At Schlumberger, it started by accident, as these things often do. One curious IT staffer asked his peers what projects they were working on and amassed the answers in a spreadsheet. When Jane Walton, then an IT analyst for the Austin, Texas, IT services company, saw that spreadsheet, she felt the blinding rush of an epiphany. The spreadsheet included just a small sample of the company’s IT projects?120 in all?but it revealed that 80 percent of the projects overlapped. There were 14 separate projects trying to accomplish the same thing with customer-facing websites, for example.
That was late in the booming ’90s, when managing IT value?even defining it?was already a mounting struggle. Then again, because it was the booming ’90s, the struggle hadn’t yet reached life-and-death proportions. Even if you couldn’t define IT’s value explicitly or manage it precisely, few seriously doubted its worth.
But Walton’s epiphany was that corporate executives everywhere soon would be questioning the value of IT. Sure enough, on the back end of the mad rush to the Internet, CEOs began to turn the screws. They asked, "What are we spending all this money on and why?" It was much like what happened in manufacturing in the ’60s, Walton realized: After a long boom, a slumping economy was causing long-held assumptions about value to be called into question. The result, she knew, was that IT would soon have to prove it or lose it.
So Walton proposed that her IT department do the same thing manufacturers did back in the 1960s: project portfolio management. The spreadsheet ought to be turned into a database that would catalog all IT projects. It would quantify risk and return, prioritize and align IT projects with the business. It was a grand plan, and it met with blank stares. "I probably took the wrong approach," Walton says in retrospect. "I probably should have approached this incrementally, but I was so passionate."
Eventually the economic crash came, and Walton’s analogy to 1960s manufacturing was complete. And that brings us to today. In this indolent economy (see "Your Budget Playbook," CIO, Sept. 1, 2001), demonstrating and managing IT value is becoming the sine qua non of getting new projects off the ground and keeping old ones running. For some CIOs, IT project portfolio management is doing the trick. At Walton’s company, the blank stares have disappeared. And her new title is portfolio manager.
A Centralized View
Project portfolio management is pretty much just what it sounds like. You collect and control your entire suite of IT investments as one set of interrelated activities in one place?a portfolio. In addition to providing a centralized overview of all IT projects, a good portfolio will make it easy for CIOs to make sure their IT investments are well-balanced in terms of size, risk and projected payoff. Used wisely, it will actually increase IT’s value by exposing projects that are redundant or too risky, while revealing how to shift funds from low-value investments to high-value, strategic ones.
The serendipitous beauty of project portfolio management is that it’s actually impossible to do it without being aligned with the business, because creating a portfolio requires close collaboration with the business. It will elevate the CIO in other executives’ eyes because he (finally) will be speaking in their native tongue. A well-managed portfolio will also reward CIOs with a seat at the big table and a larger role in influencing business strategy. Of course, the price for that influence is accountability: Portfolio management makes IT completely responsible for its actions.
If the term portfolio management is brand new to you, take a stroll to the CFO’s office. PM is old school to CFOs and anyone in finance or insurance. Harry Markowitz invented it in the ’50s and later won a Nobel prize for it. His Modern Portfolio Theory is the most rigorous form of portfolio management, using a set of specific mathematical equations for measuring risk versus return, quantifying the decision-making process and determining value.
Rare is the IT shop using Markowitz’s portfolio theory, which is why our definition of portfolio management is so broad. Ask seven CIOs what portfolio management is, and you’ll get 10 answers. So we’ve encompassed a spectrum of practices, from implementing a simple database to applying Markowitz’s dense economic math.
The good news is that applying any one of the practices is beneficial; the spectrum can even be treated as a journey from the most basic to the most advanced tools. The bad news is that the approach’s amorphousness has vendors pouncing. Portfolio management is quickly escalating to the dreaded buzzword status.
"It’s tremendously frustrating," says Howard Rubin, Meta Group executive vice president in Pound Ridge, N.Y., who has been pushing IT project portfolio management for years. "It’s like the word value. It sounds important, but it’s wildly misused. So I challenge people. I tell them, ’If you haven’t cut 40 percent of your discretionary spending, you’re not doing it.’ I tell them that in two years, all the junk in their budget should be gone."
The Five Levels of Portfolio Management
To avoid abusing the term, we’ll lay out exactly what we think portfolio management ought to be. Here are our five levels, from simplest to most complex.
Level 1 Put all your projects in one database. Portfolio management starts with a database of project names, descriptions, estimated costs, estimated time frames and staff members assigned to work on the projects. Collecting all that data may be a chore, but it can yield impressive results in the end.
"The biggest benefit to us was being able to spot redundancies," says Dan Vantucci, vice president of IT at manufacturing company ITT Fluid Technology and Specialty Products in Upper Saddle River, N.J. Vantucci found that multiple organizations in ITT were working on very similar projects. For example, seven divisions were each planning to build Web-based engineering change-notice capability. "Instead of doing the project [many] times over, we did it once and rolled it out to [multiple] organizations," he says.
Vantucci’s database resulted in savings of $4.5 million. His group also took home two best practices awards handed out in the company in May.
At Schlumberger, Walton has now cataloged about 1,000 projects, and there’s still more to go. But by eliminating the redundancy alone, she saved the company $3 million in the first year.
Financial rewards aside, the consolidation of projects into one database often produces immediate gratification for CIOs because for many it is their first holistic view of what’s going on in their department. "We found when we started this that we really didn’t know what our total technology spend was because divisions were spending without talking about it," says Marvin Balliet, CFO of Merrill Lynch’s Technology Group in New York City.
Balliet is not alone, however. Just why IT has gotten away with this inattention is the product of enough cultural and organizational assumptions and prejudices to fill a hard drive. But acknowledging the problem sheds some light on why IT is often not aligned. How do you get in-step with the business side if you don’t even know what’s going on where?
Level 2 Prioritize the projects in your database. Last year, Laurie Gaines amassed her IT projects in a central repository for Brinker International, the Dallas-based company that builds restaurant chains such as Chili’s, On the Border and Macaroni Grill. Immediately, projects looked less like discrete efforts and more like an interdependent suite. The relational view suggested to Gaines, Brinker’s vice president of IT, that prioritizing the projects using a simple risk-return analysis would enhance IT even more in the eyes of executives. Such a quantifiable ranking would, basically, give executives latitude and longitude readings on the IT department’s "map." It would make IT navigable.
Of course, ranking projects is not a science, and project portfolio management doesn’t necessarily make it any easier. "Suddenly we’re having these incredible debates," Balliet says. "Is disaster recovery strategic or not? If [businesspeople] say they have a 45 percent strategic spend, what does that include?" But just going through the exercise gets IT and the business talking.
Before portfolio management, project priority in IT often meant pitting one against the other: "ERP is more important to our business than CRM." With a portfolio, it’s each in terms of relevance to the business: "ERP carries a 20 percent risk with a 60 percent payoff, while CRM carries an 80 percent risk with a 90 percent payoff." That kind of understanding forces alignment and gives IT a more strategic role.
"My accountability is higher now, but my role is higher. The impact of the projects is much higher, and my staff feels much more in touch with what’s going on in the business," Gaines says.
Using tools businesspeople understand can also help (some CIOs are even producing "IT annual reports"?see www.cio.com/ printlinks for more). To prioritize Brinker’s IT projects, Gaines, for example, has started to use the same risk management tools her company uses to evaluate physical sites for building restaurants, including hurdle rates and payback calculations. The bosses trust and understand those tools, so Gaines avoids any problems of translation from IT-speak to business-speak.
Level 3 Divide your projects into two or three budgets based on the type of investment. Balliet may admit to lacking an overview of his IT spending before he moved to portfolio management at Merrill Lynch, but he’s developed a deft touch since then. "When I started this, about 21 percent of costs were aligned with the business. Now we’re at 78 percent aligned," he says. "Because of the portfolio, we’re able to fund strategic investments in a severe downturn for the first time ever" in Merrill Lynch’s 116-year history.
Balliet’s portfolio is split into three different budgets: utilities, or what he calls the "keep the lights on" portion; incremental upgrades; and strategic investments. What he found is that far too much of the budget is allocated to the utilities function on the left, while far too little is given to strategic investment on the right. If the budget spectrum were a toothpaste tube, Balliet’s main objective now is to squeeze as much toothpaste as he can from the left side to the right.
The goal is to get more for the same amount of money, says Joseph Castellano, CIO for New York City-based Verizon, who divides his budget into operations and strategic investments. Castellano benchmarks his operations budget against Verizon’s past and against the industry. He measures cost of IT as a percentage of revenue. He measures costs per line of code and cost per employee. Castellano twists and gnashes that operations budget, because he knows every dime he can wrest from it will drop into his strategic one.
Level 4 Automate the repository. The portfolio metaphor is strong, but not infallible. It wilts a bit when you get to Level 4. A portfolio is a collection of documents, a suite. It implies something static. It sounds like it might collect dust. But in IT, portfolio management becomes an ongoing way of life. Castellano calls his portfolio "living...organic."
That’s largely because Castellano has automated it and spends a good amount of time rejiggering the projects in it. While project priority for the year is initially set in the fall, the technical automation, which Verizon did internally, allows new projects to be added to the portfolio at any time. A manager enters a project into the database by answering several questions onscreen, such as What’s the project? What technologies are involved? What’s the estimated budget?
The questionnaire uses the answers to build a project portfolio entry automatically. Once it’s done, the project is stacked against others already in the portfolio. Castellano meets quarterly with all of the business managers to look at the portfolio to see if he can reprice or reprioritize projects. If he wants to bump up a certain project’s priority, it automatically gets more funds, while others moving down the ladder will have funds taken away. If money is reallocated, that information is immediately entered into the portfolio; budget changes are reflected as soon as they occur.
The part that is not automated is the decision making, which Castellano says takes place in intense, face-to-face sessions with the business leaders. But automating the portfolio gives Castellano more time to spend making those tough decisions. And that’s the clear advantage of automation: Less time needs to be spent managing the portfolio so more time can be spent interpreting and reevaluating it.
Level 5 Apply Modern Portfolio Theory to IT. Who’s using Markowitz’s Modern Portfolio Theory in IT? Not many. While it’s certainly a noble endgame, it is arduous and will require a total transformation of how IT operates.
Modern Portfolio Theory is set apart by the specific math it employs?including risk-return tools that map project risk on a curve?and the ways it dictates one should manage once some quantifiable risk is established. At Schlumberger, this was Walton’s vision to start, and to some extent, it remains her goal. But she has learned that there’s a danger in stumping for the total vision. "I’ve found people will cite Markowitz as a reason not to use portfolio management in IT," Walton says. "They’ll argue it can’t be overlaid exactly and that the math is too difficult. So to some extent, I don’t talk about pure portfolio theory to executives." (If you’d like to see how Modern Porfolio Theory really works, try the MPT Wizard at www.modporttheory.com.)
Douglas Hubbard, president of consultancy Hubbard Decision Research in Glen Ellyn, Ill., is a strict interpreter of portfolio management who would like to limit its definition to, at most, Levels 4 and 5 of our scale. When he applies portfolio management to IT, he includes many Markowitz-like practices. While the approach may sound prohibitively dense, Hubbard argues it’s not. Because the tools are all there?they’ve existed longer than IT has.
"Is it more complex than the way IT operates today? Yes," Hubbard admits. "But it’s the right way. The cancellation rate of the largest IT projects exceeds the default rate on the worst junk bonds. And the worst junk bonds have lots of [portfolio management tools] applied to them. IT investments are huge, risky investments. It’s time we do this."
Postscript: I.T. Is Not Special
In a sense, the CIO who takes on project portfolio management is admitting that the jig is up. IT will no longer be different, or special. It will operate like any other part of the business. The CIO can use the same tools as the CFO and have the same accountability as a senior sales executive. The reward for the CIO is clear: a more central and crucial role in the business.
"It has brought normal business disciplines to IT," Verizon’s Castellano says. "People trust us. We’re not our own little secret area. We’re totally accountable for what we do and that’s a good thing."
"It’s true, IT is not special," Vantucci says. "That’s not only OK, that’s great!"