The recent economic downturn has forced budget and workforce cuts in most industries, and few areas within companies have been spared. So how do you go about deciding what to cut without jeopardizing the fundamental business? In a tough economy, there is a greater demand for a rigorous methodology to rationally prioritize and select initiatives that will deliver the highest value to the enterprise given cost and resource utilization. Project portfolio management can positively influence the bottom line, but getting it right can be difficult. The challenge? Find a structured approach coupled with sophisticated software to reduce the cost of your project portfolios, or risk sub-optimal investments and political infighting. This article examines a best-in-class methodology endorsed by Global 1000 companies that created optimal project portfolios under various budget and resource constraints.

1. How to Reduce Costs Yet Maintain
Strategic Value
A UMT White Paper
Introduction: Lower Budgets, Fewer Personnel
The recent economic downturn has forced budget and workforce cuts in most industries, and few areas within
companies have been spared. So how do you go about deciding what to cut without jeopardizing the fundamental
business? In a tough economy, there is a greater demand for a rigorous methodology to rationally prioritize and select
initiatives that will deliver the highest value to the enterprise given cost and resource utilization. Project portfolio
management can positively influence the bottom line, but getting it right can be difficult. The challenge? Find a
structured approach coupled with sophisticated software to reduce the cost of your project portfolios, or risk sub-
optimal investments and political infighting. This article examines a best-in-class methodology endorsed by Global 1000
companies that created optimal project portfolios under various budget and resource constraints.
Three Phase Approach
One of the most effective methods to reduce overall costs and maintain strategic value consists of three steps:
1. Portfolio Prioritization.
2. Portfolio Optimization.
3. Resource Optimization.
The approach looks at your investments as a portfolio of projects, thereby (1) selecting the highest value initiatives, (2)
optimizing against budget, and human resource, and other constraints, and (3) balancing demand and supply of skilled
personnel over time.
Don't be misled into thinking you can input data into software and get a result. It's not quite that easy. In fact, the
process might lead to political tensions and erode the trust between different stakeholders. However, done correctly,
an enterprise will dramatically reduce costs while supporting the strategic direction of the firm without damaging the
morale or interrelations among executive stakeholders.
1. Portfolio Prioritization
First, key executive stakeholders must identify and weight the importance of the strategic business drivers (objectives).
In the example below, each driver is compared against each other on a 5-point Likert scale to determine their relative
importance. Once completed, the relative weights of each objective can be mathematically derived and used as an
investment guide. In this case we see that the "Sales Effectiveness" driver is determined to be more than 16 times more
important than the "Supplier Effectiveness" driver. Once business driver weights are determined, project owners and
executives must consider the project's contribution to each driver based on quantitative impact statements and
standardized project information.

2. <2>
Without a solid methodology, expert consulting, and a robust software tool, proper prioritization is difficult to achieve.
Most organizations have the potential to introduce prioritization errors that will rapidly erode the benefits of any
prioritization effort. The following are key areas to consider and address:
 Lack of Consensus: An experienced facilitator can reconcile the lack of consensus around the importance of
specific business drivers. The CIO may see the "Operational Efficiency" driver as more important than "Market
Responsiveness." The VP of Marketing may disagree. The CFO may have another view. By reaching consensus at
this juncture, you will avoid selection of sub-optimal portfolios with projects that are "forced in" by functional
managers, driving up costs and jeopardizing value to the enterprise.
 Develop Project Alternatives: When submitting business cases for project proposals, establish a governance rule
that dictates that all projects over a certain budget must have an alternative. The alternative should be the same
project with reduced functionality and cost or a less expensive project that accomplishes similar strategic goals.
 Portfolio Assessment: Once you have gathered the initial inventory of project proposals, complete this
assessment:
Review the collection and consolidate or remove projects of duplicate scope
Ensure that all strategic drivers are being supported by at least one project
Evaluate the total proposed investment for each driver
This step will help you avoid future project redundancies, strategic gaps, and over/under investment in a particular
driver. The following figure shows each driver's priority and the projected spend per driver. When there is a large
discrepancy between the two, the inventory of projects may need to be adjusted to match driver priorities.

3. <3>
With these issues addressed, you can derive a prioritized list of project proposals based on strategic value, and then
optimize the prioritized list against constraints.
2. Portfolio Optimization
With a prioritized list of projects, you must now optimize the portfolio against budget and human resource constraints.
To pursue every proposed project, it might require 250 full time employees and $100 million.
However, if you are limited to 180 employees and $65 million, you must find the best portfolio of investments utilizing
these resources. Sophisticated software can seamlessly calculate the value and cost trade-offs under any constraints
and permit analysis of ad-hoc what if scenarios. Constraint Analysis: The following figure shows a prioritized list of
projects, their respective budget, FTE (full time employee) requirements and their inclusion in different portfolio
scenarios (aggressive, NPV driven, conservative). The chart depicts the value/cost for each project and if it will be
included (green) or excluded (red) in a given scenario. Portfolio optimization is one of the most powerful ways to
reduce costs and still select the highest value portfolio of projects -- regardless of any resource constraints.
Project Alternative Optimization: The optimization routine can include all of the project alternatives created in the first
stage, allowing selection of significantly less expensive investments that have minimal reduction in functionality. Below,
we see an example of a CRM system, a Windows rollout, and a compliance project, all proposals submitted with
significantly less expensive yet only slightly lower functionality alternatives. Quality optimization software will
thoroughly consider these alternatives when determining the best portfolio of investments.

4. <4>
Portfolio Intelligence: Portfolio Intelligence takes the next important step in optimizing portfolio costs by answering
three key questions:
1. Did we identify the best portfolio?
2. How far do we need to go to reduce costs?
3. What are the constraints that are holding us back?
Once you have optimized your portfolio, you can use an Efficient Frontier chart that identifies the best portfolio value
under any given cost constraint. Each point on the Efficient Frontier represents a different project portfolio. Sub-
optimal portfolios will fall below the Frontier. By understanding the constraints placed on the sub-optimal portfolio
planning teams can then make amendments to either:
1. Move the sub-optimal portfolio up toward the Efficient Frontier (i.e., Increasing value for the same cost --
Value Maximization), or
2. Move the sub-optimal portfolio to the left toward the Efficient Frontier (i.e., Reducing cost while maintaining
the same value -- Cost Reduction)
In this example, the original solution (pink triangle) is not quite out on the edge of the Frontier. Why not? Inter-project
dependencies, forced-in projects, and soft constraints (i.e., headcount), may have held you back from the optimal
portfolio. Drilling down into these issues will help you free up budget while maintaining value.
3. Resource Optimization
Finally, you can optimize demand and supply of human resources over time in order to achieve cost savings by
maximizing utilization. The following figure illustrates an oversupply of Technical Architects and an undersupply of
Business Analysts. The oversupply may suggest downsizing/ reductions or retraining is necessary, whereas the
undersupply may indicate increased staffing is required. Alternatively, projects could be spread out over a longer time
period to allow the supply of Business Analysts to meet the demand. As a result, resource optimization will lead to cost

5. savings through sensible staff reductions, retraining or outsourcing. By assessing the monthly view for each skill type,
the planning team can better determine which projects to reschedule in order to best fit resource availability for
each point in time.
Summary
In times of budget cuts and headcount reductions, enterprises need a rational way to reduce costs, yet maintain
corporate strategy. Portfolio management provides a framework to prioritize, optimize, and manage investments
under any and all resource constraints. Enterprise Project Portfolio Management offers flexibility based on the
organization's structure, maturity, readiness and urgency to change as well as the business objectives themselves.
However, portfolio management comes with a unique set of challenges, and success depends on the ability to
maintain strategic direction throughout the entire process. Following the best practice approach explained in this
article will help ensure that IT investments are selected in a systematic, rational manner that reduces costs without
compromising the performance of the enterprise.
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