Developing Portfolio Management as an Organisational Capability

Peter Boggis argues that organisations can maximise the value of their change initiatives by managing them as an investment portfolio and that effective portfolio management is an organisational capability many organisations don’t yet have in place. He also believes that portfolio management is a necessary capability for those organisations seeking to increase their chances of escaping from their default future and moving to an improved future.

In a previous Formicio article, my colleague David Trafford argued that the most important role of leaders is to understand the default future of their organisation and ensure that the necessary conditions for success are in place to achieve an improved future. Every organisation has a default future: it is the place the organisation will end up if the leadership continues on the same path and takes no action – other than that currently planned. This may be perfectly acceptable, but unlikely. Good leaders are relentlessly dissatisfied with the status quo, uncomfortable with their default future and do everything they can to create an improved future. Sometimes this is driven by vision and ambition to be the best they can be; sometimes it may be driven by the legacy that leaders want to leave behind.

If you accept this point of view, then what capabilities do leaders need to put in place to ensure that everything that goes on in the organisation is aligned to create their chosen improved future?

In this article, I argue that one of those organisational capabilities is the future best practice of portfolio management, which I describe as:

“Building and maintaining a dynamic, balanced portfolio of activity – initiatives, projects and programmes – which directly contribute to achieving the target improved future.”

Portfolio management is not new and is used in many organisations to prioritise and schedule investments, thereby ensuring that they individually and collectively deliver value. This value can be defined in different terms, such as strategic imperatives, strategic and operational outcomes or definition of success. In this article I will focus on portfolio management as a means of managing and prioritising the activities and investments aimed at achieving an organisation’s target improved future.

In addition, I will argue that putting portfolio management in place – across the enterprise – can vastly improve the woeful success rate of projects and programmes, thereby increasing the value delivered to the organisation and reducing the risk of failure.

The case for portfolio management as an organisational capability

But first of all, let’s set some context so that we can see exactly what value is at risk. In the 1960s through to the 1990s, the late Professor Peter Drucker was on record as saying that “two-thirds of projects fail to deliver the value expected of them”. In the 1990s he referred specifically to merger and acquisition activity and revealed some of the fallacies that underlie the ‘deal’.

In the late 1990s and into 2010, leading academics and researchers, including Professor Peter Weill at the MIT Sloan School of Management, concluded – based on extensive research of hundreds of companies in 45 countries – that most organisations had got better at project management, were still poor at programme management and only a handful effectively practised portfolio management. To bring this right up to date, in 2011 The Standish Group published research showing that only 16% of projects are completely successful – ie delivered the benefits that were expected. Some 53% under-performed and 31% were cancelled – which may not be a bad thing if they were recognised as never going to deliver! Unfortunately, most organisations lack the courage to stop or re-orientate projects that are known to be failing.

And it is a global problem. Data from recent research showed inter alia:

  • From a sample of 175,000 projects in the USA with a combined budget of $250 billion:
    53% over-spent by 89%.
    82% over-ran the schedule.
  • The estimated cost of project failure across the European Union is cited as in excess of Euro 142 billion.
  • In India, 40% of projects had a combined delay of more than 21 years.

So, even a small improvement in project and programme management can yield significant benefits in terms of delivering marginally more value. The most commonly cited reasons for project failure continue to be poor organisation and project management practices. But I think there are some fundamentally more important and challenging reasons for this.

For those unfamiliar with the distinctions between project, programme and portfolio management a definition of each is given below.

Distinctions between project, programme and portfolio management

Project management– focuses on the completion of a specific and precise scope of work, often defined within the context of a broader programme objective. Value is delivered through excellent execution of project management capabilities.

Programme management – focuses on a defined set of inter-related and inter-dependent projects, having common goals and supporting common business outcomes. Value is delivered through excellence in the execution of the projects individually and the programme overall to achieve specific, strategic business outcomes.

Portfolio management – describes the process of selecting and managing the portfolio of business value opportunities for the enterprise as a whole. Value is delivered through execution and the management of a dynamic, balanced portfolio of initiatives, programmes and projects that will help to achieve the enterprise’s desired outcomes – the improved future.

Most portfolios are typically divided into three or four categories:

  • Peter Weill uses the terms Strategic, Transactional and Infrastructure and argues that the percentage of spend in each category should be determined by the type of industry and its relative maturity.
  • A leading financial services company in London uses the terms Mandatory, Strategic and Tactical and actively reviews and re-balances its portfolio on a quarterly basis.

Reasons why organisations find portfolio management so difficult

Over the past decade, many organisations have tried to build portfolio management as an organisational capability. Many have failed for the following reasons:

  • They have tried to ‘boil the ocean’ by trying to do everything at the same time.
  • Each initiative (project or programme) is judged in isolation in terms of the business benefit it will deliver.
  • Business leaders defend investments for their specific business unit and fail to take an enterprise-wide perspective.
  • The IT organisation has often taken the lead, often influenced by vendors who adopt the ‘ERP for IT’ approach that ends up being too focused on the process and the underlying technology.
  • They have taken a left-to-right approach by trying to extend incrementally from project to programme to portfolio management.
  • They have failed to address key governance aspects including roles and accountabilities, decision rights and cultural issues to do with trust and transparency.
  • Some have failed to obtain sufficient clarity of the organisation’s strategic imperatives, target business outcomes and ultimately its target improved future.

Developing portfolio management as an organisational capability

So, what would you expect to see in an organisation that has developed portfolio management as an organisational capability? Below are some of the characteristics I would expect to see:

  • Clarity of the target improved future, typically translated into a small number of strategic imperatives: for example GE Power Systems (see below) uses Growth, Profitability and Connectivity, while Cisco uses New Fundamentals, Rational Experimentation, Break-through Strategies and Operational Excellence.
  • A small number of objective criteria, which is used to assess and evaluate each and every project and programme in the strategic context. It is essential that this is not bureaucratic with weights and scoring systems that lose the line of sight to the strategic intent.
  • A process, with an owner.
  • An appropriate, effective, simple and easy-to-understand three or four category portfolio.
  • Governance with clearly-defined roles, accountabilities and decision-rights.
  • Transparency, honesty and maturity that enable ‘crucial conversations’ to be held.
  • An environment where egos and reputations don’t get in the way of doing what is right for the enterprise. Projects and programmes will inevitably be stopped or cancelled as the world – and resulting changed priorities – change.
  • Everyone takes a perspective that is right-to-left and top-down– not left-to-right, bottom-up.

The starting point for each organisation aiming to develop this capability cannot be expected to be the same – as their ‘DNA’ is unique and knowing where to start is more of an art than a science. What worked well for GE Power Systems (see below) as a spin-out business – almost starting with a blank sheet of paper – is unlikely to work for a well-established business with deep-rooted ways of doing things. While some experimentation is likely to be required, we do know that a top-down approach is necessary as you simply will not get to portfolio management by polishing or improving project and programme management capabilities.

Portfolio management, as described in this article, is still very much a future best practice organisational capability. However, as resources are under more pressure than ever, there are signs that organisations are taking portfolio management seriously and taking steps to develop it as an organisational capability. The immediate benefit is managing the value at risk in all of the projects and programmes, which in many organisations is enormous. If we can improve portfolio, project and programme performance by even a small percentage, then greater value can be realised and sustained and we can have greater confidence that the projects and programmes within the portfolio are the right ones to move us along the trajectory to our target improved future.

Portfolio management at GE Power Systems

GE Power Systems in Atlanta, Georgia makes very large and complex energy-generating turbines. It does this in conjunction with a complex eco-system or value web of engineers, architects, technical specialists and a lot of third parties. Spun out of GE corporate in the late 1990s, GE Power Systems set itself up in Atlanta, headed by the then CEO John Rice (now deputy to Jeff Immelt and running GE’s businesses in the emerging markets of Asia). During an interview with John Rice, we asked him how he went about building the balanced portfolio of initiatives in GE Power Systems.

“It’s very simple. We are a growing business and we have three very clear strategic objectives. We need to do things that support our Growth. We need to be Profitable. We need to build Connectivity with all our partners, customers, suppliers as we collaborate to build our energy-generating turbines. So when someone proposes a new initiative, I ask how does this contribute to Growth, Profitability or Connectivity? If it does not contribute to at least one of these strategic objectives, it does not make it onto the list.”

We also asked John why he chairs the Steering Group for this portfolio management process. At first he seemed bemused or even amused by the question and then answered:

“Why would I delegate some of the most important and strategic discussions in the company to someone else at this stage of our development?”

On a quarterly basis, John Rice and his fellow executives reviewed the portfolio, assessed the progress of initiatives under-way, killed, cancelled or re-directed those that were not going where they wanted, and assessed the potential contribution of new initiatives being proposed.

We also talked to several other executives during this visit and one made a particularly telling remark about portfolio management in GE Power Systems:

“You can tell exactly where the priorities are in this business – it is simply where the best resources are committed at any one time.”

Portfolio management is both new and not new

We have practised portfolio management in investment management for many decades. Individually we try to manage asset allocation of our retirement planning funds as we move through the different stages of our working life. Portfolio management at the enterprise level is similar: where are our most important assets and resources committed to deliver the most valuable outcomes in the context of our strategic imperatives? This review results in taking decisions to re-allocate assets and resources to different imperatives as conditions around us change. Tough decisions are sometimes required – additional investment may be required into a new area; some investments should be exited; some should be re-balanced. The line of sight to the improved future, however, should always be strongly and consistently maintained.

I welcome your thoughts.

Peter Boggis
peter.boggis@formicio.com

Formicio Insight Article: Developing Portfolio Management as an Organisational Capability

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