Using Non-Financial Criteria for Project Portfolio Prioritization
In business and project management, financial criteria such as return on investment (ROI), net present value (NPV), and payback period have traditionally been the primary metrics for evaluating and prioritizing projects. However, relying solely on financial metrics can be limiting and may not capture the full scope of a project’s potential value. Integrating non-financial criteria into project portfolio prioritization can offer a more holistic perspective, leading to better strategic alignment and potentially more successful project outcomes.
Why Consider Non-Financial Criteria?
The essence of a project isn’t always directly linked to its financial returns. Some projects have strategic importance, align with company values, or contribute to long-term sustainability and growth. For instance, a project with a break-even ROI might be instrumental in retaining key customers or entering a new market. In other cases, financial criteria may not make sense or be a priority. This may commonly occur with social programs delivered by non-government organizations or charities.
While ROI and achievement of other non-financial criteria are not always mutually exclusive, at times, one will take priority over the other. For example, an organization committed to achieving Net Zero Carbon Emissions will need to deliver projects that reduce carbon emissions even though they do not achieve a positive ROI.
Examples: Bringing the Concept to Life: Real-world Examples of Non-Financial Criteria in Action
Patagonia’s Environmental Initiatives
In the world of outdoor apparel, the name “Patagonia” stands out not just for its quality products but for its deep commitment to environmental sustainability. One of its notable projects was the decision to produce fleece products using recycled plastic bottles. From a strict financial standpoint, sourcing virgin materials might have been cheaper, especially during the initial phases. However, using the non-financial criteria of sustainability and environmental impact, Patagonia forged ahead with this project. The result? Not only did they create a sustainable production process, but they also bolstered their brand’s reputation as an environmental leader. This move resonated deeply with their target audience, leading to increased brand loyalty and customer acquisition. In the long run, what seemed like a costlier choice turned out to be a strategic masterstroke.
Google’s 20% Time Policy
Tech giant Google has a famous (albeit informally implemented) policy where engineers were encouraged to spend 20% of their time working on projects outside of their job descriptions. From a strict financial perspective, this could be viewed as a loss: 20% less time spent on their primary roles might mean slower outputs on primary projects. However, when considering the non-financial criteria of innovation and employee satisfaction, the merits of this policy shine through. This 20% time policy led to the creation of some of Google’s most successful products, including Gmail and AdSense. Additionally, by empowering employees to pursue passion projects, Google fostered a culture of innovation and creativity, making it one of the most sought-after workplaces globally.
Both these examples underscore the immense potential and value that non-financial criteria can bring to project decisions. By looking beyond immediate monetary returns, companies can harness a wealth of benefits, from brand enhancement and customer loyalty to breakthrough innovations and industry leadership.
Great Examples of Non-Financial Criteria:
- Strategic Alignment: Does the project align with the company’s long-term goals and objectives? For instance, a tech company might prioritize a project that aligns with its goal of expanding into the Internet of Things (IoT) space, even if the immediate financial returns aren’t as high as other projects.
- Customer Satisfaction: Projects that can lead to enhanced customer experiences and loyalty may be prioritized higher, given the long-term benefits of customer retention.
- Innovation: Does the project offer a chance for the company to develop a new product, service, or technology? Such projects could open new revenue streams in the future.
- Risk Management: Projects that help mitigate or manage risks, be it operational, financial, or reputational, can be of high value.
- Sustainability and Environmental Impact: With increasing focus on sustainability, projects that promote environmentally friendly practices or improve a company’s carbon footprint might be given preference.
- Employee Growth and Satisfaction: Projects that offer opportunities for employee skill development or improve workplace satisfaction can have long-term benefits for a company.
Incorporating Non-Financial Criteria into the Decision-making Process:
- Weighted Scoring: Assign weights to both financial and non-financial criteria based on their importance. This can help in comparing projects on a consistent scale.
- Rank Ordering: Rank projects based on each criterion separately, and then develop an aggregate ranking.
- Portfolio Matrices: Use matrices that plot projects based on various dimensions, for instance, strategic alignment vs. financial return, to visualize and prioritize.
Challenges of Using Non-Financial Criteria:
While non-financial criteria offer a broader perspective, they also come with challenges:
- Subjectivity: Unlike financial metrics, some non-financial criteria can be subjective and might vary among stakeholders.
- Measurement Issues: How do you quantify aspects like innovation or strategic alignment? Companies need to develop consistent and objective ways to measure these.
Incorporating non-financial criteria into project portfolio prioritization doesn’t mean sidelining financial metrics. Instead, it’s about achieving a balance and recognizing that the value of a project can be multifaceted. By expanding the criteria, organizations can make better decisions, ensuring that their project portfolios align with both their financial goals and broader strategic objectives.
