Sin 1: Narrowly Defining the Portfolio

A lot of companies focus much of their effort on optimizing their capital expenditures. And because these are often large, multi-year investments with major implications for future company growth; it makes sense that scrutiny is applied to these investments. However, a corporation’s focus on CapEx often takes needed attention away from OpEx, which is often assumed to be steady-state or business as usual (BAU) when, in fact, much of it is truly discretionary in nature (e.g., marketing, IT, operations, sales, R&D, innovation, etc.). By narrowly defining their view of which investments are worth optimizing, many companies are missing out on a huge opportunity to improve performance and accountability.

Another area in which companies have moved toward a portfolio-management approach is information technology (IT). This appears to be driven mainly by the emergence of IT portfolio management and project portfolio management (PPM) vendors, who seem to exclusively target IT, but again, this is a limited way of defining the portfolio, given that IT is only one of the large components of expense at many companies.

If the initial rationalizing of what is a portfolio is due to a conscious decision to walk before one runs, then this is a prudent and pragmatic approach that makes sense. Show the applicability of CPM within one important arena and then use those results and support to introduce CPM in other parts of the organization. But if your view is that CPM applies only to CapEx or IT or just one particular area, you will not be able to realize the transformational benefits that CPM can afford your organization because of this narrow view.

Sin 2: Investment Decisions Are Like New Year’s Resolutions

In their book, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap (Harvard Business School Press, 2003), Jeremy Hope and Robin Fraser talk about the “annual performance trap” as it relates to budgeting and planning. Unfortunately, the same phenomenon seems to have entrapped many organizations in terms of how they view their investment and resource allocation decisions. Your investments and projects should not be like New Year’s resolutions—something you talk about at the beginning of the year but generally forget over time.
Why? Because this is grossly counter to the way a company’s portfolio should be treated. Given the pace of change in business, this portfolio inertia is very dangerous. How do you respond to competitive threats? How do you know a product is launching when it should or delivering the short-term results that were expected? Where do you invest additional available money due to better than expected performance or some one-time extraordinary event? Viewing your investments and portfolio as a once–a-year event means you are not ready to react to such situations and hence the flexibility, adaptability, and accountability of your organization is minimized.

CPM requires that you are always updating your portfolio of investments with accurate and current information so that you can rebalance your portfolio dynamically over time as needed. It also forces you to determine which investments are flexible so that if negative events occur that require reducing investment spending, these investments can be turned off or scaled back. Negative events can be company specific (e.g., a need to reallocate funding to another market to take advantage of a new opportunity or to fend off a competitor, a need to reduce funding for a marketing campaign in order to redeploy those funds to a compliance/mandatory project). Negative events can also be macro-oriented (e.g., country-specific risks such as political, currency, etc.) which require a rethinking of investments in a particular market. Currency devaluation in several Latin America countries, SARS, the September 2006 coup in Thailand, terrorist actions in London and or Madrid were all potentially negative events that could change your investment portfolio even on a temporary basis.

Imagine for a second that the roof of your house caved in after a snowstorm in February and you went to your bank for a loan, and you learned that the decisions to give the bank’s resources were made during a four week period sometime in October and that you’d have to wait until then. This wouldn’t be acceptable in this personal situation and it should not be acceptable in the context of an organization.

Sin 3: Decibel-Driven versus Data-Driven Decision Making

There is an old business adage that says “If it’s not being measured, it’s not being managed,” and with reference to optimizing the corporate portfolio, there is definitely not a more appropriate comment. CPM is about data-driven, objectives-based decisions. It is about removing the decibels from decision making (i.e., the non-objective, personality-driven reasons projects happen). This does not mean that every investment will have a rigorous cost/benefit analysis underlying it as it is difficult if not impossible to always quantify the impact of an investment, but the majority of investments should have measurable and defined metrics or milestones associated with them. The intention is to balance the predominant intuition and decibel-driven decisioning with analytical, data-driven decision making.

Sin 4: Too Many Metrics, Not Enough Time

So data-driven, analytical decisions are essential for CPM, but can you have too much of a good thing? While the data drivers and metrics associated with an investment can help guide your business, an organization must be careful not to “boil the ocean” when it comes to determining which pieces of data are important and which are not. The main problem with too many metrics is that although most do not have significant impact on investment performance or how to manage the company, they take significant time to create, compile, and analyze. But by having a robust set of drivers and metrics, companies often are lulled into a sense of accomplishment. “We have a management dashboard which tracks the 73 most important drivers of our business.” This is not good management. It is confusion. So, one of the primary objectives your organization should have is determining which investment drivers and result metrics really impact how you run your business and how your business performs.

Hopefully, these drivers and metrics map well against one another. Performing sensitivity or other statistical analyses of your various drivers can help you distill down what really impacts the cost benefit analyses you put together in your organization. By determining the appropriate drivers, you can also ensure that people within the organization are using acceptable assumptions when building business cases. By refining the output metrics that are going to be looked at, you can help guide investment owners to focus on what is important and increase accountability for actual results that matter. If you have 50 different output metrics you determine to be important, the message to people putting forward investment proposals is ambiguous. An example of where the wrong metrics are being looked at can be seen in the current craze for innovation. The metrics companies look at to determine their progress against innovation include number of patents filed or number of opportunities reviewed and killed or dollars spent on innovative projects. Do these metrics really tell you how innovative your company is? Does the number of patents just incentivize people to aim to patent everything and anything? Does looking at number of opportunities killed give you any insights into the quality of the ideas that have come into the process? Does the amount of dollars invested in innovative projects tell you whether those ideas are good ones, whether the projects are progressing as they should, or, more fundamentally, does it tell you if people within the organization are defining innovation in the same way?

As Gladwell stated in Blink, it is important for the sake of expediency and good decision making to use what psychologists refer to as the “power of thin-slicing,” which says that as human beings we are capable of making sense of situations based on the thinnest slice of experience. Data is required, but an over-reliance on it will slow you down and ultimately cause bad decisions or, even worse, indecision. Your intuitive ability to thin-slice is necessary and valuable when used appropriately. When used in conjunction with analytics, it makes for a very powerful symbiotic relationship.

Sin 5: One-Size-Fits-All Portfolio Management

Often, companies undertaking the deployment of CPM aim to optimize a metric or use a framework to determine how they should be allocating their resources. In short, if a single framework or metric could help you determine how to make resource allocation decisions, your individual talents would ultimately not be needed. Let us take a look at an example of a fictitious metrics-oriented organization, MetricsCo, Inc. MetricsCo initially determined that return on investment (ROI) would be the main metric it would choose to optimize and that it would fund only investments with an ROI of over 100%. In essence, all MetricsCo has to do to pick where to allocate resource is to compile a list of its investments, sort it in Excel by ROI, draw a line at 100%, and action the investments that have an ROI of over 100%. Quite simple, right? Yes indeed, and wholly inadequate and ineffective. Doing this does not consider risk, strategy, the validity of assumptions driving these investments, or the most basic idea of a portfolio that says that you probably want to have a mix of investment types (i.e., those that are low risk where you are fairly certain of your returns coupled with those that are more innovative or riskier where the results are more uncertain but that you want to do in order to enable organizational growth).

Let us assume MetricsCo realizes the inadequacy of its ROI-oriented portfolio and moves to an investment-scoring methodology according to which it will consider various return characteristics to give each investment a score that can be used to compare across investments. With its new, more ”rigorous” evaluation technique, MetricsCo weighs ROI 33%, net present value (NPV) 33%, and five-year revenue growth 33% to develop this investment score. Again, this technique, while a modest improvement over using just ROI, fails to consider risk, strategy, the validity of assumptions driving these metrics, and investment mix.

After realizing the fallacy of this investment0scoring method of picking investments, MetricsCo decides to develop a more rigorous resource allocation framework that considers risk and returns. The company determines that payback period is the risk metric and ROI is the return metric to look at in its resource allocation framework and puts together a eye-catching 2 x 2 matrix on which they will plot their investments.

This framework would then “tell the organization” to fund those investments that are in the that is high ROI, short payback period. Again, the same issues arise. While this may be a useful diagnostic to determine whether the company should be doing more or less of certain types of investments or to spur questions about certain investments, organizations must prevent the urge to use their CPM process as a ”black box” to make investment decisions.

The impression on the behalf of initiative owners that CPM is a means for some central body to make decisions for their areas and the organization overall can lead to needless conflict. Moreover, it is unrealistic to expect a central body to make decisions for the entire company based on a framework. A central body reviewing investments across an organization should be able to raise provocative ideas and questions about portfolio investments and force transparency and accountability, but it is not reasonable to expect that such a central body can “optimize” the portfolio.

Sin 6: If We Install This Software, We Will Be Able to Optimize Our Corporate Portfolio

A whole host of vendors may try to sell you on the proposition that a software solution is required for a Corporate Portfolio Management discipline. And they are dead wrong. Technology exists that can help with the aggregation, reporting of, and analytics of your organization’s portfolio, but there is no technology tool that will optimize your organization’s portfolio. Many of the currently available tools lack the ability to actually model your investments; instead, they capture data on investments with no ability to determine whether these inputs are realistic or valid with historical performance. A driver-based approach would help mitigate some of these issues, but not all.

While many vendors do clearly articulate the benefits of portfolio management, their software’s value proposition in realizing these benefits is conceptual at best, although they will point you to results that their tools have delivered. In this case, correlation does not imply causation (i.e., the results delivered are more a function of a committed organization that happened to have a tool versus a tool that has really driven these benefits). Gartner analyst, Matt Light, probably has most eloquently stated the over-emphasis on a technology tool as a solution with his comment at the Gartner Symposium/ITxpo 2006, “A fool with a tool is still a fool.”

Some industry studies have actually found that 80% of the functionality available in off-the-shelf portfolio management tools is utilized by only 20% of customers. So the question is why invest time, significant money, and resources on a large-scale enterprise deployment of a tool when much of it will not even be utilized? Technology, thoughtfully applied, can help you enable the process with greater efficiency, accountability, and transparency, but it is not the solution or even one of the most essential components of the solution. In fact, adopting a technology tool after you have built a CPM capability and worked through some of the cultural and behavioral elements is beneficial in that you actually have some experience with CPM and can now better articulate to a technology provider what issues you need to solve for or what functionality you would like in the tool. As a result, adopting a technology tool at the outset of implementing a CPM discipline is usually not advisable.

Sin 7: It Is All about the Projections

If your plan to deploy a CPM discipline across your organization does not include a means to capture actual investment returns, its value is significantly minimized. The ability to compare promise (projections) versus performance (actuals) is a basic underpinning of successful CPM in that it enables accountability within the organization and helps future performance by improving and constantly refining drivers and assumptions used in investment projection creation.

That said, this “closing of the loop” is the single hardest part of CPM. Many organizations do not even have tracking systems or the infrastructure and instead rely on ad hoc methods to track in Excel or self-created databases, if at all. For those with tracking infrastructure, many such systems are legacy systems, many of which capture actuals. Often enough, those actuals are captured at a more aggregated or disaggregated level than an investment projection is created, so truly comparing promise versus performance at an investment level becomes difficult. But this is not required. Even capturing actuals at some aggregated level so that many investments can be aggregated and compared for promise versus performance is of immense value.

As you embark on your path to enabling CPM, keep the closing of the loop in mind as an objective as it is the only way to turn data about investments into knowledge over time.

Sin 7.5: Portfolio Management Is a Tunnel—Not a Funnel

If every project submitted gets reviewed and ultimately funded, an organization’s CPM process is not an investment decision-making discipline; rather, it is a bureaucratic exercise that adds little to no value. The process is a tunnel where everything that goes in comes out after filling out some checklists and process hurdles. CPM processes require constructive conflict and discussion and ultimately require that some projects get killed. A funnel means that if 100 investment proposals are submitted, only 75 get funding, for example. This ability to stop projects when proposed or sometime during their delivery if they are not achieving expectations is a key element of keeping your CPM discipline relevant and part of the organization’s DNA. It is not the number of projects accepted or killed that is important; it is just that people must know that managing the corporate portfolio is serious business, and rejecting bad business cases or ideas is a surefire way to let people know that the organization is serious about funding investments on a meritocratic basis.