JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL JÖNKÖPING UNIVERSITY Project Portfolio Management & Strategic Alignment Governance as the Missing Link Master Thesis within Business Administration Authors: Vesela Hristova Claudia Müller Tutor: Prof. Tomas Müllern Jönköping June 2009 Master Thesis By Vesela Hristova & Claudia Müller Acknowledgements We would like to acknowledge and thank our tutor Prof. Tomas Müllern for the time and effort to supervise this study, for his timely responses when in doubt and for his constructive criticism both in terms of structure and content. Furthermore, we are very grateful to the company representatives who spent time filling out the survey and commenting the questions for the second part of the thesis – without them we would not have been able to carry out the study in such depth. In addition, we would like to show appreciation to Cecilia Bjursell for her useful suggestions that helped us in keeping a clear overview of the two-fold nature of this study. We also would like to mention Jonas Winqvist , vice-President of Capgemini® Sweden, who gave us valuable insights of the practitioner perspective and the pressing challenges in the field of PPM. Last but not least, we would like to thank our friends and family for their support and patience during the process of writing this thesis. Vesela Hristova & Claudia Müller Jönköping, June 2009 i | P age Master Thesis By Vesela Hristova & Claudia Müller Master Thesis within Business Administration Title: Project Portfolio Management and Strategic Alignment – Governance as the Missing Link Authors: Vesela Hristova Claudia Müller Tutor: Prof. Tomas Müllern Date: 2009-06-02 Subject terms: Project Portfolio Management, Strategic Alignment, Portfolio Governance, Portfolio Review Board, Portfolio Characteristics, Decision-Making Rationale, Maturity Models, Project-Based Organizations ii | P age Master Thesis By Vesela Hristova & Claudia Müller Abstract Introduction – Project-based organizations face a series of challenges when trying to implement and manage their project portfolios successfully in line with their strategic goals. Good project portfolio management (PPM) practices play a crucial role in maintaining well performing portfolios, but PPM is still a fairly new academic field. And it was found that the current PPM literature embodies a gap in providing explicit governance criteria to assure consistent portfolio decision-making. Problem – What are the criteria of portfolio governance that contribute to better aligning the project portfolio to organizational strategy? Do project-based organizations in fact not implement a governance framework to guide their decision-making rationale? If there is some sort of a governance framework, do project-based organizations implement it in a consistent manner every time they take portfolio-related decisions? Purpose – The purpose of this study is two-fold. First, we attempt to fill a gap in the current PPM literature by proposing a portfolio governance framework that could enhance project portfolio decision-making. Secondly, it is our goal to find out whether decision makers in project-based organizations consistently cover all issues related to portfolio governance at portfolio meetings. Methodology – The study employs both qualitative & quantitative methods to fulfill the two-fold nature of the study. A Portfolio Governance Framework, comprising 26 statements, was developed on the grounds of existing literature on PPM, strategy & governance. The proposed Framework was then used as a basis to carry out an online survey in which 31 respondents (executive level) from 25 project-based organizations (operating in Sweden) were asked about how consistent they are in discussing relevant portfolio governance issues. Conclusion – The empirical findings of this study indicate that the majority of project- based companies do not employ a governance framework when it comes to portfolio decision-making. In the few cases that they do, it is mostly a set of policies that is not applied on a consistent basis. iii | P age Master Thesis By Vesela Hristova & Claudia Müller Table of Contents I. Introduction .......................................................................................................... 1 1.1 Problem Discussion 1.2 Purpose ........................................................................................................................ 2 1.3 Delimitation ............................................................................................................................................... 3 1.4 Definitions ...................................................................................................................................... 3 1.5 Outline of the Thesis ......................................................................................................................................... 4 II. Methodology ......................................................................................................... 6 ...................................................................................................................... 5 2.1 Description 2.2 Research Philosophy ........................................................................................................................................ 6 2.3 Research Design ...................................................................................................................... 8 2.3.1 Quantitative & Qualitative Research Approach ............................................................ 10 ........................................................................................................................... 10 2.3.2 Research Strategy – Abduction ............................................................................................ 13 2.4 Research Method 2.4.1 Sample Selection ........................................................................................................................ 20 .......................................................................................................................... 19 2.4.2 Questionnaire Design .............................................................................................................. 23 2.4.3 Data Analysis Procedure ........................................................................................................ 24 2.5 Validity, Reliability & Generalisability III. Background & Literature Review ....................................................................... 28 ................................................................................ 25 3.1 Project, Program, Portfolio – the Essentials 3.1.1 What Is a Project? ..................................................................................................................... 30 ......................................................................... 30 3.1.2 What Is a Program and a Portfolio? ................................................................................. 30 3.1.3 What is PPM? ............................................................................................................................. 33 3.1.4 PPM Purpose and Objectives ............................................................................................... 33 3.1.5 Common Issues Related to PPM .......................................................................................... 33 3.1.6 Types of PPM Methods ........................................................................................................... 35 3.1.7 Shortcomings of the Current Literature ............................................................................ 37 3.2 Aligning Strategy and PPM 3.3 PPM Maturity ...................................................................................................... 38 3.4 Corporate Governance & Portfolio Governance ................................................................................................................................ 41 3.4.1 Corporate Governance ............................................................................................................ 43 ................................................................. 43 3.4.2 Management vs. Governance ................................................................................................ 46 3.4.3 Project Portfolio Governance ............................................................................................... 47 IV. Frame of Reference ............................................................................................. 51 4.1 A Portfolio Governance Framework 4.2 Discussion of the Three Framework Parts ...................................................................................... 53 ............................................................................ 55 iv | P age Master Thesis By Vesela Hristova & Claudia Müller 4.2.1 Part One – Portfolio Characteristics ................................................................................. 55 4.2.2 Part Two – Strategic Alignment ........................................................................................... 56 4.2.3 Part Three – Review Board Aptitude ................................................................................. 57 4.3 Contribution to the PPM Body of Knowledge V. Empirical Findings & Analysis ........................................................................... 60 .................................................................... 58 5.1 Presentation of the General Findings 5.1.1 Findings by Framework Part ................................................................................................ 62 ..................................................................................... 60 5.1.2 Findings by Organization Type ............................................................................................ 64 5.1.3 Findings by Organization Type and Framework Part ................................................ 65 5.2 Analysis of the Survey Results and Discussion 5.2.1 Implications for PPM Practices........................................................................................... 69 .................................................................. 69 5.2.2 Strategic Alignment Challenges ........................................................................................... 71 5.2.3 Portfolio Governance Inferences ........................................................................................ 72 VI. Conclusions & Further Research ........................................................................ 75 References ............................................................................................................................ 78 Appendix 1- Project Portfolio Management Maturity Models ............................................ 84 Appendix 2 - Summary of Empirical Findings (%) ............................................................. 91 v | P age Master Thesis By Vesela Hristova & Claudia Müller Table of Figures Figure A: Quantitative & Qualitative Spectrum (Punch, 1998, p. 23) ................................. 11 Figure B: Continuum of this Study ....................................................................................... 12 Figure C: Deductive, Inductive and Abductive Approach (Alvesson & Sköldberg, 2003, p. 45) ......................................................................................................................................... 14 Figure D: Abductive Approach of this Thesis in Stages ...................................................... 16 Figure E: Research Choices (Saunders et al., 2007; p. 146) ................................................. 19 Figure F: Selection process of a non-probability sampling technique (Saunders et al., 2007, p.227) .................................................................................................................................... 21 Figure G: Sampling Criteria (Classification Scheme) .......................................................... 22 Figure H: Sample Size - No. of Contacts and Participants ................................................... 23 Figure I: Example Question from the online Questionnaire (eSurveyspro, 2009) ............... 24 Figure J: Framework of project business: four distinctive management areas (Artto & Kujala, 2008, p. 470) ............................................................................................................ 29 Figure K: Project, Program and Portfolio Pyramid .............................................................. 31 Figure L: Interconnectedness ................................................................................................ 32 Figure M : System model of a multi-project environment (Aritua et al., 2009, p.75) .......... 39 Figure N: Comparison of CG definitions – (adapted from Huse, 2007, p. 23) .................... 44 Figure O: Summary of problems in managing multi-project environments (Elonen & Artto, 2003, p.400) .......................................................................................................................... 52 Figure P: Portfolio Governance Framework ......................................................................... 54 Figure Q: Portfolio Governance as the Link between PPM & Strategic Alignment ............ 59 Figure R: General Findings from the PPM Governance Survey by Answer Choice (%) .... 61 Figure S: Findings from the Survey by Framework Part, answer c) No and d) Not often enough (%) ............................................................................................................................ 63 vi | P age Master Thesis By Vesela Hristova & Claudia Müller Figure T: Findings of the PPM Governance Survey by Organization Type and Choice of Answer (%) ........................................................................................................................... 64 Figure U: Survey Findings by Organization Type and Part I of the Framework (Portfolio Characteristics) ..................................................................................................................... 66 Figure V: Survey Findings by Organization Type and Part II of the Framework (Strategic Alignment) ............................................................................................................................ 67 Figure W: Survey Findings by Organization Type and Part III of the Framework (Review Board Aptitude) .................................................................................................................... 68 Figure X: P3M3 Structure (OGC, 2008, p.9) ....................................................................... 86 Figure Y: Maturity Levels of the PPMMM (PM Solutions, 2005, p.17) ............................. 88 Figure Z: Summary of Survey Findings by Answer Choice of the Respondent (%) ........... 93 vii | Page Master Thesis By Vesela Hristova & Claudia Müller I. Introduction This chapter introduces the reader to the topic of this thesis as well as outlines the problem and purpose of the study. Further, delimitations and relevant definitions are stated. Nowadays an increasing number of organizations operate on a project basis and often face challenges to carry out these projects on time, within budget and on scope. The discipline to successfully manage each project, Project Management, has evolved to an established field for researchers and practitioners. These practices seem to be insufficient though when companies deal with many projects at the same time, also called multiple projects or project portfolios (Aritua, Smith & Bauer, 2009; Dooley, Lupton & O’Sullivan, 2005; Rad & Levin, 2006). Project-based organizations face great complexity when it comes to coordinating multiple projects, project networks and project-based organization networks. Although project management is helpful for single projects, small or large, it provides limited value to organizations that strive for portfolio added benefits. Hence, the need for better-established project portfolio management (PPM) practices is ever greater. Contrary to project management, PPM is a rather new area of interest to the academics. As such, not many studies have been executed in order to make it a well-established theoretical field. What PPM refers to is the management of portfolios or collections of projects that help ‘deliver benefits which would not be possible were the projects managed independently’ (Turner & Speiser, 1992, p. 199). Furthermore, PPM is linked to ‘the strategies, resources, and executive oversight of the enterprise and provides the structure for project portfolio governance’ (Levine, 2005, p. 1). Thus, it should be mentioned that while there is a difference between governance and management, PPM is comprised of both in order to be effective. Overall, there are differences between the definitions of PPM, but most authors agree that the project portfolio should be aligned to the company’s strategic objectives in order to be a valuable contribution to the overall organizational goals. As such, PPM can be seen as the link between an organization’s strategy and its realization. The ability to implement and manage project portfolios varies between organizations and the degree to which an organization ‘practices the application of knowledge, skills, tools, and techniques to organizational and project activities to achieve its aims through projects’ (PMI, 2007, p. 7) is what is referred to as its maturity. And the increasing number of frameworks and models (focusing on organizational maturity) developed by PPM practitioners emphasizes the growing significance of those for project-based organizations. These so-called maturity models (CMMI Product Team, 2009; PM Solutions, 2005; OGC, 2008; PMI, 2007; Rad & Levin, 2006) all follow a similar structure, being comprised of 5 1 | P age Master Thesis By Vesela Hristova & Claudia Müller maturity levels, with level 1 being the lowest and 5 – the highest in portfolio maturity1. And although it could be argued that these models are somewhat different in their approach, they all represent rather novel research in organizational practices supporting performance enhancement in particular for organizations operating on a project-basis. Based on recent empirical research, hardly any company operating on a project basis is yet at the highest levels of maturity (PM Solutions, 2005). At the same time, it was also found that ‘the use of strategic methods results in better alignment of the projects in the portfolio with business strategy, and with spending better reflecting strategy’ (Killen, Hunt & Kleinschmidt, 2008a, p. 32). This indicates that there seems to be a linear correlation between the performance of PPM to the alignment of the organization’s strategy. But so far not much academic research has been carried out describing methods that link long-term planning and strategy to portfolio decisions (Killen et al., 2008a). Thus it can be argued that such a gap poses a challenge to practitioners who aim to implement project portfolios in order to enhance the organizational performance. And although existing PPM maturity models discuss the importance of strategy and strategic alignment as a prerequisite to the project portfolio success, they seem to lack providing the necessary tools to actually do so. And making sure that there is strategic alignment between the organization’s strategy and the project portfolio is an aspect of the component portfolio governance, which has been used as an indicator for PPM maturity (OGC, 2008; PM Solutions, 2005). The underlying assumption is that the stronger the portfolio governance in an organization, the more mature it will be in implementing valuable PPM practices. Therefore, a solidly governed portfolio, which is aligned to the organization’s strategic objectives, should be a goal for project-based organizations. 1.1 Problem Discussion Previous studies on PPM practices show that companies still experience challenges in implementing projects, programs and project portfolios successfully. The reasons for that could be various. Many practitioners have tackled the issue from a practical perspective and have provided tools, methods and software programs to help companies achieve their organizational goals. However, the problems that companies experience have not been overcome. With the evolution of project management practices to more complex program and portfolio management ones, the need for new approaches to PPM has been brought about. The rather new area of management has also brought with it new challenges, different from the ones common in project management. The most common challenge, as recognized by researchers and practitioners, is their inability to transform the organization’s strategy into practical operational actions (Schlichter, 2007). Hence, the major focus when developing PPM tools and practices has 1 For a details description of different Maturity Models see Appendix 1 2 | P age