Risk Management

Can Portfolio Management Address Capital Risks?

Competition and market forces are changing the tech industry more than ever. These factors have made it imperative for organizations to boost return on investment to achieve success. To keep pace with the ever-evolving business landscape, organizations must ensure they invest in the right mix of projects that deliver the highest value. This is the essence of project portfolio management (PPM). In this article at McKinsey & Company, Katy Bartlett et al. explains how to manage project portfolios to unlock the trapped capital.

Reasons Behind the Trapped Capital

Many organizations lack effective risk management communication at project and portfolio levels. Inadequate guidance to ensure a robust process between the projects can lead to mismanagement of risks. “This tendency means the most risks—including those that might be better managed at the portfolio level—become de facto project risks,” explain authors. This undoubtedly traps the capital.

PPM for Unlocking Trapped Capital

Industry experts believe that organizations must consistently set capital budgets across the portfolio. Furthermore, business leaders must identify the risks, secure adequate funding, and ensure more predictable outcomes. Enterprises can achieve this only if they:

Resolve Ambiguity

Ambiguity around risks can lead to cost overruns. Therefore, leaders must define the risks that demand attention at the portfolio level. Experts suggest project managers manage risks—design changes, execution variations, and estimation discrepancies—at the project level. Furthermore, the risks that project managers have no control over must be managed by organizational leaders at the portfolio level.

Reduce Financial Risks

“A detailed understanding of the portfolio, including project size, location, and the commodities involved, is required to ensure portfolio-level exposures are quantified and the appropriate reserve level is identified,” say the authors.

Establish a Relationship Between Risk and Resilience

Often, investors find themselves trapped in projects that are economically no longer attractive. However, they find that there are no viable options to exit. How can business leaders avoid such situations? Tech leaders must thoroughly understand the risks to build resilience. Remember, resilience in a capital investment demands an agile execution plan, robust business case, and commercial optionality.

To read the original article, click on https://www.mckinsey.com/business-functions/operations/our-insights/managing-project-portfolios-to-unlock-trapped-capital.

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