by Todd Datz

Portfolio Management Done Right

May 01, 200317 mins
IT Leadership

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

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.

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.”