investiledysfunction

The Monday, July 7th Wall Street Journal had their monthly Business Insight section which they do in collaboration with the MIT Sloan Management Review.  Usually, the section is full of interesting perspectives which, irrespective of my views,  are well considered and constructed and make you think about numerous management topics.

This latest installment had an article entitled “In Search of Growth Leaders” by Sean D. Carr, Jeanne M. Liedtka, Robert Rosen and Robert E. Wiltbank which discussed organic growth.  As I’ve argued many times in the past, organic growth is less risky/more predictable and ultimately more manageable than M&A growth or market growth and as a result, it is a great predictor of shareholder returns.  Organic growth is the manifestation of management’s ability to extract growth from their core business through their decision-making skills.  I was pretty excited to see that this method of generating growth was getting its due.

But unfortunately, the article fell flat.  Instead of arguing for improved management processes to deliver organic growth, the authors, based on a sample size of 50 mid-level managers, argued that it is a handful of managerial beliefs, talents and behaviors that drive organic growth. They missed the mark.

While I wouldn’t argue that having capable managers at the helm of a business is not important or desirable, the idea that organic growth is driven by recruitment of the right managers possessing “vision, leadership and entrepreneurial talents”makes organic growth appear much more elusive than it need be.

Based on our experience working with organizations seeking organic growth, here is what needs to happen:

1. Organizations must first understand that resource allocation decisions, e.g., investments and projects in marketing, R&D, sales, operations, innovation, etc are what drive organic growth and that they generally have too many ideas and not enough funding
2. Because of this resource constraint, they need a way to better determine the selection and prioritization of organic growth projects.  This can be done by forcing the quantification of these investments in a more data-driven way.  By understanding the strategic, financial and risk benefits and risks of these projects in a consistent and rigorous way, the projects can be considered against one another and selections can be made that leverage data.  I’m not arguing the decisions be made on the basis of a spreadsheet but am calling for decisions that balance analytical and intuition led decision making.  This is very contrary to what the authors of the article argue which seems to push for more intuition-led, decibel-driven decisioning based on the ‘prowess’ of the manager.   This is already the norm in most organizations and doesn’t need to be exacerbated.
3. Creating projections for these investments is obviously not enough as creating fancy, elaborate models is always wrong.  The point is not to create perfect projections which is a fool’s task but to create a mechanism for always improving projections.  As the business adage goes, “What gets measured gets managed” and so the critical step at this point is to actually close the loop on these investments and determine which delivered and which did not.
4. Taking this promise versus performance data, we can use the results to inform future year projections.  Our projections are still not perfect but they are continuously improving and with this, the organization’s ability to select the right projects to deliver organic growth.

With all this information, we’re actually able to objectively determine who the best managers are based on information and not abstract and nebulous determinations of vision and leadership capabilities.  These managers’ practices and ideas can be shared across the organization, and the managers themselves can be put into positions of greater responsibility.  At the same time, those managers unable to deliver are exposed and corrective action can be taken.

Creating organic growth is possible in a systematic way, and it should be treated as a strategic and managerial discipline the organization can continuously improve through consistent attention and management.  Pegging your hopes for organic growth on a few ‘gifted’ leaders and their abilities is foolish and is not a way for an organization to consistently generate organic growth.

While I’m glad to see organic growth coming to the forefront in a publication of this stature, the superficial treatment it received shows there is still more to do to create an understanding of what really drives organic growth.

The July-August 2008 issue of the Harvard Business Review has an article entitled “Employee Motivation: A Powerful New Model” authored by Nitin Nohria, Boris Groysberg, and Linda-Eling Lee which talks about, as the title implies, motivating employees and the drivers behind motivation.  In it, the authors argue that there are four drives that underlie motivation and those are (directly quoted below):

1. The drive to acquire  - obtain scarce goods including intangibles such as social status
2. The drive to bond - form connections with individuals and groups
3. The drive to comprehend - satisfy our curiosity and master the world around us
4. The drive to defend - protect against external threats and promote justice

One of the organizational dimensions that drives motivation and specifically the drive to defend is what the authors detail as “fair, trustworthy and transparent processes for performance management and resource allocation”.  They cite some corporate examples but the overarching theme is that their should be transparency in the resource allocation process and that while pet projects may get killed, employees need to understand the rationale behind the decision.  Employees reporting that funding criteria and process are fair and transparent leads them to be motivated and to view the organization as a “just one.”

Corporate portfolio management which is a discipline to more rigorously manage and optimize resource allocation is often discussed in terms of the financial and strategic outcomes it enables.  The authors of the article hit upon an employee dimension which is often ignored or misunderstood in discussions of corporate portfolio management.  When we work with clients, we often talk about creating “an internal marketplace for project and investment funding” and in some instances, this idea of competing for funding scares organizations because they worry that this will demotivate employees who are the project/investment originators or who may be working on such projects.

In actuality, this marketplace concept is empowering.  Generally, resource allocation as it relates to project and investment selection is a game where people don’t know the rules.  And so people see projects/investment selections predicated on dubious, incomplete business cases or on the basis of relationships and decibel-driven (vs data driven) criteria.  Imagine for a second that you are playing a game where the rules were unknown or always changing.  It doesn’t sound like a very fun game does it?

When employees know the “rules of the game” around resource allocation, this makes the process and the organization stronger and is motivating for employees.  People come with their best ideas because they know those ideas are actually valued and have a shot at receiving funding.  By knowing the rules of the resource allocation process, they understand what is considered an investment, what is needed for an investment to be considered for funding and they also understand the methods by which their projects will be evaluated and funded.  Yes, there will be times when their projects don’t get the funding they desire but at least they can feel comfortable that the process underlying the selection was fair.

Corporate portfolio management (or it’s children in the form of IT portfolio management, project portfolio management) often fail to consider the organizational behavior that is required to make them happen.  More often than not, they also fail to consider the beneficial behavioral outcomes which they can enable foremost amongst them is more motivated employees.

One of the 7.5 Sins of Portfolio Management is that your portfolio management effort cannot be a tunnel but must be a funnel. By that, we mean that projects must get killed as part of your portfolio management effort to give it some teeth. This could mean killing projects at the proposal stage or shedding underperforming projects along the way. If you don’t do this, you’ve just created bureaucracy (checklists, business cases, etc) but you are really not changing investment and project selection processes and the behavior that goes along with them. If you really want to create useless work in your organization, there are probably other ways to do this. If, on the other hand, you genuinely think that there is no project in your organization that should be stopped or that should not have been started in the first place, then we should talk as I have some real estate in Florida which is expected to go up 100% this year which I’d like to sell you.

Given this sin, it’s nice to see a company living by this mantra especially in the area of R&D. One notable example is HP Labs where Prith Banerjee, the new labs director, is planning to unveil a list of 20-30 major projects down from the 150 or so currently being pursued.

According to Business Week, “The labs’ $150 million annual budget will remain the same, but he’ll group the most promising related projects while dropping those with little shot at a profitable payoff.”

Banerjee himself asserts that “Just because it’s scientifically interesting won’t do it. We need to create whole new business opportunities for HP.” He is also forcing researchers to compete for money by pitching projects and writing business plans and then having those goto a central review board that will approve ideas and track progress.

It sounds like HP Labs’ is avoiding many of the 7.5 deadly sins namely:

1. They’re making it a funnel by killing projects whose proposals are not good or that are not performing
2. They’re reducing the decibels in the decision making process by requiring more intensive business cases/plans
3. They are tracking results

It sounds like HP Labs is onto the right path. There will inevitably be culture change and resistance that emerges from such an overhaul, but if they can work through these impediments (not easy), HP will go a long way in making each R&D dollar go further.

The March 2008 Harvard Business Review had an article about Japan’s Shinsei Bank and their approach to IT which was so spot on, I thought it might be worth sharing Shinsei Bank’s philosophy with regards to IT.

Per the HBR article, Shinsei used a “path-based approach to build an enterprise IT system that would provide a low-cost, efficient platform for running its existing business but was flexible enough to support the company’s growth into new areas.”

Nothing particularly revolutionary there, right?  Sounds like a lot of typical mumbo-jumbo, and I’m sure those same or very similar words have been in PowerPoint presentations that many a CIO/CTO have created.

So the part that is actually great about Shinsei Bank’s approach are the details of how they achieve the aforementioned objectives.  Again, quoting from the HBR article.

“The approach addresses the three main challenges of an IT project: It is difficult and costly to map out all requirements before a project starts because people often cannot specify everything they’ll need beforehand.  Unanticipated needs almost always arise once a system is in use.  And persuading people to adopt and “own” the system after it is in operation is much easier said than done.

First of all, Shinsei’s realization of these as the three main challenges is very impressive.  We’ve seen far too many IT organizations put a massive questionnaire or mandate that a large requirements document be put forth before doing anything.  This is not only a waste of time, but gets you no where closer to what you ultimately want because nobody ever knows all the uses, scenarios, etc they need up front.  So don’t require everyone to detail out every requirement.  I realize this maybe called for on your project manager’s checklist, but this is ultimately not helping the project.   The last point about adoption and ownership of the system is very big as well.  Technology requirements should not dictate what solution gets selected (”There an approved vendor so we should go with them” or “We only use Oracle so you should find a solution that works with Oracle only.”  It should be IT helping to work with and guide the business to making a more informed judgement about what to select while leaving it them.  This helps create the ownership that Shinsei has created.

Let me liberally quote from the HBR article some more to close.

“The path-based principles that Shinsei applied in designing, building, and rolling out the system - forging together, not just aligning, business and IT strategies; employing the simplest possible technology; making the system truly modular; letting the system sell itself to users; and enabling users to influence future improvements - are a model for other companies.”

Ok, let me count the ways in which this is correct.  We always hear talk about alignment between the business and IT.  Besides a being completely overused and generally meaningless phrase, it really is more about creating a shared vision and moving together on that.  This way, IT cannot throw the business under the bus (”The requirements were not fully given”) and business cannot do the same (”The guys in IT move too slow and are just bureaucrats.”)

Going with the simplest technology is another novel concept.  Instead of opting for the fancy bells and whistles that technology providers often tout, go for something that gets the basics right.

And lastly, let users influence the future direction of the applications because ultimately they are the USERS of them.

It doesn’t sound all that revolutionary, but it seems Shinsei is onto something.

There are so many ways to waste money within an organization, but companies are always doing creative things to find new ways to do this. Qwest Communications has come up with a good way to waste shareholder money.

To recruit CEO Edward Mueller, the “Denver telecom agreed to purchase his home if he couldn’t find a buyer” according to the WSJ. They paid $8.9 million and sold it for $7.1 million. That’s a cool $1.8 million down the drain. All this while the company’s stock is down nearly 60% over the last year.

Looks like Mr. Mueller really is doing wonderful.

A recent tournament for computer programmers crowned a champion whose winning secret was “avoiding bells and whistles, and asking questions until he knew exactly what the judges wanted his software to do.”

WOW! What a novel idea - do the basics right and really understand what the client wants. And don’t try to overwhelm them with a lot of fluff they don’t need.

We work a lot with clients looking to pick a project or IT portfolio management or innovation management solution, and it is amazing the sheer number of useless bells and whistles that the developers of these solutions show us during demonstrations. I presume the aim is that by showing us lots of potentially cool but ultimately useless features, we and our client will be so taken with the “shock and awe” that we will forget the real needs we have. Sorry guys.

Unfortunately, we’ve talked to companies who’ve already picked a solution and been lured by these features which will never be used and which they’ve realized after the fact.

Yes - it is true that 80% of the features in most of these tools will not be used. Figure out what is really important and pay for that. This requires understanding the processes and outcomes you are hoping for and not assuming that a slick system or a “solution” will save the day.

So the thinking went like this - DHL spent $1.05 billion in 2003 to buy Seattle-based Airborne Express to break into the large US parcel delivery business. After spending several billion dollars to make yellow the new brown, DHL has finally decided throwing good money after a cr^ppy idea is no longer worth it and is packing it in (sorta). They’ve racked up losses of $3B in the past four years.

They are paying UPS a billion dollars a year to take over much of their infrastructure and deliveries in the USA. So DHL’s empire building M&A deal has ended up benefiting the guys they were trying to displace.

Just another M&A success story.

Today, an article authored by Kenneth Klee was featured on TheDeal.com entitled “Better scorekeeping for investments in organic growth“ and highlighted comments by yours truly and Brilliont about the beneficial impact on organic growth that a corporate portfolio management discipline can enable. 

It’s interesting and actually quite progressive on the part of TheDeal.com to feature an article about organic growth as most of their readership are focused on deals, e.g., M&A - bankers and corporate development people within organizations.  And to some extent, organic growth and M&A are competitive levers that an organization can employ to grow.  Obviously, all organizations invest in organic growth (lowering attrition, acquiring new customers, selling more to existing customers) and many do evaluate and do M&A deals, but the two strategies can compete for resources and mindshare, e.g., build decisions (organic growth/corporate portfolio management) vs buy decisions (inorganic growth/corporate development). 

If you want to read the article, please click here.

We’re pleased to announce the launch of an education and training offering called the Portfolio Management Game (www.portfoliomanagementgame.com). 

We created the Portfolio Management Game in response to feedback from clients and practitioners who often said it was difficult to get senior leaders, their peers and employees to fully understand and committed to the idea of portfolio management.  To build this understanding and commitment, The Game uses role-playing, brainstorming, collaboration and some healthy competition to illustrate the challenges of project and investment selection.  It also fosters creative thinking about how to solve these challenges.  It is an engaging, entertaining and interactive way to ensure people really understand the importance of resource allocation and the power of portfolio management. 

We built the Game to answer these challenges and based on research that indicated that employee learning is accelerated when you conduct education using games and competition.  The Portfolio Management Game leverages and builds upon this research. 

You can learn more about the game at the site but below is a quick high-level overview:

It is a role playing game that focuses on a fictitious company, Qaio, Inc which has 4 business units and within each unit, there are several functional groups, e.g. ,marketing, IT, R&D, etc

As part of the Game, each participant is assigned a functional role and a business unit and is given several investments (given out on Game playing cards).  Each investment has details supporting why it should receive funding including strategic rationale, financial projections and risk factors.

During the Game, people take on different roles (functional and business unit roles) and are given various scenarios where there are funding constraints.  Participants must work with their peers from other units and/or functional areas to determine which project and investments should get funding and why.  Doing this requires influencing and collaborating others, and ultimately working together to identify issues and develop solutions.

Expected discussion/outcomes from The Game include:

• Participants will understand and see firsthand the dysfunction that exists when it comes to investment/project selection
• Participants will develop ideas on how project & investment selection, e.g., resource allocation can be improved
• Participants will leave with a greater understanding of the fundamentals and the power of corporate portfolio management (this applies just as well to IT portfolio management, project portfolio management, etc)

Again, please check out the website at www.portfoliomanagementgame.com. 

If you have any questions or would like to learn more, please contact us via email by clicking here.

When I talk with clients or speak at conferences about corporate portfolio management, I aim to make it clear that when we talk about portfolio management we should not only be concerned with the monolithic total organization portfolio.  Because ultimately, the company’s total portfolio of projects & investments is an amalgamation of many mini-portfolios within the organization.  These mini-portfolios are numerous and include portfolios along line of business, business segment, geographic region/country and functional lines (IT, marketing, sales, R&D, etc). 

As a result, organizations which want to be successful with corporate portfolio management should spend time optimizing each of these mini-portfolios first, then roll these up into the company-wide portfolio and then do another round of optimization on this larger corporate portfolio.

David Haigh, group chief executive of Brand Finance talked about this recently in a Knowledge at Wharton article and summarized this concept nicely.  His comments are specific to brand portfolios but the idea of mini-portfolios which he describes can be extended to project and investment portfolios.  Haigh states, “For example look at Diageo, the drinks company. You could say they’ve got 50 brands – Baileys and various others — and each one of those is a brand. They would have a profit & loss account and a balance sheet against each one of those brands. It’s really a portfolio of businesses that aggregate up to make Diageo as a whole, and the same for others like Unilever. They have a whole variety of individual brands that go as a portfolio. Unilever said a few years ago, they’ve got 1,600 brands. They wanted to get rid of 1,200 of them, and only needed 400. Those are the 400 that are going to create growth going forward. So they sold off the 1,200 brands. But what they meant is they are selling off 1,200 individual branded businesses to different people.”

Haigh also touches upon how the portfolio approach can be used to make major strategic choices about company direction.  In the case of Unilever, they sought to simplify their product portfolio and based on return and risk parameters made the decision to get rid of certain businesses. 

This is very analogous to what we’d done at American Express when we made the decision to spin off Ameriprise (formerly American Express Financial Advisors - AEFA).  Amongst other factors, we looked at the return characteristics of the AEFA mini-portfolio as compared to other AmEx businesses and saw that this mini-portfolio was better suited to being its own stand-alone company as it would have a very difficult time competing for investment and project resources against a card business with phenomenal return characteristics.  The insight here appears to have been spot on given Ameriprise’s performance after the spin-off has been quite outstanding.