In an earlier blog post we covered why defining your project portfolio is critical to success. In this blog we discuss Portfolio Definition as part of the budget cycle within an organisation.
Our previous blog stated that MoP® (Management of Portfolios) is a best practice methodology for ensuring your organisation runs successful portfolios of work, and that the Portfolio Definition cycle is a useful tool to periodically run to ensure you are on track.
Many organisations find it useful to align these Portfolio Definition cycles with their annual budget cycles. In particular, to define the project portfolio planned for the next 12 months in the lead-up to (or as part of) setting the organisational budget for the coming year. At a high level this means ensuring the projects selected align with the organisational objectives and fit within budget constraints. It is also useful to ensure that next year’s budget includes expected capital and other expenditure (or savings!) expected from the planned project portfolio.
As we outlined, according to MoP® there are a series of steps that are part of Portfolio Definition, these being:
| Understand | Develop a clear view of portfolio pipeline, performance to date, forecasts, benefits and risks. |
| Categorise | Define your portfolio by strategic objectives, business line, geography or any other sensible category according to your business. This will help decision makers determine funding between areas. |
| Prioritise | Metrics are applied to help management understand which initiatives should be prioritised and funded above others, and why. |
| Balance | Ensure the portfolio is balanced across the organisation, i.e. no one area is over or under prioritised and that you have the highest chance of success across the portfolio. |
| Plan | Create a summary of the above into a plan which can be approved and tracked. |
Whilst the Portfolio Definition cycle may seem like a nice, sequential series of steps, anyone that has been involved in the process before will know that plans change. For many reasons, projects that weren’t on the radar may suddenly pop up as an urgent priority. Conversely projects that were lining up as top priorities may need to be deprioritised.
Our top 5 tips around aligning Portfolio Definition and the annual budget-setting cycle are:
| Start early | It will take some time to work out how much expenditure will carry over into next year for any in-flight projects as well as doing some sort of estimation for any upcoming projects. There will also be haggling over priorities to contend with. The Portfolio Definition work should start at least a few months before the beginning of the next budget cycle. Ideal is to start 6 months ahead of time. |
| Communicate often | Don’t wait until everything is 100% finalised before communicating intentions. Take sponsors and stakeholders on the funding journey together. There will be disagreements, changes in estimates, pushback, etc. and you need to make sure everyone remains on the same page. This isn’t the right job for anyone who dislikes conflict because conflict resolution, facilitation and negotiation skills will be called upon. |
| Be flexible | You may think everything is lining up nicely but there will be late curve-balls. These may be due to late change in strategic priorities, an in-flight project that is running late or suddenly needs a ‘Phase 2’ or any number of other reasons. Be prepared to go back to the drawing board a few times as to what the portfolio next year will look like. |
| Involve finance | Finance are your friends. There will often be subtle rules about what can and can’t be capitalised, the period over which certain capitalised costs can be depreciated, tax implications and the impact of project upfront costs, ongoing costs and savings to P&L forecasts. This may influence the nature of the project portfolio and so involving a partner from the finance team to help and advise is always a good idea. |
| Establish ownership | If people are suggesting the costs and savings for a project for inclusion in the project portfolio and budget planning, ensure their name is recorded against any such estimates and that they own these. There is nothing worse than costs being lowballed and benefits exaggerated to get a project approved. When reality hits later down the track, ensure you know who is on the hook to justify changes. |
Project estimation is a whole other topic that we will explore in future blogs since it is never a simple and straightforward exercise. This of course impacts how well and how accurately project costs are reflected in an organisations budget planning and, as we’ve mentioned in previous blogs, failing to plan is planning to fail. Improper planning for the upcoming budget cycle can lead to a squeeze during the cycle where there’s simply not the funds to complete the intended projects or – perhaps worse – there is a surplus of funds which can lead to inefficiencies and unnecessary spending.
