One of the most difficult parts of project portfolio management is deciding how to rank the projects — that is, determining which projects should be done now, later, and, most importantly, never. There are several ways to rank a project portfolio. While one method can be applied in certain situations, it may not be so useful in others. Nevertheless, all methods share the same goal—namely, to arrive at a single ranked list of projects.
Ask this question first – Should this project be done at all?
If the project has no sponsor, no customers, and particularly no identifiable value, it should not be pursued.
Don’t be afraid to not do projects at all. Project portfolio management is about making choices that guide the technical staff toward finishing work on the most important projects in the organization and on those alone. If you can’t make a compelling argument for finishing a project, put the project back in the project pipeline before deciding whether to pursue it further.
More likely, the answer to the “Should we do this project?” question will be “yes,” and you will need to start to rank your various projects. Ranking requires discussions with the sponsor and the customer or customer surrogate. A description of the project value must also be drawn up.
Project value is the value of the project to the organization. If you were able to rank the projects with an ordinal ranking — as in, 1, 2, 3, and so on —, your work would be done. But you often need to discuss the project value in more depth/detail than a mere ordinal ranking affords in order to rank the project appropriately. Drawing up some discussion points helps you articulate the business value and provides a visible means of showing the relative business value of each project.
When you rank with points, you assign a number of points to each project, allocating more points to the more valuable projects. Points represent business value.
With limited resources, you can't improve every process at once, so it is imperative to identify the projects that have the highest priority.
The Net Present Value (NPV) is the difference between the present value of cash inflows vs. the present value of cash outflows.
NPV is used in capital budgeting to analyze the profitability of an investment or project.
The formula is: Cash Flow t / (1 + Discount Rate) t where:
Cash Flow t is Savings - Total Cost for Year t.
t represents a number of Year. It ranges from 0 to 6, where 0 corresponds to the Year containing the Project Start date.
Discount Rate: This field is available in the Project's attributes.
The Return On Investment (ROI) is a performance measurement used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.
The formula is: ROI = Savings / Total Cost x 100.
The Key performances Indicators (KPI) are visual measures of performance. They are based on specific calculated fields.
Avoid systems that rank based on financial metrics alone, such as Net Present Value (NPV) or Return on Investment (ROI). The major limitation of using purely financial metrics is that these can underestimate the true value of projects (for example, time to market advantages or increased shareholder value). With NPV, the higher discount rates selected to account for higher project risk can bias portfolios to include shorter-term projects with faster payoffs due to the fact that longer-term projects may be overly discounted.