META Report: Portfolio Management Helps Manage Through Uncertainty: Part 2

Portfolio management also requires effective and frequent tracking of ongoing expenses and schedules – both for build-out and operations. Unlike a stock purchase, an IT project’s expenses are almost never known accurately at the start. Many organizations fail at predicting, measuring, and tracking changes in the costs of their ongoing projects. Projects are inherently uncertain endeavors. Gaining a better understanding of the actual costs (direct and opportunity) and future return on investment (ROI) are key features of portfolio management. Without this capability, the CIO cannot understand the true cost/benefit proposition for any one of the portfolio entries. Portfolio management’s frequent sampling also helps CIOs manage risk and complexity.

Timing is also often vital to realizing the business value of a new IT project. Therefore, project management must also include better tracking of the progress of project build-outs and an ongoing comparison of progress to changes in the pace of market development. For instance, the pace of development of many technology-driven markets has slowed dramatically since 4Q00, making expensive projects designed to grasp new opportunities in those markets much less urgent. The opposite is also true, of course – if the IT project falls behind the market, then it may be better to stop the project than to produce an Edsel.

Tracking ongoing project costs and scheduling is the job of project managers. Many ITOs lack competent, experienced project managers, and without them, effective portfolio management of projects is impossible.

Portfolio management creates alignment between the ITO and business and senior management; it can help the CIO explain the value of IT investments to senior and line-of-business (LOB) management. By showing the expected benefits against current costs (e.g., purchase, installation, upgrade, hiring, training) and then showing how those purchase and installation costs will decrease over time as the price of technology drops and the technology, personnel skill sets, and processes improve, the CIO can chart the point at which each investment is justified based on business value. These charts can be invaluable in winning business management buy-in for IT- and LOB-sponsored investments.

Trigger setting based on business achievement (revenue generation or increased market share) can also help the CIO explain longer-term value by showing the expected business benefits against current cost. Diminishing returns may help prioritize investments, offset new technology hype, and generate performance metrics to create realistic ROI estimates.

ITOs must realize that successful portfolio management requires fiscal, process, performance engineering, and project management disciplines. When management is not able to quantify the business values of a project (e.g., CRM), it is an indication of poor performance and ROI metrics. Similar to requiring good activity-based costing and project management, rigorous portfolio management relies on applying a balanced set of measures (e.g., balanced scorecard) and a logically transparent internal rate of return. These quantifiable benefits must be captured, communicated, and known through a corporation’s value management processes. In lieu of a compelling value statement, the project in question and the entire IT portfolio of investments will revert to purely cost measures. After all, one of the benefits of portfolio management is retiring non-value-added systems.

While balanced measures and robust internal rates of return provide meaningful guidelines, experienced portfolio managers have found that sound judgment is still required for effective change. Business sponsors, project leaders, and end users have tendencies not to terminate expensive activities even when presented with clear and logical documentation (e.g., cost overruns, vendor bankruptcies).

User Action: CIOs need to adapt the methods of portfolio management, at a level of sophistication appropriate to their organizations, to increase the rigor of investment analysis. Applied reasonably, this technique will also improve an ITO’s financial flexibility to respond to sometimes unforeseen financial, market, and technology events throughout the year. Portfolio management also frames the entire IT budget process in business language, giving the CIO a vocabulary and tools for presenting the budget that business management understands. This will greatly increase senior management’s confidence in the ITO in general, moving the CIO and ITO along the senior management perception chain from trust through respect to agent of transformation.

META Group analysts Doug Lynn, Al Passori, Louis Boyle, Karen Rubenstrunk, Hollis Bischoff, Kevin Cooley, Jonathan Poe, Dale Kutnick, Val Sribar, David Cearley, William Zachmann, and Jack Gold contributed to this article.

Editor’s Note: This article is the second part of a two-part series on META Group’s IT and business portfolio management model. Click here to read Part 1.