investiledysfunction

So I recently spoke at a conference in Amsterdam where I heard an executive from Air France, (Marco Vd Poel), talk about their portfolio management effort. It was a refreshingly honest and well-articulated presentation. It was one of those presentations that only a practitioner can give because it was based in reality and showed the good and bad of their portfolio management efforts.

Marco had one line in his presentation that was simple, to the point and absolutely SPOT ON. I’m not sure if it’s a line he came up with, but he’s the first person I’ve heard say it so he gets the credit. He stated:

“Project Management is about doing projects right. Portfolio Management is about doing the right projects.”

Now let that sink in for a second.

How money is that line, eh? It is absolutely 100,000% correct and elegantly simple. So the next logical question is why are project managers running portfolio management efforts within their organizations if it is a different skillset altogether.  It’s a bit like having Eliot Spitzer teach a class on abstinence.  They don’t go together. 

Undertaking the right projects and investments is about measuring value, considering strategy, risk and financial returns, etc and optimizing the portfolio based on those inputs and factors.  Plain and simple - this is not what project managers know how to do nor what they are trained/supposed to do.

Portfolio management in the corporate setting especially IT has basically evolved like this. If you have enough projects, they roll up into a program. If you have enough programs, you all of a sudden have a portfolio. Somehow having a portfolio defined this way gives you the skills to do portfolio management. Wrong.

I’m not sure when folks will realize this. When they do, it will let project managers do their job better because they won’t have to do these portfolio exercises.  And it will let organizations get the right people to head up their portfolio management efforts and actually get the value they can from such an effort - instead of the glorified project management that it currently is.

This is not meant to disparage project managers. I just think they’re being asked to do things that they’re not best-suited to do. Picking the right projects as part of a portfolio is a strategic, financial and risk discipline and very different than the skills possessed by project managers. If you are in the handful of project managers who can do it all, please don’t write to tell me this. You are awesome and a rare gem. I’m talking about the average project manager who doesn’t have the project management + strategy, finance, risk, etc skills.

Thoughts? 

CFO Magazine’s March 2008 issue has an article titled “Thriller: The Federal Government’s Annual Report is Not for the Faint of Heart” which paints a fairly frightening story of our government’s fiscal condition based on its issuance of a 2007 Annual Report.  And the government seems to know this as evidenced by David M. Walker’s comment that “If the federal government were a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company’s management and directors needed a major shake-up.“  What’s notable is that Walker is the Comptroller general of the United States and head of the U.S. Government Accountability Office (GAO).

The government ran a budget deficit of a mere $163 billion which is 1.2% of GDP.  This is supposedly good news as it is 1/2 of the forty-year average which stands at 2.4% of GDP.  But let’s not let forty-year averages make us feel good.  The story gets scarier as the article details.  The most alarming thing is that “For the 11th year in a row - that is, for each year the federal government has prepared consolidated financial statements and submitted them for an audit - the GAO could not express an opinion on the government’s books, primarily because of material weaknesses in financial reporting.”“Of the 24 federal agencies that fall under the aegis of the CFO Act of 1994, 19 did not produce a clean set of books…The worst offender by far is the Department of Defense.  The GAO said that the agency could not accurately account for its property, plant and equipment, which make up 69% of the government’s total.”

Walker who seems to be a straight-talking sorta guy adds, “It seems clear that our nation is on an imprudent and unsustainable long-term fiscal path that is getting worse with the passage of time.” And finally, the article’s author, Edward Teach, concludes by saying, “What the Financial Report of the United States Government makes crystal clear is that the growth of federal mandatory spending - now more than 62% of the total budget - is unsustainable in the long run.  The same clarity about the government’s discretionary spending, however, won’t emerge until the Pentagon drains its financial-management swamp.  Who knows what horrors lurk therein?”So here are some thoughts based on this pathetic situation:

• The government should hold itself as accountable as it aims to hold corporations.  While it won’t garner as many headlines as going after big bad corporations, it smacks of a bit of a hypocrisy to not practice what you preach.  And we’re all probably owed this accountability given our tax money goes into this blackhole.  (sorry - that is more political than I like to get in this blog but that is not a partisan perspective and it seems this fiscal dysfunction has been going on for a long long time)
• Our federal government needs portfolio management to understand this supposed non-discretionary and discretionary spend better.  Three things will be revealed:
  1. Much of what is non-discretionary probably is actually discretionary
  2. A good portion of this money is probably going to projects of uncertain or dubious value
  3. Overall, the government has a very poor resource allocation process which is highly decibel-driven and siloed

When I talk about portfolio management, I’m not talking about the software and other consultant elixirs out there which are mostly or almost all bunk.  I’m talking about portfolio management in the context of an overhaul of resource allocation practices with the aim of creating a discipline to consistently and continually making better decision-making.  It is not an easy 6 month journey where some simplistic scoring framework or software panacea will save the day but one which will require many if not all of the following:

1. Education within the government about the value of more optimal resource allocation and the losses/impacts of suboptimal resource allocation today
2. Active championing by senior government leaders who get it and not people who give the idea lip service
3. Arriving at a definition of what is a discretionary investment or project
4. Developing a standardized means of valuing projects and investments especially those with non-financial returns
5. Creating methods to track investment performance so that promise can be compared with performance and people held accountable
6. Enabling methods to move resources (money primarily) within and between departments in pursuit of the best opportunities.  This is what is known as optimizing the portfolio.

While much of the above may seem to be a pipedream, I’m encouraged by discussion about portfolio management which is going on with the public sector at least in small parts.  If the conversation veers towards better decision-making as a means to optimizing resource allocation, the government may benefit over the medium- to long-term and we might all know where and why the government is doing what they do.  That might be wishful thinking but maybe we’ll begin to at least understand where our money is being wasted to start.  Ultimately, we might actually make the spend more efficient.