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Evaluating Projects and ranking Portfolios John Constance MSc in Project Management, University of Liverpool Summary

According to Rothman (2009) evaluating and ranking projects and portfolio can be challenging and lead to the success or failure of achieving corporate and project strategy. However, to achieve success in evaluating and ranking projects and portfolio, organization must practice using models and approaches that are common across their portfolio. This paper discusses the approach an organisation can use to evaluate projects and rank portfolios. It also considers the approach used by organization SmithKline- Beecham considering its advantages and disadvantages. The paper concludes that when appropriate approaches and methodologies is matched with organization characteristics and choice elements; and full participation from teams and all and every stakeholders is provided, the selection of projects and ranking of portfolio can achieve business strategy and goals.

Part 1: Evaluating projects, ranking portfolios, and project evaluations in project decision-making
As Morris and Pinto (2010). Indicated there is no conclusive way to evaluating and ranking projects or portfolio; therefore, organization must create project characteristics that match their business strategy. However, although not a general universal realty of identification, projects and portfolio can be and evaluated and ranked in a general context that can reflect a global universality application. The approach to evaluating projects and ranking portfolio are as follows: Economic Return: This method requires estimation of financial investment and income that flow over the project timeframe. Economic return techniques are usually based on individual organizations experience managing related projects. Economic return tools include NPV or net present value techniques, DCF or discounted cash flow techniques, IRR or internal rate of return techniques; and the ROI or return on original investment, RAI or return on average investment, PBP or payback period, and EV or expected value techniques respectively. The advantages include its resultant calculations use in ranking information for decision-making (Morris and Pinto, 2010). Some of the techniques such as options pricing theory are popular for calculating finance. Its disadvantages include its tendency to reprimand risky projects simply because the techniques do not provide for early project termination (Morris and Pinto, 2010). Real Options Theory: The theory is unique and highlights the significance of uncertainty and managerial discretion. It also gives a dynamic view of how organizations invest and make decisions on their governance. The advantages are the theory is normative, its bridges corporate strategy and finance, infuses strategic reality of into investment budgeting, brings financial marketing into strategic thinking, and considers uncertainty in general, using mathematical calculations for decision making with consideration of financial options based on real-life situations; and demand precise projections and assumptions from decision makers; and is used as a business strategy formulation tool. The disadvantages of the use of this technique are that it provides no qualitative measurements of the financial or strategic optimization process.

Market Research: The technique is basically used to gather data for new product or services demand forecasting. It is based on models or ideas presented to possible clients for impending market assessment or evaluation. Its several techniques of using panel groups, focus groups, consumer panels, perceptual mappings, and preference mapping, is good for gauging customers as well as consumers and competitors perceptions, but has the disadvantages from far assuring that results assessment are indeed real-life reality. Portfolio Matrices: Most companies use this method for new product planning. One of its popular practices such as bubble diagrams is used to display 3D/4D parameter values. Most techniques have to be used in combination with other tool, and have little theoretical support, and mislead decision makers in profit maximization. Comparative Approaches: Techniques include Q-sort, the AHP or Analytic Hierarchy Process (AHP), the pair-wise comparison, and Data Envelopment Analysis. Different objectives weights are defined, and alternatives compared to determine their contributions to these objectives, and project benefit measurement computation and organized for decision-making based on a comparative scale. Some advantages of the method is its guidance provision in selecting projects; its quantitative, qualitative and judgment criteria. One if its biggest disadvantage is its creates a very large data for comparisons, making them difficult to use in large portfolios analysis; and the process is repeated anytime there is an additional project or deletion of a project in the portfolio. Scoring Models: Morris and Pinto (2010) referenced Martino (1995) saying the models is used for decision criteria such as cost, available workforce, technical success probability to specify project desirability. The models are based on some format of mathematical programming that support the project optimization process and interaction. Some techniques select candidate projects that provide maximum benefits. The good thing about scoring models is that it is easy to use; the addition or delete of any projects does not require recalculation of the value or weight of other projects. Scoring models are probably the easiest to use of all the models, and they can be used in the combined measurement of both quantity and quality scoring. Optimization Models: The models are based on some format of mathematical programming, to support process optimization and sensitivity analysis; include project interactions. It is not used generally in practice to the need to collect bulky input data, and has no ability to include risk, and model complexity. However, the model can be used to calculate project benefit values. Portfolio Decision Support Systems: These are characteristically based on mathematical optimisation approach that selects a portfolio from a listing of candidate projects that provides maximum overall benefit. If the model is combined with interactive display of results, it provides decision makers the ability to adjust their portfolio based on nonquantifiable judgments.

Part 2: Sharpe and Keelin article SmithKline- Beecham three-phase approach included generating alternatives, valuing alternatives and creating portfolio and allocating resources. Phase-One: the organization made stakeholders understand their projects and the available alternatives including a minimum of four alternatives (as is, reduction in funding, increased funding, and complete direction change on the project). All alternatives yielded different possible benefit for the company. Before moving to the next phase this phase has to b completed ensuring stakeholders understood the analysis impact and agree with the outcome. Phase-Two: the company utilizes decision analysis tools. The team ensured transparent evaluation criteria common across all projects and also ensure data provided was required from appropriate credible sources. To make sure a transparent valuing Phase and consistent application between the projects the following condition or criteria was considered: Information provided must be the same and common for every project Information must originate from trustworthy and reliable sources.

This includes benchmarking and peer reviews and ensured all role and responsibilities participated in the process, the process was transparent and provided the means to do simple comparison (apples with apples); and effectively ranked the projects. Phase-Three: This involved choosing best-fit projects for the portfolio. The selection is based on value and business alignment and the allocation of the necessary resources. In conclusion to this article, it can be deduced that the project or portfolio success is due to transparency and participation of teams and all stakeholders. According to Sharper & Keelin (1998) these techniques allows the company to review its projects and allocate numerical value to each project, assisting each project to be ranked based on its importance in consistent to the overall portfolio. However, while the techniques and phases provide immediate evaluation it offers less focus on quality or the wrongs of the idea. These individuals were able to gain buy-in to the approach due to the ability to gather tangible data for decision-making. _____________________________________________________________________________________ References Rothman, J. (2009), Manage Your Project Portfolio: Increase Your Capacity and Finish More Projects. 1st ed. Pragmatic Bookshelf Kerzner, Harold (2010), Project Management: Best Practices Achieving Global Excellence 2nd ed. Wiley Publishing Sharpe, P. & Keelin, T. (1998) How SmithKline Beecham makes better resourceallocation decisions, Harvard Business Review, 76 (2), pp. 4557.