Managing Project Portfolio Risk: Learn the Basic Principles

Major global events such as supply chain disruptions, the pandemic and the war in Ukraine have disrupted businesses across industries. Organizations that practice effective project portfolio management were in a better position to overcome the impacts because they continually identify, analyze, monitor and prioritize risk factors affecting projects across the enterprise.

Although many companies practice project management, few have adopted the portfolio-based view. For example, in the automotive industry, the absence of necessary semiconductors has affected the manufacturing, marketing, and sales of automobiles, and thus revenue and profitability.

While not all risks can be predicted, organizations can achieve greater order to chaos by adopting the principles of project portfolio risk management. Let’s start by defining portfolio management.

What is Project Portfolio Management?

Project portfolio management PPM is a formal approach to prioritizing, analyzing, and managing ongoing projects across an organization.

Alan Zucker, founding director of the consulting and training firm Essentials of Project Management, defines PPM as all projects and programs in a portfolio. The discipline is built on a set of guidelines and practices that help companies select projects that are strategically aligned with the company’s objectives and provide oversight and governance for the portfolio of projects.

Be warned that PPM is not easy Matthew Ramirez, founder of AI application development company Rephrasely, which caters to authors and journalists. “Project portfolio management is a complex process with a number of variables, and it is often difficult to get it right. Too many projects fail because of a lack of attention to detail or poor planning,” he said.

He added that the best way to develop a project portfolio is to first identify the key business objectives that the portfolio must support and then select projects that will help achieve those objectives.

Project, program and portfolio management are related but not the same. Learn the main differences.

What is project portfolio risk management and why is it important?

Project Portfolio Risk Management helps ensure that organizations capitalize on opportunities and manage risks in a comprehensive manner. While software is essential to ensuring the right processes and practices are in place, organizations moving to a portfolio risk management approach must begin by updating their internal processes and ensuring they have the right people in place to balance risk across the overall portfolio.

Portfolio risk management applies risk management principles to ensure that organizations achieve the strategic objectives of project investment decisions.

“Risk management deals with uncertainty,” Zucker said. “Project portfolio risk management is the ongoing practice of identifying and responding to threats and opportunities. The methods are similar to project risk management but must focus on the elements that threaten [the ability] to achieve business priorities.

The project portfolio risk management process should include the following steps:

  1. hazard identification.
  2. Analyze them.
  3. Recommend actions.
  4. Provide a means of monitoring and controlling risks.
Erin Graham, Co-Founder, SpylixErin Graham

The project Risk management is more common today than file Risk management because it is easier to implement. The former applies to a specific project, while the portfolio view, as mentioned, includes all projects. The top-level view provides insight into how individual projects support business objectives, as well as the opportunities and risks for each. This information informs project and investment adjustments so that they can be managed in a data-informed manner.

Portfolio risk management helps organizations balance the degree of risk in a portfolio, and protect investments, said Erin Graham, co-founder of parental phone tracking company Spylix. “The COVID-19 crisis is a current illustration of the need for companies to set up project portfolio risk management procedures to protect the portfolio and its value.”

How to develop a project portfolio risk management plan

Before creating a project portfolio management plan, the organization must have a portfolio charter that describes the current and future portfolio status, its objectives, desired outcomes, key stakeholders, limitations and critical considerations.

Alan Zucker, Founding Director, Project Management Essentials Alan Zucker

The portfolio charter provides the basis for the portfolio risk management plan. [It] It should describe the framework for identifying and assessing opportunities and risks to help guide investment decisions, as well as the process for regularly identifying, assessing, and addressing risks.”

Plans vary based on the organisation’s goals, maturity, knowledge and culture. Some are simple while others are complex. In 2020, companies used Monte Carlo simulations more frequently than before to reduce the potential impact of various risks associated with the pandemic.

Another tool is sensitivity analysis, which models predictive risks and decisions.

The plan should be developed collaboratively by the stakeholders, with the Portfolio Governance Committee leading. This group is similar to a Project Management Office (PMO), but the players are executives and board members.

The Portfolio Governance Committee remains in close contact with the Project Management Office to ensure that the status of all projects – and associated risks – is known. The governance committee must also understand the interdependencies between projects, which may be process, technology or resource oriented.

Understanding the interdependencies is critical because a small change directed towards one project may affect another project or the portfolio as a whole. Understanding all this complexity should be simple, for example through software dashboards for quick reference and exploration.

Fundamentally, portfolio risk management – like project management – is a dynamic and continuous process that improves results, such as exploiting market opportunities or reducing risk. How companies prioritize opportunities and risks depends on the organization’s risk tolerance and tolerance.

Picture list 4 risk management strategies: risk avoidance, risk reduction, risk transfer and risk acceptance
The impact and frequency of risks helps determine which risk strategy to use.

Project Portfolio Risk Management: 8 Best Practices

There are several factors that influence success, so it is important to understand what they are. The best practices described below can help:

  1. Understand the risks present in individual projects and the portfolio. It is also essential to understand how individual projects impact the portfolio.
  2. Identify job opportunities. Portfolio risk management helps organizations understand opportunities within the context of risks.
  3. Setting goals, milestones and key performance indicators. In addition to determining acceptable or desirable levels of risk, stakeholders need to know what is expected of them, and when and whether their actions will affect others.
  4. Monitor the dynamics affecting projects and the portfolio. The portfolio must be monitored continuously and there must be clear channels of communication between the Governance Committee, the PMO and other stakeholders.
  5. Be agile. Circumstances became rapidly changing as usual. When a risk crosses a threshold, the cause must be understood and a course of action recommended.
  6. Use the data to your advantage. Project and portfolio management software collects and generates a lot of data. Over time, this data can be used to improve operations and results.
  7. Communication and collaboration. Portfolio risk management is a team sport, so it should be approached that way.
  8. asking for help. The Project Management Institute has a lot of useful resources. There are also consulting firms that can assist companies in establishing or improving a project portfolio risk management function.
Matthew Ramirez, Founder, RephraselyMatthew Ramirez

Portfolio risk management requires organizational changes, so change management practices should not be overlooked.

“Project portfolio risk management has many benefits, but perhaps most important is that it helps identify and mitigate risks early in the project life cycle. This can save a lot of time and money in the long run, as well as avoid any potential disruptions,” said Ramirez of Rivercelli. .”[It’s] Also a great way to monitor project progress. This helps ensure that projects stay on track and are not delayed or derailed.”

Pitfalls to avoid in project portfolio risk management

Like any endeavor, success varies but tends to improve with experience. Less mature organizations struggle to deliver projects on time and on budget. More mature organizations have more control over projects and are able to strategically balance risk across the portfolio.

Here are some important portfolio management risks to watch out for:

  1. There is no charter, so there are no guiding principles upon which to build the plan.
  2. There is a plan, but it is not being implemented effectively or at all.
  3. A major natural disaster occurred.
  4. Supply chain disrupted.
  5. The war affected the world economy.
  6. There is a recession or other unfavorable economic situation.
  7. Disruptive innovation threatens to make one or more projects obsolete.
  8. Some risks are not identified or cannot be foreseen.
  9. The interdependence of the project has not been considered.
  10. The company lacks the expertise or the staff to succeed.
  11. Project management and the portfolio governance committee do not communicate or collaborate effectively.
  12. The portfolio or projects are not effectively monitored or managed.
  13. Key performance indicators are not being met or the correct indicators are not being implemented.

Being aware of such pitfalls and avoiding them to the extent possible helps to manage risks effectively. The range of barriers to success in managing portfolio risk is also the main reason companies seek advisory assistance.

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