Managing Change: Strategies and Tactics to Review the Portfolio

Managing Change: Strategies and Tactics to Review the Portfolio

Joy Gumz (Project Auditors LLC, USA)
DOI: 10.4018/978-1-5225-2151-8.ch014
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The falling price of crude oil has caused the price of diesel and gasoline to drop, workers to be laid off, and competitors to consider merging. It has also provided a real-world view of companies applying project portfolio management as projects have been delayed, put on hold indefinitely, or closed down completely. Energy companies have shelved $400bn of spending on new oil and gas projects since the price collapse, delaying millions of barrels a day in future output from the Gulf of Mexico, Africa, Kazakhstan, and other areas (Adams, 2016). The price of crude oil, which traded above $100 since 2011 has dropped over 50% since September 2014 due to a lack of global demand plus continued production by Saudi Arabia and others. This chapter will look at strategies and tactics used by companies including Chevron, Royal Dutch Shell, and Total SA in reviewing and rebalancing their project portfolios. These approaches have application to other industry sectors.
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What is the value of a portfolio review? And how important is it to portfolio management? According to Robert G. Cooper, portfolio reviews are one of ten “best practices” in portfolio management. Based on studies conducted by Cooper with Scott Edgett, they found ten best practices (Cooper & Edgett, 2006):

  • 1.

    Focus on data integrity [early in the project]; front-end load the project.

  • 2.

    Install a systematic project management process with stage-gates that work.

  • 3.

    Adopt an incremental commitment or “options” approach.

  • 4.

    Know when to walk away from a project.

  • 5.

    Categorize projects into buckets and use different criteria for different buckets.

  • 6.

    Since there is no one best way to pick projects, triangulate by using two to four methods.

  • 7.

    Try scorecards, one of the top-rated but overlooked methods, for stage-gate decisions.

  • 8.

    Use success criteria for stage-gate decisions.

  • 9.

    Use financial measures other than NPV when appropriate.

  • 10.

    Build in periodic portfolio reviews to force rank your projects.

So portfolio reviews are important. But what can be learned from E&P companies (exploration and production companies whose mission is the discovery and development of oil & gas fields) about portfolio reviews? Are these companies really experts at this process – or in the realm of portfolio management?

Let’s take a closer look at the ten best practices above. Examining Chevron as an example, they would easily score an 8 or 9 on the best practices above, and perhaps even a 10. Since 1996, Chevron has used a well-defined five phase project methodology with stage-gates called CPDEP (pronounced chip-dip) which stands for Chevron Project Development and Execution Process. Phase 1 involves framing the business goal to be pursued and ensuring that it aligns with the business objectives. Phase 2 involves the search for and identification of the best alternative that meets the criteria developed in Phase 1. Phase 3 involves the development of the alternative selected in Phase 2. The first three phases are referred to as “Front End Loading.” Research in oil & gas has shown that a majority of a project's value is identified in these three phases. Comparing these practices with our list of ten, we can check Practices 1 and 2 are done.

What else does Chevron do that would be considered best practice according to Robert Cooper? Projects are funded incrementally to explore different development options with gates enforced through decision review boards. The largest investment called Final Investment Decision is not made until at least three gates have been successfully passed. Chevron uses indexes during the early phases to gauge how well the project is defined, including PDRI, the Project Definition Rating Index. It uses Net Present Value (NPV) as well as other criteria for financial measures. Chevron benchmarks projects and designates some as pacemakers, meaning they should be in the top 10% performers for their project category. They categorize projects into different types to balance the portfolio. We will look more at different dimensions use for portfolio balancing later in this chapter. Looking back to our list of practices, we can check off Practices 3, 5, 8, and 9.

And they know when to shut down a project if the risks become too high. In 2002, Chevron settled with the State of Florida for Destin Dome Unit leases rather than fight with environmental groups and the state about drilling. Shutting down a project is not always easy but it’s essential to the overall portfolio management process. There is no point in performing portfolio reviews if the review results are simply filed on a shelf. That’s a checkbox for Practices 4.

We’ll look at practices 6 and 7 in more depth in this chapter as well how Chevron and Royal Dutch Shell perform portfolio reviews. Many of these practices are applicable across a wide variety of industries, especially for capital-intensive sectors. Some leading practices, such as Decision Analysis which is used by Chevron, are applicable to all sectors.

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