Projects are not assets, they are liabilities. Like a future obligation, or a goal. When you manage a portfolio of liabilities, they have to be offset by assets. The process of project portfolio management is simply the management of flow of expenditure projected by each project, in time, compared with the projected flow of funding from defined sources.
When the projected funding is sufficient to cover the projected flow of project expenditure for all projects, no worries. When the projected funding is insufficient, decisions need to be made. We can take actions like: stop, slow, abbreviate projects or change the scope of projects to overcome the insufficiency.
The challenge with project portfolio management is to see the project as a flow, and to accurately project the rate of expenditure, as well as to capture how each project’s projections change over time. The purpose is predict when you have a projected portfolio insufficiency, and make decisions in ways that don’t reduce the delivery of value.
Understanding the relationship of each project to business value is important to portfolio management, because while you can project the cost (the value of the liability), that doesn’t really help you decide which projects to adjust when you have funding insufficiency. That is usually determined by some understanding of how the project will deliver business value.
It also depends on the projects delivery strategy. Why is delivery strategy important, because a project that does not intend to delivery actual realizable business value until it is complete has a different cost of termination than one that has an incremental value delivery strategy. Projects that are designed to delivery small amounts of value spread throughout the project time line reduce the “waste” of sunk cost when funding insufficiencies cause projects to be slowed, stopped or abandoned.
Projects running agile and lean delivery strategies result in the least waste when these projects are adjusted (slowed, stopped or abandoned) because they keep the work associated with each value proposition, as close as possible to the delivery of that value proposition. Since these projects try not to “work ahead”, they are less likely to have WIP (work in progress) that are not almost ready to deliver. Projects whose delivery strategy is “phase gated” or “waterfall” have the entire cost of the project in WIP until the final delivery phase of the project.
This means that when there is a project funding insufficiency, if one of these projects is stopped, or abandoned, all of the expenditure is lost. It cannot be capitalized, because no asset is created that can be meaningfully depreciated.