Nine key principles for developing an effective approach to active portfolio management.
How many ideas is your organization currently working on? What is their value?
You’re not alone if you can’t answer such questions. In fact, many organizations find managing their ideas portfolio extremely challenging. Too often there is no viable process for comparing one project against another.
Often projects are a breeding ground for many low value requirements. As a result, low value projects receive the wrong level of priority and low value projects are allowed to continue regardless of internal or external influences indicating they should be stopped or changed. In this paper, we consider the problems and proposes nine key principles that can be applied to establish a more effective active approach to managing an ideas portfolio.
More focus on the most valuable ideas
Most organizations don’t find it difficult to generate ideas. However, they often do have trouble identifying and implementing quickly those ideas that are best for their business. Portfolio management is often cited as a problem that needs to be fixed.
As organizations continue to rely on IT as an enabler for business, and an area that receives a large and ever increasing capital investment, resolving the issues of portfolio management has become a focus for many CEOs, CFOs and CIOs.
The standard answer to solve this problem has been the installation of a centralized IT projects repository. Generally, this has had limited success. With a repository, an organization gains a small amount of control, but rarely increases the value of the portfolio.
Taking a wider viewpoint, a good portfolio management approach should help an organization focus quickly on the most profitable ideas and expedite their time-to market. It ought to be a consistent process that creates visibility across the organization; focusing on what is important and supporting good decision-making. The approach needs to have prioritization at its heart while supporting execution and speed.
Often organizations look at the costs and benefits of an idea in isolation from other constraints such as IT capacity and the capabilities of their people. In simple terms, a good approach is one that can be executed. If people who are directly in control of the work have a wider economic view, they will be able to make trade-offs that will release a huge amount of benefit.
Looking at the economic side of portfolio management, if an organization can quantify just one thing, then it should be the cost of time. Being late seriously erodes the value of most ideas. The biggest cost for many organizations is the failure to reach the market with an idea quickly enough to truly profit from it.
Ideas portfolios are sometimes closed to the organization at large and remain the purview of a few senior decision makers. Changing this attitude and making information visible allows ideas and assumptions to be tested and improved more readily. It opens the potential to incrementally fund ideas, to mitigate risks by balancing a portfolio across different objectives, and to fund the best ideas regardless of silos. In short, it allows more focus on the most valuable ideas.
Understanding the current norms
Portfolio management is both an art and a science. It involves making decisions regarding investment mix and policy, matching investments to objectives and balancing risk against performance. Going further, it is about managing one or more portfolios (a collection of projects and programmes) and includes identifying, prioritizing, authorizing, managing and controlling projects, programmes and related work.
Effective portfolio management focuses on ensuring that projects and programmes are reviewed in light of an organization’s strengths, weaknesses, opportunities and threats. This enables resource allocation prioritization and ensures that the portfolio management approach is consistent with and aligned to organizational strategies. The goal should be to provide an optimal balance that achieves the organizational goals while dealing with the risks and constraints of the real world.
However, in many instances the portfolio management process has become more of a stage gate to be passed for allocation of funding at the beginning of a project, rather than an active management discipline looking to optimize value from the resources available. As a consequence, many organizations focus on ‘doing the wrong things well’ rather than asking ‘should we be doing this at all?’
Portfolio management and financial governance often go hand in hand. As such, some of the challenges of yearly budgeting and forecasts, capital investment boards and other aspects of the financial merry-go-round can drive less than desirable behavior within the portfolio management process.
It is not uncommon to see the very largest projects and programmes pass the gates more readily than smaller projects even when the benefit ratio is significantly higher for the smaller projects. The reason for this is that they have bigger paybacks over longer periods. However, the bigger something becomes, the harder it is to make estimations and predictions. In turn, this results in a high degree of uncertainty appearing within the business case. It is also worth recognizing that the biggest projects carry the most risk and have the highest psychological attachment to them from senior managers. This makes it much harder for the wider workforce to challenge preconceptions and realities of the idea.
This leads on to another issue in that business cases are often treated as statements of fact rather than the predictive models they should be. Large projects can create a lot of undesirable and low value gamesmanship among people who need to comply with the facts rather than continuously reflect on the predictive model to increase understanding.
In addition, large projects seem to grow their own gravitational field. They pull in lots of other smaller projects and requirements that must be completed and sometimes act as blockers to the primary purpose. These smaller projects often get funding to complete larger projects without consideration to the impact on value. Funds can be allocated without considering the benefits. Large projects become all-or-nothing endeavors rather than having the ability to deliver value, learning and certainty incrementally, which would be the case if the benefits of each step were examined incrementally.
It is not unusual to find that organizations do not have a structured approach or enough data to properly manage a valuable portfolio. Even simple questions like ‘how many ideas are we currently working on?’ and ‘what is the expected value of those ideas?’ typically cannot be answered. Decisions are made in isolation based on the merit of individual business cases and often rely on no more than intuition.
A better approach
Establishing an effective active project portfolio management process requires developing a number of capabilities and practice areas. In a mature organization, any project, idea or initiative can be judged on its merit against all other items in the organization, to the extent where less valuable projects can be stopped in order to focus on other priorities.
Most organizations don’t have a problem generating ideas. Demand will always outstrip the ability to increase capacity and supply the resources to execute ideas effectively; indeed this is healthy for an organization. The challenge is to decide how best to allocate the resources required to deliver the goals, objectives and value.
Implementation of the nine key principles outlined in the following pages will enable the effective management of a valuable ideas portfolio; one that can be delivered by modern, large and distributed organizations operating in fast-paced, competitive markets.
Capture ideas
At the heart of an effective portfolio management process is the ability to capture all projects, ideas and initiatives across the organization. A central repository of this information is necessary to enable the decisionmaking process.
There are many tools on the market that can be configured to capture project and demand information. Organizations that are already leaders within their market or have strong entrepreneurial leadership often base decisions on intuition rather than data. This can serve focused organizations well to a point but, for large organizations operating in different markets and segments, it is difficult to manage the politics and silos vying for resources without good data.
Any system chosen should enable people across the organization to register ideas in a simple and lightweight fashion. The less friction in this process, the more ideas will be registered. The more ideas, the more likely that one will be great.
Important business information for each idea should also be captured within the system. For instance, most organizations need to get ideas delivered quickly. However, although time to market is a vital piece of information, many lack the ability to capture it in full. Most capture information at the point a project is initiated, but not the time taken before that. As speed becomes ever more important, it is crucial to record early data so that it can be measured, monitored and improved.
Increase visibility
Data capture is a necessary first step in any effective portfolio management process. Unfortunately, it is all too common that the data captured in centralized repositories is not easy to mine or visualize and therefore does not necessarily help managers make decisions. Having the ability to take the data and graphical represent it to managers within a business helps people make better decisions.
Ideas, data and models grow stronger through debate. Making data and information visible to the organization will help improve decision-making, test assertions and challenge assumptions.
In many organizations the percentage of ideas that are actively being delivered by IT can be as low as 5%, and are typically between 10% and 15%. The chart above is a real example of where ideas are actively being developed. In this example, 75% of ideas are being analyzed and estimated, while only 15% are actively being developed. Five times more ideas are created than can be delivered!
Spending valuable time, money and other resources on ideas that cannot go anywhere because of a lack of delivery capacity is wasteful and, with the consequent diluted focus, slows the time-to-market speed of other more important ideas. This information is normally invisible and so the implications are often not managed.
Most organizations are so complex that it is not possible for even the most senior leaders who have the widest view across a business to understand all that is being demanded and delivered. Visualization of demand and delivery is essential for better and more effective decision-making.
Compare and prioritize
Models help represent complex scenarios in a simple way that can be shared with a wider audience. The goals and objectives of an organization can be captured within a model to allow comparisons to take place between different areas and projects. This is without necessarily needing to understand the complex detail of the specific area or project.
A business model needs to capture the intent of the organization and allow one idea to be compared against another. To do this, different dimensions have to be brought into a common unit of measure.
Throughout history the most used unit of measure has been money; people understand financial comparisons. But this does not mean you need to stick only with money-based measures from the outset. After all, a large proportion of value is intangible and perception based. For instance, you might want to quantify the economic benefit of customer or employee satisfaction. Creating a model that helps convert these non-monetary values into a money-based measure allows ideas to be compared.
It is common to see business cases developed at a very coarse grain that allows comparison of return on investment (ROI) and net present value (NPV). A good model should allow a finer level of comparison because a lot can be hidden in coarse grain cases. As a minimum, features and cases should be compared against their ability to protect revenue, increase revenue, avoid costs and reduce costs.
In addition to applying a model of comparable measurement, it can be useful to include elements of strategic intent. This could include consideration as to how parts of the strategy will be delivered, such as key elements of new architectures or business capabilities.
Once ideas, requirements, projects, products and services have a business model applied to them, they can be compared and prioritized based on their value and alignment to the strategy. Prioritization is important because it creates focus. It is very easy for an organization to try and do everything. However, when this happens, things take longer to deliver and so reduce the potential value of the project. Doing fewer things quicker and better will improve the overall value of a portfolio.
A key point to remember about any model is that it does not make decisions; models exist to help people make decisions and they are refined over time as we learn.
Make economic trade-offs
Economics allow you to make choices between different uses of limited resources. To create the most valuable portfolio, it is important to know which resources are scarce within the organization.
Most business cases are judged on their merit of cost and return without examining the underlying bottlenecks and challenges. For many large enterprises, time is actually in shorter supply than money. There are also other constraints that are hard to scale and cannot be considered infinite. Comparing ideas on cost and value alone is not enough to maximize the portfolio.
Quantifying time to trade it against other monetary measures is a first step to building a more sophisticated model. One of the biggest costs within a business case is the cost of delay in delivery. But this cost is not normally quantified or, indeed, used to compare items against one another for prioritization. Being able to run a number of ‘what if’ scenarios against any feature, project or idea will help identify the different impacts of time on the potential outcomes and assist in making better priority and investment decisions.
Many projects that are built in large batches work through requirements in an order that does not take value into account. They are normally broken down into capabilities and functional areas to be built. This can lead to the most valuable features being developed at the end of a project. Therefore, because many projects are late, over budget or cancelled, the valuable elements are often not built (yet low value features are).
Understanding the impact of time on the value of a project or programme can help identify how much money is worth spending to reduce bottlenecks.
Create a framework
Traditionally, portfolio management has been a centralized function run by senior managers across the business, finance and other key functions. Equally, the decision-making approaches that are run centrally are often not shared or copied by programme and project managers within the organization. It is easy to see then how projects can be planned without any consideration to the value elements identified within a business case.
More consideration for the business case can be applied if better, decentralized, value driven decision-making is enabled across the organization. Any models used at the portfolio level can and should be made available to project managers using a lightweight framework that shares the prioritization model, the impact of time on a project and the value of reducing bottlenecks. Project managers are in the best position to make the decisions on priorities and time alongside their customers and business partners.
Apply incremental funding
Venture capital firms are experts at managing large portfolios. Organizations in other sectors of industry and commerce would do well to borrow from venture capital expertise and consider a more incremental approach to project funding.
If ideas are prioritized by considering the economic situation of the organization, it becomes possible to finish projects earlier when a large proportion of the value has already been generated, rather than the usual all or nothing approach. In addition, it is better to continue funding projects that are known to be valuable and successful instead of continuing to make large investments on projects that have yet to be proven or justified.
Often large programmes pass the first funding hurdle and are never again inspected to the same level of detail as at their inception. Making capital available based on concrete results will increase the value of the portfolio.
An incremental funding model allows a more controlled and reasoned approach to actively managing the value delivered to the organization.
Balance the portfolio
The old adage of not putting all your eggs in one basket certainly applies to managing an effective portfolio for long-term wealth generation.
As previously mentioned, models help people make decisions about balancing prioritized needs against investment allocation. While focus is always required to effectively deliver quickly, diversity should be allowed to exist across products, services, customers, markets or technologies. Also, a temporal view is required. Funding projects that support today’s business must be considered against expected future needs. There is no universally correct answer as to where investment should be made; it is dependent on the type of industry and market position, conditions and competitiveness.
An example model that can be used is the BCG Matrix. It gives insight into balancing a portfolio and considers the share of a market against the growth opportunities within that market. Plotting products and services in this model creates information about investing in today’s high value portfolio items versus future profitable and successful products.
There are other models that exist to explore where technology investments might be needed. They look in terms of the technology’s future impact on the business versus investing in the existing infrastructure.
The key with all these models is that their use is understood and aligned to the strategy of the organization in a way that allows people to make good decisions as to where resources need to be focused.
Integrate management
Most of the principles discussed so far can be applied within a business unit, portfolio, programme or project. In fact, it could be argued that applying the principles within a single business unit will help roll-out a new portfolio management philosophy more easily than across many functional and political boundaries.
However, trying to consider the widest view of an organization means looking across the boundaries of business units and allocating resources to the most valuable initiatives. This is a level of maturity that can take a long time to reach and requires managers to have learned how to trade-off requirements for increased business performance. It will also require compensation schemes that reward organizational performance over silo performance.
Ensure consistency and repeatability
To actively and effectively manage an ideas portfolio it is necessary to create a consistent and repeatable process that everyone understands and participates in.
Ideas need to go through a lifecycle that focuses quickly on those that are most profitable. Creating a process that balances the competing needs of being fast and making the right decisions is challenging. However, it has been seen that having a framework with core stages based on four key questions can help more effectively move ideas through the delivery system:
- Stage 1 – Reveal Is it worth building a business case?
- Stage 2 – Refine Is it worth doing?
- Stage 3 – Realize Are we delivering value?
- Stage 4 – Release When can we give the idea to customers?
When an idea does not offer enough value at any of these stages, further attention must be given to the individual elements within the idea to identify which need improving in order for the idea to be prioritized. When challenged, great ideas have a habit of coming back even better while poor ideas tend to be dropped.
Within any context, the level of detail required to answer any of the questions needs to be considered. Organizations often look for ‘perfect’ information and the ability to make concrete predictions, but this can lead to a worsening economic outcome. Speed has value and so the framework should include the ability to trade-off time and data accuracy.
All too often, the right people to review the challenges of delivery are not represented within portfolio management. Therefore, where this is the case, the portfolio management process should not be regarded as a delivery governance process. The need is for portfolio management to receive feedback from the delivery processes to ensure that investments are realizing value and that decisions are being made based on an increasing understanding of delivery.
The value in an active management approach
The principles described in this paper act as guidance in developing an active portfolio management process that will allow an enterprise to extract more value from their investments. There is always a need for people to be involved in considering the strategies and approaches at a broader level, rather than relying on portfolio management IT solutions to deliver a ‘right answer’. Portfolio management is far more than putting in a business case authorization stage gate, and gives rise to a more consistent and continuous review cycle of the portfolio performance. This review should not only focus on what value is being delivered, but should also consider how value is being delivered. An area missed by many businesses is quantifying the value of time. Having this ability woven into the way a portfolio is managed allows an organization to maximize the performance of the whole business.
The benefits of active management
The principles described in this paper are intended as guidance in the development of an active portfolio management process that will allow an organization to extract more value from its investments. The thing to remember though is that rather than relying solely on portfolio management IT solutions to deliver a ‘right answer’, there is a requirement for a wider active participation. The world of delivering ideas to market is messy and dynamic; there will always be a need for other people to be involved in considering the strategies and approaches at a broader level.
Portfolio management is far more than creating a business case authorization stage gate; it actually gives rise to a consistent and continuous review cycle of the portfolio performance. When applied correctly, the review cycle not only focuses on what value is being delivered, but also considers how that value is being delivered. A true sign of advanced capability is being able to continuously monitor and manage existing projects to the extent that those that aren’t the most relevant or most valuable within current market conditions are stopped.
An aspect missed by many is quantifying the value of time. Having this ability woven into the way a portfolio is managed enables the performance of the whole organization to be assessed and maximized.
Ultimately, an active and effective approach to portfolio management offers many benefits:
- Focused execution based on value.
- An understood data-driven solution requiring less positioning and politics.
- Enhanced visibility and decision-making.
- The ability to make economic trade-offs based on the reality of the portfolio.
- Wider engagement from people who might not have had access to priority information.
- Creates the ability to incrementally fund great projects and actively manage poorly performing projects.
