Despite significant investments in PPM, it is failing to deliver the anticipated results. Both Gartner and the Standish Group have reported low project success rates and UMT360 research finds that today companies are failing to realize up to 46% of the planned business value from project portfolios.
UMT360’s Chief Product and Marketing Officer Ben Chamberlain refers to the causes of that lost business value as the “Trifecta of Business Value Erosion.” He says there are three main areas of concern.
Innovation & Estimating
Most organizations have adopted an annual planning methodology, where analysts spend a couple of months ahead of each new fiscal year evaluating competing project requests to select a portfolio that best aligns with strategic priorities and maximizes ROI. There are inherent problems with the traditional annual planning process that results in business value erosion.
During this annual planning exercise, business units submit their project requests / ideas. These ideas are analyzed, prioritized and optimized and projects are then either included or excluded from the investment portfolio. There is a significant risk that utilizing a bottom up approach to innovation results in analysts just selecting the best projects from a sub-optimal bunch of investment alternatives. The quality of the requests / innovation obviously will impact the business value delivered by the resulting portfolio.
By adopting Enterprise Portfolio Management techniques, companies move from a “project to product-based investment approach” which involves linking business and IT assets and projects to key capabilities or “products” that power your business. Analysts then analyze these capabilities and will base investment decisions on critical changes to improve business performance. This top down approach improves the resulting demand / innovation before you start to utilize optimization techniques to select the best initiatives.
The other inherent problem with annual planning is that often the cost and benefit estimates are inaccurate. Unreliable estimates can have a significant impact on portfolio value. When project cost estimates are too high, which is often the case, projects are excluded from the selected portfolio during the annual planning window. Unless you’re revisiting those decisions throughout the year, that value cannot be recaptured. Under-estimating means you’ll select more projects during the annual planning exercise and have to cut them as you go through the execution year leading to an erosion in business value.
Project Success Rates
Industry analysts all agree that many companies struggle to deliver projects on time and within budget. Although they don’t agree on the exact statistics, there is consensus that a problem exists. The Standish Group says that: 18% of projects fail to get implemented and 43% of projects are challenged (late and over budget). Gartner states that 1 out of 3 completed projects experience cost overruns and even the PMI says that 33% of projects fail to deliver their planned business value. Obviously project success rates have a significant impact on the resulting value realized from the portfolio. If you fail to implement a project, you will not realize any business value. Cost overruns result in PMOs cutting scope and cancelling projects to stay within the budget constraints, again, eroding the business value.
Surprisingly, many organizations fail to spend all their budget allocated during the year, instantly impacting the planned business value from the portfolio. Common reasons for the under-spend are:
- Due to resource shortfalls they simply did not start planned initiatives
- Projects that slip into the next planning year; also known as unplanned carry overs. These projects fail to utilize the allocated budget and worse, they consume funds from the next year’s budget.
- Over estimating projects often results in Project Managers holding funds hostage meaning the PMO cannot reallocate to inflight or new initiatives
- Project Managers often aggressively re-forecast that their projects will spend all funds and then late in the year (i.e. Q4) confirm that they don’t require all the funds. This leaves the PMO no time to reallocate funds.
Once you understand “why” value is being lost, how do you respond to capture the planned business value? One way is for the PMO to view projects as business investments and move toward integrating financial management with PPM so that the business is better able to gauge the economic impact of poor project performance and take corrective action. In a recorded presentation, UMT360’s Ben Chamberlain discusses how UMT360 is helping businesses do that and more. He shows you how to:
- Eliminate the need for Excel and standardize investment governance controls across the PPM lifecycle
- Streamline capital planning and build stronger business cases
- Automate financial tracking and variance analysis and move to an agile re-planning process
- Establish a benefits realization framework