Building the right Project Portfolio when costs are constrained
The International Monetary Fund (IMF) has described the global economy as facing a “delicate moment”. Economists are not predicting a global recession, but say “there are many downside risks”, with economic growth rates expected to be lower than in previous years. This comes as the US has announced global trade levies against Chinese imports, and China has responded in kind. It is very early days, but this is bound to have repercussions across many parts of the world economy.
Against this macro environment, organisations need to continue investing in new projects and innovating if they want to maintain their commercial positions and grow. Digital transformation is now at the centre of most major strategic projects. In the 2018 Gartner CEO and Senior Business Executive Survey, 62% of respondents indicated they have a management initiative or transformation program underway to make their business more digital and less vulnerable to challengers or disruptors. However, these initiatives are costly, and organizations will need to find a way to manage their investment budgets more carefully if they are to sustain the variety of portfolio activities required that deliver transformation initiatives.
Given the current emphasis on operational efficiency and cost management, more than ever organizations need integrated portfolio management to help them decide what to start, stop, continue, consolidate or change, to reduce unnecessary expenditure and still achieve their required business outcomes. Very often, when companies engage in cost control programmes, they will make across-the-board, short term cuts in isolation that are unconnected to strategy and they may fail to make these changes sustainable. Or they will wait to act until they have a problem, at which point they don’t have time to achieve the right long-term trade-offs.
Why are some organisations better at cost management programs than others? One reason is because they have the right analytical tools to be able to explore the impacts of investment changes. It’s important to be strategic when making operational efficiency decisions but this requires a ‘portfolio view’ of all activity. If I make changes to Project X, how does that impact the rest of the portfolio? And what is the corresponding impact on strategic goals?
The crucial difference is not so much how to prioritise which activities to cut back, but being able to identify why resources directed in certain projects will better stimulate growth and differentiation. This is strategic cost management, which becomes easily possible across a complex portfolio using the right PPM software.
Organisations that are good at cost management tend to think of it as an exercise to support their strategy execution and of cost or expenditure as a precious investment that will fuel growth. They spend money when it supports their strategic goals and they collaboratively eliminate bad costs in order to grow stronger.
How can the PMO effectively manage operational efficiencies and cost management within project portfolios - for the short and long term?
Those involved with cost cutting programmes should properly understand the organisational strategy and governance processes. This will ensure that the focus is less about finding ways to cut short term expenses, than ensuring sustained competitive relevance and maximised investment potential.
Align costs and strategy
Appreciate the connection between costs and strategy, then connect project budgets directly to strategic priorities. Which projects are strategically important and which are tactical? Direct resources towards the former. Every opportunity to cut costs is an opportunity to target project investments toward strengthening the strategic value proposition.
Review expenditure from the ground up
‘Zero base’ portfolio expenditure for the whole organisation by isolating expenses related to strategic projects, and the capabilities they are enhancing, and reviewing them collaboratively with relevant stakeholders. During the review process, decide which ones are really necessary and cut back on everything else, to focus on projects that enhance your strategic position. This allows the PMO to break free from legacy budgets and start afresh, focusing on what’s really transformational.
Be proactive about educating PMO stakeholders, so that cost-consciousness becomes part of the organisational culture rather than a temporary mindset. It needs to become part of the way all projects are evaluated and managed, rather than a set of rules to get through a difficult period. Project management leaders need to reinvent both attitudes to costs and how they actively manage costs, in a much faster and more complex environment. An essential part of this process includes having the visibility to communicate cost efficiencies to all stakeholders at the portfolio level.
Overall, cost efficiency optimization within your project portfolio needs to be a business-focused, continuous discipline intended to drive spending on digital initiatives, while also maximizing business value. Project Objects’ PPM solution can help PMO leaders find collaborative solutions to more effectively manage their project and program costs across integrated portfolios, understanding the impact of required cost management in a dynamic environment. Specifically, our PPM software allows users to understand the interdependent risks of cost efficiency programmes, exploring competing priorities within a portfolio, and across portfolios, to properly understand the long-term implications. Financial management is often a weakness within PPM solutions but for Project Objects, this is one of our areas of strength.
Gartner: Portfolio and Resource Management for Products and Projects Primer for 2019