The Business of Portfolio Management

Iain Fraser

• Publisher: Project Management Institute
• Year: 2017
• Print ISBN:
  9781628253726
• eBook ISBN:
  9781628253733
• Topic: Commerce
• Subtopic: Management

Today there is a gap between organizational strategy and day-to-day management activities. To capitalize on new opportunities, or "getting ahead" rather than just "staying in business," most workplaces need a radical transformation. This transformation can begin with how organizations devise and manage their portfolios. Long underutilized as a mechanism to provide value, portfolio management is now being recognized as an effective approach to bridging these critical business elements. The Business of Portfolio Management offers keys to adopting a new approach to portfolio management that boosts organizational value.

SECTION 1

Continuous effort—not strength or intelligence—is the key to unlocking our potential.

—Winston Churchill

Organizational Woes and Wishes

1-1.Staying in Business Versus Getting Ahead

The global financial crisis (GFC) of late 2008 made us all very aware of the damage to businesses and economies that a few reckless, overly optimistic, and—according to many—very irresponsible people can cause. Even today, economies are still struggling to recover while many businesses have simply disappeared, leaving a degree of carnage behind. There is still some debate on just how successful initiatives from the era of government stimulus were in terms of improving local economic well-being.

According to the Economist Intelligence Unit, the next decade is likely to see global growth of just 3.5% per year. This suggests fewer opportunities for the majority of businesses unless they adopt some new form—unless they innovate and change. Indeed, the post-GFC has forced many organizational leaders to focus on the need for change to combat new market mantras and fierce, and in many cases, global competition. I refer to the market mantras as “better, faster, cheaper” in the for-profit sectors and “doing more for less” in the nonprofit sectors. Those mantras are driving leaders to seek better ways of achieving their respective organizational goals and objectives. Initially, it seems that the need to speed up, to increase effectiveness, and to remain nimble are the top challenges. Further thought, however, suggests that talent management, that is, developing people and culture at all levels of an organization, is the catalyst for the sustainable organizational change required to respond to these mantras.

It seems that there is a “reset” opportunity here where we establish new models and systems that will guide us to create highly nimble organizations that are lean and fast, yet strategically focused. However, never before have organizational leaders at all levels been so challenged in their quest to adapt to the new reality of the post-GFC world. This need to adapt is being undermined by the legacy of the very same organizational structures and their leaders’ inability to change quickly and adopt new business models. I refer to the ongoing, mind-numbing practice of organizational reforms that focus only on cost cutting through talent reduction. There seems to be a reluctance to move from traditional, functional structure models to the adoption of matrix management models that empower people to become more market driven, and thereby, their organizations to be more responsive enterprises.

So what to do? Stay in the same business model and risk or deny the reach of change? Or look forward and lead and change for the future by adopting new ways of working? There certainly are risks either way and perhaps a degree of comfort in the first option. However, it is the second option that will steer us toward future success and the change in culture that is the foundation for sustaining success.

1-2.Driving Value and Becoming Aligned

Today, it seems that many organizations have a gap between what is planned at a strategic level and what is actually done at a tactical or operational level. Indeed, I believe that the term strategy is overused, possibly abused, by many middle and senior managers who spend time producing what really is an operational plan that is labeled “strategic,” typically, it seems, because it spans more than one year of operational activity. Bizarre, for sure!

To ensure organizational benefits, a primary driver for all investment decisions must be better alignment to the overarching organizational strategy through goals and objectives and short to midterm plans (say two to five years). This would contribute more value toward those goals and objectives, and ultimately, the strategy as a whole. Business leaders should already know that there are two major groups of investment within an organization, that is, those that are derived from operational activity, or “business as usual” (BAU), which typically protects existing value, and those that are derived from new strategy and the desire to change in order to gain new benefits and new value.

Figure 1-1 outlines the correlation between the value drivers and investment initiatives. I refer to it as “the continuum of investment” model.

The continuum of investment model presents the two major types of investment activity within any organization (i.e., operational expenditure and strategic capital expenditure), often referred to as “opex” and “capex.” Both of these should be delivered by planned programs of work and projects that collectively achieve or contribute to the achievement of the organizational strategy's business objectives. These collections are referred to as portfolios. The continuum of investment model can greatly help determine how proposed investments are categorized and grouped into their respective portfolios and related programs of work.

A number of factors will influence the types of projects deployed within an organization. A shift toward a market-driven operational strategy that is implemented using portfolio management will allow the organization to gain more benefits, as the portfolios will be aligned with business priorities. Corresponding programs of work and projects are better influenced as a consequence.

A considerable benefit from a market-driven approach is that of an aligned set of variables that focus on optimizing the strategic and the tangible, usually financial, value of each portfolio. This focus revolves around the following critical elements:

• Identifying and assessing the content of each portfolio;
• Weighing, prioritizing, and balancing the content of each portfolio against all work; and
• Monitoring and analyzing the value, risks, and expected results of each portfolio.

Value Management Framework

Those critical elements lead us to a value management framework to assist in establishing a strategy that focuses on organizational objectives and that can be communicated, executed, and confirmed throughout the entire organization. A value management framework encompasses the overall strategic framework for optimizing investment, its function, and its return. It utilizes five elements: value strategy, value planning, value engineering, value delivery, and value capture. As you can attest, this value management framework expands the classic element of value engineering considerably and provides a comprehensive mechanism for the wholesale determining of strategy as well as for the implementation of that strategy via the adoption of portfolio management across the organization. Without a value management framework, the deployment of portfolio management would likely tend to adopt a process-driven mentality, as opposed to the culture-driven mentality that the value management framework offers.

This new form of developing business plans from strategy needs to display certain aspects that confirm the alignment with a market-driven approach. Some examples include a strategic approach to planning versus a tactical approach; a goal-oriented vision, as opposed to a cost-oriented one; and a “time to value” culture versus a “get the job done” project execution attitude.

However, a caution should be noted at this point, as a market-driven approach to operational strategy can be hampered, and often is, by the following factors:

• Board members’, executives’, and senior managers’ reluctance to change quickly;
• Organizational portfolio, program, and project management maturity and capability;
• Cost reduction versus investment opportunities;
• Alignment of value drivers versus available resources (budget, people, capacity, etc.); and
• Risk versus reward and unexpected compliance requirements.

These challenges can be overcome with strong leadership that uses knowledge-based decision making as a philosophy for aligning what needs to be done and what should be done. Four questions can be adopted to guide and inform the dialogue around important decisions that are required to strike the balance between “staying in business” and “getting ahead.” The questions are as follows:

1. What do we know about our strategic position in regard to the capacity and capability of our organization that is relevant to this decision?
2. What do we know about our customer/client needs, wants, and preferences that is relevant to this decision?
3. What do we know about the current and evolving dynamics in the marketplace or sectors that is relevant to this decision?
4. What are the ethical and environmental implications of our choices?

The above, when considered from a value management perspective, can foster a wider and deeper understanding of each investment decision, associated time to benefits, and corresponding value capture. The questions should also assist in identifying mega-issues, or strategic risks that governance groups can further consider as necessary.

The greater the demand for investment in operations, the greater the likelihood of short-term, output-focused projects that may not deliver expected value toward business objectives. Conversely, new strategy investment projects often have a longer-term focus. There are obvious variations to this depending on the needs of the organization. However, there is a risk that with too much short-term focus, the organization will drift away from its strategy. The solution is to use the value management framework to anchor the agreed-upon goals and objectives of the organization's strategic plan to the content of each portfolio. This will greatly assist in achieving balance across both opex and capex investments.

What Is Value Management?

It is important to clarify the meaning of value management; it is not the same as value engineering. Value management focuses on organizational objectives, whereas value engineering typically focuses on the objectives of approved initiatives (e.g., project outputs). Value management encompasses the overall and strategic process of optimizing investment, its function, and its return. It utilizes the five phases referred to earlier (i.e., value strategy, value planning, value engineering, value delivery, and value capture) to achieve those.

Value management delivers most benefits in response to a functional specification, because there is much more flexibility for optimization and for change. It is more difficult to apply value management to specific or detailed specifications/user requirements because of constraints around the specifics.

Figure 1-2 shows a value management life cycle based on the model discussed above.

Value Management and Portfolio Management

To fully optimize business benefits, an organization seeking to use the value management framework must have a solid strategy around its deployment. This strategy should include the existence of some level of portfolio management that supports option taking and decision making. Value management should provide the framework that devises a better strategy and a management approach to its implementation that ensures that the maximum value is captured and gained from each investment.

However, this alone may not provide clear benefits if it is not embedded with other key strategic approaches. A mature view of portfolio management should include the use of a value management framework as one of its key methods. When these two key approaches are combined, significant gains should be available to the organization. Table 1-1 reflects a model of integrating value management with portfolio management. (Note that portfolio management is referred to, by some, as organizational project management.)

Table 1-1:Value management model in a portfolio management environment.

Value Management Component	Organizational Project Management Component	Comment
Value Strategy	Strat planning and budget planning Overall implementation management	Policy to guide strategic alignment and adoption.
Value Planning	Portfolio management	Includes option analysis, selection, and prioritization.
Value Engineering	Program and project management	Develops chosen solution further. Improves inherent value. Enhances opportunities.
Value Delivery	Program and project management	Controls change and risk Protects value.
Value Capture	Benefits realization	Confirms value achieved over defined time periods. Optimizes whole of life cost versus return on investment.

The value management framework, when integrated with portfolio management, provides a mechanism for key decisions to be made from rational, objective, and accountable methods. These decisions aim to achieve optimal value from the delivered functions at the least cost while meeting quality and other objectives. Value is then protected or enhanced by the structured application of value planning, value engineering, value delivery, and value capture. These phases are defined and explained in the following sections.

Value Planning

Value planning is the approach used to plan the introduction of value (e.g., saving time, increasing profit, improving quality, expanding market share, or solving problems) and to optimize organizational benefits and protect them from life cycle costs. Value planning should allow for periodic assessments/reviews so that value planned is protected and confirmed during the value delivery period. Value planning activities must be managed well and possibly throughout the entire value management cycle, but with an emphasis on the front end of a portfolio, program of work, or project. Typically, a consultative or collaborative approach would be adopted with critiques being done via value workshops. Various options would be considered in a value planning workshop and agreed-upon criteria compared against one another to allow selection decisions to be made in much the same way as portfolio planning is done. Those decisions would then provide key inputs into respective business cases or work authorization control mechanisms.

Outputs from the value planning stage would also include content for use in validating budgets and life cycle time periods as well as a value-for-money report. A value-for-money report should present the key findings and decisions made and a schedule that shows the overall life cycle of the proposed investment. A value-for-money report would typically comment on the following key sections:

1. Achieving Objectives: showing how the proposed investment will deliver benefits toward one or more objectives of the business plan, portfolio, or program of work;
2. Governance: suggesting the governance structure, methods, and key approvals that are required;
3. Critical Success Factors: highlighting the critical success factors from the proposed investment;
4. Achieving the Right Price: showing how the optimized scope delivers value-for-money in terms of capital and maintenance costs or whole-of-life costs;
5. Investment Risks: highlighting how the organization or delivery team intends to manage or improve the risk profile for...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Dedication
• Acknowledgments
• About the Author
• Foreword
• Introduction
• Section 1 – Organizational Woes and Wishes
• Section 2 – Portfolio Management: A Way of Doing Business
• Section 3 – Using Program and Project Management to Deliver Change and Realize Benefits
• Section 4 – Supporting Functions: Time for Change!
• Epilogue
• Glossary
• Bibliography and References