration to ensure alignment in your organization. It is a great addition (with a practical perspective) to any other organization design litterature.

Levine, H. A. (2005). Project Portfolio Management: A Practical Guide to Selecting Projects, Managing Portfolios, and Maximizing Benefits. Jossey-Bass

This is a book on project portfolio management (PPM). It provides the reader with a step by step run-through of how to create a portfolio and how to manage it. The book gives the tools and guidance to understand the implications of managing a project portfolio office.