Smart Budget Allocation for Project-Oriented Organizations

Spending decisions in a PMO can foster or impede organizational success. The process is volatile by nature. To allocate budget and resources in a smart way—and to achieve organizational goals—a measurable approach needs to take the following aspects into consideration.

Organizational Structure
Rethink the motives of the other decision makers. The budget number and its distribution across the relevant departments should reflect the goals that are set at the top. Although clear roles may be assigned, it turns out that the power structure and motives vary in order to maximize influence.

There should be a common understanding that the goals can be achieved by segmenting budget based on top priorities. If necessary, stronger personalities should collaborate or delegate parts of their responsibilities to less-busy department heads without giving up power or accountability. Filter demands for projects to balance stakeholder interests while keeping the organization’s priorities in mind.

Strategic Drivers
The distribution of budget should be aligned with the strategic business drivers. Identifying those properly for each department is key. More often than not, I discover large discrepancies in strategic goals versus budget allocation. Budget should be allocated on top priorities projects that align with strategic goals.

Using a balanced scorecard, the goals can be validated against the focused priorities. Resolving these issues up front is crucial to avoiding conflict at a later stage, when it gets difficult to achieve compromise. Establishing clear guidelines for portfolio management—and committees with a majority voting system—is an effective process used throughout top performing organizations.

Metrics
Before approving project demands and releasing budget, the definition of measures and success metrics should be verified as SMART (Specific, Measurable, Achievable, Realistic, and Timely). Depending on the type of expense, common metrics (such as estimated spend, duration, ROI, NPV, etc.) should be matched with the type of project requested.

It happens though that everything gets compared, resulting in false conclusions and scattered benefits—even when those metrics are applied correctly throughout the project life-cycle. Capital and operating expenses, resource intense versus resource light, high impact versus low impact, and other indicators are all thrown in the same bucket. Apples, inevitably, are compared to oranges.

It is healthier to break the budget down into smaller portfolios that are aligned with the organizational goals and compare them by two metrics – maximum. If in doubt, further divide the portfolio into sub-portfolios for each metric. Ultimately, benefit realization afterwards shows the efficiency of the output after the spend has been made.

Don’t fall for mixing projects, programs, and portfolios for the ease of use. Rather, custom-fit reports should show commonalities and differences. Education is vital to understand how to track portfolio performance, how to manage reserves, when to make decisions on budget stretches or budget cuts, or even when to terminate a project despite its sunk cost.

Human Resources and Skills
Staffing is one of the main challenges of digital transformation. While the skills that are needed to execute tasks are well-aligned, roles are often chosen for the project manager with little consideration for existing PM processes and little general knowledge of managing projects.

When the project manager is chosen before the budget is approved, the consideration focuses on allocating this person as a ‘free’ resource (less so if the person is skilled enough to handle it). Three basic methods can be utilized to staff projects so that they are poised for success:

  1. Provide comprehensive PM training for those roles upfront. A mix of hard skills (like scheduling, cost, scope and risk management) are covered by most PM frameworks [Microsoft Project e-Academy]. Additionally, internal PM approval processes should be made transparent.
  2. The most successful way is to assign a senior PM as a mentor before the project starts.
  3. Finally, the risk of overall project success should factor in how well the PM is integrated in the organization and their level of PM expertise. Can this person handle HR, procurement, and other budget-related topics autonomously? Where are the limits and are they clearly communicated? Do we need to increase the reserve in the budget?

In the end, smart budget allocation is about alignment. Finding a balance among organizational hierarchy, the pyramid of power, appropriate measures for each endeavor, and staffing is key to success. The invisible hand that drives those basic elements needs to be revealed, as it determines the common denominator that drives project-oriented organizations.

To learn more about budget allocations to get your projects on track, view our on-demand webcast on financial planning.