Understanding PPM Best Practices

Step 3: Categorize

At the most basic level of organization the portfolio of projects and their associated budgets need to be separated and classified between non-discretionary operational and discretionary categories.

Non-discretionary operational projects are the efforts required to “keep the lights on.” The discretionary projects are the efforts that provide the business some form of incremental upgrade or new strategic capability.

A typical discovery for a company performing this exercise for the first time is to learn that a majority of the IT budget is being spent on operational, non-discretionary activities.

The Meta Group (now part of Gartner) estimates that an IT budget not being managed as a single investment portfolio is comprised of 50% to 80% non-discretionary projects.

This discovery is usually somewhat surprising. For the first time, company executives and the CIO begin to realize that far too much of the IT budget is being allocated to operations, while too little is given to enhancing the business and strategic investments.

A large benefit of PPM is to enable the operational cost of IT to be fully understood and measured.

This financial model should be used to communicate how much money is being spent to provide a given set of business capabilities to business executives and management.

On a regular basis, the CIO should report what percentage of the total IT spending is applied to new business processing capability and what percentage is spent servicing existing customers.

Measurement can take the form of a percentage of revenue, the cost per employee or any other metric relevant to an organization. Once measured, the operations budget can be managed for efficiency and effectiveness gains because every dollar that can be reclaimed from operational functions can be applied toward more strategic initiatives.

The end benefit of managing the operational function of IT more efficiently is getting more bang for the same buck.

The remaining discretionary budget dollars need to be split into two groups: one for strategic initiatives and one for performing small, incremental upgrades.

By far, the lion’s share of discretionary dollars should be targeted for strategic projects — those initiatives that will provide the greatest value and return to the company.

Because of their size and complexity the number of strategic projects being executed at any one time will pale in comparison to the number of small projects being worked on. It is not unrealistic for an organization to see a 3:1 ratio of currently active small projects to large, strategic projects.

Because of the large number of small projects that IT must perform it is critical that this component of the portfolio be well understood and effectively managed.

A safe and consistent manner to understanding and managing the funds for incremental upgrades is to allocate and reserve a portion of the overall discretionary budget.

If the organization has a history of tracking such projects this history should be evaluated to determine a standard annual amount for an incremental projects budget. If the organization has no record or measure of such projects a good initial budget should be between three-to-six percent of the overall discretionary budget.

The Bottom Line

Building a project portfolio inventory can be painstaking, but is well worth the effort. For many it will be the first holistic view of all IT initiatives underway in the organization. But creating the portfolio’s initial inventory establishes the starting point for further analysis.

Once your baseline is created, each project should be evaluated on value and duplication criteria. In this step, the funds and resources recaptured from killed projects should be made available to high value investments.

Finally, you need to organize your portfolio by investment type. In general, there are two groups; non-discretionary and discretionary.

This simple categorization will open your eyes and the eyes of your business executives to the magnitude of work required to simply keep the IT environment running and will emphasize why managing the spending on new IT solutions is truly an investment.

A good project inventory is the foundation to managing IT investments, but portfolios are not static. They need to be continuously directed to align with changes in the organization’s strategy and business goals.

Next month, we will get our arms around the most abundant project type in the portfolio — small projects. These little gems may seem insignificant but they’re not.

Jeff Monteforte is president of Exential, a Cleveland, OH.-based information strategy consulting firm, which specializes in IT governance, information security and business intelligence solutions. He can be reached at [email protected].