investiledysfunction

The November 3, 2008 issue of Newsweek contained a letter from Mayor Michael Bloomberg to the President-Elect (and now Barack Obama).  This blog is strictly non-political and will remain that way, but Mr. Bloomberg offers a great commercial for portfolio management applied at the public sector level.

In his letter to the president, Bloomberg writes,

“In exchange for legislation creating an infrastructure bank that funds projects based strictly on merit, agree to invest more money on the infrastructure our country needs most.  And you should also demand more from the states and cities that get federal money: hold them accountable for building on time and on budget.  Call it a “New New Deal”: investing more, more wisely and getting bigger returns.”

I’m not sure there has been a better encapsulation of what portfolio management is all about.  I am pretty sure that government and citizens ultimately would benefit significantly from the approach Mayor Bloomberg is advocating.  Competition for funding and holding people accountable for results always yields good results.

I remember when I was younger (much younger), I’d wake up on Sunday morning excited to watch WWF wrestling (now WWE) only to find my dad parked in front of the TV watching Meet the Press or something that I found utterly mundane.  But it seems that I’ve outgrown my fascination with the figure-four-leglock and the camel clutch (former WWF fans will understand those references) and now I’m watching the boring stuff on Sunday mornings.  This morning, I was watching “This Week With George Stephanopoulos” (herein referred to as GS) with many guests including Robert Rubin and Newt Gingrich.  (Please note: as is fashionable these days, this is a ‘bipartisan’ post)

Newt Gingrich and Robert Reich were guests on GS’ show and these two agreed (shocking) that the US government needs to differentiate between expenses and investment.  They argued that investment occurs in improving infrastructure, education, alternative energy, etc while there are expenses which keep the machine running.

They were discussing investments vs expenses in the context of the government.  Yes - you read that right.  So let me explain why this is important.

Brilliont did an analysis of the 800 large and mid-cap companies which found that those who increase investment (expenditures in marketing, R&D, innovation, sales, etc) and minimize expense (general & administrative, IT infrastructure, etc) outperform their peers.  Basically, investing in those things that help the organization attract and retain customers and compete more effectively/efficiently is a good thing.

The key point here is that not every dollar that goes out the door is the same.  Some are strategic and create value and some are non-strategic.  It really is that simple.  Unfortunately, our accounting and treatment of these dollars is all too often not nuanced enough, and every dollar is the same.  This lack of understanding of expenses continues today in corporations which generally have more enlightened or progressive practices than government bodies given the short-term accountability they generally have and their inability to print new money.  So as you can imagine, this type of understanding within the government based on our experience with the public sector is quite rare.

Although Reich and Gingrich’s discussion was only on a talk show, I can only hope that the government (as well as corporations) starts to understand the difference between investments and expenses.  Investments may take some time to pay dividends but when thinking about the long-term, they are very important.  They’re the thing that ensure you have a long-term.  Investments (strategic expenses) need to be maximized and expenses minimized.  This is where the public sector at all levels can take a portfolio approach to its expenses and really improve decision-making and the outcomes they achieve for the constituencies they represent.

Hopefully, this type of understanding can move past talk and begin to impact decision-making within the government.

In this recent interview from Business Finance Magazine’s Sept 2009 issue entitled, “The Serial Transformer“, Gary Crittenden, CFO of Citigroup, talks about his efforts to transform the finance organization at Citi.

He touches on many critical points about Finance Transformation which we help organizations with including corporate portfolio management (Investment Optimization), reengineering and driver-based planning.  Some relevant excerpts are below, but I recommend reading the entire article for those interested in creating a strategic finance organization and who are looking for ideas and a high-level gameplan from somebody who has successfully done this before in other organizations.

Gary led such a transformation for American Express Finance which transformed the organization into one of the most respected and strategic finance groups in a large organization.  American Express Finance has been discussed and chronicled by the Harvard Business Review, CFO Magazine, and the CFO Executive Board to name a few.

(shameless plug: Gary also wrote the foreword to my book - more info here)

Here are a couple of noteworthy excerpts:

On Selecting the Best Projects and Investments Using Investment Optimization

“…We think very carefully about every dollar that gets added back that offsets the reengineering.

This process is called investment optimization. We go through and look at the expense dollar optimization and ensure that we have a common definition for expenses across the company. I’m talking about the end-state now — not where we are, but where we’re headed.

In a company that is this large and this complex, even getting the definitions common is important so that somebody who is making an investment in a fixed income trader in, say, Brazil has the same financial metrics, terminal value, and present value calculations.

This is a big part of what has to happen as part of this process. But once you have this, you can then align those opportunities and say which one you prefer. You also know what’s on the margin — what the 20 last things were that I approved that would have the least impact if I had to cut them. You also know what the 20 next things are that you would approve if you had some dollars. And if you’re constantly updating and reforecasting, then you’re always able to ask yourself the question, “Do I need to cut or can I have the opportunity to add?”

On Driver-Based and Rolling Forecasting

“It ties back into this primary thing, which is that we’re trying to drive the performance of the business. There are several different elements to it.

One is to have a rolling forecasting process so that you’re always looking further ahead than you normally would. The way this starts for us is with a strategic plan that looks at a couple of years. This then turns into an annual plan, and then the annual plan gets refreshed each quarter, out for that quarter plus then the additional six months on the end of that, and then we update this twice a month as part of our normal process.

We’re always looking forward and doing a normal update to this. Now, if you’re going to be updating this frequently, you can’t do it from a bottom-up basis. You quickly conclude that you have to use the primary drivers of the business as opposed to the detailed, kind of bottom-up forecasting. It turns out, paradoxically, that doing this is just as accurate as the bottom-up forecasting. In fact, you probably get more accurate data because you’re doing it a lot more frequently.”

Amtrak is federally subsidized and to call it’s forecasting capabilities a train wreck (pun intended) would not be an overstatement.  The pseudo-company hasn’t made a profit or met its ridership goals in 37 years.  And yet they’re asking for more money (to the tune of $15 billion) to replace old locomotives and rail cars with more efficient models.

There is a rule of corporate portfolio management and the organic growth it aids and that is you compare promise vs performance for projects and then give resources to those areas where past results and future opportunities are best.  I sincerely doubt that Amtrak’s past projects have done very well, and so it’s fair to assume that this time is not going to be different.  From a federal resource allocation perspective, there are probably better places to place bets.

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.

I’ve previously written about the underwhelming success rates of multi-year projects whether they are managed by governments or the private sector (for example - Boeing’s well publicized snafus with their Dreamliner project).  This week, another multi-year project mess was highlighted that hits closer to home (literally and figuratively) and I’m talking about the World Trade Center rebuilding.

According to reports, the rebuilding of the WTC won’t be done until the middle of the next decade and will cost as much as $3 billion more than initially planned.  My wife and I live in Manhattan’s Financial District so personally, this is disappointing as the revitalization that would have accompanied the new WTC site would be great for the area.  Moreover, as someone who was at the WTC on 9/11, it would be nice if the memorial to the many victims was completed at least by the 10 year anniversary of the event.

But alas, as with virtually all other multi-year projects, the fate of this high profile project seems no different.   I fear the delays and budget overruns will only increase over time.  Despite the work of numerous smart people (and from the looks of it some not so smart ones as well), a likely army of project managers and the pressure of a city and country on the project planners to get this done, it seems nothing can save these gargantuan projects.

In virtually every post on multi year projects I’ve ever written, I always close asking people to provide me an example of one multi-year project that has gone well.  By gone well, I mean the project delivered on time and on budget.  I’ve yet to ever hear from anyone about such a project.  Despite all that is written about multi-year projects, is the success rate really zero percent.  Let’s hope not.

In the meantime, we’ll continue to wait and hope that the WTC site rebuilding is not delayed further.

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.

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.