Project Portfolio Assessment

    For a long time I looked at the empty blog " Product Management " with an appeal to write something, and decided to write something. But the topic is closer to project management. I believe that product management is more about NPD and others like that, but we will be interested in the profitability and risk of the project portfolio. Isn't maximizing income at a given level of risk the goal of portfolio management? (The question is rhetorical).
    I must say right away that talking about dogs, stars, milk cows and so on will not work.
    Update: example . The question is what would you give up if you had one and a half thousand for the next 3 years?

    A little about portfolio management


    The topic for real projects is poorly developed, despite the abundance of software solutions in this area (each of these solutions is a lot of something). There is a PMI standard for managing project portfolios, but, having reviewed the Internet and re-read a bunch of everything, I still could not find a solution that would fully support it.
    What is included in portfolio management? Something, but not all, is:
    • Gathering information about projects and writing out their economic indicators, resource needs, compliance with strategic goals, quality benefits
    • Grading projects according to criteria (criteria are combined into indicators), weighing them and calculating the project rating (by weighting the criteria for the grades). An example of a criterion can be net profit (a score of 0 is less than zero, from zero to 5 million rubles, for example, a score of 5, and if higher, a score of 10)
    • Prioritization You can compare projects in pairs (for example, who has a higher rating, or one of the indicators - the one has higher priority) by writing them in a tablet (columns and rows indicate projects. If the project in the line is higher than the project in the column, one is put. Then everything is summed up, and priority is obtained)
    • Portfolio balance analysis. Various bubble charts are drawn based on the available data (both by indicators and by other data), “clusters”, “empty spaces” and other are searched — everything that can provide high-quality information on the portfolio. At this stage, you can understand that some projects in the portfolio are not enough
    • Aligning projects in time and resources in accordance with their ratings. The highest priority go forward, if possible, and key resources are allocated to them. Some projects may be rejected
    • Portfolio Authorization
    • Portfolio monitoring and changes

    If you look in the books, you can find various portfolio management tools.
    For example, the most interesting in my opinion are:
    • Common threads. This refers to the common components of projects (not necessarily software components, although they too). For example, common threads can be searched in the area of ​​interaction with the customer
    • Crushing the project. This is understood as a breakdown into such pieces, each of which gives a measurable benefit (best of all in money), and after each piece you can make a decision to change (close) the project
    • Scripting testing. Several business development scenarios are written out (for example, narrowing, preservation, and expansion). See how each project behaves. Those that are saved under all scenarios are probably the most significant

    These are all high-quality methods of working with project portfolios. Some of the above can be found, for example, in Microsoft Project Server 2010 . It was the reading of this article by the way that prompted me to write this post.
    Why do I call these methods quality? Because they do not say anything about the profitability of the portfolio, nor about its risk directly. Yes, a portfolio can be balanced with reference to strategic goals. But this, in my opinion, is not all, until we know how much the portfolio will bring to us with what probability.

    A bit about project risks


    From here, I will continue to talk about investment projects, meaning the main indicator of effectiveness is the financial result (the difference of all revenues and costs of the project). If NPV is more interesting (all of a sudden), then all the arguments given below can be repeated for him.

    What is the risk of an investment project? This is the possibility of such a combination of circumstances that its financial result will be less than K (I will continue to take K = 0).

    Risk measures are different. For example, the probability. For example, probability * amount of losses. Finally, the possible damage itself. We will consider all these measures.

    To work with risks, we need to structure uncertainty, and best of all, according to future scenarios. For example, consider three cases of sales: optimistic (level A), realistic (level B), and pessimistic (level C).
    Let’s take the “probabilities” from the PERT method (in fact, these are weights, but expectation implies probabilities - and this has some feint with your ears. If you want, calculate the probabilities in some other way, for example, by asking yourself “how many times do we were you mistaken in sales N, M, L times? ”): 1/6 for A, 4/6 for B, 1/6 for C.

    Weigh the financial results according to the probability scenarios, and get an estimate of the financial result. Medium - this is the expectation of the project.

    See in which cases the financial result has become less than zero (in the pessimistic, apparently). So, with the probability of this scenario, we have the damage equal to the negative financial result.
    If there are more than one scenario with a negative financial result, then
    • probability is the sum of the probabilities
    • the damage is equal to the weighted average damage according to the probabilities of negative scenarios, divided by the sum of the probabilities (the risk, measured by the second measure, for the entire project is equal to the sum of risks under the scenarios).

    Calculations


    What for a portfolio? For independent projects, we are free to summarize financial results. For addicts, we are obliged (for simplicity, so as not to bother with correlation) to combine dependent projects into one.
    Further, under the conditions accepted, it is clear that the financial expectations for the portfolio are equal to the sum of the financial expectations for the projects.

    We remember that for independent random variables the variances are summed up, which means that we can calculate the variance for each project and add up.
    The variance for the project is considered as follows: add the squares of the differences of the average financial result and the financial result according to the scenario weighted by the scenario probabilities.
    We add the variances for the projects, extract the square root - we have a standard deviation.
    There is such a Chebyshev inequality - says that a deviation of k standard deviations or more is realized with a probability of no more than 1 / k ^ 2. If it is simplified to imagine that the distribution is symmetric (if PERT was used then this is so), then this probability must be further divided into two - we are only interested in the probability of a deviation to zero. k is equal to the quotient of dividing the estimated (average) financial result by the standard deviation.

    Thus, we get the probability of losses. Those. risk level.

    Conclusion


    It is clear that in order to compare portfolios, you need to make calculations for portfolios.
    Nevertheless, we now know how to find out the expected profitability of the portfolio in money, and the corresponding probability of obtaining a financial result is greater than zero. And then it remains only to act!

    PS The method is mine (done just by analogy with a portfolio of securities), if you suddenly find a mistake, I will be very grateful.
    PPS I hope it was interesting and useful :)

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