Trade off Between Risk Management, Value Creation and Strategic
Alignment in Project Portfolio Management
Khadija Benaija and Laila Kjiri
ENSIAS, Mohammed-V Souissi University, Avenue Mohammed Ben Abdallah Regragui, Rabat, Morocco
Keywords: Project Portfolio Management, Portfolio Risk Management, Strategic Alignment, Creation of Business
Value.
Abstract: Projects portfolio management allows the company to select, prioritize, integrate, manage and check its
projects in a multi project context. In this paper, we consider a very important part of the projects portfolio
management namely the selection of projects. Indeed, the greatest challenge for managers today is to be
sure that the projects initiated achieve the strategic and financial objectives of the company. Our paper
proposes a framework for project selection based on three main criteria: value creation, risk management
and alignment with the business strategy. After a brief review of the literature regarding the basic concepts
used, we propose bivariate analyses: risk-value, risk-alignment and value-alignment. Our contribution in
this paper is to design a framework that realizes the trade-off between the three criteria.
1 INTRODUCTION
In today’s fast changing business environment,
organizations have to transform themselves
constantly to continue growing. These
transformations are realized concretely through all
the projects that these organizations launch, hence
the importance of good Project Portfolio
Management (PPM). This discipline deals with the
coordination and control of multiple projects
pursuing the same strategic goals and competing for
the same resources, whereby managers prioritize
among projects to achieve strategic benefits (Cooper
et al., 1997). Project portfolio management has
received a stable and central position in project
management research, product development
management research, and companies' management
practices during the past decade (Martinsuo, 2013).
Project portfolio management has been developed
into global standards like in the standard for
portfolio management elaborated by the Project
Management Institute, (Project Management
Institute, 2008a) as well as practical tool books
(Benko and McFarlan, 2003) (Cooper et al., 2001)
that enables companies to implement their own
projects portfolio management.
The project portfolio management objectives are
well established in the literature: the maximization
of the portfolio value, the minimization of portfolio
risk, and the project alignment to strategic goals
(Cooper et al., 2001), (Elonen and Artto, 2003).
Our goal in this paper is to define a framework
which will have theoretical criteria based on the
three main elements: value, risk and strategic
alignment.
The paper is structured as follows. In the next
section, we review the basic concepts in the field of
PPM. In Section 3, we present the framework for the
selection of projects achieving a compromise
between three factors: risk, value and alignment. The
last section is devoted to conclusions and prospects
of work done.
2 BASIC CONCEPTS OF THE
STUDY
The framework proposed in this paper relies on the
following four bases:
- Project portfolio management,
- Creation of value,
- Risk management,
- Strategic alignment.
2.1 Project Portfolio Management
A project portfolio is a group of projects or
447
Benaija K. and Kjiri L..
Trade off Between Risk Management, Value Creation and Strategic Alignment in Project Portfolio Management.
DOI: 10.5220/0004952904470452
In Proceedings of the 16th International Conference on Enterprise Information Systems (ICEIS-2014), pages 447-452
ISBN: 978-989-758-029-1
Copyright
c
2014 SCITEPRESS (Science and Technology Publications, Lda.)
programs in an organization or business unit that
aims at strategic goals, share resources, and must
compete for funding (Nowak, 2013).
In the Guide to the Project Management Body of
Knowledge (PMBOK® Guides), a portfolio is
defined as a collection of projects or programs and
other works that are grouped together to facilitate
effective management of that work to meet strategic
business objectives (Project Management Institute,
2008b).
These are the goals set by the portfolio
management, which allow the construction of the
portfolio. PMBOK states that one goal of the
portfolio management is to maximize the value of
portfolio (Project Management Institute, 2008b).
This can be achieved by careful examination of
candidate projects and programs for inclusion in the
portfolio and timely exclusion of projects not
meeting the portfolio’s strategic objectives. Senior
managers or senior management teams responsible
for portfolio management should ensure the right
balance among incremental and radical investments
and the efficient use of resources (Nowak, 2013).
The most important tasks of projects portfolio
management by (Wysocki and McGary, 2003):
• formulating investment strategy of the portfolio,
• specifying types of projects eligible for the
portfolio,
• evaluating and prioritizing projects that are
candidates for the portfolio,
• constructing a balanced portfolio that meets the
investment objectives,
• monitoring the performance of the portfolio and
adjusting its composition in order to achieve the
desired results.
2.2 Creation of Value
Benefits are measurable improvements perceived to
be a value by one or more of the stakeholders
(Rajegopal et al., 2007) (Venning, 2007). The
benefits can be tangible or intangible according to
the ease of quantification (Project Management
Institute, 2008a). In addition, tangible benefits can
be financial or non-financial (Williams and Parr,
2006).
A portfolio brings together all benefits delivered
by programs and projects. The PPM has a critical
function: assuring that all benefits are aligned to the
portfolio’s strategic objectives (Sanchez and Robert,
2010). The role of a portfolio of projects is to verify
that expected benefits are planned, realistic and in
fact delivered by programs and projects (Venning,
2007).
2.3 Portfolio Risk Management
Project Management Institute defines risk of project
as an uncertain event or condition that, if it occurs,
has a positive or negative effect on a project’s
objectives (Project Management Institute, 2004).
Association for Project Management gives the
following definition of project risk: an uncertain
event or set of circumstances that, should it occur,
will have an effect on the achievement of the
project’s objectives (Association for Project
Management, 1997).
For project portfolios, risk is defined as an
uncertain event or condition that, if it occurs, causes
a significant positive or negative effect on at least
one strategic portfolio objective (Project
Management Institute, 2008a). The management of
risks at the portfolio level may enhance the
effectiveness of risk management compared to the
independent consideration of risks at the project
level (Aritua et al., 2009) (De Reyck et al., 2005).
2.4 Strategic Alignment
The company strategy is determined in a planned
way, or in response to business environment
changes. Projects are considered as the means to
implement the strategy of the company. Indeed, it is
through projects initiated that the company achieves
its strategic vision in the short and long term.
Portfolio management provides the link between
strategy and implementation of projects into the
operational environment (Sheykh et al., 2013).
Indeed, in order to achieve its strategic objectives,
the company must manage its projects portfolio so
that projects contribute together to achieve these
goals.
The United Kingdom Office of Government
Commerce (OGC, 2009) defines a portfolio as ‘the
totality of an organisation's investment in the
changes [projects and programs] required to achieve
their strategic objectives’.
3 OPTIMIZATION
VALUE-RISK-STRATEGIC
ALIGNMENT
As we saw in the previous section, and as shown in
figure 1, the project portfolio management is based
primarily on the optimization of the following three
factors: maximum value, minimal risk and
maximum of alignment with the strategy of the
ICEIS2014-16thInternationalConferenceonEnterpriseInformationSystems
448
company.
Figure 1: Representation of the project portfolio.
It is on this principle that will stand our proposed
framework for the identification of projects to be
selected in portfolio.
3.1 Analysis Risk-Value
Let us consider the two-dimensional analysis risk-
value, as presented by (Sheykh and al., 2013).
Figure 2: Central idea of diversifying the portfolio:
Managing risk and value creation (Sheykh and al., 2013).
As shown in figure 2, we can identify high-potential
projects according to these two criteria: risk and
value.
* Projects with low risk and high value are
preferred: they have great potential because they
generate more value with low uncertainty.
* Projects with a high risk and low value are
discarded. They are the opposite of the first: they
generate a low value with a large uncertainty.
* Projects with a high risk and a high value as well
as those with low risk and low value must to be
managed according to company strategy. Hence,
it is necessary to call the third criteria: strategic
alignment.
3.2 Analysis Risk-alignment
We propose to make another two-dimensional
analysis taking into account both risk-strategic
alignment criteria. Consider then figure 3, which
summarizes this analysis.
Figure 3: Bivariate analysis risk-alignment.
Figure 3 shows that by considering the two criteria:
risk and strategic alignment, we can classify the
projects in the portfolio (or just candidates) under
three headings:
* Projects with low risk and very aligned with the
business strategy: these projects are to retain.
* Projects with a high risk and non-aligned with the
business strategy: these projects must be
discarded.
* Projects with a high risk and very aligned with the
business strategy or those with a low risk but not
aligned with the strategy: these projects should
be subject to manager’s decision, taking into
account one or more criteria, including the value
generated by these projects.
3.3 Analysis Value-alignment
The third two dimensional analysis concerns two
criteria: value and strategic alignment. We propose,
as of earlier analysis, this classification of projects
into three categories:
* Projects with a high value and very aligned with
the strategy, these projects must be selected;
Project
portfolio
management
Strategic
alignment
Creation
value
Risk
management
TradeoffBetweenRiskManagement,ValueCreationandStrategicAlignmentinProjectPortfolioManagement
449
* Projects with a low value and not aligned with
the strategy: these projects must be discarded;
* Projects with a high value but not aligned with
the strategy or those with a very low value and
aligned with strategy: these projects require a
decision.
3.4 Trade-off Between Risk, Value
and Alignment
In this section, we propose a framework based on a
three-dimensional analysis based on the three most
important factors in the project portfolio
management, namely: risk, value and strategic
alignment.
Figure 4: The three coordinates of a project.
If we consider a project P, we can estimate the level
of risk R, its expected value V and its level of
alignment with the business strategy A. These three
coordinates are placed in a three-dimensional
reference frame, as shown in figure 4.
These values are estimated using methods that are
not discussed in this paper. An example of
assessment tool is indicated in Table 3.
Rr is the risk value from which we can say that the
risk is high and below which the risk is considered
tolerable.
Vr is the value from which the benefit is considered
important, and below which it is considered low.
Ar is the value of the alignment from which it is
considered high, and below which it considered low.
We attribute "+" if the value is better than the
reference value and "-" if it is worse. We can
translate it into:
* + for R < Rr or V >= Vr or A >= Ar
* - for R >= Rr or V < Vr or A < Ar
Table 1: Scoring of possible cases.
Case Coordinates scoring
Case 1
V >= Vr and R < Rr and A > = Ar + + +
Case 2 V >= Vr and R < Rr and A < Ar + + -
Case 3 V >= Vr and R >= Rr and A < Ar + - -
Case 4 V >= Vr and R >= Rr and A >= Ar + - +
Case 5 V < Vr and R < Rr and A >= Ar - + +
Case 6 V < Vr and R < Rr and A < Ar - + -
Case 7 V < Vr and R >= Rr and A >= Ar - - +
Case 8 V < Vr and R >= Rr and A < Ar - - -
For a given project, one of the following cases
occurs:
Case 1: V >= Vr and R < Rr and A > = Ar: This
case will be appreciated “+ + +”
Case 2: V >= Vr and R < Rr and A < Ar: This case
will be appreciated “+ + -“
Case 3: V >= Vr and R >= Rr and A < Ar: This case
will be appreciated “+ - -“
Case 4: V >= Vr and R >= Rr and A >= Ar: This
case will be appreciated “+ - +”
Case 5: V < Vr and R < Rr and A >= Ar: this case
will be appreciated “- + +”
Case 6: V < Vr and R < Rr and A < Ar: this case
will be appreciated “- + -“
Case 7: V < Vr and R >= Rr and A >= Ar: this case
will be appreciated “- - +”
Case 8: V < Vr and R >= Rr and A < Ar: this case
will be appreciated “- - -“.
By analysing the eight cases, we can refine the
classification in four categories according to the
degree of potential, materialized by the number of
"+" :
Table 2: Classification framework.
Rubric Degree of
potential
corresponding
case
Decision
Rubric 1 3+ Case 1 to select
Rubric 2 2+ case 2, case 4,
case 5
to prioritize
Rubric 3 1+ case 3, case 6,
case 7
to lower
priority
Rubric 4 0+ Case 8 to abandon
Rubric 1: including the case 1 with a rating of three
"+", projects of this category must be selected.
Rubric 2: including cases 2, 4, and 5 with a rating
of two "+", projects in this section are interesting to
select. For example, if the company gives more
priority to the creation of value and risk
management it must choose projects of case 2 (for
risk and alignment the case 5, and for value and
alignment: case 4).
ICEIS2014-16thInternationalConferenceonEnterpriseInformationSystems
450
Rubric 3: including cases 3, 6 and 7 with a rating of
one "+", the projects in this section are low potential.
Rubric 4: including the case 8, projects of this
section is to give up as all criteria are negative.
Thus, the existing projects in the portfolio or
candidates to be selected can be classified into these
four categories.
Assessment of the projects for each criterion, and
determining for each project coordinates V, R and
A, are through a questionnaire including several
questions per domain. In the literature, there are
examples of these questionnaires. We are content in
this paper to give an example presented by (Sheykh
and al., 2013).
Table 3: The assessment tool (Sheykh and al., 2013).
Evaluation area
Number
of
Questions
Questions (Example)
Strategic 12
Have all project business
requirements, objectives,
assumptions, constraints,
and priorities been defined
and documented?
Technology
Exposure
6
Does the agency have
experience working with,
operating, and supporting
this technology in a
production environment?
Organizational
Change
Management
9
Has a documented
organizational change
management plan been
prepared for this project?
C
ommunication 7
Have all required
communication channels
and interfaces been
identified and documented?
Fiscal 16
Does the project have a
clearly defined and
documented business case
that demonstrates
measurable and tangible
benefit to the agency?
Project
Organization
9
Have all the roles and
responsibilities for the
project management team
been clearly defined and
documented?
Project
Management
17
Has a project schedule
specifying all project tasks,
necessary checkpoints and
critical milestones been
defined and documented
Project
Complexity
10
Is the proposed system
more complex than current
agency systems?
It is interesting to apply the framework presented on
a real case. We restrict ourselves in the following to
give an overview of the result of application of this
framework.
We consider a portfolio including projects: P1... P5,
and with candidate projects: P6... P10. By applying
the framework presented in this article, we will have
a result (for example) as shown in figure 5 below:
Figure 5: Result of applying the classification framework.
The results of applying the proposed framework can
be summarized as follows:
* Project P2 (already existing in the portfolio) and
P8 (candidate) are to abandon.
* Projects P1 and P5 (already in the portfolio) and
P10 (candidate) are to retain.
* Projects P3 and P4 (already in the portfolio) and
project P7 (candidate) are high priority.
* Projects P6 and P9 are low priority.
4 CONCLUSION
Increasingly, companies are required to have a good
projects portfolio management. A challenge for them
is managing the potentially diverse range of projects,
while ensuring that the right projects are selected
(Young and Conboy, 2013). This paper provides a
contribution in this area by presenting a framework
that facilitates the decision making in the selection
phase.
This framework is interesting to the extent that:
• It is more complete since it takes into account the
three most important criteria in the projects
portfolio management.
• It is finer because it allows the selection of
interesting projects, the removal of projects with
low potential and the classification of projects of
intermediate degrees of importance.
• It is easy to implement: the number of criteria
remains reduced (three), project assessments are
not fastidious.
TradeoffBetweenRiskManagement,ValueCreationandStrategicAlignmentinProjectPortfolioManagement
451
The work done in this paper can be completed by an
evaluation method of degrees of risk, value and
strategic alignment within an organization.
Other perspectives of this work would be to
apply this framework to a specific case, or further
refine for a well-defined area, or in a given context.
This work can therefore be expanded both
quantitatively and qualitatively.
REFERENCES
Aritua, B., Smith, N.J., Bower, D., 2009. Construction
client multi-projects: a complex adaptive systems
perspective. International Journal of Project
Management 27 (1), 72–79.
Association for Project Management, 1997, PRAM Project
Risk Analysis and Management Guide. High
Wycombe, UK: APM Publishing.
Benko, C., McFarlan, F.W., 2003. Connecting the dots.
Aligning projects with objectives in unpredictable
times. Harvard Business School Press, USA.
Cooper, R., Edgett, S., Kleinschmidt, E., 1997. Portfolio
management in new product development: lessons
from the leaders I. Research Technology Management
40 (5), 16–28.
Cooper, R., Edgett, S., Kleinschmidt, E., 2001. Portfolio
management for new products, 2nd edition. Basic
Books, USA.
De Reyck, B., Grushka-Cockayne, Y., Lockett, M.,
Calderini, S.R., Moura, M., Sloper, A., 2005. The
impact of project portfolio management on
information technology projects. International Journal
of Project Management 23 (7), 524–537.
Elonen, S., Artto, K., 2003. Problems in managing internal
development projects in multi-project environments.
International Journal of Project Management 21 (6),
395–402.
Martinsuo, M., 2013. Project portfolio management in
practice and in context, International Journal of
Project Management 31 (6), 794–803.
Nowak, M., 2013. Project Portfolio Selection Using
Interactive Approach. Paper presented at MBMST
2013 Modern Building Materials, Structures and
Techniques Conference, Vilnius, Lithuania (16 - 17
May 2013).
Office of Government Commerce, 2009. Portfolio
Management Guide (Final Public Consultation Draft).
Office of Government Commerce.
Project Management Institute, 2004. A Guide to the
Project Management Body of Knowledge (3
rd
edition).
Newtown Square, Pennsylvania.
Project Management Institute, 2008a. The standard for
portfolio management, 2nd edition. Project
Management Institute, USA.
Project Management Institute, 2008b. A Guide To The
Project Management Body of Knowledge (PMBOK®
Guides), 4th ed. Project Management Institute,
Newtown Square, PA.
Rajegopal, S., McGuin, P., Waller, J., 2007. Project
Portfolio Management: Leading the corporate vision.
New York, USA: Palgrave Macmillan.
Sanchez, H., Robert, B., 2010. Measuring portfolio
strategic performance using key performance
indicators. Project Management Journal 41 (5), 64–73.
Sheykh, M.J., Azizi, M., Sobhiyah, M.H., 2013. How Can
the Trade-off between Corporate Business Strategy
and Project Risk be Optimized? Social and Behavioral
Sciences 74 ( 2013 ), 134 – 143.
Venning, C., 2007. Managing Portfolios of Change with
MSP for programmes and PRINCE2 for projects.
London, United Kingdom: The Stationary Office.
Williams, D., Parr, T., 2006. Enterprise Programme
Management: Delivering Value, New York, USA:
Palgrave Macmillan.
Wysocki, R. K., McGary, R., 2003. Effective Project
Management: Traditional, Adaptive, Extreme. 3rd ed.
Wiley.
Young, M., Conboy, K., 2013. Contemporary project
portfolio management: Reflections on the
development of an Australian Competency Standard
for Project Portfolio Management. International
Journal of Project Management 31 (2013), 1089–
1100.
ICEIS2014-16thInternationalConferenceonEnterpriseInformationSystems
452
