Portfolio Management Done Right

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Since 1999, Eli Lilly has used Peter Weill’s model to categorize its IT investments (see "Powerful Portfolios," Page 58, for a closer look at the model offered by Weill, director of the Sloan Center for Information Systems Research and senior research scientist at MIT’s Sloan School of Management). Under the Weill model, companies view their IT portfolios on multiple levels and at different stages, by visualizing their investments in aggregate and placing them in four categories, with the percent of IT expenditures apportioned across each. "We tend to want to have 5 percent [of our projects] in strategic areas, 15 percent to 20 percent in the informational category, and the remaining percentage split between the infrastructure and transaction modules," says Sheldon Ort, Lilly’s information officer for business operations. He says that at the enterprise level, those percentages have remained fairly consistent. That model allows Lilly to balance the risk and reward of its IT investments. (The average percentage of annual IT spend of the 57 companies in Weill’s 2002 survey breaks down as follows: infrastructure, 54 percent; transactional, 13 percent; informational, 20 percent; strategic, 13 percent.)

The payoffs that come from a thorough evaluation and prioritization process is the primary reason portfolio management is so effective. First, communication between IS and business leaders improves. And portfolio management gives business leaders a valuable, newfound skill?the ability to understand how IT initiatives impact their companies.

Second, business leaders think "team," not "me," and take responsibility for projects. One tried-and-true method for how a business leader got money for his unit’s projects was to scream louder than everyone else. Portfolio management throws that practice out the corner office window; decisions are made based on the best interests of the company. At BYU, Nielsen observes that after its portfolio process was implemented, "instead of vice presidents fighting for their own lists of projects, they noticed projects below the line, not in their areas. They said to one another, ’I could provide some funds for you to get [your project] above the line.’"

Third, portfolio management gives business leaders responsibility for IT projects. "I’m no longer in a position where I have to sell these projects to the business," says Dade Behring’s Edelstein. "If I’m doing a project for marketing, it’s the marketing exec who has to sell the project to the rest of the team." Merrill Lynch’s Balliet says, "When we started, the technology people were proposing the projects. Now the businesspeople propose the projects and [take responsibility] for risk profiling, ongoing operational costs and timeliness of delivery."

Finally, everybody knows where the dollars are flowing and why, which is especially important to CEOs and CFOs who are increasingly demanding that technology investments deliver value and support strategic objectives.

Review: Actively Manage Your Portfolio

A top-notch evaluation and prioritization process is emasculated rather quickly if the portfolio is not actively managed following approval of the project list. Doing that involves monitoring projects at frequent intervals, at least quarterly. At Blue Cross and Blue Shield of Massachusetts, a project management office, which reports directly to Senior Vice President and CIO Carl Ascenzo, has that responsibility. Once or twice a month, the project management office gets financial and work progress perspective updates from project leaders. That information goes into a database, and Ascenzo reports to the entire company monthly, giving the project inventory and its status. He assigns project status?green (good), yellow (caution) or red (help!)?and includes an explanation of the key driver causing a yellow or red condition. The IT steering committee meets once a month to make decisions to continue or stop initiatives, assess funding levels and resolve resource issues.

At CKE Restaurants, the IT steering committee meets monthly to review at least three of the initiatives under way. "In my opinion, quarterly is too long," says Chasney. CKE, under the Carl’s Jr., Hardee’s and La Salsa Fresh Mexican Grill brand names, operates approximately 3,300 restaurants worldwide. Frequent reviews allow Chasney to redirect resources more quickly.

Monitoring project portfolios regularly also means projects that have run off the rails can be killed more easily. "People have an aversion to stopping projects, but the majority of projects I cancel are done because there’s a change in company strategy?a change in priority or direction," says Chasney. For example, if there’s a strategy decision to focus on SAP, then it makes sense to cancel a new system that interfaces with PeopleSoft, he says. Chasney states another simple but powerful principle that eludes many companies: "You can’t complete projects just because you started them."

Hurdles to Portfolio Management

Yes, portfolio management is a good thing. But getting to nirvana requires a serious commitment from both the business and IS sides, as well as a whole lot of sweat equity. Here are some of the pitfalls and ways to overcome them.

  • Democracy ain’t easy. Taking power away from business leaders accustomed to calling the shots will not always go smoothly.

    "Business leaders who didn’t have decisions scrutinized previously now are [having] decisions decided by group consensus," says DHL’s Kifer. But Kifer says that quickly "people realize it does work and that 12 people can make better decisions than one or two making unilateral decisions."

  • There’s no single software that does everything. "There are really good budget packages, resource management packages and fairly good portfolio management packages, but no package that ties it all together," says Gordon Steele, CIO and vice president of IT at Nike, who is in the process of implementing portfolio management. (See "Tools of the Trade," Page 62, for a list of some leading portfolio management vendors.) Steele is currently exploring a partnership with a portfolio management vendor to see if such a software tool can be developed.

Do you need to buy portfolio software? There’s no right answer. Some say it’s a necessity. "It’s a better investment now to buy rather than build," says Meta Group’s Rubin. Gopal Kapur, founder and president of the Center for Project Management, begs to differ. "Far too often people get the software and say they have portfolio management. But they don’t?they don’t have the foundation for portfolio management," he says. Microsoft Excel and Project are commonly used by companies to track and manage projects; some companies build their own tools.

Getting good information isn’t easy. Take, for example, the transparency of your cost structure. "You need good information around all technology costs and investments," says Merrill Lynch’s Balliet. In 1999 and 2000, he and his team looked hard at all the IT dollars and categorized them into service "buckets," then put them in chargeback buckets related to those activities. For example, Balliet says that they created a phone monitoring tool and told some units, "You pay for the calls you make."

In addition, you must update the database regularly. "You need to have the constant status of each project so you can react quickly to market changes," says Balliet.

It’s still hard to make tough decisions on whether to undertake?or cancel?projects. Kifer, no slouch at portfolio management, says DHL Americas currently has 20 percent more projects in its portfolio than it can support. "We won’t probably start half of those," he says. "[But] an organization has a tendency to say, You’ll figure out a way to make those work."

It’s an additional time constraint on busy executives. Good portfolio management means good IT governance means regular IT governance committee meetings. "Just about every company today has its people stretched," says Chasney. As noted earlier in the story, that concern is addressed at DHL Americas, where the lieutenants of time-constrained senior vice presidents serve on the project portfolio review board.

In the grand scheme, however, the challenges of implementing portfolio management pale in comparison to the value it brings to your IT investments. "It forces IT and businesspeople to talk about investments from a business perspective," says Weill. "That’s its most powerful feature."


Copyright © 2003 IDG Communications, Inc.

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