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Using Portfolio Management to Improve

Business Investments

By Carolyn Reid, MBA, PMP

Using Portfolio Management to improve Business Investments

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The Business Issues driving Portfolio Management

Imagine asking your children to oversee the family funds and budget for one

month. You carefully describe the various bills that must be paid, the savings

plan you are working on and you remind them of the concepts of wants vs.

needs (family budget being based mostly on needs). What do you predict

they would spend the money on? Their wants, of course!

Naturally this scenario would not play out in the corporate world. Or is it

possible that some companies still decide what gets done based on (1)

political power, (2) gut feel, or that (3) the idea was presented well? Every

day, ideas that “sound good” proceed to the stage of being funded and

ultimately fail.

All too often, investments are not selected on the basis of adding to

achievement of the high level goals of the organization. Failing projects are

not being stopped before completion. The current business processes don’t

keep up with the pace of the business environment. The bottom line: as

things change in the industry, a business must be ready and flexible to

change.

Corporate leaders increasingly face a confusing, complex, and uncertain

environment. Globalization and technology are sweeping away the market

and industry structures that have historically defined the nature of

competition. The pace of change is accelerating.

What is Portfolio Management?

Portfolio Management is the business process used to ensure that the correct

mix of investment activity is initiated, grouped, funded and managed to

deliver true competitive benefit to the business. Portfolio Management

applied to business was derived from the classical Portfolio Management

concept for financial investment.

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Portfolio Management techniques allow more organizational direction and

objectivity in terms of the management and prioritization of strategically

important investments. The techniques ensure that the available budget and

resources are employed to achieve the maximum return while aligning with

the organization’s business goals.

There are four basic goals of Portfolio Management:

1. Maximize the value of your portfolio of investments or projects.

2. Seek balance in your portfolio.

3. Ensure Strategic alignment of the Portfolio.

4. Pick the right number of projects (resource management).

The Value of Portfolio Management

Implementation of a well structured, clear Portfolio Management system

creates a common basis for discussion, discipline and consistency of

investments. All work being done is aligned to the major corporate

objectives, maximizing return, productivity, sales and market share.

While only the best projects are funded, projects that are failing can easily be

detected and stopped. Of utmost importance to a Portfolio Management

system, is supplying the highest quality information to ensure the best

decisions are made in a timely manner. Organizations can react quicker to

rapid external and internal environment changes.

Portfolio Management Methodology

A quality Portfolio Management process is well thought out, well defined and

controlled to ensure consistency. Portfolio management establishes a process

for approval and for the progressing of investments. The Portfolio

Management process will define: 1. Investment business case requirements.

2. Selection, ranking and prioritization, 3, Review and approval process, 4.

Go/ no go criteria defined. The business must determine the frequency of

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portfolio review based on typical frequency of change in the business

environment.

Capacity and Budget Planning

Prioritizing investments aids in resource management. Resources can be

assigned first to the top priorities until all resources are assigned. In a similar

manner, top priorities projects are assigned funding first.

Required for good Portfolio Management Systems:

Balanced: short and long term, risk vs. reward, risk vs. cost etc.

Good input data (investment information) and forecasting estimates:

markets, volumes, costs etc.

Credible financial metrics and tools

Clear business objectives

Close alignment between portfolio management activities and general

planning of the business

Quality business cases

Good selection process

Strong link between business objectives and investment selection

Well thought out project selection criteria, related to work that maximizes

value

Well defined decision making process

Go/ no go decision criteria is clear and controlled

Alternative scenarios examined for each proposed initiative

Disciplined search, based on familiarity, to discover and create initiatives

that provide disproportionately high rewards for the risks taken

Cross Company Process Relationship

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Cross Company Process Relationships

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Core

CompetencyMission Vision

Strategic

Objectives

IdeasBusiness

Case

Approve/

Deny

Prioritization

and Portfolio

Review

Approved

Initiatives

Performance

Measurements

The diagram above shows the process flow from Executive leadership to

Portfolio Management to Project Management. Once strategic objectives for

the organization are developed, all ideas for projects or initiatives must be

tied to these. Any ideas for investments are fully described by the business

case to determine the worthiness of the investment. Once the portfolio of

approved initiatives is established, these initiatives are passed onto project

management or operations to be implemented. Performance information is

passed back to Portfolio Reviews. This allows the organization to stop failing

projects as required. Portfolio performance information is passed back to

strategic planning for review of goal achievement.

Key Information to determine the value of the initiative

Examples of information that will determine the value, viability, and fit of the

project or initiative follow.

Value to the business:

o Strategic fit

o Benefit/ cost analysis

o Risk/ benefit comparison

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o Maintain the business, grow the business or transform the

business

o Other factors: regulatory requirement, issue resolution etc.

o Payback

o Cost savings

Viability of an initiative:

o Initiatives

o Market value potential

o Time to positive cash flow

o Personnel requirements

o Funding requirements

o Technical feasibility

Fit

o Initiative

o Alignment with core capabilities

o Alignment with other company initiatives

o Fit with organizational structure

o Fit with company culture values

o Ease of technical implementation

Market value:

o Competitive rationale

o Market attractiveness

o Commercial attractiveness

Risk Assessment

o Schedule risk

o Organizational risk

o Technological risk

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o Risk of not doing the project

o Project support costs

Benefit

o Cross-functional impacts

o Improving internal culture

o Improving external customer services

o Efficiency improvements

o Increased market share

Portfolio Balance

o Long Term versus short term

o Benefit versus risk

o Benefit versus cost

o Sustain, improve or revolutionize the business

Summary

Portfolio Management provides great value to an organization by maximizing

return from all work done within the organization. The business maintains a

competitive advantage as it is able to respond quickly to changes in the

market. A Portfolio Management system allows the organization to achieve

focus and balance of initiatives, to better communicate priorities vertically

and horizontally, to cancel failing projects in a timely manner and to link all

activity to the corporate strategy.