The Benefits of Enterprise Portfolio Management System
In 2011, a major infrastructure contractor and developer embraced an EPM approach to managing its large project pipeline. Top management committed to reduce its risk-related provisions by one-third; better risk management was identified as a core driver of profit and loss, value creation, and competitiveness.
At the outset, there was a lack of a single risk definition or risk taxonomy across projects, project stages, and departments. In addition, there was no systematic formulation of how risk management added value to the company, for example, in deriving risk-management objectives from a corporate value framework, or demonstrating how risk management could lead to better decisions. The organization’s focus was on the mitigation of project-schedule and cost overruns, but not on risk optimization.
This meant there were disconnects throughout the project stages; design requirements were often not understood in the construction phase, for instance, leading to expensive changes in specifications and orders. There was no streamlined risk-governance model headed by an overarching risk committee or divisional risk committees, and some ambiguity surrounded risk ownership with regard to who was responsible for risk at the project or portfolio level and in migrating risk ownership across project stages.
Further, the organization’s existing risk-management tools were not implemented effectively. There were strongly siloed views of risks and risk-management activities across departments and a lack of risk management standards across projects, meaning project managers could shape project risk management to their own preferences. This was compounded by a lack of effective compliance or management of consequences when things went wrong. Reactions to changed circumstances tended to be slow, as if risk was only really considered at the beginning of a specific project. There was little discussion of root causes and risk events and no clarity on how continuous risk management could add value and enhance motivation. Improvements to the existing approach were viewed as something that would require extra effort and time and bring the risk of failure.
Senior management decided to embrace a systematic step change to enhance institutional risk-management capabilities, from daily employee practices and behaviors to mind-sets and corporate culture. An EPPM system was put in place to address many of the problems outlined above. Management needed to formulate a clear business case for the value of risk-management activities and to devise a risk strategy that was tightly linked to the business. The appropriate transparency on risk cost and the key drivers and sources of risk then had to be established, along with a much clearer understanding of what risk-management levers and instruments were available. Having established this at the top of the organization, it was then vital that effective risk-management governance, organization, and processes were put in place and that a strong risk culture and awareness was driven throughout the organization.
Reliable and transparent communication is vital to the success of any project, so it was crucial that an improved system of communication was put in place between top departmental teams involved in any infrastructure project. This enabled cross-divisional cooperation and ensured alignment of goals and processes. Proper interaction with, and performance tracking of, contractors was established to help monitor and evaluate risk on a timely basis, and there were clear directions from the top of the organization to operating levels that cascaded risk-management awareness downward. This approach also required on-site “shop floor” risk transparency to be further advanced, as well as a move from ad hoc reactive risk mitigation to proactive risk anticipation.
The infrastructure sector significantly undermanages risks and lacks professional risk management. While under management of risk happens across the whole value chain, poor risk management during early conceptual planning and design phases, mostly under the responsibility of public project sponsors, has a particularly negative impact on governments’ and private developers’ ability to achieve the hoped-for improvement of infrastructure services.
Even if the involvement of private-sector risk takers, for example, investors and lenders in PPP projects, means that certain risk-management capabilities are applied later on in the process, they are not able to undo early stage mistakes. Poorly designed and planned projects lead to significantly higher financing costs and too often even to the inability to mobilize private-sector financing and risk allocation completely. In the absence of private financing and risk sharing, budget-financed public-procurement structures continue to undermanage risk throughout the entire life cycle of the project, leading to even higher rates of project failure and poor results.
Professional risk management can not only significantly improve results in public procurement processes; it can also attract and mobilize additional private financing. Given the scale and scope of emerging infrastructure projects, there is a strong case for embracing risk management throughout the life cycle of individual projects and also at the portfolio level.