for Effective Management
of Financial Performance
ADVISORY ARTICLE
By Fernando Santiago
Ontario, Canada
The performance of a project portfolio should be measured and managed at two levels of maturity. The first level aggregates and analyzes project-level data to create portfolio metrics based on project delivery (i.e., percentage of projects on time/budget). The second level of maturity uses portfolio-level metrics that consider projects as financial investments. In this article, Fernando Santiago presents KPIs defined for this second level, to optimize the allocation of capital based on risk/return.
The purpose of a project portfolio is to deliver value to the organization, through projects from two main categories, based on freedom to invest: non-discretionary VS discretionary. Projects that are considered non-discretionary are needed to maintain and optimize the operation’s capability to generate profits. Discretionary projects, on the other hand, are identified to increase the return from the operation through growth, cost reduction, and/or execution of strategy. The financial value of non-discretionary projects is realized in the financial returns from the operation. In contrast, for discretionary projects, value comes from the benefits expected minus the investment required, at an expected level of risk, as documented in a business case.
The first responsibility in managing a portfolio is balancing the allocation of funds and resources between non-discretionary and discretionary investments, as the former tends to increase over time, with new operational needs and regulatory compliance. When managing the funds left for discretionary projects, one needs to ensure that sufficient funding is still available and that these projects maximize return on investment. Value from these projects can come from their contribution to the execution of strategy, as well as from growth or cost reduction projects that are not necessarily part of the execution of strategy. In either case, the approval of a discretionary project should be based on expected return and risk, as in any other financial investment. Taking this to the portfolio level, the collection of discretionary projects is no different than any other portfolio of investments, where the expected return is balanced against the risk of delivering the project and the risk of realizing the expected benefits.
The value of projects that execute strategy can be measured based on the contribution to the development of capabilities identified by the strategy which, in turn, impact business results, usually measured through operational KPIs. This is a higher level of portfolio maturity that comes after the initial two levels described in this article. The discussion of the measurement of impact on operational KPIs will be the topic of a future article.
The first level of maturity in portfolio management focuses on delivery at the project level, by coordinating resources across projects, and defining when projects can, or should, start, in order to create the deliverables that the operation needs. Measurement at this level is based on project metrics: schedule performance, cost performance, quality metrics, and customer satisfaction are examples. These metrics use, in many cases, KPIs that can be based on the well-known indexes defined in Earned Value: SPI and CPI, schedule, and cost performance indexes.
The KPIs defined in Earned Value measure actual performance against a target. If actual performance is right on target, the value of the KPI is 1, above 1 means actual performance is better than the target, and below 1 means it is worse than the target. The interpretation of these KPIs does not require the knowledge of the target or the actual performance. The indicator has an absolute meaning. If, in addition, thresholds are defined (i.e., yellow below 0.95), the method provides a scale to map and compare projects. These metrics provide the portfolio with a visual representation of how all projects are performing, which is very easy to understand for most stakeholders.
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How to cite this article: Santiago, F. (2022). Project Portfolio-Level KPIs for Effective Management of Financial Performance, PM World Journal, Vol. XI, Issue VII, July. Available online at https://pmworldlibrary.net/wp-content/uploads/2022/07/pmwj119-Jul2022-Santiago-project-portfolio-level-KPIs-2.pdf
About the Author
Fernando Santiago
Ontario, Canada
Fernando Santiago, PMP has been a pioneer and innovator on the topic of benefits realization management for more than ten years. He is co-author of the book The Outcome-Driven Organization, as well as several white papers and articles, presentations and webinars. He has also developed original tools and a software application for benefits realizations management. He has worked in financial institutions, energy and technology companies, as well as educational and professional institutions in North America, South America, Asia and Europe. Fernando is a practitioner, consultant and trainer. He is an international public speaker and invited professor at the MBA level. Based in Ontario, Canada, Fernando can be contacted at fsantiago@p3msolutions.org
