The efficient frontier illustrates the results of funding different combinations of projects -- all delivering the greatest possible value for a given level of investment. Every point on the curve shows a different portfolio to help you improve project portfolio management efficiency. A portfolio is inefficient when it does not deliver the greatest bang for the buck (see A in the chart).
By identifying alternative funding combinations, PPO can help you identify how to:
Prioritize funding regardless of where decisions are made
PPO can help your company prioritize projects regardless of whether funding decisions are centralized at the corporate level or decentralized at the business unit level. Both funding approaches have their advantages and drawbacks, based on an individual company circumstances. PPO is equally effective in either scenario.
A centralized optimization allows resources to be redeployed across business units as the needs arise. In a centralized budgeting process, the final resources allocated to each business unit are an output of value, not a constraint set upfront.
In decentralized organizations, the resources -- most importantly, the budget -- are divided among business units. Funding is typically based on criteria such as historical precedent, strategic importance or growth expectations. Each business unit conducts its own budgeting process and portfolio optimization. The resulting portfolios can still be aggregated and analyzed at the corporate level, although the budgeting decisions were decentralized.
Which projects are worth the risk?
PPO helps you quantify risks so you can prioritize projects based on their value to risk. You can compare – on a level playing field – the risks assumed. You’ll have a basis for considering – and defending -- which projects are worth the risk.
Obtain a "bird's eye" view of all current and planned projects
PPO provides a view across the spectrum of your organization's capital projects. Seeing all projects on a level playing field helps you better compare relative risks and reward and to answer questions such as: Are we ahead or behind on the budget? Are we investing enough in brand, image and stakeholder perception?
Project dependencies: How to prioritize foundational projects
Which projects in your portfolio should take priority? You might naturally choose those with the highest benefit-to-cost ratio. But what about foundational projects? These include projects that might seem like pure cost -- until you consider that they enable other "juicier" projects to be funded.
PPO helps you prioritize by considering project dependencies. That way, you can make project portfolio funding decisions based on the cumulative impact on your organization's goals.
The graphs below illustrate how Project P may get overlooked for funding because of a low cost-benefit ratio. But when dependencies are considered, Project P takes a much higher priority because it enables other, more beneficial projects.
Valuation Leader, PwC US