Project & Portfolio Optimization: Selecting the Optimal Combination of Projects
Project Portfolio Optimization addresses a different question than traditional project prioritization: Not “Which project has the highest score?” but “Which combination of all available projects generates the highest achievable total value within the constraints of budget, resources, and other limitations?”
Project selection software and project prioritization software provide transparency regarding individual projects. Portfolio optimization software extends this perspective to the entire project portfolio.
This becomes crucial as soon as there are more attractive projects than there are budget or resources available.
For example, a company may have 100 projects that are fundamentally worthwhile. However, if only 60 of them can be funded, it is not enough to evaluate each project in isolation.
Management must select a combination.
And this is precisely where a combinatorial decision-making problem arises.
With 100 independent yes/no project decisions, there are theoretically 2^100 possible project combinations—approximately 1.27 × 10^30.
Project Portfolio Selection and Project Selection Optimization make this decision space mathematically manageable.
Table of Contents
- What Is Project Selection Software?
- What is Project Prioritization Software?
- What is Project Portfolio Optimization?
- What Is Portfolio Optimization Software?
- What Is Project Portfolio Selection?
- What does “optimal project selection” mean?
- What is portfolio decision making?
- What is Project Selection Optimization?
- Project Selection vs. Project Prioritization
- Project Ranking vs. Portfolio Optimization
- Why the Best Ranking Doesn’t Guarantee the Best Portfolio
- The Project Selection Process
- What Data Is Needed for Project Portfolio Optimization?
- Taking Budget, Resources, and Constraints into Account
- Taking Project Dependencies into Account
- Integrating Strategic Criteria into Project Selection
- The Mathematics Behind Project Selection Optimization
- Example: Why Project Prioritization Is Not Enough
- Example: 150 Projects and a Limited Budget
- Portfolio Scenarios and What-If Analysis
- Portfolio Decision Making in the Boardroom
- Project Portfolio Optimization with StratePlan
- Frequently Asked Questions About Project & Portfolio Optimization
What is project selection software?
Project selection software helps companies choose, from a larger pool of potential projects, those that should actually be implemented.
The project selection process can take various types of information into account:
- Project costs
- Expected revenue
- Net Present Value
- Return on Investment
- Strategic benefits
- Risks
- Resource Requirements
- Project Durations
- Dependencies
- Budget Constraints
The real challenge, however, does not lie in storing or presenting this data.
It lies in the selection decision.
As soon as multiple projects compete simultaneously for limited capital and resources, project selection software must take the portfolio level into account.
The relevant question is not just whether a project is good. What matters is whether it is part of the best combination of projects.
What Is Project Prioritization Software?
Project prioritization software evaluates projects based on defined criteria and typically ranks them.
For example, projects can be prioritized based on the following factors:
- ROI
- NPV
- Payback Period
- Strategic Fit
- Risk
- Urgency
- Compliance
- Management Score
The result might look something like this:
- Project A
- Project B
- Project C
- Project D
- Project E
A ranking is useful, but it answers a different question than portfolio optimization.
Project prioritization asks:
“Which project is rated higher?”
Project Portfolio Optimization asks:
“Which combination of projects generates the highest total value within our constraints?”
This difference is crucial.
What is Project Portfolio Optimization?
Project Portfolio Optimization is the mathematical optimization of a project portfolio under defined objectives and constraints.
Projects are not considered in isolation.
Instead, the analysis examines how they compete with and interact with one another within a shared portfolio.
A simplified objective function might be:
Maximize the total value of all selected projects.
Subject to the constraint:
Total expenditures ≤ available budget.
Additional constraints may also be considered:
- Resource limits
- Project dependencies
- Mandatory projects
- Minimum budgets
- Maximum budgets
- Business Unit Rules
- Strategic Requirements
- Time Constraints
This transforms a list of projects into a mathematical decision space.
What is portfolio optimization software?
Portfolio optimization software helps companies calculate possible portfolio configurations based on defined goals and constraints.
In project management, the focus is on identifying the optimal or best possible combination of projects.
Portfolio optimization software should therefore do more than just display projects and calculate scores.
It should take into account the interactions between project selection, budget utilization, resources, and goal achievement.
Typical questions include:
- Which projects should be funded?
- Which projects should not be selected?
- Which projects should be postponed?
- What happens if the budget is lower?
- Which projects are added if the budget is increased?
- Which combination maximizes the NPV?
- Which combination maximizes strategic value?
- Which projects can be implemented together?
Portfolio optimization software shouldn’t just manage the portfolio. It should support portfolio decision-making.
What is project portfolio selection?
Project portfolio selection refers to the process of selecting a subset of projects from a larger universe of projects.
The problem typically arises because not all proposed projects can be implemented at the same time.
Reasons for this include, for example:
- Limited budget
- Limited staff capacity
- Limited engineering resources
- Production constraints
- Strategic requirements
- Project dependencies
- Time constraints
Project portfolio selection thus determines which projects are included in the portfolio.
Mathematical optimization extends this process by incorporating a formal objective function.
The goal is not simply to find any permissible selection.
Instead, the goal is to find a selection that best meets the defined objective under the given conditions.
What does “Optimal Project Selection” mean?
Optimal Project Selection refers to the selection of a combination of projects that optimizes a defined objective function under all modeled constraints.
What “optimal” means therefore depends on the objective.
The objective could be, for example:
- Maximize NPV
- Maximize ROI or economic value
- Maximize strategic value
- Maximize risk reduction
- Optimizing a combination of multiple objectives
Optimization takes place simultaneously under the company’s real-world conditions.
A mathematically optimal portfolio based on incorrect assumptions would be of little help to management decision-making.
Therefore, both the objective function and the modeled constraints are crucial.
Optimal Project Selection means: the best combination of projects within the defined decision-making model.
What is Portfolio Decision Making?
Portfolio decision-making refers to making decisions about the entire project portfolio rather than isolated decisions on individual projects.
In this context, management does not merely ask:
“Should Project A be implemented?”
But also:
“What does Project A mean for all other projects that are competing for the same capital and resources?”
This brings opportunity costs into focus.
If Project A requires 50 million euros, those 50 million euros are no longer available for Projects B, C, or D.
A portfolio decision therefore takes into account the value of the alternatives that are ruled out by a decision.
This makes portfolio decision-making particularly relevant for:
- Executive Boards
- CFOs
- Investment committees
- Portfolio managers
- Corporate Strategy
- Controlling
- PMO and PPM Managers
What is Project Selection Optimization?
Project Selection Optimization combines project selection with mathematical optimization.
In this process, decision variables for projects are defined.
In simple terms, the following can apply to each project:
1 = Select project
0 = Do not select the project
The optimization then examines possible combinations of these decisions under the defined conditions.
For example:
Maximize the total NPV of the selected projects.
Subject to:
Total cost ≤ 500 million €
and:
- Project B only if Project A is selected
- Project C or Project D, but not both
- Project E is mandatory
- Business Unit A receives at least €50 million
- Engineering resources must not be exceeded
This allows complex real-world selection rules to be formally integrated into Project Selection.
Project Selection vs. Project Prioritization
| Project Prioritization | Project Selection |
|---|---|
| Evaluates projects | Decides whether to include projects in the portfolio |
| Often produces a ranking | Selects projects |
| Focus on relative priority | Focus on portfolio composition |
| Project A may rank higher than Project B | A may or may not be selected |
| Budget does not have to be a factor in the ranking | Budget can be a strict selection constraint |
| Answered: “Which is more important?” | Answered: “What are we actually going to implement?” |
Prioritization and selection can be linked.
However, they should not be confused.
Project Ranking vs. Portfolio Optimization
| Project Ranking | Portfolio Optimization |
|---|---|
| Considers projects primarily on an individual basis | Considers combinations of projects |
| Generates a ranking | Generates a portfolio configuration |
| One score per project | Total value of the portfolio |
| Opportunity costs are only partially visible | Opportunity costs are taken into account based on the selection |
| Complex dependencies are difficult to handle | Dependencies can be modeled |
| Focus on priority | Focus on overall performance |
A ranking can be an important source of information.
However, it does not automatically solve the combinatorial selection problem.
Why the best ranking does not guarantee the best portfolio
The reason lies in varying project costs.
Suppose four projects are competing for a budget of 100 million euros.
| Project | Cost | Expected Value |
|---|---|---|
| Project A | €100 million | €150 million |
| Project B | €50 million | €90 million |
| Project C | €30 million | €55 million |
| Project D | €20 million | €40 million |
Project A has the highest individual value.
If it is selected, the entire budget will be used up.
The portfolio value is 150 million euros.
Alternatively, Projects B, C, and D can be implemented together.
Total cost:
50 + 30 + 20 = 100 million euros
Total value:
90 + 55 + 40 = 185 million €
Both options require exactly the same budget.
However, the combination of B + C + D yields an expected total value that is 35 million euros higher.
The best individual project is not automatically the best portfolio.
The Project Selection Process
A structured project selection process may include the following steps:
- Identify the project universe: Compile all relevant project proposals.
- Standardize project data: Make costs, benefits, and other information comparable.
- Define the objective: Determine what the portfolio is intended to maximize or optimize.
- Set the budget: Define the available financial resources.
- Identify resources: Take capacity limits into account.
- Model dependencies: Define dependencies between projects.
- Add strategic criteria: Integrate corporate goals.
- Optimize the portfolio: Calculate project combinations.
- Compare scenarios: Examine alternative conditions.
- Decide on the portfolio: Make a management decision.
- Recalculate: Update the portfolio when conditions change.
What data is needed for project portfolio optimization?
Getting started with project portfolio optimization doesn’t have to begin with a complex data model.
A simple basic structure can consist of just three key pieces of information:
- Project ID
- Expenses or investment requirements
- Expected revenue, NPV, or another target metric
Depending on the decision, additional information can be added:
- Business unit
- Location
- Project category
- Strategic criteria
- Resource Requirements
- Project Duration
- Dependencies
- Mandatory Project Status
- Risk
- Annual Expenditures
The data structure should follow the decision—not the decision follow the data structure.
Take budget, resources, and constraints into account
A realistic project portfolio has multiple constraints at the same time.
For example:
- Total budget ≤ 500 million €
- Business Unit A ≤ €150 million
- Business Unit B ≥ 50 million €
- Maximum of 20 concurrent projects
- Limited engineering capacity
- Certain compliance projects are mandatory
- Minimum strategic goals must be met
These conditions limit the permissible decision space.
Project Portfolio Optimization then searches within this space for the portfolio configuration that best fulfills the defined objective function.
Take Project Dependencies into Account
Projects are often not independent of one another.
Typical project dependencies include:
Project B requires Project A.
Project C and Project D must be implemented together.
Project E and Project F are mutually exclusive.
Project G cannot start until after Project H.
Project I only makes sense if Project J is also implemented.
Such dependencies can significantly alter the optimal combination of projects.
A simple ranking method has difficulty capturing these relationships.
In a mathematical decision-making model, they can be formulated as constraints.
Integrating Strategic Criteria into Project Selection
Companies do not select projects based solely on financial metrics.
Strategic criteria may include, for example:
- Growth
- Innovation
- Strategic Fit
- Digitalization
- Resilience
- Sustainability
- Risk Reduction
- Customer Value
- Market Access
These criteria can be explicitly defined and weighted.
This makes it clear how different strategic priorities affect the optimal project selection.
Management can, for example, compare:
Portfolio A: Maximizing financial value
Portfolio B: Greater emphasis on growth
Portfolio C: Greater emphasis on resilience
This makes it possible to quantitatively compare the effects of strategic decisions on portfolio composition.
The Mathematics Behind Project Selection Optimization
Combinatorial complexity is one of the key reasons for mathematical portfolio optimization.
With N independent yes/no projects, there can theoretically be up to 2^N combinations.
| Number of Projects | Theoretically Possible Combinations |
|---|---|
| 20 | 2^20 = 1,048,576 |
| 50 | 2^50 ≈ 1.13 × 10^15 |
| 100 | 2^100 ≈ 1.27 × 10^30 |
| 200 | 2^200 ≈ 1.61 × 10^60 |
This theoretical decision space is constrained by various factors, but often remains highly complex when dealing with real-world portfolios.
A human decision-making team cannot manually compare millions or billions of possible portfolios.
Mathematical optimization therefore handles the combinatorial search within the defined model.
Management defines goals and rules. Mathematics calculates the consequences.
Example: Why Project Prioritization Is Not Enough
A company evaluates 40 projects using a strategic score.
The projects are then sorted from highest to lowest score.
The company starts at the top of the list and selects projects until the budget is exhausted.
This approach seems logical.
However, it has a structural drawback:
It does not systematically examine whether a different combination of lower-ranked projects would use the budget more efficiently.
For example, a highly rated project might cost 80 million euros.
Three slightly lower-ranked projects could together also cost 80 million euros, but generate a higher total value.
Portfolio optimization therefore does not just examine the order.
It considers the combination.
Example: 150 projects and a limited budget
An industrial company has 150 proposed projects.
The total investment requirement is 1.8 billion euros.
The available budget is 1.1 billion euros.
In addition, the following conditions apply:
- 250 million euros in mandatory investments
- Five business units
- Six production sites
- Limited engineering resources
- Multiple project dependencies
- Strategic growth targets
The question isn’t:
“Which 150 projects are good?”
The question is:
“Which permissible combination of these 150 projects generates the highest defined total value within the 1.1 billion euros?”
Project Portfolio Optimization mathematically models precisely this question.
Portfolio Scenarios and What-If Analysis
An optimal portfolio decision depends on the underlying assumptions.
If these change, the portfolio should be reevaluated.
Typical “what-if” questions include:
“What happens if the budget is reduced by 10 percent?”
“Which projects will be cut if the budget is reduced by 20 percent?”
“What do we get for an additional 50 million euros?”
“What happens if Project A becomes mandatory?”
“How will the portfolio change with less engineering capacity?”
“What happens if growth is given greater weight?”
A new portfolio optimization can be performed for each scenario.
This does more than just change individual parameters.
The entire project selection process is recalculated under the new conditions.
Portfolio Decision Making Live in the Boardroom
The most interesting portfolio questions often arise during the actual management decision-making process.
For example, a CFO reduces the available budget.
A CEO wants to make a strategic initiative mandatory.
A COO points out a new resource constraint.
The board wants to know which projects will consequently be removed from the portfolio.
In traditional processes, this can lead to a new analysis, the results of which aren’t available until days later.
With StratePlan’s CAPEX Live Boardroom Simulation, pre-prepared portfolio models can be recalculated based on changed conditions.
This allows, for example, direct comparisons between:
- Current Portfolio
- Optimized Portfolio
- Reduced-Budget Portfolio
- Growth Portfolio
- Strategic Portfolio
- Alternative Constraint Scenarios
This makes portfolio decision-making interactive.
Question. Calculation. Comparison. Decision.
Project Portfolio Optimization with StratePlan
StratePlan integrates project selection, portfolio decision-making, and mathematical project portfolio optimization within a single decision-making model.
Projects, investments, expected outcomes, strategic criteria, and constraints can be considered together.
This allows you to calculate answers to questions such as:
- Which projects should be selected?
- Which projects should not be funded?
- Which combination generates the highest achievable portfolio value?
- How does the selection change with a lower budget?
- Which projects would be added if the budget were increased?
- Which projects should be postponed?
- How do project dependencies affect the portfolio?
- How do resource constraints affect the portfolio?
- How do strategic criteria affect project selection?
- How do the current portfolio and the optimized portfolio differ?
- How do alternative scenarios change the optimal project mix?
This transforms project selection from a static prioritization exercise into a calculable portfolio decision-making problem.
Same projects. Different combinations. Better results.
Don’t just rank projects. Calculate the portfolio.
Frequently Asked Questions About Project & Portfolio Optimization
What is project selection software?
Project selection software helps companies select projects from a larger set of potential initiatives. Modern approaches can take into account not only project evaluations but also budget constraints, resources, dependencies, and other restrictions.
What is Project Prioritization Software?
Project prioritization software evaluates projects based on defined criteria and typically generates a ranking. Criteria can include, for example, ROI, NPV, strategic fit, risk, or urgency.
What is Project Portfolio Optimization?
Project portfolio optimization uses mathematical optimization to determine a portfolio combination from available projects based on defined objectives and constraints. Unlike a ranking, this process considers combinations of projects.
What is Portfolio Optimization Software?
Portfolio optimization software supports the mathematical selection and combination of projects or investments within defined budget, resource, and other constraints.
What is Project Portfolio Selection?
Project portfolio selection refers to the process of selecting a subset of projects from a larger universe of projects. The goal is to create a feasible portfolio that best meets the defined business objectives.
What does “Optimal Project Selection” mean?
Optimal project selection refers to the selection of a combination of projects that, within a defined mathematical model, optimizes the specified objective function while adhering to all modeled constraints.
What is Portfolio Decision Making?
Portfolio decision making considers decisions at the level of the entire project portfolio. It takes into account opportunity costs, budgets, resources, strategic goals, and interactions between projects.
What is Project Selection Optimization?
Project Selection Optimization combines project selection with mathematical optimization. It calculates which combination of projects best fulfills the selected objective under the defined conditions.
What is the difference between Project Prioritization and Project Portfolio Optimization?
Project Prioritization evaluates projects and often produces a ranking. Project Portfolio Optimization, on the other hand, considers possible combinations of projects and takes budget, resource, and other constraints into account when selecting the portfolio.
Why doesn’t the highest-priority project automatically result in the best portfolio?
Projects have different costs and consume different resources. Several lower-priority projects may collectively require the same budget amount as a single high-priority project, yet generate greater overall value.
Can portfolio optimization account for project dependencies?
Yes. Dependencies can be modeled as mathematical constraints. For example, it can be defined that one project depends on another, that two projects must be implemented together, or that two projects are mutually exclusive.
Can project portfolio optimization take strategic criteria into account?
Yes. Strategic criteria can be integrated into the decision-making model as target values, weighted utility criteria, or additional conditions.
How many combinations are there with 100 projects?
With 100 independent binary project decisions, there are theoretically 2^100 possible combinations. This corresponds to approximately 1.27 × 10^30 possible portfolios.
Can a project portfolio be re-optimized if the budget changes?
Yes. If the available budget changes, the entire portfolio can be recalculated under the new capital limit. This reveals which projects will be excluded, added, or replaced by other combinations.
What data does Project Portfolio Optimization require?
For a simple model, project IDs, expenses, and a target metric such as revenue, NPV, or utility may be sufficient. Depending on the use case, resources, strategic criteria, dependencies, durations, business units, and other constraints can be added.
What is the advantage of portfolio optimization over manual project selection?
Mathematical portfolio optimization can systematically analyze a very large combinatorial decision space while taking multiple constraints into account simultaneously. This enables management to compare alternative portfolios based on explicit decision logic.
