IT Portfolio Management –State of Industry Practice Report

 

This must be the year of the Portfolio tool suites. Interesting to see all the hype around IT Portfolio Management currently. When I dig into the materials and tools the past several months: Nothing new that you couldn’t do with a spreadsheet and have. The unfortunate thing is that the current state of industry practice is still around stack-ranking around perceived ROI and using budget target as a cutoff point for approved projects.

Yes, sure there are now project and application profile databases that allow you to capture descriptive information about the project or application, and categorize these. However, when you dig under the covers of these tools, it’s still plain old ROI stack ranking.

Maybe it that that’s all that current organizations can or wants to handle as far as investment decision making. Given the other hundreds of things that are on management’s plate. Considering that many technology decision-makers handover their own personal financial investment decisions to brokers and financial advisors, its small wonder that they would pick the simplest and quickest decision criteria.

Often when I discuss such topics I hear dismissive statements like “Academic”, “Analysis Paralysis”, or “Over-analysis”. Yet in the same corporation its field staff recommend and spent hours with clients analyzing various factors to make sound recommendations [some even use the methodologies and tools I’ve developed for this purpose].

A small, not uncommon scenario in industry today

In a previous project, I observed that at every opportunity decision-makers voted to remove objective evaluation factors or transform these factors into subjective ratings (wet finger in the air directional estimates) that the initiative sponsor would give and no one at the table would challenge. Groupthink or old-boys behind the scene dealing? In either event the portfolio management process eventually became a story-telling session to report up the chain on how great or critical the projects they were proposing are.

The process and approach were eventually closed out as it didn’t yield the results that either management or executive management wanted. –Small wonder given the only thing left of actual process was the title—And the management team went back to the way they always did it: project popularity and ROI hurdles based upon investment SWAGs that everyone knew were drastically off by several orders of magnitude. To be fair management was only following the lead of the executive they reported to, who was purported to focused on “just doing something”.

I point out the above as example of state of industry and why such practices persist.

Results from the field

However, that don’t mean there aren’t others that have matured in their decision processes and are achieving better than average results. Several statements have been made regarding the difference between number one and two in the industry and all the others. Reports suggest performance of number one and two are only about two to five percent better, they results from these year after year result in margins and market share of thirty percent or better while number three and lower are struggling to maintain five or ten percent.

A few things to clear up regarding IT Portfolio Management practices.

  • Imho, most are just inventory process and systems using discounted cashflow on guesstimates for valuation. Very few take a critical eye towards the value produced to the enterprise or the risks associated with such investments. Does this sound very financial advisor-ish? It should as that’s the domain where this all came from. The issue arises in that only part of the portfolio management equation has been used in IT Portfolios and other Enterprise portfolios. The entire risk side of the equation and other potential benefits has been dropped.
  • Portfolio Management is about balancing Risk and Reward
  • Portfolio Management results have a long tail; that is the improvement year after year compounds. It’s not market timing Big Bang / Big Bust or take a chance lotto

Several decades ago Parker & Benson proposed an investment decision framework in a modest book called Information Economics. In it what now is called a balanced scorecard approach was used to evaluate multiple factors for technology investments. I believe it was a watershed moment in that a framework for rational investment for the enterprise’s benefit was introduced. The framework embraced the concepts of a balanced portfolio the Markowitz (the economist who won the Noble Prize in Economic for developing Portfolio Management).

At present, it’s difficult to determine IT portfolio performance, as there is not an industry analysis firm gathering data on such or a benchmark yet (stay tuned). The only statistics I’ve found in this arena so far has been around IT spend or IT spend as percentage of enterprise revenue. However, the quick survey I’ve conducted over the years points to those that manage IT Investment beyond just ROI have better enterprise performance vs. IT performance year after year.

During this current year I hope to complete both my Modern Portfolio Management White Paper and Tool Suite with the support of my employer. The objective I have for both is a system that enables one to start from the basics then as time, resources, and cost/benefit determine raise themselves to the next maturity level of practice.

For those interested in this approach reach out to me either through my employer or directly via LinkedIn

Saving your way to Bankruptcy

How often have you hear “Honey I bought it on sale and saved us a ton of money”? Really? Did at the end of the month you could see your bank balance increase? Often, we hear similar words inside an enterprise. We’ll saved 1000 man-hours with this new project.   Can you really save man-hours? I’ve not seen any place where time could be saved, much less get paid interest on it.

So, if these questions seem logical, why do we continually hear internally and from vendors about all the time savings? Possibly because emotionally we all like the idea of bargains and savings. The problem becomes that savings is not always savings.

Several years ago, I help develop an economic justification methodology specifically for my employer. As I had done this previously for other employers it wasn’t a large stretch if all they wanted was a standard ROI procedure.   I had brought up to management building an business case on time savings would have little value as CFOs and other management would know time saving is not economic benefit unless you do something with it or avoid having to get more resources to accomplish the goal.

The simple examples: I could automate a process using technology “saving” one hour a day per person. If I can defer hiring additional resources (cost) to accomplish a goal for a smaller investment in the technology, then I’ve actually saved money. If, however, I “save” one hour per day of staff time and nothing is done with that time, then I’ve actually lost money. If I continue to save time and money this way, I’ll be bankrupt in no time.

My advice for avoiding such a problem is while in the planning phases of a new initiative consider what you’ll be doing with the savings. Will the staff be able to effectively use that additional hour a day? This could be getting out one more proposal to a potential client, exchanging knowledge between peers, or any number of other activities. The key here is to have a plan on how that savings is to be used.

Started Enterprise Portfolio Management CMM white paper last night.  Expect this will become a finished chapter in Enterprise Design and Engineering book in progress.  Presently collating and organizing materials from all the engagements and methods I’ve produced for corporations over the years into a cohesive practice guide.  This will be a companion guide to the tools suite I am working on to release some time end of year.

enterprise-portfolio-management-white-paper

Enterprise Investment Portfolio Management Level 3 Practices – Alignment

Integrated Portfolio Management

Introduction

One of the most difficult challenges in businesses is alignment, and with increased size the challenge only increases. Add to this corporate version of the telephone game the various contexts that are within modern corporations today and you are lucky to have sixty percent alignment.

A typical scenario that has been externalized is the common critique about management consultants and other associated business management business operations divides. How often does one hear “Culture eats Strategy for Lunch” or something similar. Or from the alternative perspective “If I ask my customer what he wants, he’ll just say a faster horse” thus demonstrating that operations misses the point that businesses and the market have never been static; and competitiveness continues to have a shorter and shorter shelf life.

At the core of this dilemma is that at each level of a corporation the context, responsibility, accountabilities, and concerns are different. And typically do not have a mapping between such. What I theorized is that an Integrated Enterprise Portfolio can mitigate some of this issue.

Such a portfolio not only captures the concerns of each level but provides that mapping so vital to creating alignment between the layers of an organization. This section of Enterprise Investment Portfolio Management: Level 3 Practices –Alignment proposes to define a mapping between the various visualization tools in popular usage such as Business Model Canvas, Benefits Dependency Network, Strategic Capabilities Network, SAFE™ etc.

 

Business Model Canvas and Agile-like taxonomy

Business Model Canvas and Lean Canvas over the past few years have become many management consultants and executive’s most favored tools. In a one page visual someone can see how a business creates value for both stockholder and customer. Unfortunately, once we leave the world of executive management and strategy we lose both context and concern.

While it is unlikely we can transmit context, the concern can be projected or mapped into another context that lower levels of operational employees can align to.

Business Model Portfolio Alignment

Above is initial draft of this mapping. The Agile-Fall taxonomy in the organizations I’m working with may have other labels but still follow the same hierarchy as well as are still in the evolutionary state.

Anti-value and Process Measurement

 Anti-value

The problem with Earn Value (EV) has applied by many PMs and Enterprises is that often there is not value achieved. What has been done is to expend effort (work) towards a goal which is hoped to achieve value. Too often lately earned value and effort have been used as interchangeable; they are not. These are two different concepts.

It is said “Value is in the eye of the beholder”. However, if the beholder is not the ultimate consumer of the effort I would contend you may or may not have achieved value. It is my assertion that value is in the eye of the consumer external to the working entity.

The example I use is rather down to earth rather than using abstract deliverables. Take an aluminum billet, rough mill it into the shape of an aircraft wing spar. Many PMs would claim some percentage of EV at this point. “See we’ve accomplished x percent of the steps towards creating the spar, so we’ve achieved x percent of EV.

However, if we stop there can you sell this rough spar to the customer or another customer for the cost of the materials plus level of effort employed?   Typically, not. More than likely the enterprise would be selling the rough billet as scrap or salvage rate (cost of the raw material). So really what has happened is the enterprise has created Anti-Value.

Process Measurement

In 1985 Dr. Arno Schmackpfeffer, et al. put forth an article in IBM’s Journal of Research and Development “Integrated Manufacturing Modeling System”. In that he and his peers asserted there are five primitive activities in a process: Make, Move, Verify, and Rest. These activities are the basis for creating value.

Five Primatives

At his point many would put forth the argument that only one of the five, make, creates value. However, that neglects other forms of value creating activities. These again are in the eye of the consumer.

Does “Move” create value? Clearly it must, as people are willing to pay firms to move things for them. Even investment firms use move to create achieve value: Arbitrage, moving goods from one location to another to gain value from the price differential in locations.

How about “Rest or Store” this activity? Does nothing but leave an item in place, what value is in that? How many people lease self-storage space to keep things? So there must be value in rest or store as people are willing to pay for it.

Now what about “Verify” clearly verify adds not value? With verify the consumer of verify is looking to get assurance that what was accomplished previously was actually accomplished. Auditors and Consultants are examples of service providers that engage is such activities that enterprises are willing to pay for.

Summary

I had labeled the above section process measurement as a correction to a previous blog article https://briankseitz.wordpress.com/2013/11/11/structure-in-threes-process-value/  to put it in better alignment with the assertion I have that value is not achieved until someone is willing to “pay” for it.

In 1998 I had taken the five primitives a little further to develop a quick analysis method for BPR/M engagements. This approach enabled my team to analyze business processes to determine what activities could be eliminated to increase process efficiency and value contributions

Process Analysis

 

Speed, Simplicity, and Results – an equation that often doesn’t balance

How often have you heard in the context of entertainment, he or she was an overnight success? Only to find out later it only took x numbers of years to become such. In an Internet age everything, everything appears to be instant including out coffee.

The Internet brings us everything instantly, or so we think. How long did it take you to get that book from Amazon Prime? Two days, not fast enough! Get a Kindle and get it immediately! However, what are you missing with all that speed? What are the trade-offs? And yes there are tradeoffs.

Like old lessons in engineering, nothing is free, one always has tradeoffs to balance the physical equations. You may not see these or be conscious of these, but these are still there in the background being made. Which is the main point of this article.

It may seem from the start that some old guy is about to pour his heart out about how good times past were. -And yes, they were good. However, what Millennium isn’t already reminiscing about that great time they had at the club last night or even brings it up several weeks later as their friends roll their eyes having heard the story for the fourteenth time already. Good and bad times cement lessons in our memories. But I digress.

Years ago, before PMI existed, project managers latched onto the concept of the Project Management Triangle: Time, Cost, Quality -picking any two dictated the other. Heuristic Functions like this are applicable today as much as we’d wish the Internet would change these.

I’ve working on several projects over the past few years –well decades—each a part in a much larger equation. My previous article, The Virtual Situation Room, hints at such. One fragment of that equation involves Business Intelligence as it’s called today. That is having not only data but information for decision makers to make effective investment decisions within the business. I consider N. Dean Meyer’s Internal Market Economics as a data point in the growing digitization of business.

As such any resource decision –Capital, Intellectual Property, Human, Equipment, etc.—is a statement of internal investment priority to address what Milton Friedman stated as business’s primary if not sole justification: maximizing shareholder value. [While I disagree with the total adherence to economics of selfishness, it is the current trend in business, but I see the pendulum swinging in other direction, hopefully to some middle ground.]

Current Internal Economics aside slightly, I come back to the engineering premise that tradeoffs are made in any decision to balance an equation, often unstated. A brilliant colleague of mine Dr. David Ullman, out of the Oregon academic society, attempted to explicate much of those tradeoffs using an application of Bayesian Analysis. Only to end in frustration. The Business World was not ready for such ideas 10+ years ago, nor the work involved to get those “simple answers”.

Speed is a relative term in Business. What is fast one day, is tortuously slow the next.

Simplicity is also relative and is based upon context. What I see readily apparent, maybe intricate and complex to you.

 

Thus we’re left with Results as the great common ground, or so one would think. However, results are based upon expectations, experience, and context. I order a meal at a restaurant. They serve me my food within a ten minutes, I eat it and don’t get food poisoning. Is that the result I was looking for? Was it satisfactory? Before you answer consider these two scenarios both fit the facts above. First I was at a Fast Food place, the second I was at a 5 Star restaurant.

If all my expectation was to get a quick meal and move on, then a Fast Food experience was adequate. If, however, I was with others and make this also a social experience the above maybe lacking.

So what does this have to do with internal business projects you’re asking now?

Consider the nature of questions leadership has to address. These are often boiled down to quick decisions: Go, no-Go, and Redirect to consider later. They are often looking for simplicity to enable speed in decision making. However; first simplicity often hides important information, and second I’ve always found it takes time to create simplicity. Boiling data and information down to its essence means understanding the truth nature of the decisions to be made and the interactions of variables in that decision.

This morning I am on the 10th iteration of a Portfolio Management initiative I came up with in ’95. I am using writing this article to reflect and document lessons learned for these activities for an upcoming paper for a June Business Architecture conference in DC.

A few insights I’ve come up with this morning as I look back on the various version of this initiative are:

  • Decision-Makers appear to have less and less time to assimilate the information
  • Simplicity is good for speed but often hides the icebergs ahead; so these captains of industry need someone in the crow’s-nest to look ahead
  • Decisions are often made by gut feel, even though analytics has proven to be more accurate
  • Follow-up on results while desired is often not accomplished: Many organizations are professing a learning culture, however the current state of being is most reviews are still flagellation inquiries [management is still a political game]

Enterprise Portfolio Management -Thoughts and Insights

Woke up early this morning to the buzzing in my head…An idea that Options Theory as currently applied within more sophisticated enterprises for IT Investment was off the mark.  I’d spent the past year going through application of approaches such as Black-Sholes which for external markets tracks well.  However, for IT Investments there is something slightly askew.  That uncomfortable feeling of what and how finally popped in my head this morning.

Several things about the standard approach to Investment Markets Options Theory rely upon market forces to determine value.  However, within the Enterprise Ecosystem value is not measured by standard economics of buyer/seller in the traditional sense.  Arbitrage in the market does not apply in the traditional sense.  The investment is either exercised for its perceived utility or not; typically based and prioritized upon return on investment of the asset (in the broadest sense of the word asset).   In corporations however there are two economic systems at play:

  • External Ecosystem, the one in which the enterprise participates in.  Here the economics that investment professionals typically discuss and where options theory approaches such as Black-Scholes apply.  One can apply hedging as in Black-Scholes to capture the best Risk/Reward.  Within this ecosystem market dynamics have investments flow between investment vehicles based upon perceived future value.  With items other than perishable commodities the perceived value is not always inline with standard accounting practices.  When valuation of corporations occur Intangible assets such as “Customer Good Will” and “Intellectual Property” are used as a filler to account for the difference between residual value of physical assets in general accounting practices  (i.e., cadaver accounting) and investment accounting.
  • Internal Ecosystem, a set of economics that is governed more strongly by general accounting practices; costs and benefits must somehow be in balance.  However, a semi-closed system is assumed within such an economic system.  That assumption is later adjusted each quarter or year by increasing an Intangible Asset valuation on the books.  This ecosystem is driven by several factors: Asset Depreciation and Utility Value of Assets deployed.

These two economic systems interact through several interfaces of which not all are visible or easily measurable.  Monetary funds go into the Internal Ecosystem from the External Ecosystem on the assumption that these funds will be used to purchase assets and through utilization of these assets return more or increase in value the enterprise.  This in the external system takes the form of stock price or dividends.   Which in many US based firms now provides a stronger drive to the internal dynamics of a publically held corporation.

However, the value of individual assets inside a corporation is not as simple as those in the external ecosystem.  Inside the corporation assets are combined with a purpose in mind, to create a utility value.  While the individual assets are accounted for in general accounting practices the utility value of a configuration of assets is typically not.

An example; a machine is purchased, a process developed to use it and others to create a product or service, supplies/consumables are also purchased, and people trained to create and sell the product / service.  This creates some value if the product or service is consumed by the external ecosystem in exchange for revenue.   Ten years later the internal assets have been depreciated in value to zero, yet the enterprise is still getting utility value from this configuration of assets.  One year later a competitor’s product / service attracts enough consumers to make the enterprise’s offering unprofitable.  The assets once providing utility value, though zero accounting value through depreciation, are now in negative territory.  Now we’ll complicate things.  One of the assets in the configuration was a computer.  It can be reassigned to do other tasks thus extending its utility value in another configuration.

Thus the value of assets in an internal ecosystem’s portfolio needs to be managed differently.  Those management practices need to more strongly account for internal utility value that it contributes within an hierarchy of abstract portfolios that support an enterprise’s participation in the various value streams in which it is a member.  That insight realized this morning has been what has been driving me to revise the portfolio management practices I had defined for previous employers –though better than none– seem not adequate for the task.   With that insight in mind developing the economic methods –for what I’ve called Level 5 Dynamic Management that are closer aligned to how an enterprise operates internally– appears more attainable and palatable than just inserting a standard Black-Scholes model.