Author: Mike Gruia

Mike Gruia is the co-founder UMT and CEO of the company’s software product group UMT360. Gruia promotes the strategic use of advanced methods to transform the way corporations operate and invest. He has led major assignments for financial, pharmaceutical, utility and manufacturing organizations in the US and directed UMT’s development of a series of successful software products, recognized as innovative by leading industry analysts, including Portfolio Manager which was acquired by Microsoft. The company’s signature product, UMT360, is a powerful Integrated Portfolio Management solution providing organizations with a dynamic and comprehensive blueprint of their business and technology architecture to drive financial transparency and informed investment decisions across their project, program and asset portfolios. For more information, visit

his chart shows the Standish Group's CHAOS Report 2015 results on project success rates. It states that 21% of projects fail to get implemented, 42% are challenged meaning they are late, experience cost overruns, or have diminished scope, and 33% of completed projects experience cost overruns. It also shows that 46% of projects did not realize business value, while 54% did realize business value.

PFI: The Framework that Drives PPM Performance

Executive Summary In the early days of Project and Portfolio Management (PPM), it was believed that any business embarking on the discipline had an automatic license to improve an organization’s ROI. Yet, today, there is strong evidence that ROI has not improved. Year after year, industry analysts report that project failure rates are high and, as a result, businesses are failing to effectively manage spending and maximize value from their investment. While that is the state of PPM, opportunities exist to dramatically improve the return on portfolio investments. Along with integration and portfolio analytics, the inability to effectively manage project and portfolio financials is repeatedly identified as a root cause of low project success rates and subsequent loss of planned value. Employing solutions which provide PPM with financial intelligence will boost success rates and help companies realize the promised benefits and returns. In this paper, we focus on portfolio financial intelligence; why it is so critical to successful PPM and how to introduce it in your own organization. The Failures of Traditional PPM Reports have estimated that some $40 billion has been invested in PPM processes and tools over the last 13 years yet the average PPM maturity level has risen only marginally, from 1.37 to 2.37 on Gartner’s PPM Maturity Model1 which ranges from Level 1 (reactive) to Level 5 (effective innovation). The Standish Group revealed in its 2012 CHAOS Manifesto2, that 43% of projects are delivered late or over budget and 18% fail to be completed or implemented, and Gartner3 reports that 33% of completed projects experience cost overruns. The Project Management Institute (PMI)®4 reports that 33% of projects did not meet their goals or business intent and UMT360’s experience, based on hundreds of PPM engagements, shows that dismal project success rates are costing businesses up to 46% of their planned business value. That 46% is in line with Gartner research5 which has found that, on average, 40% of projects do not achieve their planned benefits (See Figure 1). The net effect is a crisis of confidence in the PMO and business leaders demanding more from their PMO functions. Executives want to see higher project success rates and a portfolio that consistently delivers expected returns for the company. They are asking for more than traditional PPM is able to offer so PMOs must be able to show they have evolved and understand what they need to add to their PPM to ultimately see an increase in realized value and ROI. Why You Need Portfolio Financial Intelligence It is Portfolio Financial Intelligence (PFI) that provides the pragmatism and accountability required for companies to realize their planned value and achieve the desired ROI from their investment portfolio. Today, a majority of companies fail to use financial management best practices with their PPM processes leaving them unable to accurately gauge the economic impact of underperforming projects and proactively take corrective action. Many are hindered by the reliance on the wrong software tools such as spreadsheets and ERP systems. Commonly used to manage and model departmental and project financials, spreadsheets lack the ability to manage volume and velocity of information and data streams, standardization and governance capabilities, and standard and consistent data interpretation and presentation. ERP systems may provide the static chart of accounts view needed by the finance team, but they focus on organizational accounting that does not go beyond budget discussions and financial reporting. They lack the ability to support investment analysis, decisions and management. And traditional PPM solutions, for their part, provide strong execution-oriented project and resource management capabilities but are unable to provide the level of detail and granularity required to make selection, planning and tracking decisions. Organizations with a high degree of Portfolio Financial Intelligence enable their business to make better investment decisions and assist in project tracking, prioritization and investment analysis. Additionally, they experience improved alignment and communication with the business. Successfully Adding PFI to Your PPM As we’ve worked to improve PFI, we’ve seen four critical factors emerge which must be addressed in order to successfully integrate financial intelligence with traditional PPM to avoid losing out on planned value. Estimating: The most obvious factor is estimating costs which is the base for all PPM processes and affects selection, planning and tracking. Understanding the costs associated with an investment is critical to developing a business case to justify an investment. The impact of faulty estimates is significant. Overestimating benefits or underestimating costs results in the organization investing in the wrong projects. Equally dangerous is the rejection of strong investments based on benefits and cost errors. Poor estimating reduces the value that organizations get from investments and decreases the confidence between the PMO or IT and the business. Metrics and Variance Analysis: Metrics are required to understand what happened, why it happened and what will happen. Metrics are your indicators of success or failure and variance analysis gives you an explanation or understanding of why it’s happening so that you’re able to take corrective action such as proactively cancelling a project, committing more funds or reallocating dollars to other initiatives. Failure to measure, track costs and take action becomes yet another contributor to the erosion of planned business value and the trust between business and PMO or IT. Portfolio Integration: Most organizations have built their project portfolio decision systems on isolated foundations where newly proposed projects fail to explicitly consider reusability and the total economic impact of the decisions. Project decisions are increasingly required conversations amongst the program manager’s office (PMO), applications managers and line of business. Visibility into the interrelationships and dependencies that exist within the portfolio will help an organization build a dynamic blueprint of the business and technology architecture, effectively communicate, and understand the impacts of selection, funding, delaying, changing scope or cancelling initiatives. Governance: One of the most dramatic errors an organization can make is to tolerate lax governance. Governance is about process and decision flows, approvals and participation rules, roles and responsibilities. It is about enforcing process and data standards, setting financial constraints as well as auditing and compliance. Lax, or the absence of, governance will negatively impact the consistency of decisions and the ability of the organization to address risk and compliance exposures. Organizations should attempt to drill down into each of the four critical factors above to begin to understand how to overcome their unique challenges and where to focus. To assist in that endeavor and to better gauge where to focus initially, a correlation analysis can be used to evaluate the factors impacting the effectiveness of the project portfolio. A correlation coefficient is a statistical measure that rates degree to which two variables are related. The closer the correlation score® is to +1, the more closely change in one variable will impact the PPM’s performance. When we look at the four critical factors as performance variables, we see how strong their correlation is PPM performance. For many of our clients the most obvious starting point has been to focus on the lowest scoring variable first (See Table 1). Getting Started Many will look to their existing PPM to address those factors. If the new PPM is to work effectively, organizations must embrace and commit to Portfolio Financial Intelligence. It provides valuable insight into project financials that significantly improves decision making throughout the project lifecycle, allows companies to better manage business investments, and creates a durable advantage that can impact your competitive position. There are no barriers to entry and organizations should begin with a phased approach. Adopt Financial Management Best Practices In phase one, PFI best practices are introduced as the organization begins customizing and standardizing processes and data, and creates efficient workflows to address various work streams. Equally important is the establishment of maxims such as the basic categorization of spending or the business case being the only way to secure project funding. Integrate with Line of Business Systems Once appropriate financial governance controls are established, the next step is integration with the ERP system to collect actual cost data from the financial system of record. Automating the data collection drives data integrity between the ERP system and PFI solution and consolidates financial information into a single system to effectively track financial performance. With access to up-to-date financial data, finance and PMO teams can spend more time analyzing the portfolio rather than manually building report packs and ad hoc reports. Analyze Portfolio and Optimize Capital Spend This phase is about establishing selection, funding mechanisms and financial modeling. Having standardized and automated the collection of financials and variance metrics, companies now have the foundational data needed to adopt a dynamic process to effectively evaluate the project portfolio on a regular cadence to optimize capital spend This allows the organization to gauge the real economics of project performance and then proactively reallocate funds to maximize ROI from every dollar invested in strategic initiatives. Establish a Benefits Realization Most organizations fail to implement a benefits realization framework and, as a result, fail to reap the full benefits from their investments. We all know that people succeed when they have a benefits and value realization measurement system that is consistently used. Next, we need to ensure that learning and improvement is measured and communicated. Conclusion Managing project portfolios in a financially intelligent way is very different from managing project schedules. Project financial management focuses on accurate costs and credible benefits estimates rather than soft and loose assessments of opportunities. It runs counter to the culture of “just do it”. Most organizations have a tendency to ignore the importance of the project financial discipline. Moreover, strong financial management involves some investment in the project financial management process. Project financial management has significant ROI. Many of our clients which have implemented PFI have experienced an 8 to 12% lift in their portfolio ROI. While, good PFIcannot reduce waste completely, it helps managers think thoroughly about the rationale of their investments and search for the best value/cost relation throughout the project lifecycle. This change in thinking and behavior will neutralize their tendency to gamble without a clear understanding.   Learn more here   References: 1. Lars Mieritz and Donna Fitzgerald, IT Score Overview for Program and Portfolio Management, Gartner, 17 April 2012 2. CHAOS Manifesto 2012, The Standish Group 3. Gartner IT Key Metrics Data, December 2012 4. Pulse of the Profession, Project Management International (PMI), March 2012 5. Michael Smith, Dave Aron and Bill Swanton, CFO Advisory: Benefits Realization Overview, Gartner, 10 February 2012

The Missing Link in Microsoft Project 2010: Project Financial Intelligence

A growing number of managers rely on project and portfolio management to help them oversee their investment portfolio. As a consequence of this reliance, many have also discovered that their organizations’ current financial management practices fall short of intended goals. Results of a survey UMT conducted in September 2010 with leading U.S. companies indicated that almost 80 percent of those polled felt some level of dissatisfaction with their current financial management methods. Primary obstacles, according to the respondents, include knowledge deficiencies, lack of management support, and use of ineffective software. Many managers fail to fully understand the impact of poor financial management. They believe that the majority of investments don’t require financial evaluation — that intangible benefits provide an acceptable metric for success. This can prove to be a costly mistake, resulting in a poor track record of project selection and mismanagement of company investments. Further complicating matters are CEOs, CFOs, and corporate trustees, who face a litany of economic challenges and expanding compliance requirements, finding themselves under extreme scrutiny as to how they should allocate their resources. As a result, they’re increasingly demanding credible evidence of strong and achievable return on investment (ROI) before assigning dollars to projects. Managers and executives alike would best be served by establishing strong project financial management (PFM). But what type of PFM offers the most benefits We believe it’s project financial intelligence or PFI. This article defines PFI and its importance in project selection and investment management. I also explore the cost of PFI illiteracy and the benefits that can be derived from the use of PFI. With a more detailed understanding of PFI, managers can better address their needs to finance the right opportunities and wisely manage their investments. I conclude with recommendations on how to move forward. Project Financial Intelligence (PFI) Explained PFI integrates three disciplines: project management, financial management, and business intelligence (BI). This integration provides valuable insight into project financials that can significantly improve decision making and visibility throughout the project lifecycle. PFI focuses on the details of cost and benefits, with information that’s thorough, logical, and defensible. PFI also provides insight into decisions. In addition, PFI integrates project and business domains and helps to improve governance. The Importance of PFI Management expert Gary Hamel points out that over the course of the past century, management innovation, more than any other kind of innovation, has enabled companies to cross new performance thresholds. If you look closely at some of America’s leading companies — GE, DuPont, Procter & Gamble, and Visa — you would find management innovation at the core of their success. Interestingly, according to Hamel, almost all of the 20th century’s most significant management innovations — strategic planning, capital budgeting, project management, cost accounting and variance analysis, and ROI analysis — all fall within the PFI classification. PFI affects most key economic organizational transactions, including capital appropriation, capital spending, tracking, investment justification, cash flow management, funding, resource allocation, and chargeback. Considering that capital spending in the United States equals about $1.38 trillion, companies could use PFI to better manage their business investments in projects and create a durable advantage that can impact the competitive position. The Price of PFI illiteracy The Standish Group’s “CHAOS Summary 2009” report revealed that about a third of all projects have successful resolutions. They’re delivered on time, on budget, and with required features and functions. What that means is that IT organizations within American companies and public entities spent $136 billion out of a total of $200 billion on failed projects or projects with unforeseen challenges. The CHAOS report also shows a direct correlation between budget and success. For example, whereas projects costing between $1 million and $3 million succeeded 38 percent of the time, projects that cost more than $10 million had only a two percent success rate. This correlation between rising cost and lower success rate provides a clear example of how flawed financial management contributes to the failure of so many projects. With the proper use of PFI, organizations have a much better chance of selecting optimum projects and realizing their anticipated benefits. The Benefits of PFI PFI offers a valuable tool for many different aspects of strategic and operations management: project selection and management, operations budgeting and tracking, and governance. The following sections illustrate how managers can best use PFI in these scenarios. Improving Project and Portfolio Decisions A leadership team receives hundreds of project proposals to fill certain strategic or tactical gaps. Because of limited budget and resources, the team can only choose a select few. How does it create the optimal portfolio from the available options? The first step is to incorporate PFI into the process. Effective PFI drives action to approve, reject, or delay a project. To best utilize PFI, the team should consider the following course of action: Develop project estimates top down or bottom up. Assign cost and benefits to cost and profit centers. Create financial metrics such as net present value or ROI. Link strategic benefits to financials. Optimize investments based on financial and strategic benefits. Once managers receive approval on a project, they can move their project into the execution phase. During this stage, businesses need to introduce performance controls to ensure the timeliness of a project’s completion, to deliver the project within budget, and to maintain financial and other data about the project’s benefits. Performance controls continue to the project’s conclusion. At each review phase, occurring monthly, quarterly, or in stages, the leadership team can analyze performance. This analysis helps identify at-risk projects and their root causes and evaluates trends and predictions that assess business impact. Based on this information, plans can be revised and action taken to rectify any issues. Aligning Project and Business Accounting More and more organizations today follow a philosophy that encourages resource sharing. For example, a company may seek to share IT or marketing and capital investments. Sharing resources however, creates two large challenges: resource allocation and chargeback. For resource allocation, organizations need to find a way of transferring the cost of shared resources from the unit that formally manages them to the one that consumes their services. The chargeback mechanism acts as a horizontal link between different organizational budgets in the company, keeping profit plans accurate and driving accountability. PFI serves as the key enabler of the chargeback process. Benefits include: Providing input for fair resource allocation. Enabling the business unit that consumes the services to choose between internal or external sources. Offering insight into the resources consumed on a periodic basis. Providing the cost basis for enabling the business unit that supplies the services to charge the business unit that consumes the services. Finally, with PFI, the organization that consumes the resources can use the chargeback bill to decide whether it still values the project benefits, if it wants to move faster and invest more, or if it should shop around to find other providers. In this way, the “consumer” can choose to get the level of investment most valued. Meanwhile, the provider aligns its services with what those consumers most want. Enabling Better Governance A flood of corporate scandals combined with the recent harsh economic downturn have served to undermine the confidence in current management systems and controls. Despite the fact that information assets represent more than half of capital spending, most companies lack effective financial governance. Governance strives to promote individual creativity within defined limits of freedom by using structural and control safeguards. Structural safeguards ensure clear definition of authority for individuals handling budgets, processes, and workflows and effective standards for managing cost and benefits. In recent years, auditing has been added to this category as well. Control safeguards measure and ensure compliance and process effectiveness. Financial compliance measures the deviation from agreed rules, practices, and standards. PFI uses the project information to drive three groups of measurements: exceptions from rules, project commitment deviations, and process effectiveness. A Wake-Up Call This article is meant to serve as a wakeup call to managers that perform project and portfolio management. As such, managers will need to approach PFI implementation systematically with an action plan, a methodology, and the understanding of the required information technology. Management teams need to: Take the time to assess their current situation. Identify the processes that use PFI and assess their criticality and capabilities. Determine the gaps between current realities and needs. Consider the order in which to close them. When ready to move forward, create a timeline for action. Equally important is the project financial software that can significantly affect the analytical and collaboration capabilities. Companies can use this software to take complex data and transform it into intuitive information and visuals. When properly deployed, this software can create useful collaborative environments to define workflows, deploy rules, and ensure that those rules are followed. Over time the companies that master PFI and the tools will come out ahead. While PFI isn’t perfect, it’s a huge improvement over unreliable alternatives. The combination of people and computational power presents unlimited opportunities. The quality of the project financials depends upon the sum of all project and portfolio financial decisions made by decision makers. The good news is that the quality of these decisions depends not only on the intelligence of the decision makers, but on project financial processes and methodology that can be improved and successfully deployed in your organization.