Portfolio Management Done Right

Ron Kifer, vice president of program management at DHL Americas, is a veteran of the typical project and portfolio planning or lack of planning?process in many companies. "The last three organizations I’ve been in had the same scenario. They didn’t have defined processes for reviewing project proposals; projects were pretty much recommended by senior vice presidents in each business area," he says. "They were attempting to do many more projects than they had the capacity to do. Bad projects squeezed out good projects. There was no visibility of what was being done throughout the organization."

That’s a recipe for disaster. At a time when CEOs are demanding that technology investments return value, CIOs who don’t have control

over their IT project portfolios are fighting losing battles. Surprisingly, that’s a good number of you: A recent report by AMR Research contends that as many as 75 percent of IT organizations have little oversight over their project portfolios and employ nonrepeatable, chaotic planning processes.

But if you’re not doing it already, portfolio management can help you gain control of your IT projects and deliver meaningful value to the business. Portfolio management takes a holistic view of a company’s overall IT strategy. Both IT and business leaders vet project proposals by matching them with the company’s strategic objectives. The IT portfolio is managed like a financial portfolio; riskier strategic investments (high-growth stocks) are balanced with more conservative investments (cash funds), and the mix is constantly monitored to assess which projects are on track, which need help and which should be shut down.

But it’s all in the execution. Jeff Chasney, executive vice president of strategic planning and CIO at CKE Restaurants, notes that "some companies do it poorly and some do it well." The companies profiled in this story reveal their best practices for doing it well.

Why You Need Portfolio Management

Think about how IT investments are managed in your company; do any of the following scenarios ring true? Million-dollar projects, which may or may not match the company’s objectives, are awarded to business units headed by the squeakiest executives; weak IT governance structures mean that business executives don’t have clear ideas of what they’re approving and why; the CIO ends up selling projects that should be generated and sold by line-of-business heads; the company doesn’t build good business cases for IT projects or it doesn’t do them at all; and there are redundant projects.

A strong portfolio management program can turn all that around and do the following:

  • Maximize value of IT investments while minimizing the risk
  • Improve communication and alignment between IS and business leaders
  • Encourage business leaders to think "team," not "me," and to take responsibility for projects
  • Allow planners to schedule resources more efficiently
  • Reduce the number of redundant projects and make it easier to kill projects

All that means more pennies in your piggy bank. Dennis S. Callahan, executive vice president and CIO of Guardian Insurance, and Rick Omartian, CFO of Guardian’s IT group and chief of staff, claim that portfolio management has reduced their companies’ overall IT applications expenditures by 20 percent and that, within that spending reduction, maintenance costs have gone from 30 percent to 18 percent. Eric Austvold, a research director at AMR Research, says companies doing portfolio management report saving 2 percent to 5 percent annually in their IT budgets.

There’s no single right way to do IT portfolio management. Vendors, consulting companies and academics offer many models, and often companies develop their own methodologies. Off-the-shelf software is available from a variety of vendors (see "Tools of the Trade," this page). But there are plenty of hurdles to doing it well. There are, however, best practices and key logical steps that can be gleaned from organizations such as Brigham Young University (BYU), DHL Americas and Eli Lilly, which have integrated portfolio management into the fabric of IT management, as you’ll see in this story.

Here are the key steps in creating and managing your IT investment portfolio.

Gather: Do a Project Inventory

Portfolio management begins with gathering a detailed inventory of all the projects in your company, ideally in a single database, including name, length, estimated cost, business objective, ROI and business benefits. Merrill Lynch maintains a global database of all its IT projects using software from Business Engine.

In addition to project plan information, Merrill Lynch’s users?almost 8,000 from Asia, Europe, India and the United States?add weekly updates on how much time they spend working on projects. "We use that as our internal cost assignment tool back to the business, so that the business is paying for every technology dollar monthly," says Marvin Balliet, CFO of global technology and services.

When Kifer joined DHL Americas as vice president of program management in 2001, one of his first tasks was getting control of project portfolio activities. He created an inventory, put that into a master project schedule, gained an understanding of the resource requirements of all the projects, then did a reconciliation of the projects and reduced the schedule to a manageable level.

Creating a project portfolio inventory can be painstaking but is well worth the effort. For many companies, it may be their first holistic view of the entire IT portfolio and any redundancies. A good inventory is the foundation for developing the projects that best meet strategic objectives.

Evaluate: Identify Projects That Match Strategic Objectives

The next steps involve establishing a portfolio process. The heads of business units, in conjunction with the senior IT leaders in each of those units, compile a list of projects during the annual planning cycle and support them with good business cases that show estimated costs, ROI, business benefit and risk assessment. The leadership team vets those projects and sifts out the ones with questionable business value. At Eli Lilly, a senior business ownership council comprising the information officer and senior business leaders in each business unit takes on this role.

Next, a senior-level IT steering committee made up of business unit heads, IT leaders and perhaps other senior executives meets to review the project proposals; a good governance structure is central to making this work. "Portfolio management without governance is an empty concept," says Howard A. Rubin, executive vice president at Meta Group. Conversely, putting portfolio management in place can force companies with weak governance structures to improve them. (For more on governance, read "The Powers That Should Be," at www.cio.com/printlinks.)

One of the core criteria for which projects get funded is how closely a project meets a company’s strategic objectives for the upcoming year. At clinical diagnostics company Dade Behring, an executive leadership team, which includes the CEO, creates five strategic initiatives, such as CRM or organizational excellence. The IT governance council, made up of business leaders and senior IT leaders, then evaluates projects based on how well they map against those initiatives. "We also try to assess risk from a technology point of view, a change-management point of view, the number of people that a project will impact and whether it will involve huge reengineering," says Dave Edelstein, CIO and senior vice president of regulatory affairs, quality systems, and health, safety and environment. Using methodology borrowed from the product development group (modified for IS, but keeping terminology that business executives are familiar with), projects are placed "above the line"?those that should be funded?or "below the line"?those that shouldn’t.

At DHL Americas, a project portfolio review board evaluates the one-page project opportunity assessment for every proposal. Membership on the board includes IS and 12 vice presidents from across all areas of the business. "Those vice presidents are not the senior vice presidents?they’re the next level down, the lieutenants," Kifer says. "Portfolio management doesn’t work at the senior vice president level; they don’t have time to commit to portfolio management."

A good evaluation process can help companies detect overlapping project proposals up front, cut off projects with poor business cases earlier, and strengthen alignment between IS and business execs.

Prioritize: Score and Categorize Your Projects

After evaluating projects, most companies will still have more than they can actually fund. The beauty of portfolio management is that ultimately, the prioritization process will allow you to fund the projects that most closely align with your company’s strategic objectives.

Ernie Nielsen, managing director of enterprise project management at Brigham Young University, is a frequent lecturer on portfolio management and a founding director of Stanford University’s Advanced Project Management Program. He instituted an extremely thorough prioritization and scoring methodology at BYU.

Under his plan, projects are placed into portfolios?Nielsen thinks multiple portfolios are a good idea in many companies because they allow like projects to be pooled together. In his case, the IT department uses four: large technology projects (more than $50K), small technology projects (less than $50K), infrastructure technology projects, and one covering executive initiatives. Think of the first three as peer portfolios; the executive one is a slightly different animal. The main job of the executive portfolio management team (each portfolio has its own team) is to distribute funds appropriately to the other three. (There are plenty of other ways to categorize initiatives; see "Powerful Portfolios," Page 58.)

In the case of the large tech portfolio, its management team?made up of project sponsors, function managers (for example, representatives from engineering, financial services and operations, and Nielsen himself) and product portfolio managers (people with long-term project leadership responsibilities in areas such as student services or data management)?vetted projects and came up with a list of 150 for the portfolio team to score. (Nielsen uses Microsoft Project and Pacific Edge’s Project Office to plan and prioritize.)

They then prioritized them using a model that has four key tenets:

  • Identify four to seven strategies. BYU’s Office of Information Technology does this yearly (for example, limiting technology risk, increasing the reliability of the infrastructure).
  • Decide on one criterion per strategy. For example, the team decided the criterion for limiting technology risk would be whether the technology had been implemented in a comparable organization and the benefits could be translated to BYU easily.
  • Weigh the criteria.
  • Keep the scoring scale simple. BYU uses a scale of one to five. For the technology risk strategy, five might mean that it has been used in a comparable organization and the benefits could be transferred easily; three could mean it’s hard to do because it would require changing processes; one might mean they haven’t seen it work anywhere else.

Following the scoring, the team drew a line based on how many projects it could do with existing resources. In the case of the large technology portfolio, the line was calculated where demand (the list of projects) met supply (resources?in this case, the cumulative dollar value of available application engineers plus overhead); the line was a little less than halfway down the list. Those projects above the line could be done in 2003. The team then presented that list to the president’s council, which approved it in an hour and a half, a process that used to take weeks, according to Nielsen.

There is no one method to categorize your IT investment portfolio. One approach is to categorize it as you would your own financial portfolio, balancing riskier, higher reward strategic investments with safer categories, such as infrastructure. Meta Group’s Rubin recommends a portfolio divided into three investment categories: running (keeping the lights on), growing (supporting organic growth) and transforming the business (finding new ways of doing business using technology). Those categories can then be cross-tabulated with four to five value-focused categories, such as how those investments support revenue growth, reduce costs or grow market share.

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