Challenges Typically Faced By Enterprises
In the modern age of business, we have seen extraordinary revenue and profit growth across all industries, followed by an exceptional economic decline. Global forces and fluctuating demand have generated volatile markets and placed operations and balance sheets under strain. Coupled with ongoing capital constraints worldwide, it’s essential to optimize investment decisions and lower operating costs to ensure a healthy growth in shareholder value.
As a result, most large firms are seeking growth in foreign markets which place additional demands on how corporate investments are being managed. Working across multiple time-zones and multiple currencies presents unique challenges and introduces new risks to the enterprise. Having a clear understanding of how corporate investments are performing is paramount.
Specifically for CIOs and IT managers, it wasn’t too long ago that IT was seen as THE enterprise change agent and investment dollars flowed into the organization faster than the Mississippi River. Due to the Tech Bubble and Credit Implosion, investments in IT budgets have been slashed and IT managers continue to be asked to do more with less.
Why Implement Enterprise Portfolio Management?
With today’s tough economic climate, companies need to find ways to ensure their investments are driving enterprise value, reducing costs and improving operational efficiency. Enterprise portfolio management can help companies make better investment decisions; improve program and asset management; and optimize resource utilization and capacity planning.
Enterprise portfolio management provides a platform and process for prioritizing and selecting these investments that have strong business case justification and analyzing them against available funding and resources. Portfolio performance can be assessed to identify investment gaps and potential problems, like negative cash flow.
Enterprise portfolio management takes its roots from traditional investment portfolio management. Traditional portfolio management is based on asset allocation models, where a portfolio is viewed as a pie that can be divided according to an individuals goals and risk appetite. Further, the portfolio can be analyzed according to any number of attributes. These analytical attributes — goals, risk levels, investment type, costs, returns, etc. — also serve as planning categories. For instance, if the set of goals within a financial portfolio are growth, income and capital preservation, then the first decision becomes how much of the overall portfolio to allocate to growth, how much to income, and how much to capital preservation. Only later do decisions come into play as to which financial products in each category to sell, retain or buy. These tactical decisions are much easier to make when constrained by their relatively minor role in the overall asset allocation model. For example, deciding which large capitalization financial services stock to buy is a relatively easy decision to make when such investments as a group comprise a small percentage of the overall portfolio.
Likewise, understanding how and where where your firm should invest is easy once you tie your enterprise portfolio to your enterprise strategy.
So why haven’t all enterprises adopted a portfolio management approach to their capital budgets?
Internal politics and the business culture are by far the biggest adoption challenges. When a portfolio management process is put into place, the transparency on business strategy implementation is raised significantly. It becomes difficult to justify pet projects and to politically manipulate how money is spent. It also makes it difficult to hide mistakes and brings a level of detail and scrutiny that many senior leaders are uncomfortable with. This is the reason why implementing a portfolio management process needs to be conducted as a change management exercise.
Lack of executive sponsorship is another reason. Organizational resistance and internal criticism is almost guaranteed. Having an executive sponsor who evangelises the new process will help guard against the “we’ve never done it like this before” mentality. The executive sponsor and the leadership team is further responsible for being aware of dissenters and non-conformists within the organization. Do not make the assumption that a new portfolio management framework will magically win these type of people over. Resistance is inevitable and you will need to continually preach the benefits and value of the new approach. Tackling the resistance head-on with direct communication is the best approach.
Organizational maturity is another factor to consider as an adoption challenge. Having mature processes and capabilities for program and project management governance and standards will help to ensure the success of the portfolio management roll-out. In line with implementing a portfolio management process is the consideration of upgrading the skills of those that will be identifying initiatives that will be fed into the process. Using the phrase “garbage-in, garbage-out”, if the business cases and financial numbers are not realistic nor backed by sound analysis, the most robust portfolio selection process in the world will be for not.
Agreement on criteria for identifying and selecting projects within the organization is an important milestone. Likewise, this can be a barrier to adoption if project teams will not adhere to a standardized, consistent approach.
Disagreement on the scope and pace of adoption can be a barrier. From the outset, senior leaders need to be clear on the scope and approach of the roll-out. Will the roll-out be incremental or “big-bang”? Will every division need to comply or only certain divisions?
Portfolio management is not easy. The mechanics are easy enough to lay out in a book but there is one key component that complicates the processs: people are involved. A portfolio is made up of projects; projects are owned by people; people become emotionally attached to their ideas OR they are handed a white elephant by their boss and they don’t know what to do with it. Because people are involved, getting them to think rationally about what projects make sense for the enterprise and what projects don’t becomes a political minefield. In order to more easily navigate, portfolio managers need a structured approach that is battlefield tested.