The Dispatch Box: A portfolio management approach to reducing the public sector deficit

Chris Mills PIPC

Public Technology Net, March 2010

It The state of the UK’s public finances has been a matter of record, and huge concern for some time, but it seems the pain of trying to reduce the deficit has only just begun. Stories of swingeing budget cuts across the Public Sector are rife, as are dire warnings of the potential impact of cutting the wrong things, cutting too soon, or both.

It is an age-old dilemma for both public and private organisations – how to control expenditure without damaging strategy and service improvements – and one that in times of both economic hardship and relative prosperity has proved hard to resolve. Indeed, research has repeatedly shown that over 50% of potential value from project investments is wasted year after year, through a combination of poor selection and sub-optimal execution.

Clearly we can no longer afford such waste but getting the balance right between cutting deeply and protecting critical investments will be a major challenge for whichever government is in power after the election.

So, what’s the answer?

A good start is to go back to basics in the way projects are defined, approved, funded and delivered and apply a relatively simple approach – based on sound common sense and strategic principles. This is the essence of portfolio management.

Here are five straight forward steps to create a framework for making rational decisions on which projects to continue investing in, and which to cut without fear of damaging core service delivery:

1. Articulate clearly which are the key strategic goals the organisation must achieve. This should be aligned and cascaded throughout the organisation and set out at a level of detail that makes it relatively simple to use as a benchmark for project spending at corporate, divisional or departmental level.

2. Define a comprehensive inventory of projects – in all stages of the lifecycle – and assess their potential outputs against the strategic drivers governing the organisation (or that part which is affected). Also within this step, the approval and validation process can be formalised – for example who will sign-off on projected costs and benefits – and who will ultimately be responsible for the accuracy of those forecasts.

3. Optimise the portfolio, taking into account critical constraints such as budget, availability of resources etc, to ascertain which combination of projects offers the best ‘bang for your buck’ in strategic terms. For example, often, the potential ‘top performer’ (which also costs a lot of money) can be better replaced by a group of projects which cost roughly the same in total but which deliver to more parts of the organisations strategy.

4. Model different potential scenarios to provide additional insight into the decisions you should take for various projects in the event of changing circumstances such as unexpected budget cuts or a forced change in strategy. The true test for an effective portfolio approach is the ability not only to reach a ‘good’ conclusion once but to be able to make the right changes quickly as soon as you need to.

5. Continually re-assess performance against both normal ‘efficiency’ measures – are projects on time and budget? – and in terms of their likely delivery of the strategic benefits originally claimed. Many organisations are afraid to ‘kill’ projects once under way but circumstances change – and performance can be less than optimal – so why continue to invest in initiatives that are unlikely to deliver, when the money could be re-allocated into more productive areas.

A Programme and Project Management (PPM) tool such as Microsoft’s EPM suite – though there are others - can be particularly helpful in support of many of these steps.

One might be tempted to dismiss this approach as just good management but it is the application of basic principles that is so often found to be missing when organisations suddenly find themselves wasting money or failing to achieve necessary budget savings.

A portfolio approach enables the organisation to operate at both micro and macro-level simultaneously. Monitoring the status of individual projects remains vital – not least to the project manager. But, of course, projects are done for a purpose – not just to keep the troops busy – and the ability to understand how the portfolio is (and is likely) to impact overall strategy is critical for senior executives.

More to the point, from a financial perspective this approach can usually identify savings of around 20% before sacrifices which could affect future service delivery improvements are required. This seems like a pretty good start.

Chris Mills is a Partner with PIPC, a leading global project and programme management consultancy responsible for some of the largest, most successful business and IT transformations within the public and private sectors.