Information Technology Portfolio Management (ITPM)

The 21st century marketplace recognises information as a both a strategic resource and key enabler. When used efficiently and effectively, timely information can create and sustain long-term competitive advantage. The ability to collect the right data, develop insights from the data presented and to efficiently disseminate these insights into information and knowledge that creates and maximises shareholder value, is the key rationale that drives investment in IT.

Nevertheless in many organisations investments in IT have traditionally not been directly linked to the value propositions that a firm makes to its customers or stakeholders, or to its source of profitable and sustainable competitive advantage. There are few measures, metrics or direct correlations between profitability, risk and IT spending, and tenuous linkages (at best), between IT investment spending and the measurement of ‘Return on Investment’ (ROI) or ‘Return on Capital Employed (ROCE)’.

The strategic positioning of a typical large firm operating in a competitive economy constantly changes with the ebb and flow of the market and competitive environment it operates in. A typical large organisation would own and operate IT investments that would run into millions of dollars. The ultimate goal of these investments would be to create value and capture the opportunity costs of investing in ‘IT’ in a manner that supports the strategic positioning of the firm in real time. These investments would need to be constantly aligned (and/or prioritised) with the changing nature of the environment and the strategic objectives of the firm.

In smaller organisations a major problem is the lack of any kind of management nous on the possible advantages of actively using information as a strategic resource. IT investments in these firms tend to be ad-hoc, unsystematic and are rarely linked (if at all), to the creation of shareholder value.

The problem is exacerbated by the high failure rate of software projects, the concurrent existence of legacy projects that have long gone past their use-by date or original reason for existence, or of outdated priorities assigned to projects that are out of synch with the strategic positioning of the firm. Many managers are emotionally attached to, and/or, continue to waste resources on projects that are redundant or those that should be canned, as they no longer support the current strategies of the firm.

A few key issues that dominate the current thinking of most large organisations that invest in IT are captured below…

  • The ability of the firm to manage its IT pipeline. The focus here is on both efficiently and effectively managing the pipeline of IT projects that are currently running, and those projects that need to be undertaken to support future performance. Managing IT projects as a collection of disparate projects informs current thinking. Managing the portfolio as a whole and as a legitimate part of the investment strategy of the firm is not efficiently undertaken however.
  • The maturity and capability of the organisation to use the sophisticated suite of tools and techniques needed to measure the ability of its IT investments to create value. This is another contentious issue. Standard ‘Capability Maturity Models’ (CMM) exist that define the capabilities of an organisation on scales that range from Level One (basic) to Level Five (sophisticated). The ability of the organisation to analytically gauge its own capability level on this scale and design pathways to improve its IT management capability with a step by step methodology is less understood.
  • The application of portfolio theory to IT investments. Managing individual projects within the IT pipeline works at the micro-level of the project. Managing the entire investment in assets, process applications and ongoing projects as an ‘investment portfolio’ that is focused on the strategic positioning of the firm and is yet flexible to changes in the marketplace as they occur requires methodologies that are able to use the underlying concepts of portfolio theory into practice. This is easier said than done.

Modern Portfolio Theory (MPT)

MPT was first espoused by Markowitz in a paper he authored in 1952 which was followed by a book in 1959 where he devised a methodology that sought to maximise the expected return of an entire portfolio of financial investments for a given amount of portfolio risk, or equivalently, minimise the risk of a portfolio of investments for a given level of expected return, by carefully choosing the proportions of various assets (securities) in the portfolio. Diversification over a wide range of investments was seen by him as fundamental to this approach.

The concept underlying MPT in general financial theory is that assets in a typical portfolio of investments should not be selected individually, based on their individual merits. Investing is seen as a trade-off between risk and expected return, ergo assets with higher expected returns are seen as riskier. For a given amount of risk, MPT describes how to select a portfolio with the highest possible expected return; alternatively, for a given expected return, MPT explains how to select a portfolio of investments that provide the investor (or investing firm) with the lowest possible risk.

Modern Portfolio Theory and IT Investments In Practice

The IT pipeline of a typical organisation is by definition a portfolio of many assets, processes and ongoing projects. Whilst the vast majority of these assets and projects are used to keep the firm going at the transactional level, other more sophisticated (and arguably riskier) assets and projects are designed to provide analytical and transformational support to the strategies of the organisation. There is therefore a ‘seemingly’ symbiotic link between modern portfolio theory and IT portfolios at first glance.

The reality is that there are as many dissimilarities as there are similarities between MPT and IT portfolios. Whilst the goals of financial and IT portfolios are largely identical, the means by which they reach their goals are actually quite different. Financial securities are liquid. A financial portfolio can chose to invest or disinvest in a security without incurring large costs, often in a matter of seconds on-line. IT assets and projects on the other hand are an inter-mix of technology assets and business knowledge that have been acquired at great cost. IT investments by definition are illiquid.

Changing any technology comes with huge costs and risks as well. As a matter of fact IT managers prefer correlation and possible ways of standardising methodologies to diversification. Another difference is that financial securities have a rich body of historical data and information that is available, IT investments on the other hand invariably need the organisation to learn as it goes along. In the event, disinvestment in IT has high switching costs and often takes years.

Pipeline gridlock impacts many IT portfolios. There are far too many projects and never enough resources available to do them efficiently. An IT portfolio is more than just a collection of many projects. It is a set of often ‘interlinked’ managed assets in technology, investments in processes, people with the requisite skills assembled in an optimal mix that are aligned to future performance. Diversification is not an easy option.

These differences have made IT investments difficult to manage and align with the broader aims of the organisation without a specific plan. As a consequence, IT Project Management Offices (ITPMOs) focus on managing the projects within their portfolios but rarely on managing the portfolio as a whole.

This is the guts of the problem. A typical IT professional in the market place is inundated with a host of seemingly unconnected methodologies, tools and techniques that are used to measure efficiency or value. These include but are not limited to project management methods based on ‘on time, on budget ‘or ‘earned value techniques’, outdated ‘function point analytics’ to measure software projects that are rarely understood by staff, customer driven measurement metrics, ‘stage gates’ for major process driven projects, strategy maps, scenario management techniques, ‘balanced scorecard’ activities and measures, destination cascades and an array of financial metrics that are driven by ROI, ROCE or discounting techniques like NPV, IRR, EVA, profitability indices and real options analytics. These value measures are rarely linked from the level of the IT project into a coherent hierarchy of sorts, or correlated to shareholder value (if at all).

Not surprisingly there is much confusion from within the IT departments and in the organisation as a whole, on how the entire IT Portfolio Management methodology needs to work. In any organisation there are three different audiences who meet at very jagged coalfaces namely…

  • The IT project managers who focus on the efficacy of delivering their projects ‘on time’ and ‘to budget’.
  • The business champions (beneficiaries of the IT investments) focused on the value proposition they offer their customers, and on the ability of these IT assets (or on going projects) to support their objectives of creating and sustaining competitive advantage.
  • Finally the senior managers and key stakeholders who focus on the benefits that the entire IT portfolio brings to the organisation as a whole. This last cohort would prefer to see a coherent link between IT and shareholder value.

There is growing recognition amongst market professionals that IT investments need to justify their rationale for existence and that all IT investments must be linked coherently to business value. This is turn requires a typical organisation with large investments in IT to pursue four concurrently run pathways to value…

  • Manage IT investments as ‘individual projects within a portfolio’, to bring in the rigour of efficient project management to an individual project.
  • Manage the entire collection of investments in IT as an ‘investment portfolio’ that maximises shareholder value and minimises risks. This approach effectively requires each project to be mapped with respect to its contribution to the entire portfolio of IT projects ongoing and the assets and process investments in place, in terms of each of these projects or investment’s ability to add create value (increase ROI of the portfolio as a whole) and/or, reduce the risk of the portfolio as a whole.
  • Align the portfolio at the micro strategic level with the business units seeking to create value propositions for their customers and stakeholders and simultaneously at the corporate level i.e. on the ability of the portfolio to maximise shareholder value. This approach also requires the portfolio to be flexible to changes in the market place in real time.
  • Define (and redefine) the capability of the firm in terms of its current Capability Maturity Model (CMM) level with the added intention of designing pathways and methodologies to improve the capability level of the organisation moving forward. Use the CMM to design a workable governance model.

With the exception of a few large organisations (or senior CIO’s), the average New Zealand IT line manager and their professional staffers who work in this space lack an in-depth understanding of how IT portfolio management works, or on how to maximise and optimise the benefits to be garnered from their IT portfolio of projects and assets. Conversely almost all large organisations have expressed a need to restructure their IT investments and align them to strategy and value in some way. Depending on the focus of the organisation most professionals tend to cherry pick the bits they understand, and ignore the bits that they don’t. Many key analytics that focus on metrics that increase value or mitigate risk are glossed over or ignored.

There is therefore an urgent need for staff within IT and from the major planning departments of large organisations to understand this big picture of how ITPM works in the first instance. Designing a big picture plan that is able to capture for the organisation across the board, a roadmap of how the IT portfolio of the firm fits in with its business level performance metrics (or scorecard) is a good start point. The IT department needs to be able to treat its IT portfolio as a dynamic investment that is aligned to the strategic changes in the marketplace, to the key drivers of competitive advantage and finally to its shareholder value metrics. Managing the firm’s journey as it improves its maturity, capability and knowledge to use the key tools, techniques and measures that create value is a concurrent critical requirement.

Allan Rodrigues of The Business Binnacle, in collaboration with Michael Saunders (ex Gartner Group and Tenon Group), has designed an IT Portfolio Management methodology that captures these essential ingredients to value.

You can contact him at allan@thebusinessbinnacle.co.nz [no spam]


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