Project Evaluation and Selection for the Formation of the Optimal Portfolio
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used throughout recent years in order to cope with this problem, each of them with its own | used throughout recent years in order to cope with this problem, each of them with its own | ||
advantages and disadvantages. The most common are quantitative methods, qualitative methods | advantages and disadvantages. The most common are quantitative methods, qualitative methods | ||
| − | and hybrids methods<ref name="Ashrafi" />. Nonetheless, most of the times not only one method is used during | + | and hybrids methods <ref name="Ashrafi" />. Nonetheless, most of the times not only one method is used during |
the evaluation process. | the evaluation process. | ||
Even if the projects are correctly evaluated separately, this does not guarantee that the best | 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 | 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 | + | 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 | 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 | 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, | interrelations that may exist between the projects. The most common of them are related to cost, | ||
| − | resources, financial return and technical factors | + | resources, financial return and technical factors <ref name="Blau" />, as well as outcome and impact dependencies. The problem of evaluating and selecting projects and scheduling them is |
complicated further by their presence. These dependencies add | complicated further by their presence. These dependencies add | ||
complexity to the decision that needs to be taken, since the decision-making process becomes less | complexity to the decision that needs to be taken, since the decision-making process becomes less | ||
| − | straightforward. A good example is the impossibility of using some quantitative methods, like linear programming. A good example of this situation is given when investing an additional monetary unit, since it may have impact in more than one project, since the additive restriction does no longer exists under this perspective. In consequence, a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio | + | straightforward. A good example is the impossibility of using some quantitative methods, like linear programming. A good example of this situation is given when investing an additional monetary unit, since it may have impact in more than one project, since the additive restriction does no longer exists under this perspective. In consequence, a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio <ref name="Chien" />, and it may be also the case where the objectives that are considered when evaluating portfolios are different than those used when selecting |
individual projects. | individual projects. | ||
If a company decides to evaluate a portfolio as it would evaluate projects, the amount of time | 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 | required would be unmanageable. With only a set of 10 projects, the decision-maker would need | ||
| − | to evaluate 1024 portfolios | + | 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 have been developed to assist with choosing the best portfolio | consequence, newer methods have been developed to assist with choosing the best portfolio | ||
within a shorter time. This article focuses on describing and analyzing these methods. | within a shorter time. This article focuses on describing and analyzing these methods. | ||
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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. | 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 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" | + | According to the 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, gives the maximum benefits and is the one that best meets the company's objectives. |
==Development History== | ==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. | 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 utilized as aids to decision making. 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 | + | Even though some standards and recommendations exist, few project selection models are being utilized as aids to decision making. 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== | ==Acceptance and Use== | ||
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[[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration]] | [[File:Process2.jpg|text-top|right|frame|Portfolio Management Process - High Level Illustration]] | ||
| − | According to the Project Management Institute | + | According to the Project Management Institute <ref name= "PMI">, the portfolio management processes are a series of interrelated processes, from identifying and authorizing portfolio components to reviewing the progress of each individual component (project), as well as that of the entire portfolio. This article focuses mainly on the Evaluation, Selection, Prioritization and Portfolio Balancing phases. The processes and tasks described in this sections has been recognized as good practices in the discipline of portfolio management. |
The PMI defines the Evaluation phase as the process for gathering all pertinent information to evaluate components, with the purpose of comparing them in order to facilitate the selection process. The Institute recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level accuracy (if possible). Also, graph, charts, documents and recommendations are produced to support the selection process. The recommended key activities for this process are: | The PMI defines the Evaluation phase as the process for gathering all pertinent information to evaluate components, with the purpose of comparing them in order to facilitate the selection process. The Institute recommends beginning with information gathering, both qualitative and quantitative, until reaching the required level 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 components with a scoring model with weighted criteria. The criteria may be related, but no limited, 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). | * Evaluate components with a scoring model with weighted criteria. The criteria may be related, but no limited, 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). | ||
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[[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]] | [[File:Venn3.jpg|frame|200px|text-top|right|Methods for Project Evaluation and Selection]] | ||
| − | Three schools of thoughts have been identified | + | 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 (Iamratanakul,2008): | * '''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 (Iamratanakul,2008): | ||
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<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 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 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> | ||
Revision as of 16:53, 16 November 2014
From Projects to Portfolios. Due to dependencies or strategy, 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 [1]. 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 are quantitative methods, qualitative methods and hybrids methods [1]. Nonetheless, most of the times not only one 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 [2]. 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, financial return and technical factors [3], as well as outcome and impact dependencies. 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. A good example is the impossibility of using some quantitative methods, like linear programming. A good example of this situation is given when investing an additional monetary unit, since it may have impact in more than one project, since the additive restriction does no longer exists under this perspective. In consequence, a difference between measuring the preference for the portfolio as a whole and measuring the preferences for projects in the portfolio [2], and it may be also the case where 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 Cite error: Closing </ref> missing for <ref> tag [2] [3] [4] [5]
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