Project Selection

Project Portfolio Management Strategy for the Operations Strategic Business Unit (SBU) of a Company Case Study 

Executive Summary

This report presents a project portfolio management strategy for the Operations Strategic Business Unit (SBU) of a company that provides support services to travel and hotel industry in the Southeastern United States. This company, with annual revenues of about $350 million dollars, is faced with the need to both expand its business and control costs. A well-thought project selection and evaluation process is needed to attain these goals.

Although the company has several projects running at the moment, there has been no formal selection process and the choice of projects to work on was mostly arbitrary. The proposed strategy relies on the conceptual framework of four steps project selection and evaluation process, incorporating the elements of the multiple objective decision analysis (MODA) and the weighted factor score model. Tailored to address the companys strategic goals and the industry context, the proposed selection process is designed to provide the organization with a clear and easy-to-use methodology of project selection according to its current goals and available resources. The process is developed for Operations SBU, but it is flexible enough to be adapted for other business units.

Part 1: Project Selection Process

Proposed Portfolio Process

The proposed project portfolio evaluation and selection process will incorporate the following stages:

Identifying the objectives of the project portfolio management.

Developing a set of project evaluation criteria.

Gathering information about the proposed projects.

Evaluating the projects on the criteria.

Comparing and selecting the projects.

The objectives of the project portfolio management are needed to ensure that the project selection process is in line with the companys overall strategy and the Operations SBU goals and capacities. The objectives should be specific and measurable, e. g. Select the combination of projects that maximize the units revenue while the total cost is within the budget.

The project evaluation criteria are developed on the basis of the objectives to ensure their attainment. With regard to the objective stated above, projects will be evaluated by their expected revenue and total cost.

The information gathered about the projects will include the specific values of the indicators that are used as criteria or the data needed to calculate or estimate these values. Taking into consideration the criteria above, the estimates of each projects cost and revenues should be provided.

After the information is gathered, the SBU manager uses a weighted factor score model to evaluate each project according to all selection criteria. Next, an analytical software tool is applied to form the most efficient project portfolio on the basis of the calculated project scores and the units resource constraints.

Justification

The proposed project evaluation and selection process are based on the conceptual framework by Gido and Clements (2014). This framework has incorporated the latest advancements in project management and is flexible enough to be easily adapted to a particular industry. The nature and specific requirements of the cruise ship supply industry can be reflected in the set of criteria and the companys project portfolio objectives will be determined by strategic goals.

The weighted factor score model is proposed as the most appropriate in the situation when the decision-maker has to pursue multiple objectives, some of which need to be maximized (revenue) and others minimized (costs), and consider multiple tangible and intangible factors, which are largely independent (Meredith & Mantel, 2011).

Project Selection Criteria

The project selection criteria should facilitate the selection of projects that best meet the companys strategic goals, the units financial goals, and the units organizational goals.

The companys strategic goals include:

Expanding to new markets, with Alaska and Europe as priority locations.

Expanding services provided to customers.

Increasing customer satisfaction.

Increasing revenues.

Reducing operations costs.

Reducing overhead and warehouse costs.

In order to successfully complete the portfolio selection process, it is assumed that all strategic goals are of equal importance. Preference will be given to projects that are most consistent with these goals.

The units financial goal is profit maximization. For this reason, preference will be given to projects that ensure the greatest cash inflow at the lowest cost.

The units organizational goal is to provide uninterrupted and timely support to customers. Therefore, the managers will prioritize the projects that involve minimal disruption or improve customer service, e. g. by reducing order processing times.

Considering all these factors in the decision-making process, the multiple objective decision analysis (MODA) technique will be applied. MODA is a method used to accomplish the maximization and minimization of multiple objectives through directly measurable qualitative and quantitative criteria (Bayney & Chakravarti, 2012, p. 125).

The MODA process for criteria development consists of the following stages:

Identification of objectives.

Definition of attributes (criteria) for each objective.

Hierarchic organization.

The key objectives of the Operations SBU portfolio management are:

Facilitation of the accomplishment of the companys strategic goals.

Profit maximization.

Minimal disruption of the current operation.

The accomplishment of the first objective can be evaluated according to the criteria specific to the companys strategic goals: the market expansion, the service portfolio expansion, the customer satisfaction increase, the revenue increase, the operation cost reduction, and the overhead and warehouse cost reduction. The higher the project scores for each of these criteria, the more attractive it is. In other words, these attributes should be maximized.

The accomplishment of the second goal can be measured with the help of such indicators as the net present value (NPV) of the project, the initial cost recovery, and the portion of project costs in the units total annual and quarterly funds. The NPV should be maximized. The initial cost recovery time should be minimized. The portion of project costs in the total portfolio should be minimized as the more diversified a project portfolio is, the less risky it becomes.

The accomplishment of the third goal can be measured by such indicators as the processing time reduction, the time of disruption caused by a new projects launch, its impact on current operations, its need for additional staff, and risk. All these attributes, except for the first, should be minimized.

The hierarchy of the project objectives and attributes is summarized in the table below.

Table 1

Project Selection Objectives and Attributes Hierarchy

Objective/Attributes	Type	Desirable State
Strategic objective
Market expansion	Qualitative	Maximized
Service portfolio expansion	Qualitative	Maximized
Customer satisfaction	Qualitative	Maximized
Revenue increase	Quantitative	Maximized
Operation cost reduction	Quantitative	Maximized
Overhead and warehouse cost reduction	Quantitative	Maximized
Financial objective
Net present value (NPV)	Quantitative	Maximized
Initial cost recovery	Quantitative	Minimized
Quarterly cost/quarterly funds	Quantitative	Minimized
Annual cost/annual funds	Quantitative	Minimized
Organizational objective
Processing time reduction	Quantitative	Maximized
Time of disruption	Quantitative	Minimized
Impact on current operations	Qualitative	Minimized
Need of extra staff	Quantitative	Minimized
Risk	Qualitative	Minimized

As the table demonstrates, the project selection criteria set is adapted to meet the companys strategic goals and the SBUs financial and organizational goals in the context of the cruise ship supply industry. The set is composed of both qualitative and quantitative criteria, which allows to incorporate measurable project properties and expert judgments in the selection process.

Scoring and Evaluation

Evaluation method and justification. Examining the method of project evaluation according to the criteria, the weighted factor scoring model is proposed for the following reasons:

This model allows to consider the impact of multiple factors, both tangible and intangible, in the decision-making process.

This model takes into account the relative importance of criteria.

This model presents all criteria in a unified, quantified format, which makes it easy to evaluate their impact.

This model is structurally simple and easy for staff members to understand and use.

This model can easily be modified to reflect changes in the business environment or managerial policy.

This model clearly demonstrates the trade-offs between criteria.

This model is a direct reflection of the managerial policy (Meredith & Mantel, 2011, p. 61).

In the weighted factor scoring model, each criterion is assigned a weight, which is a relative measure of its importance. Next, each project is evaluated according to each criterion. Then, each projects total utility score is calculated. At the final stage, the optimal project portfolio for the next period is determined on the basis of project utility scores and resource constraints.

Criteria weights. To assign weights to criteria, the Delphi method will be used. Each member of the project portfolio council will be given a criteria evaluation form and asked to grade the criteria from 1 to 5, where 1 is the minimal importance and 5 is the maximal importance. Later, each criterions weight will be calculated by the following formula:

where Wi is the weight of i-th criterion,

wij is the grade given to i-th criterion by j-th expert, and

wj is the sum of all grades given by j-th expert.

The criterions weight is a relative measure of its importance, determined by the experts and compared to other project evaluation criteria. The total sum of weights cannot exceed 1.

Given the large number (15) of the currently used criteria, the resulting negligible weights and overall impact of each one, it is recommended to assign weights to criteria groups (strategic, financial, and organizational) rather than individual.

Scoring. Each project will be graded according to all selection criteria. All scores will follow a unified, quantified format to enable project comparison and analysis.

The scores of quantitative criteria are assigned to projects due to grading intervals. The exact score is determined by the interval in which the calculated value of the criterion falls.

Intervals are determined individually for each criterion, with regard for its measure units and typical value ranges. The typical value ranges are estimated from the projects previously completed by the unit. In the future, the intervals can be re-considered to reflect changes in the companys scope of operation or the business environment.

The proposed intervals to use for project selection are summarized in the table below.

Table 2

Grading Intervals for Qualitative Criteria

Criteria	Scores
	1	2	3	4	5
Annual revenue increase	<$100,000	$100,000-500,000	$501,000-1,000,000	$1-3 million	>$3 million
Annual operation cost reduction	<$100,000	$100,000-500,000	$501,000-1,000,000	$1-2 million	>$2 million
Annual overhead and warehouse cost reduction	<$100,000	$100,000-500,000	$501,000-1,000,000	$1-2 million	>$2 million
Net present value (NPV)	<$1 million	$1-5 million	$6-10 million	$11-15 million	>$15 million
Cost recovery		1-3 years	4-6 years	7-10 years	>10 years
Quarterly cost/quarterly funds	<10%	10-30%	31-50%	51-70%	>71%
Annual cost/annual funds	<10%	10-30%	31-50%	51-70%	>71%
Processing time reduction	<1%	1-10%	11-25%	26-50%	>50%
Time of disruption		7-30 days	1-2 months	3-5 months	>6 months
Need of extra staff	No extra staff needed	1-4 members	5-10 members	11-20 members	>20 members

To score projects according to qualitative criteria, the Delphi method will be applied. A number of inner organizational experts will receive project evaluation forms that they have to complete independently. Each expert grades each project by each criterion on the scale from 1 to 5, where 1 is the lowest value, 5 is the highest. The example of a project evaluation form is given below.

Table 3

Project Qualitative Evaluation Form

Evaluation criteria	Projects
	Project A	Project B	Project C
Market expansion
Service portfolio expansion
Customer satisfaction
Impact on current operations
Risk

After the experts have completed evaluation forms, the total score for each project is calculated by the formula:

where Si is the projects score on i-th criterion,

sij is the score on i-th criterion given by j-th expert, and

n is the number of experts.

Project evaluation. When the scores for each project are determined by all qualitative and quantitative criteria the projects total utility score is calculated according to the following formula:

where Si is the utility score of i-th project,

sij is the score of the i-th project on the j-th criterion, and

wj is the weight of j-th criterion (Meredith & Mantel, 2011, p. 58).

The scores for criteria that should be minimized will be included into the calculation with negative sign, hence decreasing the sum. For example, time of disruption is a criteria that should be minimized. The longer disruption a projects start will cause in the units current operation, the less desirable this project is. Therefore, the score for this criterion will be deducted.

The projects utility score is an indicator of the value that the project can bring to the unit and the company in general. The higher the score, the more beneficial this project is to undertake. However, selecting the projects on the sole basis of their highest utility scores is not always the best solution. As the unit has limited resources, such as funds and workforce, it might not be capable of undertaking all most attractive projects at once. The aim of the project portfolio management is to select such projects, the combination of which will allow the most efficient use of the available resources.

Part 2: Project Selection

One of the most ambitious projects proposed for the following year is Rocky, which involves opening a new service facility in Alaska, to serve the local booming cruise ship industry. The projects NPV is estimated at $19 million over five years, with initial set-up $13 million and extra $400,000 annual costs. The initial investment cost can be spread equally over all four quarters and should be recovered within three years. Most of the work on the project will be outsourced and its management is likely to be difficult.

To evaluate the project according to quantitative criteria, the data above can be used. The projects portion in the units total quarter and annual budget should be calculated.

The projects ratio in the annual spending is calculated as:

The projects ratio in the quarterly spending is calculated as:

Therefore, the project will require 79% of the total funds available to the unit.

The quantitative scores assigned to the project, using the grading intervals from Table 2, are the following:

Table 4

Quantitative Scores for Project Rocky

Criteria	Value	Score
Annual revenue increase	$4,750,000	5
Annual operation cost reduction	None	1
Annual overhead and warehouse cost reduction	None	1
Net present value (NPV)	$19,000,000	5
Cost recovery	3 years	2
Quarterly cost/quarterly funds	79%	5
Annual cost/annual funds	79%	5
Processing time reduction	None	1
Time of disruption	None	1
Need of extra staff	5-10 members	3

The qualitative scores, assigned to the project by three experts, are summarized in the table below. The average qualitative scores are calculated by a respective formula.

Table 5

Qualitative Scores for Project Rocky

Criteria	Scores
	Expert A	Expert B	Expert C	Average
Market expansion	5	5	5	5
Service portfolio expansion	3	4	3	3.33
Customer satisfaction	5	3	4	4
Impact on current operations	4	4	3	3.67
Risk	5	4	5	4.67

The average weights assigned by experts are 0.5 for strategic criteria, 0.3 for financial criteria, and 0.2 for organizational criteria.

The projects utility score is calculated as:

Utility scores are used at the final stage of analysis to select the most efficient mix of projects for the given period.

The utility scores obtained by the methodology described above for all projects are summarized in the table below.

Table 6

Utility Scores for Proposed Projects

Criteria	Projects
	Call Center	Ordering Upgrade	Rocky	Europa	Robot	Tableware
Annual revenue increase	1,00	1,00	5,00	5,00	4,00	2,00
Annual operation cost reduction	1,00	2,00	1,00	1,00	4,00	1,00
Annual overhead and warehouse cost reduction	1,00	1,00	1,00	1,00	3,00	1,00
Net present value (NPV)	1,00	1,00	5,00	5,00	1,00	2,00
Cost recovery	4,00	4,00	2,00	2,00	3,00	3,00
Quarterly cost/quarterly funds	5,00	3,00	5,00	3,00	5,00	3,00
Annual cost/annual funds	3,00	2,00	5,00	3,00	5,00	2,00
Processing time reduction	5,00	4,00	1,00	1,00	1,00	1,00
Time of disruption	1,00	1,00	1,00	1,00	4,00	1,00
Need of extra staff	3,00	1,00	3,00	4,00	1,00	3,00
Market expansion	3,67	3,33	5,00	5,00	3,00	3,33
Service portfolio expansion	4,33	3,00	3,33	3,67	3,00	5,00
Customer satisfaction	5,00	4,67	4,00	4,33	3,67	3,67
Impact on current operations	1,67	1,33	3,67	4,00	1,33	3,33
Risk	2,33	2,00	4,67	5,00	2,67	3,00
Utility Score	4,10	4,83	5,30	6,50	5,14	4,33
Quarterly Cost	4,25	2,50	3,25	2,75	4,25	2,25
Annual Cost	8,50	2,50	13,00	11,00	17,00	5,50

On the basis of the utility scores, the optimal portfolio mix is determined by a MS Excel linear programming tool.

Memo

The optimal project portfolio for the next year includes three projects: Europa, Ordering Upgrade, and Tableware. This project mix yields the highest possible utility value (15.67) while staying within the budget.

Each of the included projects effectively targets one of the companys strategic goals. Project Europa will expand our business to Europe, a booming market for cruise industry. Project Tableware will expand our service portfolio by offering a completely new value to our customers. Moreover, we will gain a competitive advantage as the only large company in this market niche. Finally, Project Ordering Upgrade will boost customer satisfaction by reducing order processing time by 50 percent.

The total annual cost of this portfolio is $19 million, which leaves $5 million, or 20 percent of our funds as a reserve for unexpected expenses.

The time-based plan for project implementation is given below.

Table 7

Time-Based Project Implementation Plan

Project/Cost, $ million	Q1	Q2	Q3	Q4	Total
Europa	2.75	2.75	2.75	2.75	11
Ordering Upgrade	2.5	–	–	–	2.5
Tableware	–	2.25	2.25	–	5.5
Total	5.25	5	5	2.75	19

Project Europa will be completed throughout the year, with the cost equally distributed among quarters. Project Ordering Upgrade will be completed in the first quarter. Project Tableware will be completed in the second and the third quarters, with the cost equally distributed.

Possible Effect of Technological Advancement

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