Portfolio Management for Effective Resource and Project Planning – Pt. 2
In Part 1 of this series, we laid the groundwork for understanding effective resource and project planning in large corporations.
What is Portfolio Management, and why is it important in today’s business environment?
Information Technology Portfolio Management concepts are frequently compared to Financial Portfolio Management. The Information Technology Portfolio differs from an individual’s financial portfolio in the need to evaluate the information technology spending as a whole. Todd Datz describes the nature of an Information Technology Portfolio as “managed like a financial portfolio; riskier strategic investment (high-growth stocks) are balanced with more conservative investments (cash funds), and the mix is constantly monitored to assess with project are on track which need help and which should be shut down.” The investment decisions of an individual are similar to the investment decisions of a company.
Peter Weill, the director of the Center for Information Systems Research (CISR), compares the similarities as “any other investment portfolio, the Information Technology Portfolio must be balanced to achieve alignment with the business strategy and desired combination of short and long term pay off.” In a research briefing published by MIT Sloan, Weill and Sinan Aral, PhD Candidate at MIT Sloan Center for Information Systems Research, describe the information technology investments as classified into Transactional, Informational, Strategic and Infrastructure. Transactional investments reduce the cost of processing systems or increase the throughput.
Informational investments improve the availability of analysis data for accounting, management, control, communications or collaboration. Strategic investments improve competitive advantage or market share. Infrastructure investments are the foundation of the shared information technology environment including networks, personal computers, servers and data bases.
The mix of these investments requires management and balance based on the priorities and goals of the business. In the following figure, the pyramid visualizes the balance of Information, Strategic, Transactional and Infrastructure investments by percentage.
In Figure 1, Infrastructure is at the base of the pyramid to represent the foundation of the information systems. Based on a study of 147 firms in 2001, the average percentage of total information technology spending allocated to infrastructure was 54%. Transactional systems represented 13% on average. In environments where new transactional systems are being implemented, this percentage was also affected by the existing infrastructure. If the necessary infrastructure is already in place for a new transaction system, the cost of the new investment was decreased. When an additional investment is needed to support a new transaction system, the percentage increased in both areas. Informational systems averaged 20% and depend on both the Transaction andInfrastructure to support new investments. The remaining 13% of the total average is Strategic with a possible dependency on existing systems. The Information Technology Portfolio balance is dependent on the business goals and type of industry. The correct distribution of investment for an insurance company would not meet the needs of a manufacturing firm.
Figure 2 provides a view of the Information Technology Portfolio over different industries. The average portfolio mix for an insurance company is 54% Infrastructure, 14% Transactional, 12% Informational and 20% Strategic. One firm selected an Information Technology Portfolio mix of 40% Infrastructure, 40% Transaction, 15% Informational and 5% Strategic. This investment distribution would be appropriate for an insurance firm planning a low cost strategy. The reduction in spending compared to the industry average investment will allow for more competitive pricing for their customers. Can you explain the difference between your portfolio and the industry average by your strategy?
Business objectives drive information technology investments. In the next figure the balance of investments are demonstrated based on business goals. A cost focused firm has a lower total spending with an average distribution of only 5% in strategic investment. Agility focused firms tend to have a higher total Information Technology spend with an average distribution of 17%. One point of interest on the distribution for the agility focused firm is that the infrastructure percentage is also increased. This demonstrates the close relationship between new strategic initiatives and the infrastructure to support these efforts. Economic factors also play a part in the weighting of Information Technology Portfolios. Tough economic periods force firms to take a cost-saving-oriented approach to Information Technology Portfolio Management.
Industry Specific Guidelines for Information Technology Portfolio Management
In an industry specific study done by the Gartner Group, the four classifications are divided into Frontier, Enhancement, Utility and Infrastructure. Frontier investments are applications resulting in major changes in mission performance. Enhancement investments are applications geared toward improvements in mission performance or speed, cost and quality. Utility investments are essential applications such as payroll and human resources. Infrastructure investments are equivalent to the infrastructure in the previous model. In Figure 3, Gartner illustrates average Information Technology Portfolio distributions for government organizations by Local, State and Federal business areas. For the federal government organizations the approximate distribution for infrastructure is 41%; utility, 22%; enhancement, 22%; frontier, 15%.
The three primary focuses of an Information Technology Portfolio are Process & Framework, Analysis Tools and Governance. The Process & Framework are standard methods for planning, creation, assessment, balancing and communication of execution.
Analysis Tools will be required to evaluate the value, costs, risks, benefits, and requirements of the business investments. Standard scoring with weightings will be applied against investment data to rank and prioritize information technology spending. Governance is the overlying policies andguidelines for decision making. These are the rules of engagement for the Information Technology Portfolio Management Process.
The Framework and Process can be divided into three sub portfolios:
- The Discovery Portfolio is composed of investments that are in the infancy of development. These investments are ideas that need to be captured and developed.
- The Project Portfolio is composed of investments under way. These projects have passed the initial approval process and are in various stages of development.
- The Asset Portfolio is made of the existing investments. These investments include infrastructure, software, data and information, people and processes. There is a distinctive flow from Discovery to Project to Asset.
A group of Information Technology Program Managers (ITPM) and Functional Managers are brought together for the Information Technology Portfolio Management Kick-Off Meeting. The members of the group range in background from six month of exposure to the Portfolio Management Environment to no previous experience. In addition to the sector team members, a consultant with Information Technology Portfolio Management expertise, an enterprise program manager and an enterprise representative lead the group discussion. Each ITPM team member represents the interests of a Business Sector within the enterprise. The goal of the meeting is to explain the concepts of Information Technology Portfolio Management and gain consensus on the scope, requirements and approach for implementation. Guiding principals, enablers and barriers will also be defined with the group. The group discussion evolved around the concerns of the implementation of an initiative of this enterprise scale. Communications with the business area on the process change was the highest priority to the group. It will be imperative to attain the buy-in from the business customer for a successful transition. The maturity of the Governance process at each sector varies. Governance will need to be in place prior to the roll-out of an Information Technology Portfolio tool set. Resource constraints for the working roll-out team have not been established. Each sector will be required to provide budget and resources.
The Scope of the project at a high level was established by the group. The implementation will be a phased approach with an initial focus on the breath and not depth approach across Discovery, Project and Asset portfolios.
Analysis Benefits of the Information Technology Portfolio Management
The benefits of establishing an Information Technology Portfolio can be large depending on the current level of business alignment and governance practices in place. Without the framework for a solid evaluation process, million-dollar projects are undertaken with little or no business case or business objectives. In large organizations redundant projects are common due to a lack of a common Discovery and/or Project Repository.
The implementation of a good Information Technology Portfolio Management process is measured by a reduction in overall spending and increase in business customer satisfaction. Areas of improvement are value maximization with minimized risk, partnering with the business to improve communication and business alignment, optimization of resource scheduling and reduced number of redundant projects. All of these efforts add to the bottom line for the business.
The statistics are available to support the need for portfolio management in the information technology environment. Research supports an annual savings of 2 to 5 percent for companies doing portfolio management. Some companies even report a reduction of 20% for application expenditures and an education from 30% to 18% in maintenance costs alone. Other benefits are more difficult to assess. Some bookes have described the non-tangible prospectus of the process:ìA 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.”
Summary of Findings
The research on Information Technology Portfolio Management provides an array of different approaches for a common objective. The goal is to focus resources on the appropriate projects and assets to meet the needs and objectives of the business. Key prerequisites for a successful implementation are governance rules, business engagement and executive sponsorship. The statistics prove that Information Technology Portfolio Management can affect the bottom line for spending.
Benchmarks for industry standard portfolio investment mix are becoming a standard practice. With an eye toward business goals, decisions are migrating to a structured distribution for investing the limited resources available. Variations from the industry will require business critical justification for successful Information Technology Management.
The trend to relate information technology and business savvy is evident in the job market. A Gartner Group study reports that by the year 2010 six out of ten information technology employees will have business-facing roles. The need to have a strong business knowledge foundation and education are rapidly becoming requirements in the recruiting of mid to top level information technology positions. The New Information Technology Department: The three top jobs are Project Management, Relationship Management and Business Analysis. These position all require strong partnership with the business. Employers are looking for experience that can not come from an individual straight out of college.
The substance of Information Technology Portfolio Management is to measure, manage and control information technology investments. The terminology and metrics are secondary to the continual evaluation of investments and spending. The once or twice a year review of budget numbers is no longer sufficient for management of modern day information technology departments.
Coming up in Part 3 of this series, we’ll provide detail on Decision Making Metrics.
If you enjoyed this post, please leave a comment or subscribe to PM Majik and get future articles delivered to your email.
I finally decided to write a comment on your blog. I just wanted to say good job. I really enjoy reading your posts.