Portfolio Management – Making better choices

Organisations are being presented with more opportunities for investment than ever before, yet they have fewer resources to execute. In this climate they need to pick the winners and focus on the investments that will deliver the greatest return and value.

• Organisations have many opportunities, but they can’t do everything.
• Short-termism and "decibels making decisions" will eventually lead to business failure
• Portfolio Management is a pro-active approach to prioritising and selecting potential investments.
• Portfolio management can help organisations "do more with less" in a climate where budgets and resources are constrained
• Portfolio management implementation relies on an holistic approach (e.g. people, process, tools, etc.)
• Visualisation of the portfolio is an important aid to executive decision making.
• Portfolio management does not relieve the executives of the need to make decisions!

Organisations are being presented with more and more possibilities for change, often with technology as an enabler. Invariably, there are always more ideas for potential investments than capability and resources to execute. Therefore the management challenge, is to help organisations to pick the winners from this myriad of infinite possibilities.

In all organisations, potential investment ideas are constrained by the availability of resources. The most obvious resource that constrains choices is money, but there are others that are equally pertinent. In particular, the human dimension can be a major inhibitor, as people have a limited capacity for change and significant investment must be made in achieving their commitment and buy-in. For example, you may have enough money to invest in several projects to re-engineer a call centre, but the call centre advisors may not have sufficient "capacity" to absorb all the associated changes to systems, processes, roles and responsibilities.

In many organisations, the investment choices are based on pure financial return. In the current business climate this approach often manifests itself into selection based on short term return. This apparent oxymoron of a strategy based upon short-termism can lead to an organisation being ill prepared for market changes and ultimately to a downward spiral in the organisation’s performance.

Another common occurrence is for organisations to prioritise investments based on political considerations; even in today’s budget –constrained climate it is still common to see "pet" projects and the strong personality getting his or her project approved by brute force (the term we have coined is "decibels making decisions"!).

To make matters worse the business world is increasingly complex, with a blurring of sector boundaries, which (e.g. retailers offering financial services) and technology (such as Internet, CRM, 3G mobile, broadband, etc.) opens up possibilities that five years ago would be classified as the work of dreamers or science fiction authors.

The approach to helping organisations make better investment choices is Portfolio management.

In the Oxford English Dictionary a portfolio is defined as; "a list of investments held by a person, company, etc.". In general English usage its simply a "collection of items", e.g. portfolio of shares, IT systems, projects, etc. Within this article we focus our definition of a portfolio to a collection of investments in technology enabled change, i.e. business change programmes. These are the basic components that can deliver value – or enterprise value as we term it (see related article Enterprise Value). Other collections of items, such as IT projects or applications are primarily focused on cost.

Portfolio Management is a proactive approach to prioritising and selecting potential investment choices in order to create a portfolio of higher potential value. Another component of effective portfolio management is the governance to ensure that the selected investments are still the most appropriate for the organisation.

The document "A Summary of First Practical Learnings in Information Technology Management, US Federal CIO Council, March, 2002", discusses three major developments in Portfolio Management:

The introduction of Financial Portfolio Management in 1952, described by "Portfolio Selection", Journal of Finance, Harry Markowit

zThe Application of portfolio management to IT in 1981, described in "Portfolio Approach to Information Systems", Harvard Business Review, Warren McFarlan

The evolution of the approach to the management of IT-Enabled Change in 1998, described in the "The Information Paradox", McGraw Hill, John Thorp & Fujitsu Consulting’s ‘Center for Strategic Leadership’

It is the third development upon which this white paper paper builds, adding experience gained in practical delivery of business benefits together with exploitation of new software tools.

With the economic downturn there is a move to doing more with less and budgets are being slashed. According to analysts, 86% of CIOs have experienced a reduction in IT budgets. There is therefore increasing concern that limited resources are channelled into the right investment choices. It is no wonder that prioritisation tops the list of CIOs’ concerns (Forrester Research).

There is an increasing trend towards performing or considering investing in improved Portfolio Management approaches.

Although the basic drivers are the same (too many ideas and too little resource), the current economy is creating greater interest. Indeed, many organisations need to cut their investment budgets, but want to do this without reducing the potential value. Industry analysts (Meta G roup) estimate that effective portfolio management of investment programmes can reduce costs by 30-40%.

The benefits of effective portfolio management include:

• Reductions in overall investment spend by eliminating lower value investments. 
• A portfolio with increased potential value to the organisation. 
• A level playing field upon which to compare potential investments, and increased confidence that "apples are being compared with apples". 
• Ability to make better-informed decisions regarding the portfolio. 
• Reduced executive time spent in the decision making process (but with greater confidence that the right decisions have been made). 
• Better ability to react to changes in the marketplace and organisations. 
• Greater flexibility to examine potential scenarios for portfolio manipulation, e.g. what-if analysis.

The key to successful implementation of Portfolio Management is a holistic approach that covers all key aspects of the enterprise. Introduction, or improvement, of Portfolio Management is like any change initiative and must therefore address the different facets of the enterprise, including processes, roles and responsibilities, culture and tools.

Clarity around business strategy is essential to define the basis for decision making and the appropriate balance of a portfolio. Without clarity here organisations find it difficult to objectively assess whether an investment choice aligns with the strategy. The strategy will also help to shape the portfolio based upon the time horizon of benefits, i.e. short, medium and long-term return. It should also identify the organisation’s propensity for risk taking; for example the organisation may be prepared to have a high-risk portfolio.

There are a number of key processes within portfolio management, which can be broadly divided into selecting and executing the investments. Within the process of selecting investments there are additional activities such as clarification of objectives, which should ensure that the portfolio selection is made based upon the correct and up to date criteria. The process of executing the investments includes activities such as communicating the status of the investments of the portfolio in terms of aspects such as health, spend to date, current level of risk.

While software tools play an important part in effective portfolio management they are not a solution in their own right. To date portfolio management has been carried out using custom developed spreadsheets. These had a number of drawbacks including long development lead time and costs; high maintenance overhead and reliance on experts; and relative lack of sophistication in data analysis.

Nowadays there are specialist software vendors who offer "industrial strength" portfolio management solutions. These tools fall into two main categories: those that are extensions of project management tools and those that take a top-down approach from the perspective of executive decision making. We believe it is the latter category of tools that make a better basis for implementation of Portfolio Management.

Visualisation is a powerful technique that should be present in any Portfolio Management approach. A graphical representation of the current or potential portfolio, that provides an "at a glance" view to facilitate decision making. What Portfolio management doesn’t do is remove the need for executive decision making!. Thus the relative costs, risk, benefits, alignment can be viewed and manipulated –see figure below.

Whilst the organisation structure need not be drastically revised, there is often a need for the clarification of certain roles and responsibilities. In particular the formalisation of the group of executives that will make the investment decisions, and establishing a function to provide support to the creation of consistent and comparable business cases to support the executive group.

For most organisations, the implementation of Portfolio Management constitutes a significant cultural change. Few organisations have a culture where rejection or termination of a project is perceived to be a positive result. There needs to be a shift in attitude to accept that the organisation is now positioned to make informed decisions about which projects will deliver most value and where resources should be deployed.

Today’s executives are faced with the dilemma of too many choices and too few resources. Portfolio management cannot make the choices for the executives, nor conjure up additional money, staff of capacity for change. Portfolio Management is a governance approach with associated processes and roles, supported by tools. Those organisations that are equipped to implement portfolio management effectively are discovering that it can help executives make better-informed decisions based on sound criteria, enable the organisation to focus on the investments that deliver the greatest value.