Portfolio Management

Understanding portfolio management and its essential role in overall digital transformation and strategic initiative investment governance

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Professionals in many capacities across a spectrum of industries use portfolio management concepts.  Collectively, this discipline requires a framework for organizations or individuals to select, prioritize, optimize and manage a group of investments.  The portfolio manager establishes criteria for inclusion of items or groups into a portfolio and assesses elements individually, at the group level, or relative to other defined attributes, such as return on investment (ROI).

Investment asset portfolio managers use these concepts to determine the best alternatives to deploy capital from, for example, mutual funds or an individual investor account.  Mutual fund managers sometimes are called portfolio managers.

In operationally intensive industries, such as oil and gas, sometimes executives are made responsible for the productivity of a hard asset portfolio, such as North American refining capability.

In biopharmaceutical companies, R&D executives are responsible for collections of new drug candidates, sometimes focused on therapeutic areas, such as oncology.

Any industry that derives success primarily from the execution of new projects or programs to deliver new products or services or optimize the productivity of hard assets likely practices some form of portfolio management.

Each industry has its own set of requirements and objectives for portfolio management practices. However, virtually all industries receive benefits from employing these disciplines to make and manage decisions for IT-centric or IT-intensive initiatives across the full investment governance life-cycle.

Digital transformation initiatives at the core of many operating strategies rely heavily on portfolio management to marshal and monitor programs end-to-end.

Inpensa focuses exclusively on digital investment governance, with a unique perspective on the influential role of portfolio management throughout the investment life-cycle.

Whether undergoing a fundamental digital transformation or seeking a balance between run-the-business and change-the-business initiatives, organizations can gain valuable insight by considering how the concepts in this overview bring value to the IT-driven enterprise.

Project Portfolio Management

Traditional project managers focus on execution–marshaling schedule and monitoring associated costs and resourcing.

Executives and managers in the business operations, finance and IT areas use portfolio management techniques to understand the performance of related and interdependent projects in a program or higher-level portfolio.  Sometimes they take action using this view to manage trade-offs that impact in-flight projects.

But, organizations need a wider aperture for active portfolio management.  Executives cannot make and manage decisions on the deployment of resources effectively without a portfolio management framework that extends beyond projects in flight.

The context must include potential initiatives under consideration and projects that have completed the set-up phase and are capturing benefits underlying the original business case.

To create this broader portfolio view, companies require a data and governance model that captures the entire life-cycle of strategic initiatives and subjects them to portfolio management best practices.

Project Portfolio Management Process

A robust data model is the foundation of a best practice portfolio management process that incorporates initiatives across the entire investment governance life-cycle.

  • Ideas in the pipeline
  • Business cases in the assembly, analysis and approval process
  • Projects in the set-up period
  • Projects delivered and in the benefits realization phase

Required data capture to fully characterize initiatives for a thorough portfolio management process as part of an end-to-end investment governance framework include:

  • Metadata that describe and characterize an initiative. These include initiative name, investment category, business unit, and target region(s), among others.
  • Financial data used to quantify cost and benefit, along with key performance indicators, such as return on investment (ROI), net present value (NPV), internal rate of return (IRR), payback period, and more.
  • Non-Financial data used to describe other attributes. These include data defining non-financial business benefits that can be measured, and data resulting from the calculation on ratings for characteristics such as strategic alignment, strategic value, and ability to execute. Unstructured data types may include a project narrative and notes associated with the elements mentioned above.

The combination of:

  • A robust data model, purpose-built to capture and manage detailed financial and non-financial information specific to strategic initiatives, with
  • A representation of projects based on status in the investment governance life-cycle,
    provides portfolio managers a 360° view of all initiatives, regardless of status, with a detailed characterization of each.

Portfolio Management Software

When managers attempt to implement the above-outlined methodology with a combination of off-line tools and manual processes, they find it difficult to impossible to manage a portfolio with even minimal complexity in a useful and timely manner.

Organizations seeking best practice for portfolio management that embraces the entire investment governance life-cycle usually turn to purpose-built portfolio management software.

Users benefit from portfolio management software designed from the ground up to facilitate optimization and re-balancing.  Project and portfolio management software work together through portfolio management capabilities that place projects in-flight in the context of appropriate full initiative life-cycle portfolios.

Portfolio managers require on-demand access to real-time data to render any number of visualizations needed to optimize or re-balance a portfolio at any level. Some portfolio definitions are fixed and persistent over time.

A basic example is the “2020 Run the Business for the North American Region”.

Other portfolios may be dynamic and temporal.  Representative examples are the “Integration of NewCo Acquisition” or “State of Emergency Work From Home”.

The integration of the data model

Whether a portfolio is an element in an ongoing governance framework or targeting a specialized program or groups of programs that will be episodic, managers need portfolio software to leverage all aspects of the underlying data model easily.

The integration of the data model with portfolio visualization capabilities is required to power this solution.

The portfolio manager selects data elements that provide specific views or lenses into each project.  Select generic examples of typical lenses include ranking projects in a portfolio according to:

  • Strategic value
  • Ability to execute
  • Financial benefits; overall and by type
  • Business outcomes
  • Strategic alignment
  • Overall cost; cash impact and balance sheet impact
  • Performance to budget

After defining portfolios and selecting lenses through which to view them, analysts use portfolio management software to run scenarios based on budget guidelines to optimize or re-balance portfolios according to criteria.

An example of a basic optimization scenario: Rank projects according to strategic value with budget guidance of $15m for the coming year.

An example of a basic re-balancing scenario

Determine projects for defunding with preemptive priority for all pending infrastructure projects supporting the “Work From Anywhere” strategic initiative and with overall infrastructure budget reduction from $100m to $80m. Identify executive sponsors for affected projects. Define the downstream effect of related benefit deferral.

Portfolio managers consistently face challenges justifying decisions concerning project prioritization. Comprehensive portfolio management software makes visualizing project prioritization easy. Users can prioritize projects by the intersection of strategic value and ability to execute plotted in a traditional quadrant format, with upper right quadrant projects assigned the highest priority.

Relative bubble size visualizes budget, and color can add a fourth dimension, such as region or program within a larger portfolio.

Dedicated portfolio management software provides other significant benefits

When outlining at the high-level idea or business case phases, metadata values can trigger rules automatically incorporating an initiative in the appropriate portfolio. Single metadata characteristics such as business unit or region can drive portfolio assignments.

Multiple attributes can be used, such as a growth initiative, targeting the wealth management business unit. The manager gains real-time visibility to portfolio inclusions that must be incorporated immediately into optimization or re-balancing activities.

Key Investment Project Pipeline

Project-driven organizations can use portfolio management software to enhance the integrity and increase the velocity of essential decisions.

Many companies conduct regular financial committee reviews to determine which key investment initiatives should advance based on standard or dynamic criteria.

Governance committees benefit from the clarity and fidelity brought by portfolio management capabilities delivered as part of an overall investment governance framework.  Critical project pipeline reviews can occur at different points in the life-cycle. Popular inflection points include determining which high-level ideas should be moved forward and assigned resources to develop fully characterized business cases and deciding which business cases should move to execution.

Frequently Asked Questions

How does strategic portfolio management relate to project management?
What is enterprise capacity management for project portfolio?
What does a portfolio structure look like in project management?