Portfolio management: Navigating through the crisis

Sheriff Hashem sheds some light on the importance of portfolio management during the financial crisis.

It all started in October 2008, at the eve of the current global financial crisis. At the time I was participating in PMI's Global Congress 2008 held in Denver, USA, when the concept of portfolio management jumped into my mind as the way forward for organisations to navigate through the current global financial crisis and emerge as a stronger business, with a management edge over competitors.

When signals of the subprime mortgage crisis were first reported in the US in July 2007, the world watched from a distance, assuming that the problem would remain local to the US, and that the government would deal with it by applying common macroeconomic theories and policies.

The crisis, however, persisted and continued to grow into 2008. All of a sudden, in September 2008, a financial "big bang" rocked the world with news of conservatorship [external control], collapse and bankruptcy of several major US-based financial firms. Before the world knew it, the financial problem spread worldwide. That put the global construction sector into an unprecedented state of panic, and the Middle East was no exception.

The crisis was substantial, and so was the global response. Governments announced the injection of huge stimulus packages into markets. Financial institutions enhanced protective measures. Developers and real estate investors implemented instant go/no-go decisions on current and planned investment initiatives. This initial response at various levels helped markets absorb the initial shock by reducing stake. However it is not enough, and nor is the end of the story.

Now that the dust has settled, project organisations need to reconsider their ways of doing business. The crisis has rocked the marketplace, changing its characteristics and bringing back to life harsh principles such as "survival of the fittest." Resources have been reduced due to the crisis, creating the need to decline projects that are good, but not good enough, focusing available resources on projects with the highest return on investment, and managing the same in a controlled, effective and efficient manner.

To accomplish this objective, project organisations need to deploy an integrated project management system of the capacity to govern and influence the process and achieve business objectives.

One of the best integrated project management platforms is that published by PMI through its series of complementary project management global standards.

The first is the ‘Project Management Body of Knowledge - Guide' addressing management of single projects. The second is the ‘Standard for Programme Management' addressing the management of a number of interdependent projects together. The third is the strategic ‘Standard for Portfolio Management' which covers managing project portfolios consisting of a combination of projects and programmes.

Portfolio management is about "doing the right work" rather than "doing the work right". It links strategy to operations. Organisations that do not use portfolio management run the risk that misaligned or low return on investment initiatives get through and consume valuable corporate resources.

It comprises a set of interactive management processes that facilitate informed decision making. The subject processes aggregate into two interdependent portfolio management process groups, namely, Aligning Process Group, and the Monitoring and Controlling Process Group.

Basic inputs required to initiate the portfolio management process include a working business strategy identifying predefined performance metrics, such as key performance indicators, return on investments and critical success factors; economic and technical constraints; strategic objectives such as expansion and diversity; and a list of candidate investment projects.

The aligning process group is concerned with ensuring that out of the candidate investment projects only the most efficient get through. Candidate investment projects get subjected to a sequential set of portfolio management processes, namely: categorise projects, evaluation projects, select projects, identify portfolio risks, analyse portfolio risks, prioritise projects, develop portfolio risk responses, balance portfolio, communicate portfolio adjustment, and finally authorise projects, which generates a final list of approved projects.

Project portfolio is then reviewed to identify cases of project interdependency which permit implementation of certain project groups as programs under the portfolio. The output of the aligning process group takes the form of a working procurement strategy addressing reference business strategy; portfolio layout including sub-portfolios, programmes, and projects; portfolio components; constraints; a high level portfolio timeline; budget allocation; and detailed feasibility information for funding purposes.

The monitoring and controlling process group is concerned with managing portfolio risk, ensuring that the portfolio is performing to achieve the predefined metrics. Monitoring and controlling may proceed by portfolio category, or merely across the entire portfolio. The monitoring and controlling process group consists of three processes.

The first is monitor and control portfolio risks which establishes and implements a portfolio risk management programme. The second is review and report portfolio performance that gathers and reports portfolio compliance with predefined metrics thus ensuring compliance with business strategy and effective resource utilisation.

The third and last process is monitor business strategy changes which enables the portfolio management to respond to significant changes in the business environment which often results in a new strategic direction, thereby impacting the portfolio and its components.

Adopting portfolio management is a major business decision that requires top management vision and commitment. It is the most important accomplishment any senior executive team can strive for, and it pays off in optimised and well-controlled operations leading to growth, increased profit and long term business sustainability.

Hashem is an associate director at WSP Middle East and has over 23 years of experience in implementation of major international civil engineering projects in Europe, Asia and the Middle East. He has had several papers published on project management in the USA, Brazil and the UAE, and is a formal contributor and final draft reviewer of PMI's project, programme and portfolio management global standards.

The opinions expressed in this column are of the author and not of the publisher.

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