Portfolio Management is the Means of Optimizing for Outcomes
Bill Hoberecht - This email address is being protected from spambots. You need JavaScript enabled to view it.
Optimizing your investments in technology is best accomplished with a disciplined, comprehensive portfolio management function.
As a portfolio manager, is your implementation of portfolio management delivering a reasonable return on every invested dollar? If your organization is performing portfolio management functions well, you are in rare company.
Portfolio Management is perhaps the best way of ensuring the best allocation of budget and expertise towards programs and projects. Unfortunately, the benefits of portfolio management are often not achieved because of an incomplete or ineffective implementation.
How do you know if portfolio management activities are effective in your company and are having the needed impact? Take a look at the macro level and ask yourself if IT is focused on the right portfolio of work:
- Strategic Alignment. Have most recently completed programs and projects directly contributed to the organization's strategy execution? (e.g., Let's assume all programs & projects deliver value; did they each deliver value that advanced the company's strategy?)
- Executive Stakeholders. Are stakeholders satisfied that IT applied funding and resources on the most important programs and projects?
- IT Delivery Performance. Is IT fulfilling program and project delivery commitments?
- People. Are many IT employees consistently reporting that they have too many competing priorities?
If you don't know the answer to these questions or some answers are negative, then perhaps portfolio management isn't sufficiently visible or isn't adequate. This is an opportunity for you, a portfolio manager, to apply your expertise in educating, training and implementing a robust set of portfolio management practices.
Portfolio management isn’t just for large companies with an established technology base. Start-ups, at some point, will be faced with decisions on funding allocations (e.g., how much should we invest in HR systems vs. new product development) - the practice of portfolio management brings discipline to those discussions and decisions.
My perspective is that IT portfolio management is more important now, in 2024, than at any time in the past decade. Let's dig into that hypothesis.
Robust Portfolio Management - Missing in Action
Years ago, I joined a well run corporation, heading up a 180-person software engineering department. The number of software engineers in this department was unchanged for many previous years. The annual budget and headcount allocations were set by IT, with no business unit involvement.
Our work was focused on the current pain points of the business unit we served. Little strategic longer-term thinking was applied to our large mission-critical system - we focused exclusively on immediate needs.
There's no doubt that what we created and delivered was useful. Years later, I pondered, hypothetically, if that the best investment of the corporation's capital budget? Could those funds and that technical expertise have been applied elsewhere with more impact? Would business unit leaders agree to that allocation of funding and expertise? Hard to say, as those questions were never asked or explored.
I frequently find a similar situation when I first encounter an organization. The portfolio of technology work is enabled via the annual IT budgeting process, generally allocated as last year's budget amount adjusted by a delta factor applied IT-wide. Programs and projects typically produce incrementally useful features. (Occasionally I'll encounter some moderate or large budget strategic programs.)
Once a portfolio budget is established, a variety of methods are applied in reviewing proposed projects. In some cases, projects above a funding threshold (as small as $50K) are evaluated and approved - projects are considered in isolation, without considering other projects that are in competition for the available funds and expertise. Approval criteria are generally along the lines of “is this a good idea?”
Sometimes an additional pool of funds is available for proposed projects. Those proposals are generally evaluated independently from one another, first-come-first-served. Good ideas with a favorable business case are approved. When available funds are no longer available, then the intake process closes its doors.
These approaches are okay, as they provide some degree of consideration on the proposed work and the allocation of funds and expertise. However, they may or may not optimize investments for the best results and outcomes.
Shortcomings of Today's Typical Portfolio Management Execution
The portfolio management and project prioritization methods I’ve observed have several drawbacks:
- Establishing Portfolio Budgets
- Annual budgeting processes may not optimally allocate fund funds to portfolios.
- Lack of collaboration with business unit leaders puts IT in the position of prioritizing the technology focus without necessarily understanding the business opportunity or need.
- Target Benefits
- Many projects lack a well-defined benefit that can be tracked.
- Most approved projects have no financial ROI.
- Optimal investment in Programs and Projects
- Project portfolio management is often in reaction to immediate needs.
- Project portfolio management rarely compares projects in deciding where to allocate funds and expertise. It isn’t always the best ideas that get approved; the first good ideas that arrive are approved.
- Responding to Change
- Adjustments are rarely made to the collection of projects within a portfolio, even when new information surfaces suggesting that a previously approved project should be canceled with funding and resources reallocated to better investment choices.
- Capacity Management
- In the absence of information about the capacity of key skill sets, it is virtually impossible to know that the skills needed for an approved project are available.
- Validation of Outcomes
- Project portfolio management focuses exclusively on review and approval.
- Superficial attention is given to execution and delivery, with no evaluation of actual benefits realized.
These observations collectively hamper an organizations ability to get the best outcomes with their investment dollars.
Portfolio Management - Not Top of Mind
Portfolio Management may not be getting the attention that it needs, which is unfortunate given the positive impact a robust implementation can bring to an organization. I suspect that this isn't just a phenomena specific to just a few companies; rather this lack of understanding and focus is across the profession of managing technical endeavors.
The execution and value of portfolio management may not be recognized by the organization's executives; thus, it is not seen as a key element of the organization’s operation.
Frequently it is viewed as merely reviewing and approving project business cases that seem to offer a reasonable return of value and are in strategic alignment.
However, the real value of portfolio management is determining where can a company best invest the available funds. This takes them beyond the "We fund the first good ideas presented" or "We work to satisfy the loudest voice" into the realm of "We evaluate all proposed ideas against one another and fund those that have the best return."
Here are some indicators that portfolio management is an area getting less attention than it should:
- (July 2024) Google shows a whopping 509M search results for "project management." By contrast, searching for "portfolio management" yields about 14% as many references (and many of those are for financial investing services, not IT portfolio management). This suggests less of an awareness about IT portfolio management.
- (July 2024) Google trends show that there are 10X as many searches for project management (when compared with searches for portfolio management).
- The PMI's most recent update to The Standard for Portfolio Management – Fourth Edition was in 2017! Has the profession been stagnant since then? (This guide is overwhelmingly bureaucratic with its focus on complex governance structures - I’m reluctant to introduce these heavy weight methods to any organization)
- The PMI's learning library lists about 2500 Portfolio Management articles, most written in 2018 or earlier. By contrast, this learning library has nearly 10,000 project management articles.
Why is Portfolio Management so Important Today?
The USA has experienced an extended period of time where capital funding has been low cost to corporations. In 2020, the 5-Year High Quality Market Corporate Bond Par Yield was below 1%. Today, that same bond yield is around 5%, a prohibitive amount to pay for new debt or refinancing of existing debt.
Here's the impact of those higher corporate bond rates: The CFO Report (Duke University and Federal Reserve Banks of Richmond and Atlanta) published in September 2023 observes that monetary policy (e.g., interest rates) is causing 40% of surveyed companies to reduce spending and investment.
Anecdotally, from postings on social media about difficulties in IT job search endeavors, the magnitude of tech layoffs in the past two years, and discussions with my professional colleagues, it does appear that technology investments have significantly decreased.
For over 5 years, we've been in a period where IT could cavalierly apply resources on "nice to have" and "wish list" projects. Delivering a meaningful ROI hasn't been all that important. The period of free-flowing capital has ended abruptly.
Ensuring a Return on Every Investment Dollar
With fewer capital funds available, the importance of achieving a return on every invested capital dollar is monumentally important. (And with some companies diverting funds to the latest shiny object - generative AI - that further decreases funding available for projects.)
My conclusion from this new reality is that an organization's portfolio management function is more important now than at any point in the previous decade. Ensuring that the organization is investing in the "right programs and projects" is more than a just good idea, it is essential.
The journey to a robust implementation of portfolio management starts with understanding your current situation and developing an awareness of portfolio management capabilities and the potential benefits. Having a well-qualified portfolio manager to collaboratively implement robust methods could well be the key to maximizing the value that IT can deliver.
How would you characterize the effectiveness of portfolio management in your organization?
Are investments being made in the "right programs and projects?"
Is your organization realizing a reasonable ROI of tangible and intangible value on every investment dollar?