Many companies in the early phases of the project management maturity model rely totally on ROI (or sometimes gut feelings) to prioritize their projects. But does ROI tell the entire story? The ROI is just one piece of the business case that should be presented before a project gets approved as part of a company's portfolio. There are at least four categories of business drivers that should be considered:
1) Financial Analysis
2) Strategic Alignment
3) Tactical Importance
4) Risk Mitigation
When looking at the financial aspect of a project, key metrics like Net Present Value (NPV), ROI, Payback Period, Cost Avoidance, Cost Reduction, and Opportunity Costs should be considered. Things to consider in the Strategic Alignment category are business fit, customer retention or growth, revenue growth, new markets, customer satisfaction, or other important business drivers that come straight from the company's goals & objectives. Then there are the tactical drivers like improved performance or quality, longevity, competency enhancing, competitive impacts, improving time to market, or first to market to name a few. The fourth category is for business drivers that mitigate risks for business issues. Regulatory compliance (SOX, HIPAA, etc.), business continuity, disaster recovery, security, and patent protection are a few that come to mind.
Each company should have specific business drivers that fall into these four categories. All of these drivers should be evaluated in the business case that gets presented to the business owners of the portfolio. The business should tailor the specific drivers within each category to meet the overall company goals and objectives. Then weights should be assigned to each business driver.
Here is an example: Let's say that Strategic fit is a driver you wish to measure. You can apply a weight of 1 for low, 2 for medium, and 3 for high. For ROI or NPV, set some thresholds for low, medium, and high (low < $1M, Med < $10MM, High >=$10MM for a small company). After entering in all the weighted business drivers, sum up the total for each project and you get the Net Weighted Portfolio Value (NWPV).
If your company does not own robust portfolio tools, you can simply use Excel. To test this out, take what you think are the top 10 projects in your company and enter all of this data in the spreadsheet. Then sort by the NWPV and see how this compares to the original top 10. You might be surprised.
Keep in mind that the NWPV is for guidance purposes only. The CFO's pet project may still be #1 but at least you gave him visibility into the value of all of the projects in your portfolio. The intent is to put all projects on a level playing field so you can use more then the standard ROI or gut feel to prioritize your IT investments.
Kaplan, J. (2005). Strategic IT portfolio management: Governing enterprise transformation. PRTM,Inc.
Handler, R., & Maizlish, B (2005). IT portfolio management: Unlocking the business value of technology. John Wiley & Sons.
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