What\u2019s beneath the buzz about portfolio management? \n\nIn IT circles, portfolio management is being used to describe a wide range of initiatives, from project-approval processes to project management methods and tools. \n\nWhat\u2019s the real meaning of the term, and what should IT leaders be doing about portfolio management? \n\nThe ProblemImagine this: You go to the grocery store and hand its manager $50, saying that\u2019s all you can afford for the week. You then explain that you\u2019re hosting a dinner party for 12, and you want to serve caviar, steak and chocolate truffles. \n\nWhat happens in the real world? The manager laughs and walks you over to the hamburger! \n\nBut isn\u2019t this exactly what many companies expect of their IT departments? \n\nIT 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\u2019s the CIO\u2019s fault when the IT department can\u2019t deliver. \n\nThe Real Meaning of the TermUnreasonable 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\u2019t please all the clients all the time. \n\nThe 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 \u201cpre-paid account\u201d\u2014a checkbook of money put on deposit with IT for clients to buy products and services throughout the year. \n\nInstead of IT leaders writing the checks, clients should decide what they will and won\u2019t buy from IT. The checkbook (the IT budget) is like an investment portfolio, and it\u2019s up to clients to decide what investments they\u2019ll make\u2014hence the term portfolio management. \n\nWhen clients manage the checkbook, they don\u2019t blame IT when they can\u2019t 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\u2019t 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. \n\nIn this spirit, many IT organizations have established a client steering committee to decide priorities. But there\u2019s a lot more to portfolio management than this. \n\nImplementing portfolio management involves the following six steps: \n\n\n\nBudget by DeliverablesPortfolio 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\u2014each deliverable\u2014instead 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\u2014they\u2019re constrained to buy less in the year ahead. \n\n\n\nCheckbook ManagementBudgeting fills up \u201ccheckbooks.\u201d Then, clients \u201cwrite checks\u201d 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 \u201cpursers\u201d 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 \u201ccheckbook\u201d account (rather than distributed among IT managers). As work is delivered, an invoicing process moves money into IT managers\u2019 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\u2014not the traditional \u201cactual versus planned expenses,\u201d which are a function of what clients choose to buy from them. \n\n\n\nContracting and Project TrackingTo ensure delivery on every commitment, IT documents all its \u201ccontracts\u201d (both service-level agreements and project charters). And systems are implemented to track contracts and progress made on their delivery. \n\n\n\nLife-Cycle Cost EstimationBoth 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. \n\n\n\nBenefits MeasurementUnderstanding 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 \u201cintangible\u201d 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.) \n\n\n\nCultureThe 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\u2019ll 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\u2019 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. \n\n 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 \u201csoft\u201d side of leadership. Contact him at email@example.com or visit his website for information that can help you implement these ideas, or with suggestions for other buzzwords to analyze in future columns.