This article will be the first in a series on Lean Portfolio Management. Today we’ll start by talking about the problems inherit in the traditional project selection process and how Lean Portfolio Management can help.
Traditionally, approval of large projects is done once a year and aligned to the corporate budget cycle. This process can cause several problems for an organization whose goal is to be responsive in the marketplace.
By approving large projects once a year, organizations are inhibiting their ability to react quickly to market forces. Once you've set budgets for the fiscal year, there is a scramble to get projects approved before all the money or capacity runs out. Your funding is now locked in for approved projects, and there is no money left for new ideas discovered during the year. Considering typical lead time for business cases can be at least 4-6 months, we're almost always working on ideas that 6 months to a year old or more!
Yearly approval processes increase the stakes for getting funding. Sponsors only get one shot a year at getting work funded, so this model incentivizes the creation of large business cases. We'll talk about some of the issues with incentivizing large initiatives in a later post. For now, let's focus on how it makes the approval process slower and more expensive.
We're also making the process very expensive and wasteful. Let's look at the contributing factors:
We've incentivized the planning of large initiatives
Business cases for those large initiatives require months of planning and many people.
There are limited funds in the organization for new initiatives
Many of the initiatives we've developed business cases for won't get approved. The time spent creating detailed business cases for each of these projects is waste, making it a costly way to select initiatives for funding. A company I worked with recently spent an average of 14 months and over a million dollars each on business cases. When we looked at the number of initiatives approved each year compared to the number submitted, we found that only about 18% received approval. We can't hope to eliminate the need for analysis before starting work completely, but we should seek to minimize it as much as possible.
So what's the alternative?
Increase speed with a continuous selection process throughout the year and reducing the size of initiatives. By making the initiative selection decision more frequently, we provide multiple options for initiative selection and more options for new ideas to enter the pipeline. I've worked with several organizations that have found success with reviewing these investment opportunities quarterly, but see what works for you. The key lies in reducing the size of your initiatives and reevaluating investment opportunities regularly. How frequently you should do this is a function of the amount of volatility in your market. For more information on how to develop products iteratively in small batches using MVPs and validating value hypotheses, the Lean Startup community is a great place to start.
Solve the "budget scramble" process by funding capacity, not projects. Many of the organizations I've worked with have found success in switching their funding model to be product or value stream based rather than project-based. That switch has enabled those organizations to reduce the size of initiatives and make investment decisions more frequently.
Reduce the cost of initiative selection by using lean business models. We may not be able to reduce the need for research and analysis on initiatives that may get shelved, but we can minimize it. In my experience, these selection decisions are primarily made based on the executive summary in the business case and a few primary pieces of supporting data. Since those are the pieces of information that we care about anyway, why not limit our business cases to just those elements? Look at SAI's Lightweight Business Case or Strategyzer's Lean Canvases for examples of how to provide the essential information necessary to make investment decisions much more quickly and economically.
Not only can we make funding and selecting investment opportunities faster, more adaptive, and less expensive to start; we can also remove large amounts of risk in the process. We'll touch on that topic a little more in the next part of this series.
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