ABC Analysis in Project Portfolio Management

The key to effective project prioritization

What is the ABC Analysis?

The ABC analysis is a method of prioritization and decision-making. It is based on the Pareto principle and can help you focus on the essentials as well as set priorities for your next steps. Based on the criteria defined by you, the analysed elements are classified into categories A, B, and C, thus prioritizing them. The ABC analysis originated in materials management and was used to optimize inventory by identifying items that are in high demand as well as those with a long inventory duration, which incur the highest costs. However, the analysis can also be applied to numerous other areas to address questions such as:

• Product management: Which are the most important products or services that contribute the most to the company’s success? What are the key features of a product?
• Customer analysis: Who are our most important customers contributing the most to revenue?
• Procurement: Who are our key suppliers?
• Time management: How should tasks be prioritized? Which activities provide the greatest benefit, and which ones should be delegated?
• Project portfolio management: Which projects are particularly important for achieving corporate goals, and which ones could be abandoned? Which projects consume many resources without ultimately contributing to the company’s success?

Benefits of ABC Analysis in Project Portfolio Management

The ABC analysis can be used in project management for various purposes:

• Project prioritization: By conducting an ABC analysis and visualizing it with a Lorenz curve, you can easily get an overview of your project portfolio, such as which projects require the most resources, which projects are strategically the most important, or which projects have the highest costs. This allows you to assign resources primarily to high-priority projects, ensuring their successful implementation.
• Risk management: The ABC analysis can be used to classify projects according to their risk profiles and implement appropriate risk mitigation measures. Additionally, it allows you to easily identify which projects require special attention as well as monitoring. For criteria, you can consider factors such as the magnitude of risks, their probability of occurrence, or the risk value, which is the product of probability and magnitude.
• Stakeholder classification: If you are unsure which stakeholders require special attention, you can also classify them using the ABC analysis, based on criteria such as conflict probability or influence.
• Time management: The tasks involved in a project can also be prioritised using the ABC analysis. This allows you to assign a high priority to tasks that have the greatest impact on the project’s success.

Criteria for ABC Classification

The criteria for ABC classification can vary depending on the company, industry, and specific requirements. In project or project portfolio management, the following criteria are often considered:

• Financial contribution: This criterion assesses the financial value a project brings to the company. It can include factors such as expected revenues, profits, or project returns.
• Strategic importance: The alignment of a project with the strategic goals as well as the priorities of a company is often taken into account. Projects closely linked to the company’s strategic goals and with high strategic importance are often classified in category A. Projects with lower strategic importance fall into categories B or C.
• Resource requirements: This criterion evaluates the resource needs of a project, such as time, money, personnel, or other required resources.
• Customer value: The value of the project from the perspective of customers or target groups is an important criterion as well. Projects that have high customer value and a direct impact on customer satisfaction, market growth, or competitive advantage can be classified in category A. Projects with lower customer value may fall into categories B or C.
• Risk: The risk profile of a project, including technical challenges, uncertainties, or potential impacts on the company, is also commonly assessed.

In comparison to other areas where ABC analysis can be applied, project management often has to rely on estimated values since the actual values are not yet known. For example, before the start of a project, the actual effort required is unknown, so an effort estimation is used for analysis purposes.

The process of ABC analysis in project portfolio management

The process of ABC analysis in project portfolio management consists of several steps. Here is a description of the typical workflow:

1. Goal setting and listing the projects to be examined:

First, consider the goal you want to achieve with the ABC analysis or the question you would like to answer. Next, you should get a good overview of your project portfolio or the relevant projects.

2. Identification of evaluation criteria:

As a next step, the evaluation criteria to be used for classifying the projects need to be defined. These can include expected effort or revenue, strategic significance, or risk value, for example. It is important to define clear and measurable criteria that align with the goals and needs of the company.

3. Data collection:

Next, the relevant data and information about each project in the portfolio needs to be gathered. Furthermore, you should calculate the respective share of the total data volume to establish comparability among different projects. If the criterion, for example, is the cost of implementing a project, you should sum up the costs of all projects to determine the percentage contribution of individual projects to the total cost. You can then sort the projects in ascending or descending order based on their share.

4. Categorisation of projects:

The categorisation of the projects into different classes follows next. Originally, three classes were used in ABC analysis, but it is possible to adapt the number to your needs if different classes require different action strategies. This is useful when different action strategies are specified for different classes. So, if you want to establish four different strategies, you would need four categories. However, if only two different strategies are available, you would only need two categories.
The allocation to different classes roughly follows the 80/20 rule of the Pareto principle. This states that in most cases, 20 percent of the considered elements are responsible for 80 percent of the success, costs, revenues, etc. To determine the allocation to different categories, an objective analysis and careful weighing of individual project characteristics are necessary. For example, you might determine that an allocation of 15 percent, 20 percent, and 65 percent makes sense, or an allocation of 5 percent, 15 percent, and 80 percent is better suited for your projects.
In general, projects in category A are the few projects that have the largest share of the evaluated criteria. These are the projects you should pay special attention to as they usually have the greatest impact on your company. B projects form the middle ground with a moderate number and a moderate contribution to the evaluated criteria. Projects in category C occur in a relatively large quantity but have a low impact on the overall situation.
To quickly visualize the results of the analysis, you can represent them in a Lorenz curve. The steep ascending part of the curve symbolizes the large share of projects in category A, while the decreasing shares of categories B and C can be observed through a less steep curve.

5. Prioritisation and deriving strategy:

Based on the categorisation of the projects, you can now derive appropriate actions, such as allocating resources to important projects or prioritising them.

6. Monitoring and updating:

The ABC analysis is a continuous process. Therefore, the classification of projects should be regularly reviewed and updated as needed. This allows for dynamic adjustments to the project portfolio, such as flexibly allocating resources, identifying risks early, or changing the strategy when necessary.

Example: ABC analysis for representing a project portfolio

In our example, a company wants to analyse its project portfolio and prioritize the projects. The estimated revenue of the projects is defined as the evaluation criterion. Therefore, the expected revenue of each project is recorded, and its share of the total revenue is calculated. The projects are then sorted in descending order based on their share. This way, the following table is generated:

In this table, it is easy to see that projects P2 and P1 have the largest share of the revenue. Projects P3 and P7 already have a significantly smaller share, while the remaining projects only make a small contribution. Now, the projects can be divided into different categories. This can be done using the Pareto principle, i.e., the 80/20 rule. In our case, the allocation to the shares of the projects is adjusted to the company’s needs, resulting in the following breakdown:
Category A: Projects P2 and P1 – Total revenue 59.3 percent
Category B: Projects P3 and P7 – Total revenue 22.8 percent
Category C: All other projects – Total revenue 17.8 percent
This is then visualised using the Lorenz curve for an easy understanding.

The initially steep increase in the curve clearly shows that projects P2 and P1 in category A have the largest share of the revenue, while projects in category B contribute an additional 22.8 percent. Thus, these two categories are already responsible for over 80 percent of the expected revenue, while category C contains the majority of projects but only contributes 17.8 percent to the revenue.
The next step is to define strategies for dealing with the different categories. For example, the sample company could give high priority to projects in category A as they are expected to generate significant revenue. It could allocate preferential resources to these projects and closely monitor their implementation to ensure successful completion. Projects in category B have a moderate revenue and could be given a moderate priority, ensuring sufficient resources but prioritizing category A projects in case of conflicts. Projects in category C, with the lowest expected revenue, could be evaluated to determine if they are truly necessary, perhaps due to their strategic importance.

Advantages of ABC analysis

• Focuses on the essential aspects
• A simple method to apply
• Helps in the strategic alignment of a company
• Clearly presents priorities
• Can be flexibly used for various areas and questions
• Provides a good basis for communication with stakeholders and for decision-making
• Presents complex problems in a straightforward manner

Challenges of ABC analysis:

• In project management, the analysis can yield inaccurate results when using estimated values.
• The categorization into different classes requires subjective judgments, leading to potentially different results when performed by different individuals.
• The analysis is purely an assessment of the current situation, meaning it only represents the current state and does not consider future potentials, such as newly added projects or changes in the project portfolio.
• The analysed elements or projects are considered in isolation, neglecting dependencies or synergies between them.
• Project prioritisation can be conducted based on a single criterion, which does not accurately reflect the complex reality.
• The ABC analysis does not provide recommendations for actions.
• The classification into only three categories is highly simplified, potentially losing important nuances or differences between the projects.

Conclusion

The ABC analysis is a simple tool that allows companies to focus on the essential aspects and set priorities. Especially in project portfolio management, it can help prioritize the right projects, distribute resources optimally, and mitigate risks.

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