Portfolio Management for Effective Resource and Project Planning – Pt. 5
This is Part 5 of a series on Portfolio Management from Nancy Ingalls at Ingalls Consulting. You can go back to start reading this series from Part 1.
We will conclude our series with a look at a key study and conclusion of findings which will answer this question: Why should a business do Information Technology Portfolio Management?
Introduction to the Study
The process of Portfolio Management involves decision-making based on the entire corporate environment. In order to make the best choices for the corporation, management must evaluate each initiative as it relates to corporate goals and objectives, available resources and project dependencies. This is a continual process that evolves throughout the budget year.
The research on Information Technology Portfolio Management provides an array of different approaches for a common objective. The goal of all approaches to portfolio management 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. Project selections are no longer evaluated on the bases of who makes the loudest request. Hard numbers supporting the return on the investment are required for justification. This shift in the evaluation eliminates “pet” projects from receiving a high priority over more profitable ones. Portfolio Analysis of all forms leads to a common goal. The profitable return on investments from all product lines and business units is the end objective.
Benchmarks for industry standard portfolio investment mix are available for comparison to 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 are common, but should 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. These positions 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.
The business case development captures the risk and rewards for a proposal. A strong business case is more import than ever. Companies are moving to a model that relies more on the true Return on Investment (ROI) then ever. The supporting information behind a proposal determines how it will compete with the various information technology priorities.
Project Portfolio Management metrics have been established by professional organizations evolved with business practice and converged with Six Sigma concepts. The PMBOK Guide was developed by the Project Management Institute as a standard for project management techniques. This guide is an accumulation of “generally accepted” project management practices. The guidelines can be adapted to fit different types of business applications. In more recent years these guidelines have been combined with the methods and tools of Six Sigma. This section will discuss the metrics from the PMBOK, Six Sigma and standard business practice.
The goal of this research is to examine the methods used in current Portfolio Management practice for decision making in large corporations. The primary example used for this study will be International Defense Contractor (IDC) currently developing a Portfolio Management Prototype. The following questions will be addressed in resolving this question:
- What is Information Technology Portfolio Management, and why is it important in todayís business environment?
- What metrics are used in the implementation of Information Technology Portfolio Management?
- How does Information Technology Portfolio Management affect the use asset and project planning?
Summary of Findings
Some people 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. The pyramid visualizes the balance of Information, Strategic, Transactional and Infrastructure investments by percentage. 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 and Infrastructure to support new investments. The remaining 13% of the total average is Strategic with a possible dependency on existing systems.
Business objectives drive information technology investments. The balance of investments are demonstrated based on business goals. A cost focused firm has a lower total spend 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.
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.
In another case study around the implementation of Information Technology Portfolio Management significant benefits were achieved. Since the implementation some companies achieved a 193% ROI on its investments. Labor Expenses have been reduced by 8% in only one year. An amazing $10 million savings was accomplished with a single Enterprise Geographical Information System Implementation versus decentralized systems. The organization was able to adapt rapidly to changes in business priorities. Adjustments to the budget moved to fact based decision making. Customer satisfaction and confidence increase exponentially as the portfolio maturity increased.
Final Conclusions
Why do Information Technology Portfolio Management? The statistics are clear on the improved capability and productivity that can be gained. The advantages range from the ability to detect overlapping projects to a stronger alignment with the business goals and objectives. The obstacles encountered in establishing the portfolio pale in comparison to the gains it brings to the improved investment results. some have proposed that information technology should be run like a business. The point that information technology organizations have been preoccupied with technology and neglected the business sense in budget management. The process of portfolio management is a high priority and visibility effort. The position of Chief Information Officer has been created to shoulder the responsibility of this area. This demonstrates the level of commitment invested into the concept.
The advantages to the business range across many possible improvements. Evaluation at the enterprise level can yield improved revenue overall or within a specific sector. Opportunities to create, consolidate, and retire products become visible with the creation of the asset portfolio. The evaluation of investments by classification demonstrates the focus of capital. This distribution of investments can be measured against industry standards and compared with the business goals for improved alignment.
Portfolio Management changes the conversation with the business customer. The past practice of holding the CIO to a fixed budget with an endless list of business requirements migrates to a discussion of decision making based on resources and business priorities. By viewing information technology as a business within a business, a new healthier relationship with the customer can be achieved. The days of shopping cart approach to picking and choosing technology based on emotion and buzz word trends are numbered. The discipline established by a strong portfolio moves to an environment tied to hard returns and business objects focus.
A stronger governance structure is very important to bring the full strength of the portfolio to an optimized state. It has been described as the two main components of governance as the decision-making mechanisms, and the assignment of decision making authority and accountability. In organizations that support local spending and decision making, it is impossible to optimize spending for the enterprise. The governance structure must support visibility and accountability at the enterprise to meet the needs of the portfolio.
Many companies fail to gain control of the portfolio because they do not have the information in place to implement a portfolio. According to research done by the Meta Group, 89% of companies do not have the metrics in place to perform portfolio management. Business Cases are only completed by 16% of companies. In 84% of companies, the budget review and adjustment process only takes place once or twice a year.
The Project Portfolio is an important tool for appropriately managing the Information Technology Portfolio. Projects are the frequently managed in separate planning tools. The lack of an overall view of the resource allocation for the total resource pool leads to over allocation and poor visibility of the issue. A centralized planning tool provides visibility of contentions between projects. In the interviews with the IDC sector representatives, the lack of resources on the right projects at the right times became a common theme. At this point in time, the sharing of resources between sectors is very limited. The ability to shift resources to business critical initiatives is coordinated through phone calls and e-mails. The most valuable resources are frequently over extended with no relief from the current planning system. Industry estimates are projected at an over commitment in the range of 200 to 300% on resources of an average research and development organization.
An effective Information Technology Portfolio goes beyond the measurement of ROI. To truly optimize the resources and opportunities of the Information technology organization, other factors need to be considered. The satisfaction of the business customer with the technology is difficult to measure, but is an important piece of the evaluation of assets. The ability to manage, grow and evolve operational system over the long term will influence replacement, upgrade and retirement decisions. New initiatives require a direct tie to strategic goals. Efforts that do not support the strategic goals of the customer are suspect ìpet projects.î Technology for the sake of technology efforts frequently do not add to the bottom line. To bring the investment full circle, the estimated value must be measured against the actual results. This is an area that many companies fall short. The business case evaluation at the end of the initiative should receive the same amount of scrutiny as at the proposal phase. Providing this feedback to the business customer creates an environment of trust and value realization.
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[...] us for Part 5 of this series which will conclude this study of Portfolio Management. Portfolio [...]