PCMA-311 Chapter 1 PDF

1.1 What is a Project............................................................................................................. 2 1.2 Project Management VS. General Management......................................................2 1.3 What is Managed? The Three Goals of a Project....................

1.1 What is a Project............................................................................................................. 2 1.2 Project Management VS. General Management......................................................2 1.3 What is Managed? The Three Goals of a Project...................................................... 3 1.4 The Life Cycles of Projects............................................................................................ 3 1.5 Selecting Projects to Meet Organizational Objectives............................................5 Nonnumeric Selection Methods................................................................................................................5 The Sacred Cow............................................................................................................................................5 The Operating/Competitive Necessity.........................................................................................6 Comparative Benefits.............................................................................................................................. 6 Numeric Selection Methods.........................................................................................................................6 Financial Assessment Methods.........................................................................................................6 Financial Options and Opportunity Cost.................................................................................... 9 Scoring Methods.........................................................................................................................................10 THE PROJECT PORTFOLIO PROCESS.................................................................................. 13 1. Derivative projects........................................................................................................................................ 14 2. Platform projects...........................................................................................................................................15 3. Breakthrough projects...............................................................................................................................15 4. R&D projects.....................................................................................................................................................15 Chapter 1 The World of Project Management 1.1 What is a Project A project is a temporary endeavor undertaken to create a unique product or service. It is ○ specific, ○ timely, ○ usually multidisciplinary, and ○ typically conflict ridden. Projects are parts of overall programs and ○ may be broken down into tasks, subtasks, and further if desired. Current trends in project management include ○ achieving strategic goals, ○ achieving routine goals, ○ improving project effectiveness, ○ virtual projects, and ○ quasi-projects. Projects are characterized by conflict. As we will see in later chapters, ○ the project schedule, ○ budget, and ○ specifications conflict with each other. The needs and desires of the client conflict with ○ those of the project team, ○ the senior management of the organization conducting the project and ○ others who may have a less direct stake in the project. Some of the most intense conflicts are those between members of the project team. ○ Much more will be said about this in later chapters. ○ For the moment, it is sufficient to recognize that projects and conflict are often inseparable companions, an environment that is unsuitable and uncomfortable for conflict avoiders. It is also important to note that projects do not exist in isolation. They are often parts of a larger entity or program, just as projects to develop a new engine and an improved suspension system are parts of the  program to develop a new automobile. The overall activity is called a program. Projects are subdivisions of programs. Likewise, projects are composed of tasks, ○ which can be further divided into subtasks that can be broken down further still. The purpose of these subdivisions is to allow the project to be viewed at various levels of detail. 1.2 Project Management VS. General Management Project management differs greatly from general management. Every project is planned, budgeted, scheduled, and controlled as a unique task. Unlike non projects, projects are often multidisciplinary and usually have considerable need to cross departmental boundaries for technology, information, resources, and personnel. Crossing these boundaries tends to lead to intergroup conflict. The development of a detailed project plan ○ based on the scope and due date of the project is critical to the project’s success. Unlike their general management counterparts, ○ project managers have responsibility for accomplishing a project, but little or no legitimate authority to command the required resources from the functional departments. ○ The PM must be skilled at win-win negotiation to obtain these resources. 1.3 What is Managed? The Three Goals of a Project The two primary roles of the project manager are ○ to manage trade-offs among three interrelated objectives and ○ to manage risks. The three interrelated objectives are: to ○ (1) meet the budget, ○ (2) finish on schedule, and ○ (3) generate deliverables that satisfy the client. Because we live in an uncertain world, ○ as work on the project proceeds, ○ unexpected problems are bound to arise. These chance events will threaten the project’s schedule or budget or scope. The PM must now decide how to trade off one project goal against another (e.g., to stay on schedule by assigning extra resources to the project may mean it will run over the predetermined budget). If the schedule, budget, and scope are rigidly predetermined, the project is probably doomed to failure unless the preset schedule and budget are overly generous or the difficulty in meeting the specifications has been seriously overestimated. 1.4 The Life Cycles of Projects All organisms have a life cycle. They are born, grow, wane, and die. This is true for all living things, for stars and planets, for the products we buy and sell, for our organizations, and for our projects as well. A project’s life cycle measures project completion as a ○ function of either time (schedule) or ○ resources (budget). During the early stages, the PM must make sure that the project plan really reflects the wishes of the client as well as the abilities of the project team and is designed to be consistent with the goals and objectives of the parent organization. As the project goes into the implementation stage of its life cycle, ○ the PM’s attention turns to the job of keeping the project on budget and schedule—or, ○ when chance interferes with progress, to negotiating the appropriate trade-offs to correct or minimize the damage. ○ At the end of the project, the PM turns into a “fuss-budget” to assure that the specifications of the project are truly met, handling all the details of closing out the books on the project, making sure there are no loose ends, and that every “i” is dotted and “t” crossed. Many projects are like building a house. A house-building project starts slowly with a lot of discussion and planning. Then construction begins, and progress is rapid. When the house is built, but not finished inside, progress appears to slow down and it seemingly takes forever to paint everything, to finish all the trim, and to assemble and install the built-in appliances. Progress is slow-fast-slow, as shown in Figure 1-2.  It used to be thought that the S-shaped curve of Figure 1-2 represented the life cycle for all projects. While this is true of many projects, there are important exceptions. Anyone who has baked a cake has dealt with a project that approaches completion by a very different route than the traditional S-curve, as shown in Figure 1-3, J-shaped curve The process of baking a cake is straightforward. The ingredients are mixed while the oven is preheated, usually to 350°F. The mixture (technically called “goop”) is placed in a greased pan, inserted in the oven, and the baking process begins. Assume that the entire process from assembling the ingredients to the finished cake requires about 45 minutes—15 minutes for assembling the materials and mixing, and 30 minutes for baking. At the end of 15 minutes we have goop. Even after 40 minutes, having baked for 25 minutes, it may look like cake but, as any baker knows, it is still partly goop inside. If a toothpick (our grand-mothers used a broom straw) is inserted into the middle of the “cake” and then removed, it does not come out clean. In the last few minutes of the process, the goop in the middle becomes cake. If left a few minutes too long in the oven, the cake will begin to burn on the bottom. Project Cake follows a J-shaped path to completion much like Figure 1-3. There are many projects that are similar to cake—the development of computer software, and many chemical engineering projects, for instance. In these cases, the PM’s job begins with great attention to having all the correct project resources at hand or guaranteed to be available when needed. Once the “baking” process is underway—the integration of various sets of code or chemicals—one can usually not add missing ingredients. As the process continues, the PM must concentrate on determining when the project is complete — “done” in the case of cake, or a fully debugged program in the case of software. 1.5 Selecting Projects to Meet Organizational Objectives Project selection is the process of evaluating individual projects or groups of projects and then choosing to implement a set of them so that the objectives of the parent organization are achieved. Before a project begins its life cycle, ○ it must have been selected for funding by the parent organization. Whether the project was proposed by someone within the organization or an outside client, it is subject to approval by a more or less formal selection process. Often conducted by a committee of senior managers, the major function of the selection process is to ensure that several conditions are considered before a commitment is made to undertake any project. These conditions vary widely from firm to firm, but several are quite common: ○ (1) Is the project potentially profitable? Does it have a chance of meeting our return-on investment hurdle rate? ○ (2) Is the project required by law or the rules of an industrial association; i.e., a “mandate?” ○ (3) Does the firm have, or can it easily acquire, the knowledge and skills to carry out the project successfully? ○ (4) Does the project involve building competencies that are considered consistent with our firm’s strategic plan? ○ (5) Does the organization currently have the capacity to carry out the project on its proposed schedule? ○ (6) In the case of R&D projects, if the project is technically successful, does it meet all requirements to make it economically successful? This list could be greatly extended. There are many different methods for selecting projects, but they may be grouped into two fundamental types, non numeric and numeric. The former does not use numbers for evaluation; the latter does. At this point it is important to note that many firms select projects before a detailed project plan has been developed. Clearly, if the potential project’s scope, budget, and due dates have not been determined, it will be quite impossible to derive a reasonably accurate estimate of the project’s success. Nonnumeric Selection Methods The Sacred Cow At times, the organization’s Chief Executive Officer (CEO) or other senior executive either formally or casually suggests a potential product or service that the organization might offer to its customers. The suggestion often starts, “You know, I was thinking that we might...” and concludes with “... Take a look at it and see if it looks sensible. If not, we’ll drop the whole thing.” The immediate result of this bland statement is the creation of a "project" to investigate whatever the boss has suggested. The project is "sacred" in the sense that it will be maintained until successfully concluded, or until the boss, personally, recognizes the idea as a failure and terminates it. The Operating/Competitive Necessity This method selects any project that is necessary for continued operation of a group, facility, or the firm itself. A “mandated” project obviously must be selected. If the answer to the “Is it necessary... ?” question is “yes,” and if we wish to continue using the facility or system to stay in business, the project is selected. Comparative Benefits Many organizations have to select from a list of projects that are complex, difficult to assess, and often noncomparable. Such institutions often appoint a selection committee made up of knowledgeable individuals. Each person is asked to arrange a set of potential projects into a rank ordered set. Typically, each individual judge may use whatever criteria he or she wishes to evaluate projects. Some may use carefully determined technical criteria, but others may try to estimate the project’s probable impact on the ability of the organization to meet its goals. While the use of various criteria by different judges may be troublesome, it results from a purposeful attempt to get as broad a set of evaluations as possible.  Numeric Selection Methods Financial Assessment Methods Most firms select projects on the basis of their expected economic value to the firm. Although there are many economic assessment methods available— ○ payback period, ○ average annual rate of return, ○ internal rate of return, and so on— we will describe here two of the most widely used methods: ○ payback period and ○ discounted cash flow. The payback period for a project is the ○ initial fixed investment in the project divided by the estimated annual net cash inflows from the project (which include the cash inflows from depreciation of the investment). ○ The ratio of these quantities is the number of years required for the project to return its initial investment. ○ Because of this perspective, the payback period is often considered a surrogate measure of risk to the firm: the longer the payback period, the greater the risk. ○ To illustrate, if a project requires an investment of $100,000 and is expected to return a net cash inflow of $25,000 each year, then the payback period is simply 100,000/25,000 = 4 years, assuming the $25,000 annual inflow continues at least 4 years. ○ Although this is a popular financial assessment method, it ignores the time value of money as well as any returns beyond the payback period. ○ For these reasons, it is not recommended as a project selection method, though it is valuable for cash budgeting. ○ Of the financial assessment methods, the discounted cash flow method discussed next is recommended instead. The discounted cash flow method ○ considers the time value of money, ○ the inflation rate, and ○ the firm’s return-on-investment (ROI) hurdle rate for projects. ○ The annual cash inflows and outflows are collected and discounted to their net present value (NPV) using the organization’s required rate of return (a.k.a. the hurdle rate or cutoff rate).  If one wishes to include the potential effects of inflation or deflation in the calculation, it is quite easily done. The discounting term, (1 + k)t, simply becomes (1 + k + pt)t, where pt is the estimated rate of inflation or deflation for period t. If the required rate of return is 10 percent and we expect the rate of inflation will be 3 percent, then the discount term becomes (1 +.10 +.03)t = (1.13)t for that period. In the early years of a project when outflows usually exceed inflows, the NPV of the project for those years will be negative. If the project becomes profitable, inflows become larger than outflows and the NPV for those later years will be positive. If we calculate the present value of the net cash flows for all years, we have the NPV of the project. If this sum is positive, the project may be accepted because it earns more than the required rate of return. The following boxed example illustrates these calculations. Sample Scenario: Ceramic Sciences, Inc. (CSI) is a large producer of decorative ceramic pots. The firm is considering the installation of a new manufacturing line that will, it is hoped, improve the quality of its pots as well as their vases designed to hold artificial flowers. The plant engineering department has submitted a project proposal that estimates the following investment requirements: an initial investment of $125,000 to be paid up-front to the Pocketa Machine Corporation, an additional investment of $100,000 to install the machines, and another $90,000 to add new material handling systems and integrate the new equipment into the overall production system. Delivery and installation is estimated to take 1 year, and integrating the entire system should require an additional year. Thereafter, the engineers predict that scheduled machine overhauls will require further expenditures of about $15,000 every second year, beginning in the fourth year. They will not, however, overhaul the machinery in the last year of its life. The project schedule calls for the line to begin production in the third year, and to be up-to speed by the end of that year. Projected manufacturing cost savings and added profits resulting from higher quality are estimated to be $50,000 in the first year of operation and are expected to peak at $120,000 in the second year of operation, and then to follow the gradually declining pattern shown in Table A. Project life is expected to be 10 years from project inception, at which time the proposed system will be obsolete and will have to be replaced. It is estimated that the machinery will have a salvage value of $35,000. CSI has a 13 percent hurdle rate for capital investments and expects the rate of inflation to be about 2 percent per year over the life of the project. Assuming that the initial expenditure occurs at the beginning of the year and that all other receipts and expenditures occur as lump sums at the end of the year, we can prepare the Net Present Value analysis for the project as shown in Table A. Note that Excel’s built in Net Present Value function NPV was used to facilitate the analysis. The NPV function has two arguments: the discount rate and the range that contains the cash flows to be discounted. Because the first cash flow of – $125,000 occurs at the beginning of the first period, there is no need to discount it as it is already in present value terms. The remaining cash flows are assumed to occur at the end of their respective periods. For example, the $115,000 cash flow associated with 20X4 is assumed to occur at the end of the fifth period. According to the results, the Net Present Value of the project is positive and, thus, the project can be accepted. (The project would have been rejected if the hurdle rate had been 15 percent or if the inflation rate was 4 percent, either one resulting in a discount rate of 17 percent.) Perhaps the most difficult aspect related to the proper use of discounted cash flow is determining the appropriate discount rate to use.  While this determination is made by senior management, it has a major impact on project selection, and therefore, on the life of the PM. For most projects the hurdle rate selected is the organization’s cost of capital, though it is often arbitrarily set too high as a general allowance for risk. In the case of particularly risky projects, a higher hurdle rate may be justified, but it is not a good general practice. If a project is competing for funds with alternative investments, the hurdle rate may be the opportunity cost of capital, that is, the rate of return the firm must forego if it invests in the project instead of making an alternative investment. Another common, but misguided practice is to set the hurdle rate high as an allowance for resource cost increases. Neither risk nor inflation should be treated so casually. Specific corrections for each should be made if the firm’s management feels it is required. Because the present value of future returns decreases as the discount rate rises, a high hurdle rate biases the analysis strongly in favor of short-run projects. For example, given a rate of 20 percent, a dollar 10 years from now has a present value of only $.16, (1/1.20)10 = 0.16. The critical feature of long-run projects is that costs associated with them are spent early in the project and have high present values while revenues are delayed for several years and have low present values. The discounted cash flow methods of calculation are simple and straightforward. Like the other financial assessment methods, it has a serious defect. First, it ignores all nonmonetary factors except risk. Second, because of the nature of discounting, all the discounted methods bias the selection system by favoring short-run projects. Let us now examine a selection method that goes beyond assessing only financial profitability. Financial Options and Opportunity Cost A more recent approach to project selection employs financial analysis that recognizes the value of positioning the organization to capitalize on future opportunities. It is based on the financial options approach to valuing prospective capital investment opportunities. Through a financial option an organization or individual acquires the right to do something but is not required to exercise that right.  For example, you may be familiar with stock options. When a person or organization purchases a stock option, they acquire the right to purchase a specific number of shares of a particular stock at a specified price within a specified time frame. If the market price of the stock moves above the specified option price within the specified time frame, the entity holding the option can exercise its right and thereby purchase the stock below the fair market price. If the market price of the stock remains below the specified option price, the entity can choose not to exercise its right to buy the stock. To illustrate the analogy of financial options to project selection, consider a young biotech firm that is ready to begin clinical trials to test a new pharmaceutical product in humans. A key issue the company has to address is how to produce the drug both now in the low volumes needed for the clinical trials and in the mass quantities that will be needed in the future should the new drug succeed in the clinical trial phase. Its options for producing the drug in low volumes for the clinical trials are to invest in an in-house pilot plant or to immediately license the drug to another company. If it invests in an in-house pilot plan, it then has two future options for mass producing the drug: (1) invest in a commercial scale plant or (2) license the manufacturing rights. In effect then, investing now in the pilot plant provides the pharmaceutical company with the option of building a commercial scale plant in the future, an option it would not have if it chooses to license the drug right from the start. Thus by building the in-house pilot plant the pharmaceutical company is in a sense acquiring the right to build a commercial plant in the future. While beyond the scope of this book, we point out to the reader that in addition to the traditional approaches to project selection, the decision to build the pilot plant can also be analyzed using valuation techniques from financial options theory. In this case the value of having the option to build a commercial plant can be estimated. In addition to considering the value of future opportunities a project may provide, the cost of not doing a project should also be considered. This approach to project selection is based on the well known economic concept of “opportunity cost.” Consider the problem of making an investment in one of only two projects. An investment in Project A will force us to forgo investing in Project B, and vice versa. If the return on A is 12 percent, making an investment in B will have an opportunity cost of 12 percent, the cost of the opportunity forgone. If the return on B is greater than 12 percent, it may be preferred over selecting Project A. The same selection principle can be applied to timing the investment in a given project. R&D projects or projects involving the adoption of new technologies, for example, have values that may vary considerably with time. It is common for the passage of time to reduce uncertainties involved in both technological and commercial projects. The value of investing now may be higher (or lower) than investing later. If a project is delayed, the values of its costs and revenues at a later period should be discounted to their present value when compared to an investment not delayed. Occasionally, organizations will approve projects that are forecast to lose money when fully costed and sometimes even when only direct costed. Such decisions by upper management are not necessarily foolish because there may be other, more important reasons for proceeding with a project, such as to: Acquire knowledge concerning a specific or new technology Get the organization’s “foot in the door” Obtain the parts, service, or maintenance portion of the work Allow them to bid on a lucrative, follow-on contract Improve their competitive position Broaden a product line or line of business Scoring Methods Scoring methods were developed to overcome some of the disadvantages of the simple financial profitability methods, especially their focus on a single criterion. The simplest scoring approach, the unweighted 0–1 factor method, lists multiple criteria of significant interest to management. Given a list of the organization’s goals, a selection committee, usually senior managers familiar with both the organization’s criteria and potential project portfolio, check off, for each project, which of the criteria would be satisfied; for example, see Figure 1-4. Those projects that exceed a certain number of check-marks may be selected for funding.  All the criteria, however, may not be equally important and the various projects may satisfy each criterion to different degrees. To correct for these drawbacks, the weighted factor scoring method was developed. In this method, a number of criteria, n, are considered for evaluating each project, and their relative importance weights, wj, are estimated. The sum of the weights over all the j criteria is usually set arbitrarily at 1.00, though this is not mandatory. It is helpful to limit the criteria to just the major factors and not include criteria that are only marginal to the decision, such as representing only 2 or 3 percent importance. A rule of thumb is to keep n less than eight factors because the more important factors with weights of, say 20 percent or more force the weights of the less important factors to be insignificant. The importance weights, wj, can be determined in any of a number of ways: a particular individual’s subjective belief, available objective factors such as surveys or reports, group composite beliefs such as simple averaging among the group members, and so on. In addition, a score, sij, must be determined for how well each project i satisfies each criterion j. Each score is multiplied by its category weight, and the set of scores is summed to give the total weighted score, Si = Σj sij wj for each project, i, from which the best project is then selected. Typically, a 5-point scale is used to ascertain these scores, though 3-, 7-, and even 9-point scales are sometimes used. The top score, such as 5, is reserved for excellent performance on that criterion such as a return on investment (ROI) of 50 percent or more, or a reliability rating of “superior.” The bottom score of 1 is for “poor performance,” such as an ROI of 5 percent or less, or a reliability rating of “poor.” The middle score of 3 is usually for average or nominal performance (e.g., 15–20% ROI), and 4 is “above average” (21–49% ROI) while 2 is “below average” (6–14% ROI). Notice that the bottom score, 1, on one category may be offset by very high scores on other categories. Any condition that is so bad that it makes a project unacceptable, irrespective of how good it may be on other criteria, is a constraint. If a project violates a constraint, it is removed from the set and not scored. Note two characteristics in these descriptions. First, the categories for each scale need not be in equal intervals—though they should correspond to the subjective beliefs about what constitutes excellent, below average, and so on. Second, the five-point scales can be based on either quantitative or qualitative data, thus allowing the inclusion of financial and other “hard” data (cash flows, net present value, market share growth, costs) as well as “soft” subjective data (fit with the organization’s goals, personal preferences, attractiveness, comfort). And again, the soft data also need not be of equal intervals. For example, “superior” may rate a 5 but “OK” may rate only a 2. The general mathematical form of the weighted factor scoring method is As the campaign manager to elect Jennifer Allison to the city council, you have determined that winning the election is largely dependent on Jennifer’s name recognition. One idea for increasing Jennifer’s name recognition is to distribute car bumper stickers with her name on them. In selecting a vendor to design and print the bumper stickers, you have two primary criteria of equal importance, cost and the reliability of the printer to complete the work on time. You have a limited budget for the bumper stickers and would like to spend no more than $4,200. Beyond cost and reliability, the reputation of the vendor for developing bold and aesthetically pleasing designs is also an important consideration. Upon further reflection and since this is only a bumper sticker, you determine that the reputation of the vendor is only half as important as either cost or reliability. Table B shows a set of scales you created for the three criteria, converted into quantitative scores. You have identified three possible vendors to design and print the bumper stickers. In Table C, you have scored each of the vendors on each of the criteria, calculated their weighted scores, and summed them to get a total. The weights for the criteria were obtained from the following logic: If Y is the importance weight for Cost, then Y is also the importance for Reliability and 1⁄2Y is the importance for Reputation. This results in the formula Thus, Cost has 0.4 importance weight, as does Reliability, and Reputation has 0.2 importance. Based on this assessment, it appears that the Vendor 3 with a total weighted score of 3.0 may best satisfy your need for bumper stickers. As shown in Table D, spreadsheets are a particularly useful tool for comparing options using a weighted scoring model. Project selection is an inherently risky process. Throughout this section we have treated risk by “making allowance” for it. Managing and analyzing risk can be handled in a more straightforward manner. By estimating the highest, lowest, and most likely values that costs, revenues, and other relevant variables may have, and by making some other assumptions about the world, we can estimate outcomes for the projects among which we are trying to make selections. THE PROJECT PORTFOLIO PROCESS The Project Portfolio Process (PPP) attempts to link the organization’s projects directly to the goals and strategy of the organization. This occurs not only in the project’s initiation and planning phases, but also throughout the life cycle of the projects as they are managed and eventually brought to completion. Thus, the PPP is also a means for monitoring and controlling the organization’s strategic projects, as will be reiterated in Chapter 7: Monitoring and Controlling the Project. On occasion this will mean shutting down projects prior to their completion because their risks have become excessive, their costs have escalated beyond their expected benefits, another (or a new) project does a better job of supporting the goals, or any of a variety of similar reasons. The steps in this process generally follow those described in Longman, Sandahl, and Speir (1999) and Englund and Graham (1999). ➔ The first step is to appoint a Project Council to establish and articulate a strategic direction for projects. ◆ The Council should report to a senior executive since it will be responsible for allocating funds to those projects that support the organization’s goals and controlling the allocation of resources and skills to the projects. ◆ In addition to senior management, other appropriate members of the Project Council include program managers, project managers of major projects; the head of the PMO, and general managers who can identify key opportunities and risks facing the organization. ➔ Next, various project categories are identified so the mix of projects funded by the organization will be spread appropriately across those areas making major contributions to the organization’s goals. ◆ In addition, within each category criteria are established to discriminate between very good and even better projects using the weighted scoring model previously discussed. The criteria are also weighted to reflect their relative importance. ➔ The first task in this step is to ◆ list the goals of each existing and proposed project— that is, the mission, or purpose, of each project. ◆ Relating these to the organization’s goals and strategies should allow the Council to identify a variety of categories that are important to achieving the organization’s goals. ◆ One way to position many of the projects (particularly  product/service development projects) is in terms of the extent of product and process changes. ◆ Wheelwright and Clark (1992) have developed a matrix called the aggregate project plan illustrating these changes, as shown in figure. Based on the extent of product change and process change, they identified four separate categories of projects: 1. Derivative projects These are projects with objectives or deliverables that are only incrementally different in both product and process from existing offerings. They are often meant to replace current offerings or add an extension to current offerings (lower priced version, upscale version). 2. Platform projects The planned outputs of these projects represent major departures from existing offerings in terms of either the product/service itself or the process used to make and deliver it, or both. As such, they become “platforms” for the next generation of organizational offerings, such as a new model of automobile or a new type of insurance plan. They form the basis for follow-on derivative projects that attempt to extend the platform in various dimensions. 3. Breakthrough projects Breakthrough projects typically involve a newer technology than platform projects. It may be a “disruptive” technology that is known to the industry or something proprietary that the organization has been developing over time. Examples here include the use of fiber-optic cables for data transmission, cash balance pension plans, and hybrid gasoline-electric automobiles. 4. R&D projects These projects are “blue-sky,” visionary endeavors, oriented toward using newly developed technologies, or existing technologies in a new manner. They may also be for acquiring new knowledge, or developing new technologies themselves. The size of the projects plotted on the array indicates the size/resource needs of the project, and the shape may indicate another aspect of the project (e.g., internal/external, long/medium/short term, or whatever aspect needs to be shown). The numbers indicate the order, or time frame, in which the projects are to be (or were) implemented, separated by category, if desired. The aggregate project plan can be used to: View the mix of projects within each illustrated aspect (shape) Analyze and adjust the mix of projects within each category or aspect Assess the resource demands on the organization, indicated by the size, timing, and number of projects shown Identify and adjust the gaps in the categories, aspects, sizes, and timing of the projects Identify potential career paths for developing project managers, such as team members of a derivative project, then team member of a platform project, manager of a derivative project, member of a breakthrough project, and so on For each existing and proposed project, assemble the data appropriate to that category’s criteria. Include the timing, both date and duration, for expected benefits and resource needs. Use the project plan, a schedule of project activities, past experience, expert opinion, whatever is available to get a good estimate of these data. If the project is new, you may want to fund only enough work on the project to verify the assumptions. Next, use the criteria score limits, or constraints as described in our discussions of scoring models, to screen out the weaker projects. For example, have costs on existing projects escalated beyond the project’s expected benefits? Has the benefit of a project lessened because the organization’s goals have changed? Also, screen in any projects that do not require deliberation, such as projects mandated by regulations or laws, projects that are competitive or operating necessities (described above), projects required for environmental or personnel reasons, and so on. The fewer projects that need to be compared and analyzed, the easier the work of the Council. When we discussed financial models and scoring models, we urged the use of multiple criteria when selecting projects. ROI on a project may be lower than the firm’s cut-off rate, or even negative, but the project may be a platform for follow-on projects that have very high benefits for the firm. Wheatly (2009) also warns against the use of a single criterion, commonly the return on investment (ROI), to evaluate projects. A project aimed at boosting employee satisfaction will often yield improvements in output, quality, costs, and other such factors. For example, Mindtree, of Bangalore, India, measures benefits on five dimensions; revenue, profit, customer satisfaction, employee satisfaction, and intellectual capital created—in sum, “Have we become a better company?” Next, assess the availability of both internal and external resources, by type, department, and timing. Timing is particularly important, since project resource needs by type typically vary up to 100 percent over the life cycle of projects. Needing a normally plentiful resource at the same moment it is fully utilized elsewhere may doom an otherwise promising project. Eventually, the Council will be trying to balance aggregate project resource needs over future periods with resource availabilities, so timing is as important as the amount of maximum demand and availability. Many managers insist on trying to schedule resource usage as closely as possible to system capacity. Then use multiple screens to reduce the number of competing projects. The first screen should be each project’s support of the organization’s goals, but other possible screens might be: Whether the required competence exists in the organization Whether there is a market for the offering The likely profitability of the offering How risky the project is If there is a potential partner to help with the project If the right resources are available at the right times If the project uses the organization’s strengths, or depends on its weaknesses If the project is synergistic with other important projects If the project is dominated by another existing or proposed project If the project has slipped in its desirability since the last evaluation Now apply the scores and criterion weights to rank the projects within each category. It is acceptable to hold some hard-to-measure criteria out for subjective evaluation, such as riskiness, or development of new knowledge. Subjective evaluations can be translated from verbal to numeric terms easily by the Delphi* Method, pairwise comparisons, or other methods.  Finally, select the projects to be funded and those to be held in reserve. That is, determine the mix of projects across the various categories and time periods. Next be sure to leave some percentage (e.g., 20%) of the organization’s resource capacity free for new opportunities, crises in existing projects, errors in estimates, and so on. Then allocate the categorized projects in rank order to the categories according to the mix desired. It is usually good practice to include some speculative projects in each category to allow future options, knowledge improvement, additional experience in new areas, and so on. The focus should be on committing to fewer projects but with sufficient funding to allow project completion. Document why late projects were delayed and why any were defended. Be sure to make the results of the PPP widely known, including the documented reasons for project cancellations, deferrals, and nonselection as was mentioned earlier. Top management must now make their commitment to this project portfolio process totally clear by supporting the process and its results. This may require a PPP champion near the top of the organization. As project proposers come to understand and appreciate the workings and importance of the PPP, their proposals will more closely fit the profile of the kinds of projects the organization wishes to fund. As this happens, it is important to note that the Council will have to concern itself with the reliability and accuracy of proposals competing for limited funds. Senior management must fully fund the selected projects. It is unethical and inappropriate for senior management to undermine PPP and the Council as well as strategically important projects by playing a game of arbitrarily cutting χ percent from project budgets. It is equally unethical and inappropriate to pad potential project budgets on the expectation that they will be arbitrarily cut. Finally, the process must be repeated on a regular basis. The Council should determine the frequency, which to some extent will depend on the speed of change within the organization’s industry. For some industries, quarterly analysis may be best, while in slow moving industries yearly may be fine. In an article on competitive intelligence, Gale (2008b) reports that Cisco Systems Inc. constantly tracks industry trends, competitors, the stock market, and end users to stay ahead of their competition and to know which potential projects to fund. Pharmaceutical companies are equally interested in knowing which projects to drop if competitors are too far ahead of them, thereby saving millions of dollars in development and testing costs.