The Big Challenge
If you have the responsibility or accountability for managing a portfolio of capital projects, then you are aware of the many challenges associated with this role. If the capital projects in your portfolio are to be implemented globally, the challenges are significantly more difficult.
A capital project portfolio often consists of projects in various stages of their implementation cycle, they each have unique attributes and complexities. The projects may have estimated costs in the range of thousands of dollars to millions of dollars and perhaps even billions of dollars for some of the largest companies.
When I’m asked to describe the challenge of managing a portfolio of projects to achieve the desired capital budget, cash flows and capital execution goals, I say it is like landing a fighter plane on an aircraft carrier at night during a storm.
Many of you who are reading this article, know what it’s like to be on an airplane making a landing approach at night in bad weather. Well picture the same thing but instead of a stationary runway, the fighter plane is landing on a much smaller runway that is moving in three dimensions.
I am a bit of an aviation buff and when I’ve seen videos of these kinds of aircraft carrier landings, it is very impressive. The pilot must be highly skilled and focused on the tasks involved in safely landing the plane, the instruments that monitor the plane's flight parameters have to be accurate, the ship's AIROPS personnel, ship helm personnel and pilot have to all be on the same page to execute a successful landing.
In a similar manner, the portfolio manager and several other business resources need to coordinate the necessary tasks to be successful at managing the capital project portfolio for a company.
Capital Project Portfolio Management Goals
Every portfolio manager should have portfolio goals that align with corporate objectives.My typical capital project portfolio management goals often included:
- Optimize execution efficiency of in-flight projects
- Begin Front End Engineering and Design (FEED) based on respective project processes, business priorities and timing associated with each capital project
- Attain +/-2% forecast accuracy for capital spending and expected budget carryover at the end of each cash flow cycle
- No exceedance of the budget for non-capital costs associated with capital projects
- Dynamically manage cash flows to an affordability plan (which can usually be quite variable over the course of time). More specifically, two buckets of cash flow had to be managed. As I alluded to in the previous bullet items, one bucket was cash flow associated with spending that was going to be capitalized. The other bucket was spending that was going to be expensed.
What Do You Need to Succeed in Managing a Portfolio of Capital Projects?
Success in managing a capital project portfolio relies in having all the pieces needed to complete the puzzle of dynamically addressing situations that cause changes to a plan. We all know that change is inevitable. However, how you react to the change can mean the difference between success and failure. It's imperative to know what the change is and when it is occurring so that the appropriate actions can be taken.
The pieces of the puzzle or attributes needed to successfully accomplish these goals include:
- Competent leadership at various levels
- A sound capital project prioritization and categorization process
- Collaborative document management and project metric systems
- Good connectivity to corporate capital allocation, asset assessment and planning processes
- Consistent and regular communications with all stakeholders
- Collaborative organizational structure and capital project decision boards
- Team commitment to achieve desired outcomes
- Trust in the skills and capabilities of diverse project implementation teams across various company facilities
- Project cost control processes and personnel
- Ability to do early estimates on project costs, cash flow and milestone projections
- Connectivity to real-time electronically collaborative enterprise resource planning(ERP),authorization, forecasting and portfolio management tools
Be Aware of the Pitfalls
Portfolio management comes with several pitfalls to be aware of.One mistake that some portfolio managers make is not managing portfolio non-attainment. Another is not anticipating end of cycle spend anomalies which is normally a spike in spend. The image below illustrates this issue.
Another pitfall, especially on major retrofit or expansion projects, is having no connectivity between key project milestones, project sourcing and resourcing plans and installation windows associated with plant operations.A good way to assure that you have reasonable milestones and monthly cash flow estimates for projects that are not yet in-flight, is to have sound methods or a tool that allows you to do this.
One such tool is one that can be found on our website called, Early Spend-out Profile and Milestone Estimator (ESPME) - Click here. If you would like to learn more about portfolio management best practices, please message me on LinkedIn. Also, it would be great to learn about some of your capital portfolio management experiences in your comments.