Lean Project and Portfolio Management (LeanPM®) Framework

Redefining #ProjectManagement. Free to Read, Free to Use.

Chapter 6: Lean Portfolio Management Framework

What is strategy?

Strategy is a plan for realizing the organization's mission.

Collis and Rukstad (2008) state that organizational strategy is part of a hierarchy of statements that provide guidance for organizational development: [1]

  • Mission: why the organization exists
  • Values: what the organization believes in and how it will behave
  • Vision: what does it aspire to
  • Strategy: how it will achieve competitiveness. The strategy has three components – definition of objectives, scope of the organization and means (advantages)
  • A strategy performance measurement tool (e.g., Balanced Scorecard)
An organization's mission, values, vision and strategy are the foundation on which it builds and develops its value stream system.

Objectives

The ultimate strategic objective (goal) is set for the next several years. The ultimate objective should be SMART (specific, measurable, achievable, realistic and time-bound) and aim to maximize the organization’s value. It can be expressed in terms of market share, market leadership, growth, profitability, etc. A number of SMART strategic objectives follow from the ultimate objective and contribute to its achievement. [2]

Scope

The scope of the organization sets its boundaries and provides guidelines for decision-making and for carrying out operational activities.

To delineate the boundaries, the strategy identifies: which unique, combined and fitting activities the organization will perform and which activities it will not perform; which customers, needs and locations it will and will not serve; what product and service features it will and will not offer; what trade-offs the organization will make. [3]

High-order strategic themes can be defined to design the system of interrelated activities of the organization – as in the following example of IKEA's strategic themes: [4]

  • Limited customer service
  • Self-selection of goods to purchase by customers
  • Modular furniture design
  • Low manufacturing cost

Advantage

The definition of the competitive advantage comprises a description of the customer value proposition and references the unique configuration of the organization's activities that alone are able to realize the distinctive value proposition. [5]

Lean Strategy Process

“Strategy without entrepreneurship is central planning; entrepreneurship without strategy leads to chaos.”

- David J. Collis

The lean strategy process of David J. Collis reconciles strategy and entrepreneurship. Strategy defines the boundaries within which daily decisions are made and disciplined experimentation is carried out. The results of the experiments are used for strategic redirection so that the organization can take advantage of new opportunities. The lean strategy process has five phases: [6]

  • Vision: the founders define the organization's reason for existence
  • Analysis: the organization analyzes its resources, capabilities, strengths, weaknesses, opportunities and threats
  • Deliberate strategy: defining the objectives, scope and advantage of the organization
  • Learning: daily decisions are made and strategy-driven experiments are conducted
  • Emergent strategy: the results of the experiments and the feedback modify the strategy; the process restarts from the Analysis phase

Introduction to Lean Portfolio Management: The Role of Projects

The projects realize three types of initiatives that support the flow of value created by the organization:

  • Strategic transformation initiatives
  • Improvement initiatives
  • Exploratory initiatives
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Figure 6.1 shows the relationship between the lean project initiatives and the flow of value.

Lean Portfolio Management - Relationship between the lean project initiatives and the flow of value

Transformation initiatives create new value streams or transform the whole value creation system. They originate directly from the organization's strategy.

Improvement initiatives stem from the value stream system. These are major and continuous improvements (kaikaku and kaizen) that may include projects for:

  • developing new products and services within existing product/service families
  • improving existing products, services, value streams and processes
  • eliminating obsolete value streams
  • ensuring compliance and responding to emergency situations

Exploratory initiatives acquire validated knowledge through rapid plan-do-check-act (PDCA) cycles and serve transformations and improvements. They are stand-alone projects or an Exploration phase of the Lean Project Life Cycle (as we discuss in The Lean Project Life Cycle chapter).

The organization's project initiatives differ from each other, and from ongoing initiatives in terms of impact scale, time horizon, frequency, and uncertainty. We show these characteristics in Figure 6.2.

Figure 6.2: Characteristics of Organization’s Initiatives

Characteristics of the organization’s initiatives

These types of initiatives (transformation initiatives, major improvements, continuous improvements and ongoing continuous improvements) differ in the magnitude of change, which implies they make a different contribution to the implementation of the organization's strategy. However, all of them are necessary for the sustainable development of the organization's value creation system.

Examples of Transformation Initiatives that transform the organization’s value creation system are changing the business model and investments in new streams of revenue, e.g., in a new product/service line or a major product/service (outside of the existing product/service lines).

Major Improvements involve radical changes, for instance, developing new products and services within existing product/service lines, restructuring an existing value stream and redesigning a product or a production process.

Continuous Improvements can be incremental changes of various types, such as product extensions, quality improvement, process optimization, marketing and sales innovations, productivity improvement and cost reduction. Ongoing Continuous Improvements are of the same nature but these are small improvement initiatives that are below the threshold for a project.

The threshold for a project is specific to the organization. For example, the policy could be that any initiative that costs more than $30,000 and lasts more than one month should be managed as a project. Initiatives below this threshold may not be managed through a separate project structure, but as ongoing improvements within the operational activities.

All these types of initiatives are important and they work as a system. For sustainable development, the organization must maintain an optimal dynamic balance between them (Apply systems thinking principle).

Figure 6.3: Lean Project Portfolio Allocation

Lean Portfolio Allocation

Introduction

The goal of Lean Project Portfolio Management is to maximize the net value of the organization's initiatives, thus helping to optimize the flow of net value that the organization creates. Portfolio initiatives realize their effect through operational value streams, and each initiative should improve the capacity of the value stream system to create value.

Lean Project Portfolio Management is a means for sustainable development and continuous improvement of the organizational value-creating system. It is fundamentally different from traditional project portfolio management, as shown in the table below.

Difference between Traditional Portfolio Management and Lean Portfolio Management

Lean Project Portfolio Management has three processes that interact with each other and run simultaneously:

  • Develop organizational strategy and set objectives
  • Generate ideas, select and prioritize projects
  • Fund, execute and evaluate

Develop Organizational Strategy and Set Objectives

The vision of the organization gives meaning to its existence, and the strategy is a high-level plan for realizing the vision. The strategy and its objectives provide a framework for defining value-stream objectives. In the lean organization, the strategy, the objectives and the performance measures result from a bidirectional process which is both top-down and bottom-up.

The objectives and Key Performance Indicators (KPIs) or Objectives and Key Results (OKRs) at both the strategic and value stream levels set the foundation for lean portfolio management.

Generate Ideas, Select and Prioritize Projects

Lean organizations constantly screen the environment and sense and seize opportunities. They encourage innovation and intrapreneurship. Kaizen and kaikaku activities create a continuous flow of improvement initiatives. Lean leaders initiate ambitious strategic transformations. Teams use stakeholder feedback to improve customer service and identify fresh opportunities. (See Idea Generation and Triage)

To be suitable for selection, potential projects must be:

  • Aligned
  • Feasible
  • Viable

Alignment

Projects are aligned when they contribute to the achievement of the strategic objectives (for the transformation projects) or the objectives of the value streams (for all other projects) as measured by the relevant KPIs or OKRs.

We need not invent project objectives different from the strategic and value-stream objectives. An organizational objective may require several initiatives, and the individual projects will provide incremental contributions to achieving that objective. The opportunities for creativity and innovation remain endless, as there are many ways we can achieve each objective.

Alignment requires a binary decision. It's about yes or no, there are no intermediate options.

The rule is: Use the organization’s objectives for project objectives. 

Feasibility

Feasible projects are those that are practically possible (at reasonable cost), in terms of the project environment, the nature of the project deliverables and the process of their creation, and in terms of the organization's capacity.

Viability

At the selection stage, viable projects are those whose potential benefits outweigh the potential costs.

The LeanPM Framework sets an additional requirement, which is to select Minimum Viable Projects.

Minimum Viable Project (MVP)

A Minimum Viable Project is a viable project that is minimized in terms of complexity, scope, effort, cycle time, dependencies, and risk (Simplify principle). The focus is not on minimizing but on viability and its maximization.

The questions we need to answer include:

  • Is the estimated net value of the initiative sufficient to justify its inclusion in the project portfolio (above the threshold; a minimum desirable net value)?
  • Can we implement the initiative more effectively and efficiently as an ongoing continuous improvement or exploration?
  • Can we achieve the objectives through a better and simpler project approach?
  • Can we achieve the project objectives through better and narrower deliverable configuration, better and simpler deliverables, and better and simpler deliverable creation processes?
  • Can we minimize external project dependencies?
  • Can we break down the initiative into discrete projects which would reduce overall complexity, uncertainty and cost, and would speed up value creation?
  • Is the project independent (not a part of mutually exclusive projects)?
  • Does the project overlap with other initiatives?

One aim of the Minimum Viable Project is to draw the line between projects and ongoing improvement initiatives. It should support a growing number of initiatives that become a flow of ongoing improvements, at the expense of initiatives formalized as projects.

The Minimum Viable Project reduces waste and risk, shortens cycle time, increases the probability of success, and limits the cost of failure. By minimizing individual viable projects, we maximize the net value of the project portfolio.

The concept of the Minimum Viable Project resembles that of the Minimum Viable Product [7], but there are significant differences between them. The Minimum Viable Project seeks to improve the project’s manageability. The Minimum Viable Product helps you quickly validate or invalidate hypotheses and fail fast.

LeanPM Framework uses the Minimum Viable Product and other similar concepts in the exploratory projects. In a Minimum Viable Exploratory Project, we create validated knowledge through rapid plan-do-check-act cycles, using increments that include:

  • Minimum Viable Product
  • Minimum Viable Service
  • Minimum Viable Value Stream
  • Minimum Viable Experiment
  • Minimum Viable Research
  • Minimum Viable Study
  • Minimum Viable Test

Project Selection

The initial screening will create a pool of potentially aligned, feasible and viable projects, and then selections can be made for inclusion in the portfolio (see A3 Analysis and Pre-Selection/Selection).

The selection should be grounded on a project’s absolute and relative importance, or simply put, on the importance and priority.

Prioritization

Prioritization addresses the following issues:

  • Allocation of resources to the transformation portfolio and the value streams portfolio
  • Allocation by strategic themes within the transformation portfolio
  • Allocation of resources to individual value stream and the cross-value stream portfolios as well as to major and continuous improvement projects, exploratory projects and ongoing continuous improvements
  • Project sequencing (schedule priority)

Allocation is a bi-directional process with complete decentralization at the value stream level. The governance teams discuss and decide on the relative importance of the different portfolios and sub-portfolios and align the allocation with the capacity.

Prioritization seeks to achieve an optimum balanced mix of sequenced initiatives that will best deliver the strategy. The organization must continuously challenge and revisit priorities and allocation.

Importance

If we determine the importance of each project, we can sort the projects from highest to lowest in importance and select projects until we have exhausted the resources of the respective portfolio.

It’s a common practice to use scoring models to evaluate project importance. The scoring model is composed of multiple criteria with assigned weights and a scoring scale. The governance team assigns numerical scores to each criterion, and the total weighted score represents project value and importance.

For example, we could use a scoring model for triage and sorting of project ideas into one of the four categories of MoSCoW prioritization: Must have, Should have, Could have and Won't have. 

However, the total project score is not a good measure of project value. When we use it, we encounter the following problems:

  • The total project score does not carry objective information about the project’s value. The score does not represent absolute value, but (at best) relative value of one project compared to another. 
  • We measure the project score and project cost in different units, which makes it impossible to calculate the net value (the net value rather than the value shows project’s importance).
  • We can manipulate the result through the scores and weights.
  • It seems logical to use total project score to sequence projects (and we often do this), but, as we’ll see, this is incorrect.
  • When we use the expected net monetary value together with other criteria in the scoring model, this means that we haven’t properly measured the expected benefits and costs. Adding a risk criterion, for example, shows that when estimating the net value, we didn’t take into account the parametric and model uncertainty (and if we did, we should not use a duplicate criterion).
  • The arbitrary, indiscriminate use of diverging criteria and subjective scoring and weighting may result in a biased outcome.

Among the most commonly used criteria in scoring models are strategic alignment, return, risk and compliance. Organizations also use a variety of other criteria that ultimately affect benefits, costs, or risks.

But there are many questions that need to be asked:

  • What's the point of assigning 0 score for “no alignment with strategic goals” and a score of 4 for “alignment with more than 3 strategic goals”?
  • Can we accept “no alignment”?
  • Can we compensate for non-alignment with a higher score for project size and technical feasibility, for example?
  • Is the project impact proportional to the number of strategic objectives it’s aligned to?
  • If a project contributes to the achievement of only one strategic objective, does this make it inconsistent with the other strategic objectives (and would a good strategic plan allow such inconsistency)?

Instead of a rational, we get a lot of questions. As noted above, alignment is a precondition for considering the project and should not be part of the appraisal model.

As we suggest, using the organization's objectives for project objectives has another important advantage. If we have previously evaluated how the progress in achieving objectives benefits the organization, this will help us assess the effect of the incremental contribution of the projects.

Let's look at three examples of value stream objectives:

  • To improve Lead Conversion Ratio (the ratio of the number of leads to the number of those who turn into customers).
  • To lower the Absenteeism Rate (the ratio of the number of absences to the number of workdays in a given period, expressed as a percentage).
  • To improve Donor Retention Rate for a nonprofit organization (percentage of donors who have donated more than once).

Operational value streams should have evaluated (in monetary units) the effect of incremental change in the values of the indicators associated with these objectives. This would enable us to assess the impact of projects that, for example, aim to reduce the Absenteeism Rate from 4.2% to 3.3%, improve Lead Conversion Ratio from 20:1 to 15:1, and improve Donor Retention Rate from 38% to 43%.

Using compliance and urgency (emergency) in scoring models is also problematic. If we need a project to save the organization and continue operations, this project is mandatory and of utmost importance. We should include it in the portfolio. Where the threat is not apparent and imminent, the benefit-cost assessment will establish the project’s importance, as for any project. So, we have a better way to take compliance and urgency into account.

Risk-Adjusted Net Value

Risk has no independent role in the importance of the project. Its role lies in the fact that it affects the benefits and costs. The same applies to many other criteria used in the scoring models (including time-related factors). We should therefore strive to take into account the impact of risk and other factors on benefits and costs, to work out the risk-adjusted net value of the project as the only measure of its importance. 

Once we have selected projects for each portfolio using risk-adjusted net value, it’s very tempting to apply this metric of importance in order to establish schedule priorities and to sequence the projects. But that would be a mistake.

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Projects Sequencing (Schedule Prioritization)

As our goal is to maximize the total net value of the portfolio for any time period, we need to consider its total Cost of Time. If we execute one project before another that has a higher Cost of Time, we may incur costs that we can avoid by changing the order of execution of the two projects.

Don Reinertsen gives three principles for prioritizing (sequencing) jobs: Shortest Job First (SJF), High Delay Cost First (HDCF) and Weighted Shortest Job First (WSJF) [8].

Shortest Job First (SJF) is the best sequencing strategy when all jobs have the same cost of delay. Starting with the longest jobs would delay the others more than when starting with the shortest jobs and would lead to higher overall delay cost. 

High Delay Cost First (HDCF) should be applied when the costs of delay differ, but all jobs have the same duration. The jobs with higher cost of delay have a priority.

Weighted Shortest Job First (WSJF) is the best scheduling strategy when both durations and delay costs are different. WSJF is equal to delay cost divided by job duration. WSJF is also referred to as CD3 (Cost of Delay Divided by Duration). The logic is that the higher the delay cost and the shorter the duration of the job, the smaller its contribution to the total costs when we do it earlier.

Here is an example of applying the WSJF rule.

Project

Cost of Delay ($/week)

Duration (weeks)

WSJF (CoD/Duration)

A

$1K

4

0.25

B

$2.5K

8

0.31

C

$3.2K

12

0.27

From the information in the table, we can calculate which of the sequencing combinations produces the optimum results (here we present the calculations for four of the possible six combinations):

B-C-A sequence
  • Project B is delayed by 8 weeks and the CoD is 8 x $2.5K = $20K
  • Project C is delayed by 20 weeks and the CoD is 20 x $3.2K = $64K
  • Project A is delayed by 24 weeks and the CoD is 24 x $1K = $24K

The total CoD is $108K


A-B-C sequence
  • Project A is delayed by 4 weeks and the CoD is $4K
  • Project B is delayed by 12 weeks and the CoD is $30K
  • Project C is delayed by 24 weeks and the CoD is $76.8K

The total CoD is $110.8K


C-B-A sequence
  • Project C is delayed by 12 weeks and the CoD is $38.4K
  • Project B is delayed by 20 weeks and the CoD is $50K
  • Project A is delayed by 24 weeks and the CoD is $24K

The total CoD is $112.4K


A-C-B sequence
  • Project A is delayed by 4 weeks and the CoD is $4K
  • Project C is delayed by 16 weeks and the CoD is $51.2K
  • Project B is delayed by 24 weeks and the CoD is $60K

The total CoD is $115.2K

So, according to the WSJF rule, the best sequence is B-C-A because it has the lowest total CoD of $108K. The sequence of A-C-B has the highest CoD of $115.2K

Let's add two more projects. The best sequence now is D-E-B-C-A and the sequence with the highest CoD is A-C-B-E-D.

Project

Cost of Delay ($/week)

Duration (weeks)

WSJF (CoD/Duration)

A

$1K

4

0.25

B

$2.5K

8

0.31

C

$3.2K

12

0.27

D

$5.2K

10

0.52

E

$2K

6

0.33

Sequencing projects does not imply that we need to wait for one project to finish before starting another. Depending on our resource capacity and the target average lead time, we will have a certain number of projects in process.

WSJF principle is a major improvement in decision-making. We can see that to apply it, two conditions must be met:

  1. The delay costs of the individual jobs must be constant for all time periods. 
  2. All jobs must have the same reference point of delay (the present moment).

In fact, the WSJF, HDCF and SJF principles take into account the effect of postponing the jobs. We can formalize this effect as a Cost of Postponed Execution (CPE), which includes components such as lost opportunity cost, deferred use cost and customer dissatisfaction cost. As we discuss in the Cost of Time chapter, projects can have distinct points of reference for postponement and the postponement costs may vary over the time periods. 

WSJF uses the expected job duration, which it takes as a constant. The delay in this case refers to the delay in starting and ending the work, and not to the extension of its cycle time (which we defined as the delay cost factor).

It’s a common situation to have unique values of the cost of postponed execution of a project for each future time period. Along with the varying reference points of postponement, this makes the sequencing a more complex task.

Let's look at an example of three projects that we need to arrange by order of execution. We need to find the best sequence among the six possible combinations.

Case Study

General Information

Project

Expected duration (number of time periods)

Ideal point in time to finish Just-in-Time

Estimated ideal point in time to start

Project Alfa

2

End of

period 3

Beginning of period 2

Project Beta

3

End of

period 6

Beginning of period 4

Project Gama

5

Now

Beginning of period 1

Cost of Time and WSJF

Cost of Time and WSJF

Since we can't directly apply the WSJF formula, we could calculate the average CPE (CoD) values for the period 1-10, which gives us Alfa-Beta-Gama as the optimal sequencing combination.

It's obvious that in this case we cannot apply the WSJF and SJF rules correctly. When we perform the individual calculations for each combination (which we show below), we can see that the optimal sequence is Alfa-Gama-Beta with the lowest total cost of postponed execution of $38.1 K.

Calculation - Cost of Postponed Execution 1
Calculation - Cost of Postponed Execution 2
Lean Portfolio Management - Project Sequencing - Example 1

In the example above, the ideal execution period for each project is shown in blue and the adjusted one in green.

In the Beta-Gama-Alfa combination, project Beta will be completed at the end of period 3, instead of at the end of period 6, as in the ideal case. Thus, project Beta will incur premature delivery costs for three periods, totaling $4.8 K ($1.5 K + $1.5 K + $1.8 K).

The ideal point in time to finish project Gama is "now" but instead it will be finished at the end of period 8, i.e., eight periods later. This will generate a cost of postponed execution for eight periods of $32 K in total ($3.8 K + $3.8 K + $3.8 K + $4.0 K + $4.0 K + $4.2 K + $4.2 K + $4.2 K).

Ideally, project A should be finished at the end of period 3 but this is now expected to happen at the end of period 10, so this project incurs costs for seven periods of postponed execution ($30.5 K = $2.0 K + $3.0 K + $3.5 K + $4.2 K + $5.1 K + $6.2 K + $6.5 K). 

Calculation - Cost of Postponed Execution 3
Calculation - Cost of Postponed Execution 4
Lean Portfolio Management - Project Sequencing - Example 2
Calculation - Cost of Postponed Execution 5
Calculation - Cost of Postponed Execution 6
Lean Portfolio Management - Project Sequencing - Example 3

We can conclude that when the postponed execution costs for the individual time periods, the durations, and/or the reference points for postponement are not all homogeneous, we can’t apply the SJF, HDCF and WSJF rules. We need to identify the correct priority by comparing the total costs of postponed execution of the individual combinations.

Note also that the CPE priorities will depend on the time horizon and the trends in the time-related costs. Varying the time horizon may lead to different optimal prioritization.

The portfolio allocation should not be fixed for the entire year. It needs to be regularly assessed and altered as needed, for example, following quarterly or monthly feedback loops. Within the funds allocated to each portfolio, the individual projects should be funded incrementally and each portion of the investment should be justified by the net profit it would generate.

Incremental financing reduces risk and waste. Short feedback loops on project progress help to improve budget estimates and to better assess the probability of achieving project objectives through rolling forecasts. The more accurate net project value estimates, and the changing environment and organizational objectives, may require a rearrangement of portfolio priorities. Therefore, project funding should be incremental, taking into account the shifting budgetary needs and priorities.

The key aspects of lean portfolio execution are ongoing project coordination and synchronization and portfolio optimization, by altering resource allocation and changing, cancelling and modifying projects.

Regular evaluation of the portfolio provides the basis for portfolio optimization and continuous improvement of portfolio management processes.

Portfolio Process Efficiency and Project Lead Time

An important thing to look at, when considering the portfolio management processes, is the process efficiency of the portfolio (or the process efficiency of the project life cycle). The cycle efficiency of a process is calculated by dividing the value-added time by the total lead time of the process. A low process cycle efficiency is a symptom of waste.

As we can see in Figure 6.4, the total project lead time comprises several components.

Figure 6.4: Project Life Cycle Process Efficiency

Lean Portfolio Management - Little's Law - Project Life Cycle Process Efficiency

At the level of the project portfolio, we can calculate the efficiency of the project life cycle process by dividing the Project Cycle Time (the time for executing the project) by the Total Project Lead Time (in-system time).

Often, the time for non-executing life cycle phases is a large part of the total lead time. The low cycle efficiency is a symptom of waste. To reduce the lead time, we need to shorten the non-executing phases.

The project execution phase (and the other phases in the project life cycle) also has its own measure of cycle efficiency - the ratio of the value-added time to the cycle time. We address this issue in the Managing Creation and Absorption chapter.

The average lead time of the individual projects is affected by the work in progress limit (or the lack of limit) for each portfolio.

Sequencing projects does not imply that we need to wait for one project to finish before starting another. Depending on our capacity and the target average lead time, we will have a certain number of projects in progress at the same time.

Little's Law is a theorem that provides a principle for evaluating the efficiency of queuing systems. It defines the relationship between the long-term average number of customers in a stationary system (L), the long-term average effective arrival rate of the customers (λ) and the average time that a customer spends in the system (W).

In a stable system, the departure rate (throughput) is the same as the arrival rate.

The formula of the law is: L = λ W

In projects, the relationship is between average number of jobs in the system (Work in System or in-system inventory), average processing rate (throughput) and average lead time.

Work in System (WIS) is the number of jobs in the system (waiting to be serviced or being worked on).

Processing Rate is the number of jobs that are processed and depart the system for a given period.

Lead Time (time in system) is the time a job spends in the system, including queue time (waiting to be processed) and the processing time (cycle time).

The project lead time has important implications for project success due to the Cost of Time. With the help of the law, we can determine the average number of projects in the system that is needed to achieve a certain average lead time. We can define the project processing system as the time and processes framework, from project idea generation to project completion. 

Let's say that the average processing rate of a value stream is 30 process improvement projects per year and we aim to ensure that the average project lead time is no more than 5 months.

Using the formula

Average Work in System (L) = Average Processing Rate (λ) x Average Lead Time (W)

we get 12.5 (30 x 5/12).

To ensure an average project lead time of up to 5 months, we must limit the average number of in-system projects to 12 and balance the arrival rate with the departure rate.

For an average lead time of 3 months, we have to set a limit to an average of 7 in-system projects. We achieve the longest average lead time of 12 months with an average of 30 projects in the system.

Introduction

Governance and management frameworks bring together principles, rules, procedures, practices, roles and responsibilities.

Lean Portfolio Governance provides overall direction, leadership, strategic decision-making and control.

Lean Portfolio Management provides day-to-day management of project portfolios within the boundaries set by the governance. [9]

Portfolio governance and management work together to ensure that portfolio objectives are achieved and portfolio practices are continuously improved.

The portfolio bodies and roles and their responsibilities provide insight into the scope of portfolio governance and management activities.

Lean Portfolio Board is the portfolio’s governance body and Lean Portfolio Sponsor is the leading governance role. The central portfolio management role is the Lean Portfolio Manager who may be assisted by a portfolio management team.

Lean Portfolio Sponsor

The Lean Portfolio Sponsor is a senior manager who is accountable for the ultimate success of the portfolio. This is usually a member of the management team of the value stream of which the portfolio is a part, or a C-level executive for a strategic transformation portfolio. This role:

  • Ensures portfolio alignment and realization of portfolio benefits
  • Provides portfolio funding and resources
  • Removes major obstacles to realizing portfolio benefits
  • Warrants collaboration with key stakeholders, including the organization’s senior management
  • Oversees portfolio management team
  • Supports and provides guidance to portfolio management
  • Takes part in governance decision-making as a member of the Lean Portfolio Board

Lean Portfolio Board

This is the governance team of the portfolio. It consists of stakeholders who represent the following interests:

  • The interests of the organization, through the Lean Portfolio Sponsor who chairs the board and the Lean Portfolio Manager
  • The interests of the portfolio customers
  • The interests of the suppliers of resources to the portfolio
  • The interests of the portfolio performers (project teams)

The interests of customers and resource suppliers may be represented by one or more persons in each case. If portfolio projects are not too numerous, they can all have their representative (through their Lean Project Sponsor or Lean Project Manager). Otherwise, two or more projects can have one person representing them.

The Lean Portfolio Board has the following responsibilities:

  • Approves the lean portfolio management framework
  • Allocates portfolio resources
  • Ensures that the value of the lean portfolio is preserved and increased
  • Makes decisions on the portfolio design: approval, inclusion and exclusion of projects, sequencing, execution period, and design of constituent projects
  • Improves lean portfolio governance and governs the improvement of lean portfolio management
  • Solves major problems related to conflicts, impediments, obstacles, and inter-project and inter-portfolio coordination
  • Approves portfolio plan and performance metrics and targets

Lean Portfolio Manager

This role is responsible for the success of the portfolio and his/her specific responsibilities include:

  • Developing, implementing and improving portfolio management processes
  • Managing portfolio workflow and the portfolio Plan-Do-Check-Act/Adjust cycles
  • Coordinating portfolio projects, removing impediments and obstacles, resolving conflicts, and supporting project governance and management teams
  • Assisting portfolio governance team
  • Managing portfolio variables and risks
  • Coordinating and synchronizing the portfolio with other portfolios and the operational value streams
  • Ensuring collaboration with all portfolio stakeholders
  • Overseeing lean project managers

The governance and management of the portfolio projects are performed by the Lean Project Board, Lean Project Sponsor and Lean Project Manager.

Lean Project Manager

This Lean Project Manager is the central project management role that can be assisted by a project management team. This role is responsible for the success of the project and to this end:

  • Develops, implements and improves lean project management processes
  • Manages project workflow and the project Plan-Do-Check-Act/Adjust (PDCA) cycles
  • Preserves and increases the project’s value
  • Manages project variables, interdependencies and risks
  • Removes obstacles and impediments, resolves conflicts and assists project team members
  • Collaborates with all project stakeholders

Ideally, the Lean Project Manager is involved throughout the project cycle — from project idea to project completion and retrospective/evaluation.

The Plan-Do-Check-Act/Adjust Cycle

Another look at the main lean portfolio governance and management activities is provided by their grouping by the components of the PDCA cycle, as presented below. The activities presented below should not be seen as necessarily following one another and not overlapping. These are not “steps” for portfolio management. For example, activities from all four groups may need to be carried out within a very short period.

The rhythm of the PDCA governance and management activities is set according to regular time intervals (e.g., monthly), including Lean Portfolio Board Reviews, prepared and facilitated by the lean portfolio management team.

Planning

Portfolio governance:

  • Defining and updating the lean portfolio governance plan (which defines the steps and the resources required to perform the lean governance function)
  • Defining and revising project selection, prioritization, definition and funding criteria
  • Setting and refining portfolio objectives
  • Approving portfolio plan, portfolio management plan, portfolio metrics and performance targets

Portfolio management:

  • Developing and updating a portfolio management plan and portfolio implementation plan (continuous planning)
  • Defining and revising lean portfolio metrics and performance targets
The Portfolio Management Plan defines the steps and resources needed to implement the portfolio management function.
The Portfolio Implementation Plan defines the steps and resources required to execute the portfolio workflow (the aggregate of workflows of the constituent projects), and the outcomes expected.

Doing

Portfolio governance:

  • Allocating portfolio resources
  • Making decisions regarding project selection, prioritization, definition, execution period and funding (governance decisions)
  • Creating conditions for the realization of portfolio benefits
  • Solving major problems related to conflicts, impediments, obstacles and interdependencies
  • Overseeing and supporting the portfolio management team
    Monitoring portfolio progress

Portfolio management:

  • Managing portfolio resources and value generation
  • Managing portfolio workflow, variables, risks, issues and interdependencies
  • Facilitating project ideation, analysis, selection, prioritization, definition and funding
  • Removing impediments and obstacles
  • Resolving conflicts at the portfolio level
  • Assisting portfolio governance team
  • Overseeing and supporting project management teams
  • Coordinating and synchronizing constituent projects
  • Tracking portfolio performance metrics
  • Reporting to portfolio governance

Checking

Portfolio governance:

  • Performing portfolio management audits
  • Analyzing portfolio alignment and status

Portfolio management:

  • Analyzing real-time data
  • Analyzing the status of the portfolio and constituent projects
  • Assessing the probability of achieving the objectives of the projects and the portfolio
  • Analyzing changes in the organization's strategy, strategic goals, objectives of value streams, allocation of resources at the macro and value stream level, changes in the organizational and external environment, the impact of portfolio risks and problems
  • Measuring portfolio impact/value realization
  • Auditing portfolio projects

Acting/Adjusting

Portfolio governance:

  • Taking action for incremental improvement of the portfolio governance processes and the portfolio management framework
  • Revisiting governance decisions
  • Making decisions for optimizing the design of the portfolio and its constituent projects

Portfolio management:

  • Defining action items to continuously improve portfolio management and project management processes
  • Suggesting options for optimizing the design of the portfolio and the constituent projects
  • Proposing updates to the portfolio plan, portfolio management plan, portfolio metrics and performance targets

Macro Allocation

The organization's total budget (excluding the general needs budget) should fund the following functions, in line with its strategic objectives:

  1. Operating and improving existing value streams
  2. Transforming the organization's value creation system and investing in the future (transformational and seed investments)

The apportionment between these two major functions is the first macro-allocation decision to be made by the organization’s lean governance team.

Alternatively, the first macro-allocation decision could relate to the ratio between operations and investments, with the investment component then allocated between transformations and value streams. The disadvantage of this approach is that the total budget for the value streams would be determined in two steps instead of one, and this may hamper consensus building. If the first approach is used, the appropriate operations-to-investment ratios can be used as a guide (guardrail) for subsequent allocation decisions within the value streams.

Next, the value streams budget is allocated to individual value streams to create a balanced portfolio of value streams.

Figure 6.5: Macro Allocation

Macro Allocation - Lean Portfolio Management

Portfolio Balancing

For an organization to develop sustainably, it must allocate its human, physical, financial and intellectual resources and organizational capabilities by balancing potential benefits, risks and opportunities over time.

Strategic portfolio balancing requires that necessary and sufficient resources are allocated to achieve each strategic objective. If the resources are not sufficient, the organization must rework the strategy rather than attempt to partially achieve the objectives.

Another aspect of balancing involves a balanced allocation between different types of initiatives and different time horizons of development.

The Horizons of Growth model of Baghai, Coley and White (also known as McKinsey’s Three Horizons of Growth model)[10] states that sustainable growth requires investing in initiatives with different time horizons, as summarized below: 

Horizon of growth

Objectives

Investment focus

Horizon 1

Protect and extend core businesses


Secure funding for Horizons 2 and 3 initiatives

Continuing innovation: product extensions, marketing and sales innovations, restructuring, productivity improvement, cost reduction, etc.

Horizon 2

Build emerging businesses


Complement or replace core businesses

Transformational investments in new streams of revenue

Horizon 3

Create viable options


Reach Horizon 1 levels of profitability, if the initiatives prove successful

Seed investments in research projects, market tests, building partnerships, acquiring minority stakes, etc.

An example of three horizons of investment and growth is Facebook's 10-year roadmap [11] announced in 2016, which envisions:

  • 3-year horizon to improve the ecosystem — the foundational social media and social networking service (Facebook itself)
  • 5-year horizon to strengthen key products such as Instagram, Messenger and WhatsApp
  • 10-year horizon for developing technologies of the future for connectivity, artificial intelligence and virtual reality/augmented reality

As we can see, the capabilities that Meta is currently leading with were planned no less than a decade ago.

This model can be applied both at the organizational level (as described above) and at the level of individual value streams, especially when these are built not just on a single product or service but around product or service lines. [12]

Figure 6.6: Three Horizons of Investment and Growth

Three Horizons of Investment and Growth

The Innovation Ambition Matrix of Nagji and Tuff (a refinement of Ansoff’s matrix) [13] is also a tool that helps to allocate funds among growth initiatives. To balance the innovation portfolio, organizations need to invest simultaneously at three “levels of ambition”:

  1. Core innovation initiatives: investment in incremental improvements to existing products and gradual entry into new markets. Core initiatives serve existing markets and customers and draw on existing products and assets.
  2. Adjacent innovation initiatives: aimed at expansion from existing to new businesses. These initiatives add incremental products and assets in order to enter adjacent markets and serve adjacent customers.
  3. Transformational innovations: to make breakthroughs and invent things for markets that don't yet exist. Transformational initiatives develop new products and assets that make it possible to create new markets and satisfy new customer needs.

Nagji and Tuff point out that the most successful companies allocate 70% of funds to core initiatives, 20% to adjacent initiatives and 10% to transformational ones – but this is not a magic formula and the ratio varies by industry and strategy.

They also found that the contribution to the total return on investment in innovation is the inverse of the allocation ratio. The core, adjacent and transformational innovation initiatives account for 10%, 20% and 70% of total returns, respectively.

Figure 6.7: Core, Adjacent and Transformational Innovations

Core Adjacent and Transformational Innovations

Balancing the portfolio requires simultaneous investment in all three horizons of growth (or levels of ambition).

The ratio between continuing innovation, transformational investments and seed investments or between core, adjacent and transformational innovations (depending on the concept used) should be determined by taking into account the following:

  • Organizational strategy
  • Size of the organization and its stage of development
  • Industry
  • Environment
  • Ambition of the strategic goals, and
  • Risk tolerance

Within value streams, allocations should also make allowances for their lifecycle stage, as well as the stages of the products or services involved.

Portfolio balancing must take into account existing constraints. For example, the project sequencing (which is an aspect of time balancing) should consider not only the cost of time and the inter-project dependencies but also factors such as portfolio and project management capacity and the capacity to create and absorb project assets. High-priority projects with a high cost of deferred use may be moved forward in time, to ensure that there are resources available.

The Horizons 2 and 3 budgets finance a portfolio of transformational and seed initiatives which is controlled by the transformation portfolio governance and management. The next level of allocation directs the transformation portfolio budget to individual initiatives (Minimum Viable Projects).

The total budget for the value streams is allocated through a bi-directional consensus process between the individual value streams. The budget of each value stream is managed in a decentralized manner by the value stream management.

The sustainable value stream has three components that determine the allocation of the total value stream budget (meso-level allocation):

a) Ongoing operations that create value for the customers (“Operations”). Ongoing maintenance and support (sustainment), marketing, sales, etc. also fall here.

b) Ongoing problem solving and incremental improvements (for brevity, we'll call this component "Operations Support"). This is work that remains below the Minimum Viable Project (MVP) threshold.

c) Investment initiatives to maintain and increase the value-creating capacity, and capability of the value stream or to phase it out (“Investments”).

This allocation is done by the value stream governance team, in accordance with the value stream objectives and budget guardrails.

The allocation ratios depend on the lifecycle stage of the value stream – Development, Introduction, Growth, Maturity or Decline and Phase-out. They also factor in the different lifecycle stages of the individual products/services of the value stream product/service line.

Investment resources are allocated to individual projects that form a project portfolio.

Figure 6.8: Value-Stream and Portfolio Levels of Allocation

Value-streams and Portfolio Levels of Allocation

Participatory Budgeting is a form of stakeholder participation in decision-making on how to allocate resources at all levels. It implies the participation of all key stakeholders, who must reach a consensus on the allocation within the budget guardrails. For example, this can be done by organizing budgeting forums where participants are given a portion of the total budget to allocate according to their preferences, in order to arrive at a common decision.

Participatory Budgeting harmonizes interests, increases support for decisions, and develops collaboration.

There are no universal lean budgeting and financing cadences, but here is an example of a customized approach:

  • The total budget is set and macro allocation is performed on an annual cadence, and adjusted on a semi-annual cadence
  • Value-stream level allocation is performed on a semi-annual cadence and adjusted quarterly
  • Portfolio level allocation is carried out quarterly and revisited monthly
  • Projects are financed incrementally on a monthly cadence

The organization's projects can be incorporated into a single portfolio with sub-portfolios, or organized in separate portfolios. Any approach that would ensure central coordination on strategic issues and decentralized management at the value-stream level could be appropriate.

If a number of value streams are managed together (as one value stream), they will have one portfolio. If they are managed separately, however, there will be separate portfolios. The organization must decide the extent of aggregation of its value streams so that they are manageable. The number of value streams and their manageability determines what the number of portfolios will be.

When the value stream portfolios are relatively small, they could become sub-portfolios within a single portfolio. They will be managed through a common management structure, but there should still be decentralized management at a sub-portfolio level.

However, if the value stream portfolios are large enough to be managed separately and if combining them would have a negative impact on manageability, the multi-portfolio approach might work better. This approach also requires centralized coordination between the portfolios.

Note that the two sub-portfolios in Figure 6.3 (Major Improvements and Continuous Improvements portfolio) are separated for the purpose of resource allocation but they can be managed within a single portfolio.

The portfolio implementation plan is an overall plan for performing all the work included in the portfolio. Its time horizon is determined by that of the projects involved.

The portfolio implementation plan integrates the plans of the individual projects and links them into a common execution system. This plan defines objectives, major deliverables, milestones, time, costs, sequence, dependencies, assumptions, risk and PDCA cadences for the entire portfolio.

The plan is not a commitment, but a forecast with a certain degree of probability which increases as the time horizon shortens.

Portfolio implementation planning can be supported by tools such as the Portfolio Roadmap which visualizes all portfolio projects on a timeline. Color codes can be used to indicate different teams or types of projects.

It shows the overall timeline for achieving portfolio objectives, communicates the high-level portfolio implementation plan to stakeholders, and helps to track progress. This makes it a reliable tool for achieving common understanding and decision-making.

Figure 6.9: Portfolio Roadmap

Lean Portfolio Roadmap

The roadmap helps manage key portfolio dependencies as well as major inter-project synchronization and integration activities.

The roadmap is a part of the portfolio implementation plan and the work it visualizes is a forecast, with a decreasing degree of certainty for the more distant future. That is, the roadmap does not reflect a firm commitment.

The portfolio implementation plan should be updated on a cadence as part of the lean portfolio review.

A portfolio is a system of interconnected projects. Portfolio dependencies affect the overall portfolio performance. They are of two types:

  • External portfolio dependencies
  • Dependencies between the projects within a portfolio (project interdependencies)

The external portfolio dependencies are those that link it to other portfolios or initiatives of the organization. Their management is analogous to the management of project interdependencies, which we discuss below.

There are four main types of project interdependencies:

  1. Resource dependencies
  2. Deliverable dependencies
  3. Knowledge/outcome dependencies
  4. Synergistic dependencies

Resource dependencies arise from the need to share resources between two or more projects. These can be all kinds of resources — people, equipment, tools, infrastructure, space, etc. Financial dependencies also fall here. In principle, all projects in the portfolio are interdependent, at least in terms of shared financial and portfolio management resources.

Deliverable dependencies exist when the successful implementation of one project requires a deliverable of another project. From the point of view of a specific project, this can be an input dependency (the project needs a deliverable of another project) or an output dependency (another project needs a deliverable of this same project).

Another type of deliverable dependency is the synchronization dependency - when deliverables from two or more projects need to be synchronized in time, without necessarily being integrated, and integration dependencies — when deliverables from two or more projects need to be synchronized in time to be integrated into a common system.

Knowledge/outcome dependencies are those when the outcome or findings of one project affect the design or value of another project. Unlike deliverable dependencies, which a priori do not imply a change in the dependent project, this type of dependency introduces conditionality and implies adaptations and changes in the affected project.

While each type of interdependency has a potential synergistic effect, by synergistic dependencies we mean the impact of the portfolio configuration on portfolio value.  The synergistic effect may vary when certain projects are included in or excluded from the portfolio, or when the sequence, execution periods, or project definitions are changed.

Exploiting opportunities can lead to synergistic dependencies which can have positive results. For this purpose, the value of the portfolio can be optimized through simulations.

Within the allocation guardrails, the simulation-based optimization should take into account variations in the following parameters:

  • Portfolio composition
  • Project sequence and execution periods
  • Key project design parameters
  • Assumptions about the net value of individual projects
  • Assumptions about inter-project synergies

It is important to keep in mind that optimization should be done not only for the set of potential future projects but for the overall portfolio, including all projects that have been approved for implementation or are already being implemented.

Optimization is an evolutionary process. The optimization result (portfolio design) should be validated and adapted periodically.

For convenience, we will refer to the non-synergistic dependencies (resource, deliverable and knowledge/outcome dependencies) as technical dependencies.

Technical dependencies may be direct or indirect and there may be several levels of dependency. If Project B depends on Project A and Project A depends on Project C, then Project B indirectly depends on Project C.

In general, technical interdependencies complicate the system (the portfolio) and lead to greater risk and uncertainty.

But the introduction of dependencies may be necessary to eliminate waste and exploit opportunities. For example, data collected for one project can be used for another project instead of being collected again. This would require synchronization of the two projects in terms of the execution periods and data attributes. Joint procurement for two or more projects is another typical example.

Knowledge and outcome dependencies can also play a positive role and are therefore better identified and exploited than ignored.

The following approaches can be used to manage technical dependencies:

  • Dependency reduction
  • Visual management
  • Coordination

Dependency Reduction

Reducing unwanted dependencies in the portfolio can lessen its complexity and uncertainty, thereby maximizing its value.

This can be done by:

  • Applying the Minimum Viable Project (MVP) concept to define projects that are technically independent of other projects, to the extent possible
  • Limiting Work in Process (WIP) and balancing resources and needs at the portfolio and project level to reduce resource dependencies (read more on this in Flow Management)
  • Synchronizing and optimizing the schedules of interdependent projects to reduce conflicting demand on shared resources

Visual Management

Visual management is a great practice to help identify, evaluate, reduce and implement cross-project dependencies.

Figure 6.10 shows a roadmap of a portfolio, along with the timing of various interdependencies. This visualization helps dependencies to be presented and managed as project milestones.

Figure 6.10: Portfolio Roadmap with Project Interdependencies

Poprtfolio Roadmap with Project Interdependencies

A useful tool for identifying and visualizing all dependencies among a project and all other projects is the centralized dependency map shown below.

Figure 6.11: Map of Project Interdependencies (Centralized)

Map of Project Interdependencies - Centralized

To get a picture of all the dependencies in the portfolio, the decentralized map shown below can be used. It can also be used to study indirect dependencies and the importance of dependencies. The map displays the density of dependencies, indicating key and potentially vulnerable nodes (projects) in the portfolio.

Figure 6.12: Map of Project Interdependencies (Not Centralized)

Map of Project Interdependencies - Decentralized

Coordination

Coordination is a lean portfolio management function that, in the context of project interdependencies, aims to ensure that those interdependencies are best realized. Coordination takes place at two levels:

  1. Teams of the dependent projects collaborate, working as a joint extended team to coordinate and synchronize their activities. Thus, interdependencies are managed in a decentralized way.
  2. Lean portfolio management coordinates the component projects so that the necessary dependencies between them are realized. The portfolio management team serves the projects by identifying, assessing, tracking, and helping to implement interdependencies.

The following two practices can be useful for realizing dependencies:

  • Defining milestones in the interconnected projects whose achievement will ensure the realization (or resolution) of the dependencies
  • Applying a proactive approach to ensure the conditions for achieving the milestones

Resolution of resource conflicts should be decentralized within the respective value stream, cross-value stream and enterprise resource pool.

Portfolio Kanban is a system that supports portfolio management through visualization and workflow management.

Like other similar Kanban systems, Portfolio Kanban consists of three components:

  1. Kanban board and Kanban cards
  2. Work items
  3. Policies

A Portfolio Kanban board is a physical or digital tool that visualizes the portfolio workflow as a sequence of process states presented in columns. The board can be divided into horizontal "swim lanes" for different types of projects or to form a fast track.

Kanban cards representing the work items are moved from left to right and show the status of the portfolio. Each card contains basic information about the respective portfolio item.

Figure 6.13 below shows a Portfolio Kanban board with the process states of the Lean Project Life Cycle. Four of the phases are further divided into "doing" and "done" states.

The work items in this system are project ideas that evolve into lean business cases (in A3 Analysis), which in turn transform into Minimum Viable Projects (from Portfolio Backlog onwards).

Figure 6.13: Portfolio Kanban Board

Lean Portfolio Kanban

Kanban policies are rules that determine how the Kanban system works. The effectiveness of Portfolio Kanban, and therefore portfolio management, is directly dependent on the rules and the extent to which they are followed, adapted and improved.

The main Portfolio Kanban policies to be defined are related to:

  • The definition of process states and the conditions for the transition from one state to another
  • Definitions of work items
  • WIP limits
  • Planned capacity utilization
  • The size of the work items (batch sizes)
  • Special cases
  • Responsibilities

In Chapter 5, we explain the lean project cycle, the process states and the conditions for changing them, and the definitions of portfolio work items, so we will not dwell on that issue here.

To maximize the portfolio throughput, lower and upper WIP limits can be defined for the individual steps in each lane, as well as for each lane as a whole and the entire portfolio. These limits must balance portfolio demand and capacity.

It is probably not wise to have WIP limits on the number of project ideas, because that may place an artificial constraint on creativity and innovation. It also makes little practical sense to impose limits on the number of projects in retrospection and evaluation.

Where projects are of similar size, WIP limits can be set as a minimum and a maximum number of projects. In cases where project sizes differ significantly, limits can be set in a number of normalized, average-sized projects.

Special case policies define possible deviations from standard Portfolio Kanban processes (and portfolio management processes in general).

For example, it’s probably not appropriate for transformation projects to go through the sieve of triage and A3 analysis. These projects emerge as a result of strategic dialogue within the organization and policies may require that they enter the Kanban directly at the Exploration stage.

Another special policy may allow for the creation of a fast track in a separate “swim lane” for emergency projects. Also, low risk and low-cost projects may need a lightweight fast track process so that they advance from idea to implementation in a very short time.

Portfolio governance and management responsibilities, as described above, also apply to the Kanban system. In addition, there should be a determination of who can add, remove and change the status of portfolio items in the Kanban system.

It is beyond the scope of this framework to describe the portfolio risk management in detail, and this has been done elsewhere.

Here, we present the main principles and guidelines for lean portfolio risk management:

(1) Main principles

The main principles of lean portfolio risk management are proactivity, hypothesis testing, prevention, adaptation and opportunity exploitation.

(2) Portfolio-level risks

Manage portfolio-level risks that arise from:

  • Factors external and internal to the organization that affect more than one project in the portfolio
  • Interdependencies between constituent projects, including synergistic interdependencies

(3) Risk response to project-level risks

Response to project-level risks can be more efficient at the portfolio level, either due to the resource constraints of individual projects, or because it may only be possible at the portfolio level.

(4) Risk Pooling

Maximizing opportunities and minimizing threats at the portfolio level should be complemented by risk pooling:

  • Including projects with different risk profiles in the portfolio tempers the risk
  • A greater number of projects in the portfolio reduces variability and risk
  • Negative and positive portfolio risks (threats and opportunities) balance each other

Risk pooling reduces overall portfolio risk through diversification.

(5) Risk thresholds

Risk thresholds are determined by the organization's risk appetite for transformation portfolios, and by the appetite of the corresponding value stream for value streams portfolios.

(6) Approach

Key risk management tools are portfolio design decisions. These decisions can be supported by portfolio models that explore risk and response scenarios and simulate various portfolio designs (simulation modeling).

In addition, portfolio risk response measures can be assigned to component projects.

(7) Portfolio reserves

Portfolio reserves are useful to manage risks and exploit opportunities.

(8) Coordination

Risk management efforts at the portfolio and project levels should be coordinated.

Portfolio metrics are quantifiable measures used to assess the state of the portfolio and the portfolio management practices. They are used for:

  • Evaluating the extent to which the portfolio's objectives have been achieved or are likely to be achieved
  • Early detection of trends in portfolio performance
  • Assessing the predictability of creating value
  • Directing the measures for continuous improvement and assessing their effect

To make use of the metrics, numerical performance targets or the desired direction of change must be determined in each case.

Below are examples of lean portfolio metrics.

Metrics related to portfolio objectives:

  • Net present value of the portfolio
  • Total net value created by the portfolio over a past period
  • Total expected net value over a future period
  • Metrics for the variables that affect portfolio benefits and costs
  • Return on investment for the portfolio and the constituent projects
  • Value stream Key Performance Indicators (KPIs) that are affected by the portfolio
  • Number and share of successful projects or percentage distribution by the degree of success of the constituent projects

Portfolio flow metrics:

  • Portfolio process efficiency and efficiency of each process stage
  • Pre-selection time, portfolio backlog waiting time, input queue waiting time
  • Project lead time and project cycle time
  • Portfolio WIP: total and per a process state; the proportion of WIP in each process state
  • Portfolio throughput (work completed in a given period)
  • Portfolio batch size (project size)

Portfolio funnel (conversion) metrics:

  • Ratio of the number of completed projects to the number of project ideas
  • Similar ratios for funnel (project life cycle) stages

Team health metrics:

  • Metrics for portfolio team morale, communication, collaboration, learning, improvement, etc.

Beyond quantitative measures, the Conditions of Satisfaction of portfolio stakeholders can take various forms and should be tracked by appropriate means.

Project initiatives create a flow of transformations and improvements and support the organization’s flow of value.
The continuous improvement, major improvement and transformation projects, and the ongoing continuous improvements differ in the scale of impact, time horizon, frequency (number) and uncertainty. All these types of initiatives work as a system, and the organization needs an optimal dynamic balance between them to ensure its sustainable development.
Lean Project Portfolio Management maximizes the net value of the organization's initiatives, thus improving the capacity of the value-creating system and contributing to the maximization of the organization’s flow of net value. 
Lean Project Portfolio Management differs from the traditional portfolio management:
  • It’s managed in a decentralized way at both organizational and value stream levels.
  • It uses bidirectional objective setting, and incremental and adaptive planning and funding.
  • Resource allocation is fast and flexible and funds value streams that incrementally fund Minimum Viable Projects and ongoing improvements.
  • Lean portfolio management uses strategic and value stream objectives and KPIs or Objectives and Key Results (OKRs) as project objectives.
  • Progress measurement is value-based.
  • Stable long-lived teams which are subsets of the value stream teams are preferred.
Project selection should be based on alignment, feasibility, viability, importance and priority.
Minimum Viable Projects reduce waste and increase the probability of success.
Using scoring models to evaluate project importance is problematic because this can lead to biased decisions. 
An appropriate measure of project importance is the risk-adjusted net value.
Prioritization provides allocation of resources to individual portfolios, including allocation by strategic themes, and project sequencing.
Allocation is a bidirectional process. It should be completely decentralized at the value stream level and aligned with the capacity.
Schedule prioritization must be based on the Cost of Time.
When the postponed execution costs for the individual time periods and the durations and/or the reference points for postponement are homogeneous, we should apply the SJF, HDCF and WSJF rules to sequence projects. When these parameters are not homogeneous, to identify the correct priority, we have to compare the total costs of postponed execution of the individual sequencing combinations.
Schedule priorities depend on the time horizon and the trends in the time-related costs.
The portfolio should be reassessed and altered following regular feedback loops.
To reduce risk and waste, short feedback loops on project progress must facilitate incremental funding.
Key aspects of portfolio management are ongoing project coordination and synchronization and continuous improvement of portfolio management processes.
The portfolio process efficiency should be improved by reducing the time for non-executing project life cycle phases. The average project lead time can be shortened by limiting the Work in Progress.
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[1] Collis, David J. and Michael G. Rukstad. April 2008. Can You Say What Your Strategy Is? Harvard Business Review

[2] Ibid.

[3] Porter, Michael. 1996. What is strategy? Harvard Business Review 74(6) 61–78.

[4] Ibid.

[5] Collis, David J. and Michael G. Rukstad. April 2008. Can You Say What Your Strategy Is? Harvard Business Review

[6] Collis, David J. March 2016. Lean Strategy. Harvard Business Review

[7] The term Minimum Viable Product was coined and defined by Frank Robinson in 2001 

[8] Reinertsen, Donald G. (2009). The Principles of Product Development Flow: Second Generation Lean Product Development. Celeritas Publishing

[9] The Lean Portfolio Governance Framework brings together principles, rules, procedures, practices, roles and responsibilities for lean portfolio governance.

The Lean Portfolio Management Framework brings together principles, rules, procedures, practices, roles and responsibilities for lean portfolio management.

Here we provide general guidelines for both frameworks; each organization should define its own specific frameworks.

[10] Baghai, Mehrdad, Steve Coley, David White (2000). The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise. Basic Books

[11] Source: thenextweb.com/news/facebook-reveals-10-year-roadmap (last accessed 2022-10-20) 

[12] Continuous improvement projects correspond to Horizon 1; Major improvement projects correspond to Horizon 2 for investments in existing product/service lines; Transformation projects correspond to Horizon 2 for investments in new product/service lines and to Horizon 3. Although the concepts correspond with each other, the terminology differs because these are different models.

[13] Nagji, Bansi and Geoff Tuff (2012). Managing Your Innovation Portfolio. Harvard Business Review. Available on hbr.org/2012/05/managing-your-innovation-portfolio (last accessed 2022-10-20)

  • Дмитрий Томшин says:

    Управленцам читать это до конца.

    • Alexander (LeanPM) says:

      Дмитрий, спасибо за комментарий.

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