project portfolio formation framework
TRANSCRIPT
Reza Masoumi
A FRAMEWORK FOR PROJECT PORTFOLIO FORMATION USING A HYBRID OF
MULTICRITERIA DECISION-MAKING METHODS
July 2015
Construction Management
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Outline
1) Research objective and contribution2) Introduction3) Project portfolio formation framework4) Case study5) Conclusions and future studies
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1) Research Objective and Contribution
A systematic approach for project portfolio formation
by prioritizing and selecting projects considering the
most important criteria to form balanced portfolios
under budget constraints.
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2) Introduction
Project Management Institute (PMI):
A coordinated management of portfolio components to achieve specific organizational goals.
Portfolio
Project AProgram APortfolio A
Project BProgram B (CII IR303-2, 2014)
Portfolios
Programs
Projects
Organizational Goals
What is Project Portfolio Management?
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The CII Research
Title:
Managing a Portfolio of Projects – Metrics for Improvement
Problems:• Organizations inclined to have several small
projects• Best practices are for project managers and not
portfolio managers
2) Introduction
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The CII Research Objectives:
• Identify major gaps in current best practices• Identify tools and processes for portfolio
management• Understand major implementation barriers• Recommend best practices to improve portfolio
management• Recommend areas of future research
2) Introduction
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Collect Data
• Industry Survey• Interviews• Case Studies
Analyze Data
• Identify Business Drivers• Identify Recommended
Practices
Develop Tool
• Portfolio Management Playbook
The CII Research Methodology:
(CII RR303-3, expected 2015)
2) Introduction
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Barriers based on the CII survey:
• Unclear objectives and priorities (78%)• Lack of industry standards and best practices
(78%)• Lack of management support or direction (74%)• Cost of implementation (74%)• Lack of awareness of value added (59%)
Balanced Project Portfolio Formation
2) Introduction
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3.1) Project Portfolio Formation Process
3.2) Balanced project types and business lines
3.3) Group projects
3.4) Rank projects
3.5) Balanced risk
3.6) Select projects and form portfolios
3.7) Check interdependency
3) Project Portfolio Formation Framework
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Criterion 1 Criterion 2 Criterion 3 Criterion 4 Risk FactorCriterion m
... +
Candidate Projects
Ranking Projects
Budget Ceiling
Organizational Risk Tolerance Level
Selected Projects
P11
P4
P10
P2
P8
P6
P5 P3 P7
P1
P9
Pn
P12
P2P7
P3
3.1) Project Portfolio Formation Framework
Schematic
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Identify portfolio categories and project types
Portfolio Formation Process
Project Selection (Ranking)
Consider budget restriction
Identify preferred criteria for evaluation of projects
Decide about weight of each criterion
Establish quantitative or qualitative values of criteria
Select a decision making method
Do you allocate budget to portfolio categories or
project types?
Are all projects in different project types
ranked?
No
Yes
A
Assign selected projects in their portfolio types
Finish
Portfolio
Project
Decide weight of each portfolio categories for budget allocation
Decide weight of each project types for budget allocation
Assign candidate projects to their related portfolio categories
Did you give weight to portfolio categories or
project types?
Project
Portfolio
Assign candidate projects to their related project types Select projects from
different project types based on their ranks and
budget restriction for each project type
Select projects from different project types
based on their ranks and budget restriction for each
portfolio categories
Create balanced portfolios in terms of risks
Check the interdependencies among selected projects
Select one portfolio
Calculate risk factor of projects
A
3.2Balanced Project Types or Portfolio Categories
3.5 Balanced Risk
3.3Group Projects in Different Project Types and Portfolio
Categories
3.4Rank Projects
3.6Select Projects and Form
the Portfolios
3.7Check Interdependency
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3.2) Balanced Project Types or Portfolio Categories
Rank Tool/technique Used (%)1 SWOT 702 Benchmarking 603 Critical success factors 514 Competitor analysis 385 Stakeholder analysis 356 Core competencies 327 Balanced scorecard 308 Scenario planning 289 Lifecycle analysis 239 Culture analysis 23
10 Stakeholder mapping 22(Gunn and Williams, 2007)
• Use different strategic decision making tools to create balanced project types and portfolio Categories
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3.3) Project Types and Portfolio CategoriesProject types:• Productivity projects: to lower utilities costs or
decrease maintenance costs• Environmental, Health, and Safety (EHS) projects• Maintenance projects• Strategic projects: increased sales/revenues• R&D projects
R&D
Offshore
Portfolio CategoriesA Sample Oil & Gas Organziaiton
Upstream
South America
North America
Middle EastEurope
Downstream
Onshore
Refineries
South America
North America
Middle EastEurope
Petrochemicals
South America
North America
Middle EastEurope
Level 1
Level 2
Level 3
Level 4
MaintenanceProductivity EHS StrategicLevel 5
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3.4) Rank Projects
• Calculate the risk factor of projects• Identify preferred criteria for evaluation and
optimizing the list of candidate projects• Decide the weight of each preferred criterion• Establish quantitative or qualitative values of
criteria• Select a decision making method
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Calculate Risk Factor of Projects
Create an RBS for the portfolio
Are risks for the portfolio evaluated
qualitatively?
Decide on the weights of risks
Evaluate risks on the RBS qualitatively
Select one candidate project from a portfolio
Yes
Use a Likert scale to convert the qualitative risks to quantitative
Calculate projects’ risks using AHP
No
Determine the impact of risks and their probabilities
Are risk factors for all the projects calculated?
Multiply the impacts and probabilities
Add up the expected values
NoYes
Finish
StartRisk factor:• Qualitative risks
• Quantitative risks
Decide on the weights of risks
Evaluate risks on the RBS qualitatively
Use a Likert scale to convert the qualitative risks to quantitative
Calculate projects’ risk factor using AHP
Determine the impact of risks and their probabilities
Multiply the impacts and probabilities
Add up the expected values
3.4)
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OVERALL PROJECT RISK
INTERNAL RISK EXTERNAL RISK
LOCAL RISK GLOBAL RISK
LABOURRISK
PLANTRISK
MATERIALRISK
SUB-CONTRACTORRISK
SITERISK
PERFORMANCERISK
CONTRACTUALRISK
LOCATIONRISK
FINANCIALRISK
availibility
quality
productivity
availibility
suitablility
productivity
availibility
suitablility
supplywastage
availibility
quality
productivityfailure
ground conditions
accessibility
type of workcomplexity of work
management experience
availability of partners
relationship with clientworkload commitment
contract type
contractual liabilities
amendments to standard form
head office
project
funding
cash flow
economic conditions
inflation
exchange rate fluctuation
technology changemajor client induced changes
politics
A Sample RBS for Contractors
(Tah et al., 1993)
3.4)
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OVERALL PROJECT RISK
INTERNAL RISK EXTERNAL RISK
LOCAL RISK GLOBAL RISK
LABOURRISK
PLANTRISK
MATERIALRISK
PERFORMANCERISK
CONTRACTUALRISK
LOCATIONRISK
INFLATIONRISK
EXCHANGERISK
TECHNOLOGYRISK
POLITICSRISK
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Example of Calculating Risk Factor
OVERALL PROJECT RISK
INTERNAL RISK EXTERNAL RISK
LOCAL RISK GLOBAL RISK
LABOURRISK
PLANTRISK
MATERIALRISK
PERFORMANCERISK
CONTRACTUALRISK
LOCATIONRISK
W11 = 0.667 W12 = 0.333
W111 = 0.164
W112 = 0.539
W113 = 0.297 W123 = 0.681W121 = 0.201
W1 = 2/3 W2 = 1/3
W122 = 0.118
INFLATIONRISK
EXCHANGERISK
TECHNOLOGYRISK
POLITICSRISK
W12 = 0.157
W12 = 0.104
W12 = 0.510
W12 = 0.229
3.4)
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Decide on the weights of risks
Evaluate risks on the RBS qualitatively
Use a Likert scale to convert the qualitative risks to quantitative
Calculate projects’ risk factor using AHP
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Example of Calculating Risk Factor
Likert scale:RBS and evaluation of risks:
3.4)
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Decide on the weights of risks
Evaluate risks on the RBS qualitatively
Use a Likert scale to convert the qualitative risks to quantitative
Calculate projects’ risk factor using AHP
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Example of Calculating Risk Factor
AHP
: value of risk k for project i
Ak : pairwise comparison matrix of risk k
: priority vector of risk k
a 𝑖𝑗𝑘=w kiw kj
Ak = =
(k = 1, …, m and p = 1, …n)
3.4)
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RF1 = 0.667 * [0.667 * (0.164 * 0.136 + 0.539 * 0.133 + 0.297 * 0.400) + 0.333 * (0.201 * 0.190 + 0.118 * 0.063 + 0.681 * 0.417)] + 0.333 * (0.157 * 0.133 + 0.104 * 0.200 + 0.229 * 0.167 + 0.510 * 0.143) = 0.219
RF2 = 0.329RF3 = 0.166RF4 = 0.287
Example of Calculating Risk Factor3.
4) R
ank
Proj
ects
-Ste
p 1
Decide on the weights of risks
Evaluate risks on the RBS qualitatively
Use a Likert scale to convert the qualitative risks to quantitative
Calculate projects’ risk factor using AHP
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Identify Preferred Criteria for Evaluation of Projects
Productivity projectso Payback periodo NPVo IRRo Pioneer producto ROI
EHS projectso Safety complianceo Safety risk o Amount of damage
Strategic projectso Alignment to goalso NPVo IRRo Pioneer producto ROI
Maintenance projectso NPV (based on failure
cost history)o Criticality scoreo Safety risk
3.4)
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Decide the Weight of Each Criterion
• Weight various in different organizations• AHP• Delphi• Survey
3.4)
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Establish Quantitative or Qualitative Values of Criteria
• Quantitative (facts and figures)
• Qualitative (Likert scale)3.4)
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Select a Decision Making Method
Decision Analysis Methods
Single Criterion Decision Making
Decision Making Groups
Multi-Criteria Decision Making
(MCDM)
Influence Diagram(ID)
Decision Tree(DT)
Multiple Objective Decision Making (MODM)
Multiple Attribute Decision Making (MADM)
PROMETHEE ELECTREAnalytical Hierarchy
Process (AHP)
Multiple Attribute Utility Theory (MAUT)
Benefit-Cost Analysis
Elementary Methods
Pros and Cons Analysis
Maximin and Maximax Methods
Conjunctive and Disjunctive
Methods
Lexicographic Method
Outranking Methods
Simple Multi-Attribute Rating
Technique (SMART)
3.4)
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PROMETHEE vs. AHP
• Consistency in results
• Flexibility on defining preference functions:o Various preference functions for each
criteriono The combination of the Ex-PROMETHEE and
@Risk gives the ability to have probabilistic analysis
3.4)
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PROMETHEE3.
4) R
ank
Proj
ects
-Ste
p 5
• Preference Ranking Organization METHod for the Enrichment of Evaluations
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PROMETHEE
(a,b) ,
Pj : a preference function for criterion jGj : a non-decreasing function for criterion j
3.4)
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PROMETHEE I and II
a,b¿ : preference index
(a,b) = (a,b) .
= .
= .
(a) = (a) -
: positive outranking flow : negative outranking flow ф : net outranking flow
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Ex-PROMETHEE
• PROMETHEE on an Excel worksheet• 4 spreadsheets
o Entry sheeto Calcs sheeto Net flow sheeto Preference function sheet
3.4)
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Ex-PROMETHEE + @Risk™
• Use probabilistic input variables o Values of criteriao Weights of criteria
• Use Monte-Carlo simulation• Analyze projects’ ranks• Give net outranking flow variations
3.4)
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AHP3.
4) R
ank
Proj
ects
-Ste
p 5
• Analytical Hierarchy Process
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Step 8
Calculate priority vector
Check consistency (CR < 0.1)
Determine the priority of each alternative
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AHP-Matlab Code
• Avoid numerous calculations
• Open source for future development
• Use Matlab capabilities for probabilistic analysis
3.4)
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AHP-Matlab Code
Finish
Part 1Enter the value of criteria to form matrix (A),
number of alternatives, number of criteria
Part 2Enter the entities of pairwise comparison matrix of
criteria (C)
Part 3Calculate the C’s priority vector, l max, CI, and CR
Part 4Define the ideal value of each criterion
Part 5Calculating the entities of pairwise comparison
matrix of alternatives
Part 6Calculate the A’s priority vector, l max, CI, and CR
Part 7Calculate the value of each alternative
Start
3.4)
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3.5) Balanced Risk
• Including organizational risk tolerance level
(risk-prone vs. risk-averse)
• Sensitivity analysis on risk factor to prioritize and
select projects
• Example in the case study
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3.6) Select Projects and form portfolios
• Organizational goals are consideredo Budget for each portfolio categoryo Budget for each project typeo Risk tolerance level
• Risks at different levels are included o Organizationo Portfolioo Programo Project
• The optimized list of selected projects are identified
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3.7) Check Interdependency of Selected Projects
InterdependencyTree
MultiInterdependency
Two wayP4
P1 P2 P3
One wayP4
P1 P2 P3
MultiP4
P1 P2 P3
SingleInterdependency
Two way
P1 and P2 are complimentary
P2 P1
One way
P2 is predecessor of P1
P2 P1
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Finalize this project in the portfolio hierarchy
Single interdependency?
No
Yes
Does the project have any interdependancy?
Yes
One way?
Does the project a preceding project?
Yes
Is the preceding project selected?
Yes
No
Yes
Put the project on waiting list and select the next project
No
Preceding & succeeding projects
selected?
No Yes
No
One way?
Yes
NoNoAll
connected projects
selected?
Yes
No
Any projectsleft?
Finish
No
Yes
Choose a project from selected projects
Start
3.7) Check Interdependency of Selected Projects
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Three cases:4.1) Case I: All candidate projects in one bucket4.2) Case II: Candidate projects in various buckets
based on their types4.3) Case III: Prioritizing projects based on project
types with balanced budget on portfolio categories
4) Case Study
• A large chemicals, plastics, and fertilizer organization• Plants in over 40 countries
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4) Case Study
• Strategic objectives:o Keep the existing units operational
based on the environmental protection agency (EPA) regulations
o Provide a healthy and safe environment for operators
o Maintain the existing units in good working conditions
o Increase the productivity
Plastics
Organization Portfolio
Fertilizers Chemicals
... Site 2Site 1 Site 15 ... Site 2Site 1 Site 8 ... Site 2Site 1 Site 17
P
EHS
S
M
P
EHS
S
M
P
EHS
S
M
P
EHS
S
M
P
EHS
S
M
P
EHS
S
M
P
EHS
S
M
P
EHS
S
M
P
EHS
S
M
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4.1) Case I: All Projects in One Bucket
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• PROMETHEE selects P1, P3, P8, and P14 instead of P10
selected by AHP• The top three projects have identical ranks in both
methods• EHS projects are not selected
4.1) Case I: All Projects in One Bucket
P2
P1
P3
P4P5
P6
P7
P8
P9
P10
P12P13
P14
P15
P16
P17
P11
Bucket of Projects
Portfolio of Projects
P6
P11
P7
P2 P3
P8
P12 P14
P15 P17
P1
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4.2) Case II: Projects in Various Buckets Based on their Types
P11
P2
P1
P3
P4
P5
P6
P7
P8
P9
P10
P12
P13P14
P15
P16
P17
Productivity Bucket EHS Bucket Maintenance Bucket
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4.2) Case II: Projects in Various Buckets Based on their Types
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4.2) Case II: Projects in Various Buckets Based on their Types
Probabilistic analysis (NPV, IRR, and ROI)
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4.2) Case II: Projects in Various Buckets Based on their Types
• Balanced Risk on Portfolios
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4.3) Case III: Prioritizing Projects based on Project Type with Balanced Budget on Portfolio Categories
Allocate budget among top level portfolio categories
Top-down budget allocation
Collect list of candidate projects
Group all projects based on their types
Prioritize candidate projects in each project type
Assign budget ceilings to project types considering portfolio budget
Select high value projects aligned with organizational goals
Form portfolios
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5) Conclusions and Future Studies
Conclusions:• A systematic project portfolio formation
framework is essential for organizations :o Meet strategic objectives/organizational goalso Maximize the value of their portfolioso Create a balance in terms of risks, business
lines, and project types• The organizational goals drive project portfolio
formation
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Conclusions:• An optimized list of projects will be selected to
form portfolios• Favoritism will be avoided in selecting projects• The risks can be included in the portfolio
formation• PROMETHEE is an appropriate MCDM method for
ranking projects• All the criteria should be included in the project
ranking process at the organizational level
5) Conclusions and Future Studies
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Conclusions:• Organizational risk tolerance level should be
included in portfolio formation
5) Conclusions and Future Studies
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Future research:• Standardize list of criteria for various industries• Identify the typical criteria’s weights for different
industries• Develop a comprehensive software to facilitate
portfolio formation process
5) Conclusions and Future Studies
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Contributions
• Design a framework for systematic project portfolio formation using a hybrid of MCDM methods (PROMETHEE and AHP)o Incorporate a global risk factor in the process
of prioritizing projectso Use a MCDM (AHP) to calculate a risk factor
having qualitative riskso Create the Ex-PROMETHEE tool for
probabilistic analysis of projects’ ranks
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Contributions
o Consider organizational risk tolerance level in the portfolio formation framework
o Develop AHP Matlab code as an open source to avoid numerous calculations
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