X2 - Optimize and balance the value generation strategy

What

This activity optimizes the value generation strategy for the upcoming cycle by updating the Value Generation Matrix.

Why

This activity helps the organization in multiple ways by

• Structured, proactive identification of valuable programs and projects
• Absolute justification of ideas to ensure resources are not wasted
• Relative justification to ensure the most valuable ideas are run first
• Balancing to ensure all strategic domains are served

Who

This activity is done by the portfolio board and carefully facilitated by the portfolio manager.

How

The activity is done in the Strategy Workshop, where all core portfolio board members or at least their proxies attend. One day is usually enough, but some organizations may need more.

New global follow-up items may be identified during this activity, which will be added to the Global Follow-Up Register and appointed to custodians.

Adding new Programs and Projects

All portfolio board members bring their new program and project ideas and their Business Cases to the workshop (e.g., those generated in activity G02 of P3.express). They review the output of activity X1 and use it as a source of inspiration for brainstorming and generating new ideas together. All ideas will be recorded in the Value Generation Matrix.

Organizations that are focused on their internal projects should use all employees' and even end users' opinions to generate ideas. Each portfolio board member is responsible for seeking ideas from people related to their department and bringing them to the workshop. In addition to that, employees should have a direct channel to send program and project suggestions to the portfolio manager. Accepting anonymous submissions can help increase contributions.

In general, the number of items in the matrix reflects the organization’s options. The more options you have, the more flexibility and freedom you’ll have. That’s why bigger matrices are desirable. Remember that the matrix is not limited to what can be done in the next few cycles but contains everything you might want to do one day.

After adding a new item to the matrix, one of the portfolio board members should be assigned to it as the sponsor. A rough Business Case should exist for the item to describe its purpose and justification. If the sponsor wants, they can initiate sensitive programs or projects (assign a team to create a high-level plan without executing it) and use the output to create a refined Business Case, but in most cases, the rough Business Case is enough.

Sponsors may delegate the responsibility of preparing their Business Cases to specialized people, but they stay accountable. Program and project managers may help in this process by providing some of the required information, but it’s best not to give them the whole responsibility of preparing the Business Cases because they usually don’t have the necessary background and strategic information.

The portfolio board needs a holistic, top-down approach to identifying programs and projects. They shouldn’t limit themselves to the programs and projects suggested by the environment and always ask, “What other programs and projects can we have to improve our portfolio?”

Balancing item sizes

Normally, programs and standalone projects in the matrix have different sizes. However, having items that are vastly different in size would make it difficult to manage the matrix. Therefore, when possible, the portfolio board must try to break down those that are too large into smaller ones and merge the ones that are too small and have similar goals into relatively larger programs.

Remember that projects underneath a program won’t be directly directed in the portfolio management system.

Absolute justification

After adding the information about the expected benefits and estimated investment of new ideas and revising that of the old ones, the portfolio board would judge the absolute justification of the ideas: Are the expected benefits higher than the required investment? Should we do this program/project at all? The status of the idea will be updated based on this decision. Note that rejected ideas must not be removed from the matrix, but they will be marked as rejected and moved to the bottom of the matrix for future reference.

Sometimes, organizations have to accept programs or projects with benefits lower than their investment because otherwise, some of their capacity would remain unused (some benefit may be better than no benefit at all). This situation should be considered in this step, but more importantly, the portfolio board should investigate this unhealthy situation to see how they can prevent it in the future.

All expected benefits and estimated investments must be in a single unit of measurement, so that we can compare them. When there are multiple sources of value, they must be converted and combined into a single unit. Moreover, the benefits of programs and projects that are continuous rather than one-time can be converted into one-time values by considering a pre-agreed time window.

The portfolio board members may estimate the required parameters by voting using the method documented in the Portfolio Description.

If an ongoing program or project loses its absolute justification, the board should cancel it. This can also be done in activity Y2, if the portfolio manager and the sponsor can agree on it.

Relative justification and overall prioritization

The programs and projects on the matrix will be sorted based on their status first: finished → ongoing → pending → canceled → rejected

Items within each of the above statuses will be ordered based on date, except for pending ones that will be initially ordered based on their strategic value (the ratio between their expected benefits and estimated investment), so that the more valuable ones are placed first.

If the relative justification of an ongoing program or project decreases dramatically, the board may decide to pause it to free up capacity for more important ones. This can also happen in activity Y2, if the portfolio manager and the sponsor can agree on it.

Revise the total capacity

The board members discuss the idea of increasing or decreasing capacity (e.g., hiring more people in the organization) and evaluate its impact on the portfolio.

Balancing and final prioritization

The matrix should have fields for various strategic domains:

• General domains
  • Continuity (sustainer, diversifier)
  • Return on investment timeframe (short-term, medium-term, or long-term)
  • Overall risk (low, medium, high)
• Specific domains (depending on the sources of value in the organization)

A “sustainer” is a program or project that helps improve the existing services, whereas a “diversifier” is the one that helps create new service channels. Some organizations are entirely focused on a single, specialist field, but even they should consider diversifying their services in that field or related ones.

Each program or project has a contribution between 0% and 100% in each domain to indicate what portion of its strategic value serves that domain. Besides, we also need to have calculated fields to show the resulting strategic value by multiplying the contribution to the overall strategic value.

Each domain should have a relative target, and the sum of the strategic values from all programs and projects in a balancing horizon should more or less match that target. By default, the balancing horizon is the upcoming cycle plus three previous cycles. The previous cycles are determined by facts. To determine the upcoming cycle, a rough estimate of how many of the programs and projects can be done in the cycle is necessary.

To balance the portfolio, the order of pending items on the matrix should be manually adjusted so that their combined calculated strategic value in each domain gets close to the relative target values. This means that the total strategic value of the balanced portfolio may be lower than the unbalanced one – that’s the price we should pay to have a balanced whole. However, in rare cases, we may sacrifice balance to gain especially higher values and then make up for it in future cycles.

At this point, the matrix would have a properly prioritized list of pending programs and projects. When enough capacity is freed in the organization, the highest pending program or project in the matrix that matches the available capacity can be started in activity Z2.

Some organizations may need to have extra balancing criteria; for example,

• When an external customer requests a proposal, it can’t be done at any desired time, but if you wish to proceed, it has to be done at a certain date, and the organization should be ready to start the project if the proposal is accepted.
• For organizations focused on conducting their own projects, some of their projects may have dependencies with each other, which should be made visible in the matrix and considered when balancing. However, note that projects that have dependencies with each other usually belong to a program and won’t be directly directed in the portfolio management system.

There are many uncertainties about the way portfolios work. Therefore, the matrix can never be precise enough to be optimized mechanically based on calculations, and the judgment of experienced portfolio board members is essential. As a result, it’s important not to waste time and energy trying to make the values more precise than they should be. Instead, the portfolio manager should encourage collaboration, involvement, transparency, and critical thinking.

All portfolio board members should be involved in balancing the portfolio. When needed, they can combine their opinions by voting, following the voting method documented in the Portfolio Description.