CHAPTER 14
Innovation-Driven Portfolio Management
Change is the norm, fierce competition is everywhere, and creative thinking is the current call to action. Portfolio management is fast becoming the critical managerial approach to drive innovation in today’s business environment. Enterprise portfolio management provides the rational decision framework necessary to make the right project investment decisions—decisions that enable organizations to innovate, compete, and win in the marketplace.
To implement an innovation-driven portfolio management process and achieve organizational goals, it’s necessary to move beyond strategic planning and the conventional tactical approach to project management—to innovation management. This entails aligning key business processes: strategic planning, strategic goal setting, portfolio management, enterprise business analysis, and complex project management.
Without strategy, you fail. Without strategy in a rapidly changing industry, you fail rapidly.
—LOUIS J. GERSTNER, CEO OF IBM
STRATEGIC PLANNING
In their strategic planning role, the executive management team defines the organization’s future in terms of vision, mission, and strategic goals. Strategic planning focuses the executive team on the organization’s reason for being and provides a foundation for selecting and prioritizing programs and projects. The strategic planning process drives portfolio management, which converts strategic goals into program initiatives and supporting projects.
In today’s world, the strategic plan is considered, and should be, a living, breathing plan that changes and evolves with changes to the global economic ecosystem. However, strategy changes should be managed through a rigorous process. As the strategies change, the portfolio of programs and projects is also likely to change.
Just as the strategic plan is a living document, strategic goals are not static. Through iterative planning cycles, progress is monitored and adjustments made as needed. After selecting the right portfolio investment path, executive management must be vigilant in monitoring and adjusting the organization’s project portfolio as project risk becomes too high, new opportunities arise, and change occurs in the marketplace. Today the stakes are so high that innovation is the only option, necessitating more rigorous attention to strategy, goals, and project initiatives.
PORTFOLIO MANAGEMENT BASED ON INNOVATION AND VALUE
Programs and projects must be selected and managed strategically to add value. Portfolio management is a business practice that is embedded between strategic planning and project execution. Enterprise portfolio management involves identifying innovation opportunities, assessing the business fit, preparing the business case (the business analyst’s job), analyzing risks and estimating cost and schedule (the project manager’s job), and selecting and prioritizing the portfolio of innovative projects (the leadership team’s job). The objective of portfolio management is to create a road map that takes the organization from strategy to innovation to business results. Benefits include:
Executive program control. Organizational management from the executive level down is driven by innovation; executive management balances projects like an investment portfolio.
Strategic project investments. Portfolio management enables the leadership team to select the right investment path from a mix of potential opportunities, including research initiatives, innovative product-development activities, information technology enhancements, internal business-improvement projects, and new business endeavors.
Targeted resource management. Through portfolio management, organizations can effectively allocate corporate assets to ensure projects have the necessary resources to meet goals and remain competitive.
Achievement of strategies. Portfolio management allows organizations to program-manage critical initiatives to achieve key strategies and eliminate barriers to success.
Portfolio management requires a flatter, less hierarchical configuration of organizational elements to drive accountability down through the organization (see Figure 14-1). Groups within the organization each have their own responsibilities relative to portfolio management:
The executive team is charged with defining strategy, setting priorities, and establishing strategic measures of success.
Enterprise business analysts and complex project managers analyze innovation opportunities and propose creative solutions.
The portfolio management team selects and prioritizes innovative programs and projects, allocates resources, and manages changes to the project portfolio.
Cross-functional project teams launch and manage projects, serving as a strategic arm of the leadership team.
The enterprise project management office (EPMO) or the organization’s center of excellence (COE) provides services and information to all groups.
THE PORTFOLIO MANAGEMENT TEAM
As discussed in Chapter 2, for strategic goals to result in innovation and create value, they must be translated into tangible programs and projects (see Figure 14-1). The portfolio management team comprises members of the executive management team or a subset thereof. It serves as the organization’s project governance committee, selecting and prioritizing projects to maximize the value project outcomes contribute to the organization and to drive innovation.
FIGURE 14-1. Innovation-Driven Portfolio Management
The organization’s strategic goals are translated into a portfolio of innovation projects through a process that begins with enterprise analysis—the business analyst’s role—which culminates in the development of a business case to propose new projects. Decisions about project investments are no longer made within the functional silos that exist in most corporations and governmental agencies today. The portfolio management team is accountable for creating the right investment path for the enterprise. Business analysts are accountable the burden of analysis which given the senior team the information needed to make the right decisions—investing in the most innovative projects.
PORTFOLIO MANAGEMENT ACTIVITIES
The process to be followed by the portfolio planning and management team must be defined and agreed to by all team members. The process should be kept as simple and straightforward as possible. Activities include:
Development of the new idea. The process to submit a new project idea for consideration. This should include an early filter to eliminate projects that will clearly be rejected.
Enterprise analysis/business case development. The enterprise BA convenes a small expert team to analyze the enterprise, identify innovation opportunities, determine the most feasible solution, and build the business case to propose the new innovation project.
Project approval. The process to review, select, and prioritize a proposed new project. This process must include making adjustments to the portfolio if a new project is approved with higher priority than current active projects. It may be necessary to reallocate resources from or even temporarily shut down an active project.
Resource allocation. The process to allocate resources based on project priorities. Resources are finite, so management must be able to ensure these vital assets are deployed appropriately.
Project reviews. The process to conduct control-gate reviews of ongoing projects to revalidate the business case, review current estimates of cost and time, manage risks, validate or refine the priority of a project, and make a go/no-go decision about funding the project for the next phase. Decisions are based on project status, the updated competitive analysis and business case, and the adjusted project priority. Some organizations take a two-tiered approach to project reviews, with the portfolio planning team and executive management team reviewing critical projects and a team of lower-level managers reviewing lower-risk projects.
Phase reviews and phase funding, the practice of funding only the next phase rather than the entire project, is becoming an important risk-mitigation strategy in portfolio management.
Project portfolio assessment. The process to review, assess, and prioritize the entire portfolio of projects in terms of innovation, competitive positioning, and value. Specifically, the reviewers revisit, reaffirm, or make adjustments to the portfolio of projects based on events since the last review, new project ideas, new competitive and technology advances, and changes in business strategies. Portfolio review meetings are highly structured and typically facilitated by a member of the EPMO/COE. Ideally, this assessment is conducted on a quarterly basis.
Data management. The process used by the EPMO/COE to store, maintain, and report information about the portfolio.
A BENEFIT OF PORTFOLIO MANAGEMENT: STRATEGICALLY ALIGNED TEAMS
As the influence of the portfolio management process permeates the organization, project team members begin to understand the alignment of their project with the strategy of the organization. Project managers are responsible for the scope, quality, risk, cost and schedule of each project, and the business analyst manages the project business case to ensure the results are on track. Project status reports directly correspond to the goals outlined on the corporate (or balanced) scorecard (see Chapter 2). The project sponsor, business analyst, and project team are accountable for business benefits. Project profitability now becomes the lowest unit of planning and control for the enterprise.
Project managers and business analysts report directly to the executive project sponsor for ongoing direction and to the portfolio planning and management team for critical milestone control-gate reviews. It is no longer necessary for information to be filtered from the project manager up through the functional chain of command.
As a result of portfolio management, cross-functional project teams become an effective strategic tool employed by management to achieve goals. Consequently, a considerable investment is made to build and sustain high-performing teams—small core project teams that are highly trained, multiskilled, highly experienced, and personally accountable. To protect this investment, management must be alert to environmental obstacles to project success. Often, management must simplify and streamline processes, eliminate outmoded policies, and remove barriers to team performance to create the optimal change-adaptive culture in which project teams can thrive.
PORTFOLIO MANAGEMENT PITFALLS
Implementation of portfolio management is not a trivial matter. Portfolio management systems continue to face ongoing challenges. Many lingering difficulties can be resolved through rigorous enterprise business analysis and disciplined, innovation-driven portfolio management practices. Some of these lingering difficulties include:
Too many off-strategy projects; disconnects between spending breakdowns and priorities.
Too many unfit, weak, mediocre projects; success rates at product launch inadequate.
Weak go/no-go decisions.
Tendency for projects to take on a life all their own; poor-performing projects are not killed.
Project density: far too many projects for limited resources; cycle times and success rates suffer; project team members are over-allocated.
Too many trivial projects in the new product pipeline (e.g., modifications, updates, enhancements).
Not enough major-breakthrough, competitive-advantage projects (probably the result of the quest for reduced cycle time coupled with insufficient resources).
Inadequate resource planning and allocation process; project team members are overcommitted. (Organizations are now using full-time, dedicated, small project teams to resolve this issue.)
DECISION-MAKING METHODOLOGY FOR PROJECT SELECTION
Successful portfolio planning and management teams follow a structured decision-making methodology for selecting a portfolio of valuable projects. Because not all project proposals can be funded, selecting projects requires a framework consisting of a predetermined, structured, defined decision-making process.
The decision-making process is supported by tools for assessing and prioritizing projects. Portfolio planners use sophisticated data-management techniques to gather and present the information to make informed project selection decisions. Portfolio reports and graphical maps make the entire portfolio of projects visible for executive assessment. Portfolio maps are effective tools for visually demonstrating the link between projects and strategic goals. If there are no projects designed to advance progress toward a goal, it begs the question, “How do we intend to get there?” In addition, portfolio maps are created to show how projects relate (1) to the balanced scorecard dimensions, (2) to risk levels, and (3) to innovation and financial return (e.g., net present value, a project’s cash value over a period of time, or economic value added, how project deliverables affect earnings).
The three overarching project selection goals that drive the process of portfolio selection are value, strategic alignment, and balance. Decision-support tools and reports are designed to support assessment of the portfolio according to these areas of business value.
Value: A project should maximize the value of the entire portfolio in terms of innovation, value to the customer, and wealth to the organization.
Strategic alignment: Project investments must be tied to business strategies.
Balance: The organization should strive to achieve the appropriate balance of projects in the portfolio. Balance is perhaps the most difficult goal to achieve. Factors may include:
Types of projects: research and development, IT, new product development, and product-line enhancements
Timing: long term vs. short term; both are necessary
Risk: some high-risk projects may provide the breakthrough that drives competitive advantage; the organization needs some “sure wins” also
Retooling: technology or business process improvements to help the organization remain competitive.
CAREER ADVICE
The Business Case
In many organizations, portfolio management is still an immature business practice, and you may not have a business case for your current project.
A Word to the Wise
Working with other key project team members, facilitate a session to create a business case for your project. With the other project leads, present the business case information to your project sponsor for her review to ensure that you are meeting the needs of the business. Phrase the business benefits of the solution in terms of:
Value to your customers
Wealth to your organization
Creativity and innovation for competitive advantage.
THE ROLE OF THE ENTERPRISE PROJECT MANAGEMENT OFFICE/CENTER OF EXCELLENCE IN PORTFOLIO MANAGEMENT
An enterprise PMO/COE is a strategic organization that serves at the direction of the executive team. The EPMO/COE is a proactive internal consulting group that provides subject-matter expertise in all aspects of innovation management. In that role, the EPMO/COE spends about 40 percent of its time facilitating and providing decision-support information to the portfolio management team. The goal is to ensure the organization is investing in the most innovative project mix. Activities include (1) metric data aggregation and balanced scorecard reporting, (2) portfolio database maintenance and reporting, (3) portfolio mapping, and (4) portfolio-planning meeting preparation and facilitation.
The EPMO/COE spends the other 60 percent of its time providing execution support to the project innovation teams. The goal is to build high-performing innovation teams that execute flawlessly, leading the earliest possible launch of the innovative product or service and helping the organization seize the opportunity to create the greatest value. Project team support activities include:
Project kickoff and requirements elicitation workshop facilitation
Diagnosing project complexity
Coaching, mentoring, and team building
Resource allocation
Risk management workshop facilitation
Business case review and validation
Preparation for control-gate reviews
Facilitation and team leadership assistance
Report formatting, compilation, and publication
Formal and informal training.
If your organization already has a PMO in place, it should still follow many of the steps described below when implementing or improving project portfolio management. Incorporating business analysis practices into the center will result in a project support office that encompasses both project management and BA practice maturity. Implementation of portfolio management involves an organization-wide change management effort. It does not make sense to simply train a group of project managers if the organization does not align itself in ways necessary to make project management an effective tool at all levels of the organization. Likewise, it does not make sense to conduct rigorous strategic planning without direct linkage to project delivery.
EXECUTIVE SEMINAR
Implementation of portfolio management starts at the top, with an executive seminar that introduces the concepts and elements of strategic management and explains where portfolio management fits in relation to other business management processes. The seminar is designed tenable executives to arrive at consensus on moving forward with portfolio management implementation. (This kind of seminar is also useful for conducting a review of the effectiveness of an existing portfolio management process.)
The seminar is intended to accomplish several objectives:
Introducing the idea of transitioning from strategic planning to strategic management
Determining the current state of strategic planning in the organization
Enhancing leadership and management awareness of the importance of portfolio management, an enterprise business analysis, and complex project management
Reviewing all components of innovation management
Emphasizing the importance of a strategy-driven change-adaptive culture.
Topics that should be covered in the executive seminar include:
The importance of a robust and dynamic strategic innovation planning process that includes the development of strategic measures
The role of portfolio planning and management in ensuring initiatives are aligned with strategies
An emphasis on complex program and project management enterprise and business analysis to ensure flawless execution
The critical role of executive oversight through ongoing monitoring and control.
PLANNING FOR THE IMPLEMENTATION OF PORTFOLIO MANAGEMENT
Implementing project portfolio management is a significant endeavor requiring all levels of management to change their current way of selecting and managing project initiatives. The required cultural change can be painful and move slowly if the existing culture continues to determine the project selection methods. Portfolio management implementation must start at the top and trickle down to all levels of the enterprise. The change initiative must be managed as a project to avoid false starts. This can be accomplished by formally launching the initiative by means of a portfolio management kickoff workshop. The workshop brings together all key stakeholders, including the senior management team, functional managers who own project resources, senior project managers and business analysts and other formal or informal leaders within the organization. The outcome of the workshop is the charter and business case for portfolio management implementation and for establishing or expanding the role of the EPMO/COE.
PORTFOLIO ASSESSMENT AND PRIORITIZATION
After securing management commitment to implement portfolio management, the EPMO/COE conducts a current-state analysis of active projects. Serving as a resource to the portfolio management team, the EPMO/COE inventories, organizes, and makes the first attempt at prioritizing the portfolio.
PORTFOLIO ANALYSIS
The EPMO/COE determines the current state of the portfolio of projects by establishing boundaries to clearly define which projects will be subject to the portfolio management process. The portfolio planning and management team must spend its time managing only major strategic enterprise initiatives. Frequently, the organization budgets a limited amount of funding for department-specific initiatives, and those effects are managed within the business units. The projects subjected to rigorous portfolio management may include those that meet one or more of the following criteria:
The project is cross-functional in nature.
The initiative is designed to achieve innovation and advance one or more strategic goals.
The project is high-risk, involving new, unproven technology.
PORTFOLIO DATABASE
When conducting an inventory and quick assessment of the current state of the projects in the portfolio, the EPMO/COE prepares a portfolio report describing the characteristics of each project, including:
Project objective and major deliverables
Phases completed and current phase
Key time and cost baselines
Estimated business benefits including type and level of innovation
Risk rating and mitigation plans.
The EPMO/COE establishes a portfolio database to maintain an inventory of the projects in the portfolio and implements a process to keep the information current.
PROJECT PRIORITIZATION
After the current portfolio of projects is assessed, the projects can then be prioritized. The first step is to determine prioritization criteria based on strategic plans, innovation goals, and balanced scorecard performance measures. Typical prioritization criteria include organizational factors, cost/benefit analysis, customer satisfaction, stakeholder relations, risk analysis, technical uncertainty, and cultural change impact. If the organization does not have a mature strategic planning process, this might be difficult. If this is the case, a strategic planning session might need to be held to determine key strategic goals and measures.
It is imperative that the organization use a project prioritization tool to assist in making project investment decisions. Most executive teams are used to deferring to the senior team members or those members who can lobby the strongest for their pet initiatives. The EPMO/COE should develop and pilot a prototype project prioritization tool within the EPMO/COE to see if the projects appear to be prioritized appropriately. Adjustments to the prioritization tool are then made based on pilot results. The EPMO/COE then presents the prioritized list of projects and the project prioritization tool to the portfolio planning and management team for approval.
PORTFOLIO REPORTING
The EPMO/COE prepares an initial set of portfolio reports for presentation to the portfolio planning and management team. Elements of these reports include (1) projects ranked by priority, including the summary information about each project obtained during the quick assessment, (2) project dashboard reports for each project, and (3) portfolio mapping reports. The EPMO/COE determines which views will mean the most to the portfolio planning and management team and continues to refine and improve them. Remember the golden rule: keep it simple.
PUTTING IT ALL TOGETHER: WHAT DOES THIS MEAN FOR THE BUSINESS ANALYST?
Your organization may not call the individuals who conduct enterprise analysis and create business cases for proposed new projects “business analysts,” but without a doubt, they are engaged in business analysis work. As organizations further develop the role of the business analyst, it will become clear that the work of converting strategic goals to valuable projects and programs is within the purview of business analysis. In the meantime, as a BA you can improve portfolio management of your current projects by:
Working with your project manager and executive sponsor to make sure your projects have sound business cases.
Continually validating the business case throughout the project.
Working with your project leadership team to identify alternative courses of action if the business case does not remain sound.
As a leadership team (the BA, project manager, business visionary, and the lead technologist), recommending a new course to the project sponsor.
As with any management practice, there are critical success factors for portfolio management—best practices that, if followed, will lead to a stable, continuously improving portfolio management process. Without understanding and following these guidelines, the implementation of a portfolio management process will be at risk.
Strategic enterprise-wide focus. This is the foundation for selecting projects. Specific and measurable innovation goals for the entire enterprise are a prerequisite.
Simplicity. A simple process to identify opportunities facilitates success. Most executives have an aversion to complex processes and bureaucratic paperwork. The enterprise project management office/center of excellence does most of the work.
Early filtering criteria. Basic requirements, often referred to as watershed criteria, must be met before a project is considered to be strategic and therefore a candidate for selection. Common filters include alignment with the organizational mission, business threshold minimums (e.g., return on investment, cost/benefit ratio), compliance with organizational constraints (e.g., current technology), and cross-functionality.
Standards. If a new business idea is approved for consideration, standard templates for the business case should be used so that the decisionmakers always see consistently formatted information.
Project ranking tool. Use standard project assessment, selection, and prioritization tools. The decision-support tool usually contains ranking criteria that are based on strategic goals and creativity and innovation levels, assigns relative weights to each criterion, determines a project’s ranking based on the criteria, and calculates a score (priority rating) for each project.
Portfolio reviews. Senior leadership holds portfolio review meetings to review the entire portfolio for balance and strategic alignment and to review new project proposals and ongoing project status at key checkpoints for go/no-go decisions.
Process support. The EPMO/COE or a similar decision-support group will help to define and continuously improve the portfolio management process, maintain portfolio records, and prepare accurate decision-support information for the portfolio management team.