The definition of priorities is one of project managers’ main tasks and is an area where there’s always uncertainty.
The need to set priorities comes from the fact that you don’t have enough resources to work on everything you want for the time you want.
Therefore, it is necessary to have a process that determines the sequences of activities that must be carried out in order to offer maximum value at all times, given the constraints we face.
In a nutshell, priority setting is a process that establishes which projects are most important so resources can be focused on the right delivery.
Why give priority to projects?
Many organizations consider project prioritization as a process of budget setting, however giving priority to projects is much more than that.
If you improve the process of prioritizing your project and select a portfolio that better reflects your organizational objectives, you will gain benefits in the following areas:
- Increased project success rate. Good prioritization ensures project alignment and fewer errors.
- Greater return on investment (ROI) (link to the previous article). Projects that are better aligned with business objectives will provide more value to the organization. Naturally, value does not just mean money and can be expressed in all kinds of forms; for every organization value has its meaning.
- Improved quality of project requests. When strategic objectives are recognized, initiatives align accordingly. This allows project stakeholders to improve performance in relation to specific strategic drivers, thus increasing the quality of their demands.
- Obsolete projects removal. A structured project prioritization process will ensure that only well-aligned projects will be approved and obsolete ones will be identified in advance.
- Resource allocation. A good project prioritization process will allow the portfolio to be properly scaled up. Resources can therefore be allocated more effectively.
Overview of the techniques for setting project priorities
The MoSCoW method is a priority-setting technique employed in multiple management fields to achieve consensus on what is most important to stakeholders and customers.
The term is an acronym that represents the different possible categories of prioritization – in English. The requirements are thus classified as:
- “Must have”: essential requirements that must be absolutely included in the product. If even one of these is not present, the issuance of the product is considered an error.
- “Should have”: these requirements are important yet not crucial. They generally share the importance of the requirements of the first point, but are not so necessary.
- “Could have”: these requirements are desirable but not necessary for issuance. Usually they are low cost product improvements.
- “Won’t have”: These requirements are the least critical or even those not aligned with the product strategy. They must be permanently discarded or possibly reconsidered for future versions.
This method offers a quick and simple prioritization solution. The problem, however, is: how is it possible to know which requirements should or could be more important than others?
As a result of this limitation, the MoSCoW method is probably more suitable for internal projects than for products involving many customers.
2. Financial analysis
Initiatives and projects are often carried out with the specific objective of increasing revenue or reducing costs.
For these situations, a financial analysis is required and, for those with the best results, priority will be assigned.
There are 4 types of financial objectives that can be addressed:
- New revenues that should be generated;
- Incremental revenues, i.e. additional revenues from existing customers who now can purchase an upgrade or additional services;
- Revenue withheld, i.e. revenue not lost due to the reduction of the customer’s withdrawal quota;
- Cost savings, i.e. any type of operational efficiency that is achieved within the company.
These targets can be estimated over a given period of time, thus providing an overview of the revenue and/or cost reductions they will be generating.
By analyzing these metrics in combination, teams can then make investment decisions based on the organization’s financial priorities and desired results.
3. Net Present Value (NPV)
“How much money do you have to save in the bank to get to the end of the year with 10 extra euros?”
This is what is called the present value of a certain amount and depends on the interest rate. Here’s its formula:
PV = C x (1 – i)-t
C= cash flow , i = interest rate and t = time
With an interest rate of 5% today we would have to invest 9.52 euros in the bank to obtain 10 euros in a year.
When assessing alternative projects in which to invest, companies consider an opportunity cost instead of an interest rate.
This is what is not earned as a result of investing in something else.
If a company usually gets a 15% return on its projects, this is the opportunity cost to which an alternative project should be compared.
A product initiative will produce a series of cash flows over time periods (e.g. months or quarters) and each must be discounted to its present value (PV).
The net present value is the sum of these elements over a certain period of time and is determined by this formula:
This method allows a company to prioritize projects by providing an answer to this question: “How much of today’s money we will have after X time, if we invest in Project A or Project B?”
4. Internal rate of return
The internal rate of return is a metric that expresses the performance of a project in percentage terms. In other words, it shows the speed with which an investment will increase in value.
It is difficult to calculate this value manually, however spreadsheet software offers this formula.
From this value, you can derive a return on a project and compare it with others.
However, this should not be considered separately when making decisions, as the investment time needed, for example, can be an important decision-making factor.
The longer it takes to return the money, the more risky the investment is.
Depending on the financial condition of the organization and the risk tolerance, this could be a key factor.
5. Value vs. Risk
A classic way of prioritizing projects is to compare the value of what needs to be done with some other trade-off measure: usually that measure is the cost.
However, there is another method that suggests considering risk as a priority factor.
There are no established ways of estimating value, and for this it is necessary to use one of the other techniques however, as far as risk is concerned, these are the criteria:
- Planning risk: the risk of not finishing a project within deadline.
- Cost risk: the risk that the project will cost more than what is allowable at company level.
- Functionality risk: the risk of not being able to execute a project.
There is a constant struggle between high risk and high value. What should be done first? There’ s no definitive answer and everything depends on the choice of the organization.
Ultimately, the most difficult part of the priority setting process is understanding what the team’s time is worth and thus to only commit to the most precious, urgent and important projects.
Once it is decided where to focus the energy, the project manager will be ready to draw up a plan and start working.