Portfolio management. Executive Dilemmas. Our Agenda Today. Compiled by Johann Packendorff. The Context for Portfolio Management

Transcription

1 Portfolio management Compiled by Johann Packendorff Our Agenda Today The Context for Portfolio Management What is the business problem we are addressing? Project Portfolio Mgt v Enterprise Portfolio Mgt Picking the Winners Components of Portfolio Management Portfolio Categorisation Assessing Value Prioritisation, Selection and Monitoring Program Portfolio Executive Dilemmas We do a good job of Project Management - why don t our projects succeed? How do we link our initiatives to strategic objectives and measure our performance? How do we identify the most important initiatives? How do we allocate resources within our constraints? Governance How do we simplify the investment approval process? How do we make our governance more effective?

2 Program Program 0 Program Program 9 Program 06 Program 0 Program Program 09 Program 0 Program Program 08 Program Program 7 Program 6 Program Program 07 Program One Way To Manage Our Portfolio Advantage? its easy and quick Cut Cut along along dotted dotted line. line. Firm Infrastructure (e.g. Finance, Planning) 0% 0% Human Resource Management Technology Department Procurement Inbound Logistics Operations Outbound Logistics Marketing and Sales After-Sales Service 0% Cut along dotted line. But can the collateral damage be managed? The Symptoms We Regularly See Arising From Poor Portfolio Management Situation Leads to.. Leads to.. Results in.. Results in.. Lack of Strategic Focus Reluctance to say no to projects Too many projects Over budget Projects Late Projects are sold on emotional basis -- not selected No strong review process Overemphasis on Financial ROI No clear strategic criteria for selection Can t kill projects Underestimation of risks and costs Quality of execution suffers Projects not aligned to strategy needs not met Benefits not received Lack of confidence (in IT) What is Portfolio Management? A set of processes that maximises value by introducing: Clear and complete understanding and definition of potential investments Objective evaluation and selection of the highest potential value investments Alignment with strategic goals Measurable contribution to Hold business outcomes Acceptable level of risk Proactive management of execution to deliver results Overall l Worth Stop Proceed Overall Risk

3 Benefits from Portfolio Management Alignment Projects are aligned with business objectives Value Focus on projects that deliver value to customers and shareholders Strategic Focus on projects that increase the strategic capability Timeliness More projects are completed on time and budget Balance Portfolio has the right balance of high, medium and low risk projects Right Number Portfolio has the right number of projects plus Develops Trust, Shared Vision and Communication with the Source: Portfolio Management for New Products, Cooper, Edgett, Kleinschmidt (Perseus Books, 00) Portfolio Portfolio value value maximised maximised -increased -increased by by x x to to x x (META) (META) Portfolio Portfolio spend spend decreased decreased by by 0-0% 0-0% (META) (META) Where does your organisation stand in relation to Portfolio Management?. Projects are aligned with business objectives. Portfolio contains very high value projects. Spending reflects the business strategy. Projects are done on time. Portfolio has good balance of projects 6. Portfolio has right number of projects Poor Poor Excellent Excellent Source: Portfolio Management for New Products, Cooper, Edgett, Kleinschmidt (Perseus Books, 00) p9 Our Agenda Today The Context for Portfolio Management What is the business problem we are addressing? Picking the Winners Project Portfolio Mgt v Enterprise Portfolio Mgt Components of Portfolio Management Portfolio Categorisation Assessing Value Prioritisation, Selection and Monitoring

4 The Primary Challenge : The Disconnect Between Strategy And Delivery Of Change Strategy Management Selective hearing Wishful thinking Fear Emotional overinvestment Project Management Asset Manage ment Architecture Management Operations Management A New Perspective IT Investments Investments in IT-enabled Change To Bridge The Gap We Must Think In Terms Portfolio Management Program(me) Management Portfolio a suite of business Program(me)s managed to optimise overall enterprise value Program(me) a structured grouping of projects designed to produce clearly identified business outcomes Project Management Project a structured set of activities concerned with delivering a defined capability based on an agreed schedule and budget

5 A Complete Framework For Strategic and Value Governance Strategy Management Portfolio Management Program Management Project Management Asset Manage ment Architecture Management Operations Management Sources of value leakage experience as to where our focus should be! Duplication of initiatives Applications which don t fit the business model Poorly conceived initiatives (too late, too early, unnecessary) Rework (requirements misunderstood) Over-engineering (lost sight of reason for change) Resource model not aligned to business need Strategy Management Portfolio Management Program Management % Project Management % Asset Manage ment Operations Management % Architecture Management Source: IBM Strategy & Change, Survey of Fortune 000 CIO s. Underutilised infrastructure Frequent reinvention due to poor architectural alignment Our Agenda Today The Context for Portfolio Management What is the business problem we are addressing? Picking the Winners Project Portfolio Mgt v Enterprise Portfolio Mgt Components of Portfolio Management Portfolio Categorisation Assessing Value Prioritisation, Selection and Monitoring

6 Categorising & Balancing the Portfolio Balance the Portfolio mix to align with strategic and tactical, near and long term objectives Every investment need not follow: The same level of value analysis The same level of control doing better things doing more things doing things better VENTURE GROWTH ENHANCEMENTS Discretionary Projects Transform the Grow the Value Assessment Cost Benefit Analysis keeping our promises keeping the lights on keeping our job NON CORE MANDATORY Non-Discretionary Costs Run the Impact Analysis Little Analysis Categorising & Balancing the Portfolio The first challenge is in creating as much choice as possible in how funds are used doing better things doing more things doing things better keeping our promises keeping the lights on keeping our job VENTURE GROWTH ENHANCEMENTS NON CORE MANDATORY Non-Discretionary Costs Discretionary Projects Transform the Grow the Run the Choosing and Evaluating Initiatives - Dimensions of Value Alignment Measure of fit with goals Are we doing the right things? Worth Measure of $ and non-financial contribution Risk Chance of not realizing benefits NPV = = n o ( CF n ) n + i Value = Alignment * Worth Risk 6

7 Program Program 0 Program Program 9 Program 06 Program Program 08 Program Program Program 0 Program 7 Program 09 Program 0 Program 6 Program Program 07 Program It is not just about Financial ROI Recommended reading: Portfolio Management in New Product Development, Results of an Industry Best Practices study, Cooper et al Rated the success of Portfolio Management methods as the dominant method of selection in the portfolio Strategic Measures came out most successful Pure financial measures came out the worst by far Many organisations have a combination of financial and non-financial goals A business case where every outcome is attributed a dollar value is believed by no-one Need to adequately reflect contribution to the organisation s goals And then picking the winners... Objective evaluation & selection of the highest potential value investments, according to: Alignment with strategic goals Measurable contribution to business outcomes The apparent risk that the benefits will not be realised worth worth Overall l Worth Proceed Hold Stop risk risk Overall Risk Our Experience Shows There Are Ingredients For Successful Portfolio Management Portfolio Management Approach Supported by. Portfolio Management Processes Enabled by. Portfolio Management Tool Source: Gartner (June 007) 7

8 Decision Tree Corus Roadmaps Identified technologies [ ] Corus Technology Roadmaps K ill [ ] no no Need for? [ ] Sim ilar yes c a p a b ilitie s externally? [ ] yes D e v e lo p, B u y o r K ill decision schem e Develop/keep in te rn al capability [8] high C o m p e titive Im p a c t? [ ] unclear Strategic fit? [6 ] clear Acquire externally [9 ] to p Potential position in years? [7 ] Develop/keep in-house [8] lo w Acquire externally [9 ] average Develop alliance [0] Attractiveness Capability Matrix Maximum Project Project Score A B Attractiveness Strategic importance 0 Economic reward 0 7 Time to market 0 7 Robustness Indirect benefits Total Capability Validity of the idea 0 9 Adequacy of resources 0 9 Production/market skills Readiness to scale-up Quality of the proposal 0 7 Total Other Methodologies Min Revenue Probable Max Min Costs Max Probable 00 $0K $0K $60K $0K $00K $60K $00K $70K $900K $60K $000K $0K $70K $900K $00K 007 $60K $900K $0K 008 $60K $900K $0K Cash Flow ($8K) ($97K) $00K $70K $9K $9K $9K..0 Distribution for NPV / 00/C Mean=$76K Values in Millions % 90% %.6 8

9 Other Methodologies cont The Net Present Value of a project is the cash inflows less outflows, discounted at a given rate over a period of time. It is based on the concept that a dollar spent today is worth more than a dollar received in the future. Cash flow + 0 Revenues R&D years - Capital Other Methodologies cont Commercial Success Technical Success P cs Yes $ NPV P ts Yes Launch $C $ ECV Development $D No Commercial Failure No Technical Failure ECV = [(NPV x P cs C) x P ts D] $ECV Expected Commercial Value of Project P ts Probability of technical success P cs Probability of commercial success $D Development costs remaining in the project $C Commercialisation (launch) costs $NPV Discounted net present value of future earnings PfM Lessons learned Recognise that the introduction of Portfolio Management is a major change It s about behavioural changes to: Accountability Focus (on the next dollar not sunk costs) Transparency & consistency Measure what s important and manage what you measure Integrate with existing processes Avoid excessive bureaucracy There is a place and need for tools Pick the right place to start Take an incremental approach 9

10 Program Program Program 0 Program Program 0 Program 7 Program 9 Program 09 Program 0 Program 06 Program Program 08 Program Program 6 Program Program 07 Program Overall Risk Define Programme Concept Mgmt Approved Design Programme Commission Programme Mgmt Approved Mgmt Approved Execute Programme Mgmt Approved Transfer to Operations Mgmt Approved Maturity levels for Portfolio Management INITIAL REPEATABLE DEFINED MANAGED OPTIMISING Value Ad Hoc Initiatives are selected for investment based on ad hoc processes. No overview is maintained of all investments cases may be needed for initiatives: Typically based on simple financial metrics. cases are considered in isolation. Once approved, there is no consistent or effective management and tracking of benefits. Making Lists cases are needed for most initiatives. cases are scored and assessed primarily on financial measures. An investment approval lifecycle is established and followed. But there are no effective processes to track the outcomes of investments and to manage the investment portfolio as a whole. Portfolio View cases are essential for all initiatives. The whole portfolio is captured and outcomes are tracked and reported, using basic measures of financial value, alignment, risk and initiative health. Refined Metrics Robust metrics of financial value, alignment, risk and health are established. Initiatives are categorised. Scorecards are used to summarise portfolio composition and health. Project selection is integrated with resource management. Portfolio management is proactively used as a means of aligning the portfolio to business strategy, through a cyclical investment process. Dynamic Execution There is feedback and continuous improvement. The portfolio is continuously monitored and adjusted to maximise its value. Portfolio management is no longer tied to cycles. Dynamic portfolio management is the accepted process. Initial tool implementation and investment capture. Extended metrics and scoring. Dynamic analysis and measurement. Capability Portfolio management is the key to good governance VENTURE GROWTH ENHANCEMENTS Non-DiscretionaryDiscretionary Transform the Grow the NON Alignment Run the CORE worth Are we Are we doing getting the right the things? benefits? Are we doing them the right way? Risk Are we getting them done well? Categorise Transformational Informational Transactional Infrastructure Mandatory Sustaining Discretionary Evaluate Alignment Worth Financial Non-Financial Risk TRANSPARENCY Overall l Worth Stop Proceed Hold Select & Monitor Source : John Thorp 0