Congratulations – you’ve organized your projects into a portfolio and have introduced standard practices for populating, evaluating and fine-tuning the portfolio. You might even have acquired a tool to organize all that data and to help support your governance committees with their portfolio balancing responsibilities.
But what are you doing to address portfolio risk management?
If you are just gathering the high severity risks from across the active projects within the portfolio and reporting those in a consolidated fashion, then you are not really managing portfolio risk!
Just as a project risk is an uncertain event which could positively or negatively impact the expected outcomes for your project, a portfolio risk could affect the realization of overall portfolio benefits. While there can be project risks which can impact portfolio outcomes, there are also portfolio-specific risks which transcend the context of all individual projects.
What are some examples of portfolio-level risks?
Investing in the “wrong” project – opportunity cost is a significant threat at the portfolio-level as the wrong funding decisions will have a greater impact on realizing a company’s strategic objectives. This is a risk both during project selection and prioritization but also for ongoing evaluation of active projects. An inability to effectively write off sunk costs and overcome optimism bias increases the likelihood of this risk being realized.
Ineffective talent planning – financial resources might be available to fund project investments, but if the right team members are not available at the right time, business value realization is delayed or could be lost altogether when faced with “first to market” situations.
Extinction events – while a single project always has some potential to irreparably hurt the company, executing the wrong strategic plan could result in much greater damage. Portfolio managers need to assess the overall financial, regulatory or reputational risks from their investment decisions.
Poor portfolio balance – achieving the right balance between risk and reward and diversifying investments across investment categories is not an easy task. Over-conservative investments will not only yield low returns, it may also doom a company’s future. On the other hand, too aggressive investments or a predominant focus on one sector is equivalent to going all in on a poker hand.
High-level processes for portfolio risk management might be similar to those for project risk management but it involves different inputs, participants and practices.
Ignore portfolio risk management and you may find that the whole is less than the sum of the parts!