Every manager has a good idea of what portfolio management means in an investment context. It’s about stepping back and looking at the entirety of your investments to ensure that they make sense when viewed as a group. In doing this, we consider the characteristics of investments along a variety of dimensions. For example, we consider how risky they are; we don’t want a portfolio that includes only risky or safe investments, instead, we want a good mix.
When we talk about IT portfolio management, we do mean it in this way, but we also have a broader and evolving sense of portfolio management in mind.
The broader kind of IT portfolio management has its roots in R&D and product development. It’s intimately related with what is often called aggregate project planning. The basic idea is this: projects are vehicles for executing business strategy. Therefore, your business strategy and portfolio of projects should be mirror images. So, when you evaluate your mix of investments along different dimensions, you should be concerned not only about financial risk, but also about dimensions such as size, innovativeness, and customer impact. If your strategy is to be the technology leader in the marketplace, your project portfolio ought to have enough innovative projects to be consistent with that strategy. Otherwise, in analyzing your portfolio of projects, you’ll spot incongruities. All too often, however, when companies do this kind of analysis, they find that their project portfolios don’t fit very well with their business strategies. The key to understanding why is this: you can’t see this kind of incongruity until you view your projects as a group — that is, until you take the portfolio management view.
One reason project portfolios get out of whack with business strategy is that companies do a bad job of pipeline planning and resource management. In R&D settings, research has shown that it is very common for resources (or people) to be overcommitted by 200%-300%. Companies often take on too many projects and fail to note bottlenecks that arise when multiple projects contend for the same scarce resources. This too is a problem that can lurk invisible, since most project planning happens at the project level.
There are many possible dimensions to consider in portfolio management, such as major breakthrough, new functionality, or refinement of existing functionality; major platform versus derivative; creating new market segments, entering existing market segments, expanding current market share, or keeping current customers; and finally, revenue enhancements versus cost savings.
Here is where the “framework in progress” part comes in: you must choose which dimensions are important to you. Some particular dimensions are important universally (e.g., risk, cost, benefit), but there are others that are more important to some companies than others. The portfolio management approach has the potential to make visible any problems or incongruities in the projects you are currently doing or in the set of applications you are currently running. It creates a discipline for project selection. Most important, it focuses managers’ attention on how projects and applications contribute to the long-term development of organizational capabilities. If you are not yet doing portfolio management, you ought to be.
— Robert D. Austin, Fellow, Cutter Business Technology Council