by Chris Curran and Jim Quick

Portfolio management was all the rage 5-6 years ago, driven in part by some good management thinking from people like Peter Weill at MIT CISR and Dr. Howard Rubin and in part by some software tool vendors.  Back then, most organizations added some kind of portfolio thinking or at least dabbled with it.  While most of the interest seemed to be in the IT organization, some organizations actually drove portfolio thinking up higher in the organization where it belongs, where a complete view of an business investment can be calculated and evaluated.  Those organizations who didn’t find value in portfolio management likely found it too complex, too much overhead or too theoretical.  However, we believe that as organizations are preparing to come out of the recession, they are thinking more broadly about the types of investments they will need to make to support business growth.  As a result, some are re-looking at portfolio management as a way to organize and evaluate.

One of our financial services clients has historically driven its investment planning at the product level – they have 3.  This had served them pretty well until they realized that their customer facing systems had diverged to the point where they not only looked fundamentally different, they were developing software using 3 different technology stacks.  As a new CIO entered, he quickly diagnosed the need for a single view of the projects with special emphasis on cross-business sharing of investment dollars, projects and software assets.  And, he turned to portfolio management as a technique for organizing his thinking.  And, interestingly, the first question asked was to determine the starting portfolios – which, in turn, should be discussed and centered around business capabilities and goals, for starters.

What’s In the Portfolio?

There are 2 questions to ask when designing a portfolio management approach:

1. Which Budget?
2. What Types of Investments?

The IT budget is the scope of most organization’s portfolio management.  However, some have applied it successfully across all business investment (eg, those that have a PMO covering investments business-wide). Successful companies are focused strategic ideas early in their life cycle and utilize portfolio management principles to screen, evaluate, and calculate the total cost of investment (business activities, application development, architecture, infrastructure, and some ongoing costs).  It’s important to keep this process and governance as simple as possible – over-engineering can result in people reverting back to spreadsheet tracking and one-off discussions.

The second question to tackle is what kind of investments will you track within the budget?  The holy grail for us is to talk about the “total” investment made in the billing function, for example.  It would include all the labor, hardware, software, paper, telecom, etc.  This requires access to all of the spend data at a granular enough level to allocate it to a business function and a way to allocate the cost of shared services.  Unfortunately, not many organizations have this data easily available.  So, the default for many, at least in the beginning, is to look only at project-driven investments.

Start With Projects

Projects are an investment ready-made for portfolio management because the planning process usually includes the basic information needed to categorize and evaluate it – cost, duration, benefits, estimated return, risk, etc. – the elements of a standard business case.  Most mature organizations have a robust project proposal and estimating process.  To begin effective portfolio reviews and analysis, you need three kinds of project data:

1. Business Impact – which capabilities required by the business over the next 12-18-24 months are built or enhanced by the project?
2. Financial Case – for the proposed costs, what type of return is projected?  Is it a straight forward ROI business case, an earlier stage pilot to learn more, or an investment needed to remain at competitive parity?  The financial case for different types of investments can be vastly different.  For example, a risky, early stage investment may have no  immediate return but can gather data to drive a more realistic business case.
3. Risk Profile – how hard will the project be for us to pull it off?  do we have the skills, experience and leadership?  What’s the impact to the business if we are delayed?  Are there any external risk factors like customer satisfaction or regulation?

With this kind of data for each proposed project, you can then start to evaluate the mix across various dimensions, such as business capability and risk/return.  The next steps are to add in information about in-flight projects and to measure actual investment returns upon project completion.
photo credit: striatic