What’s the real meaning of the term, and what should IT leaders be doing about portfolio management?
Imagine this: You go to the grocery store and hand its manager $50, saying that’s all you can afford for the week. You then explain that you’re hosting a dinner party for 12, and you want to serve caviar, steak and chocolate truffles.
What happens in the real world? The manager laughs and walks you over to the hamburger!
But isn’t this exactly what many companies expect of their IT departments?
IT is given a fixed budget for the year; then, clients feel free to ask for anything they think they need all year long. They demand virtually infinite products and services for a fixed price. And it’s the CIO’s fault when the IT department can’t deliver.
The Real Meaning of the Term
Unreasonable expectations spring up when the organization gives IT a budget and then expects IT leaders to determine what to spend it on. As hard as they try to make the right decisions, it becomes their fault when they can’t please all the clients all the time.
The key to fixing this problem is to view IT as a business within a business, working in a marketplace of diverse clients with unlimited needs but finite spending power. In this context, the IT budget is a “pre-paid account”—a checkbook of money put on deposit with IT for clients to buy products and services throughout the year.
Instead of IT leaders writing the checks, clients should decide what they will and won’t buy from IT. The checkbook (the IT budget) is like an investment portfolio, and it’s up to clients to decide what investments they’ll make—hence the term portfolio management.
When clients manage the checkbook, they don’t blame IT when they can’t have all they want. The IT organization is not the constraint; it would be happy to sell clients anything and everything. The constraint is the size of their checkbook; clients just can’t afford all they want. Of course, for this to work, business clients must know what IT services cost, and be assured that IT is charging the right amount for its services.
In this spirit, many IT organizations have established a client steering committee to decide priorities. But there’s a lot more to portfolio management than this.
Implementing portfolio management involves the following six steps:
Budget by Deliverables
Portfolio management begins with the budget. Instead of deciding IT spending based on prior years, executives allocate funds based on the investment opportunities at hand.
This requires an IT budget that estimates the cost of each product and service—each deliverable—instead of forecasting the various expense codes for each group as in traditional budget processes.
Costs include both direct costs and a fair share of indirect costs such as overhead. Thus, IT can build in necessary expenses for sustenance activities like professional development and product research, within the limits of competitive pricing.
A budget by deliverables positions clients to defend the funding for the projects and services they need. This is only appropriate, since clients are the ones who suffer when the IT budget is cut—they’re constrained to buy less in the year ahead.
Budgeting fills up “checkbooks.” Then, clients “write checks” throughout the year for the products and services they need. This dynamic portfolio-management process keeps IT priorities aligned with ever-changing business strategies.
To set this up, business units appoint “pursers” to manage their checkbook. Pursers are trained, and clients are informed of the process for gaining approval of their requests.
There are also some minor accounting changes. The IT budget is held in a “checkbook” account (rather than distributed among IT managers). As work is delivered, an invoicing process moves money into IT managers’ revenue accounts to offset their expenses. Rates (with or without actual chargebacks) are extracted directly from the budget to ensure consistency and avoid redundant cost analysis.
Thus, clients (specifically, their pursers) manage a budget that dwindles to zero by year end. IT managers, on the other hand, are measured by their revenues versus expenses—not the traditional “actual versus planned expenses,” which are a function of what clients choose to buy from them.
Contracting and Project Tracking
To ensure delivery on every commitment, IT documents all its “contracts” (both service-level agreements and project charters). And systems are implemented to track contracts and progress made on their delivery.
Life-Cycle Cost Estimation
Both in the budget process and throughout the year, executives need to understand the ROI of IT investments to make well informed decisions.
Calculating ROI begins with an understanding of true life-cycle costs, a key element of all IT proposals. This requires methods to identify the elements of life-cycle costs, and tools to improve the quality of estimates.
Understanding ROI also requires an estimate of the benefits of proposed investments. IT staff are trained to help clients document expected benefits, including quantification of the so-called “intangible” strategic benefits. In fact, strategic value is not intangible; it just requires different methods to quantify it. (For more on this, see The Information Edge by Mary Boone and myself.)
The entire organization, and IT staff in particular, must learn to view the IT department as a business within a business, and recognize that clients have the right to decide what they’ll buy from the IT organization.
Without a culture of customer focus and entrepreneurship, portfolio management may quickly deteriorate into just more bureaucracy. Or these processes may be circumvented by IT staff who are eager to please and make promises to clients without funding from the client purser.
Portfolio management has proven to be a very effective way to manage clients’ expectations. In fact, portfolio management does more. It adjusts the IT budget based on investment opportunities. It dynamically aligns IT with business strategies. And it empowers IT staff to set prices that are sustainable. The key to effective portfolio management is this: Design a comprehensive set of resource-management processes based on market economics and the business-within-a-business paradigm.
Dean Meyer helps IT leadership teams design high-performance organizations. Author of six books, numerous monographs, columns and articles, he brings innovative systematic approaches to what others consider the “soft” side of leadership. Contact him at firstname.lastname@example.org or visit his website for information that can help you implement these ideas, or with suggestions for other buzzwords to analyze in future columns.