The UMT360 Strategy Execution Management Series

Redefining Portfolio Management in the Age of Business Agility

Executive Summary

Today’s mandate for digital transformation is forcing every organization to find the right mix between operational and innovative investment. Too much innovation and not enough operational investment will lead to an earlier than planned revenue shortfall. Too large a percentage investment still being made in operations can make innovation ineffective.

In our current fast-moving environment, many organizations will surely find it hard to accept the premise that portfolio management is the answer to the above problem. After all, current Agile work management practices came into existence, according to some pundits, to eliminate the old, time-consuming portfolio process. But to the extent that Agile approaches work for small teams, they seem to suffer at scale, where conflicting priorities can make decision-making more difficult.

The pressures of the digital age have convinced organizations that execution disconnected from strategy can never deliver the transformation they need to compete and grow. The right top-down strategic planning coupled with clear and current operational objectives are critical to ensure that every initiative is aligned with strategy. By shifting the focus back to portfolio management – that second P in PPM – organizations can more effectively balance their mastery of execution with an enhanced ability to deliver strategically across all investments.

We are far enough into what is being called the 4th industrial revolution (see Figure 1), that organizations need to stop talking about digital transformation as a goal and start mastering the realities of the new environment we all find ourselves working in.

From a PPM perspective, that means finally mastering portfolio management. This might seem a strange comment since PPM stands for project and portfolio management. But let’s be honest, most PMOs have remained focused primarily on project management methods and procedures, satisfied to relegate the second P to an aspirational goal.

In the past that might have made sense. Historically the term portfolio management was actively used in large companies to describe their “investment rationing system”. The logic was simple, it was a process of forcing people to jump through hoops and prepare pounds of paperwork, consciously designed to drive the faint of heart to abandon their request.

This system was never intended to be fair, and it never produced the best results, but it was extremely successful at its primary goal of controlling capital spending. The unfortunate legacy of “old school” portfolio management is that an entire generation of people remain completely unaware that there is both a need and a significant benefit to be gained from portfolio management. And of those that recognize the need, many think it’s still a process laden with excessive paper or lengthy decision cycles.

Today’s software tools have effectively eliminated much of the need for the old bloated approaches to portfolio management and instead offer an agile and adaptive approach to making investment decisions as a seamless part of day-to-day operations, rather than as a time-consuming annual process.

Agility Requires the Ability to Make Investment Choices, and That Requires Portfolio Management

Figure 1 The 4th Industrial Revolution

Simply saying, “portfolio management is simpler and easier!” doesn’t mean much if new approaches to executing work (i.e. Agile Software Development approaches) eliminate the need for top-down decision making. There are many in the Agile community who contend that ultimate flexibility is only achieved by adopting a bottom-up approach, where “product teams” can dynamically respond to market conditions.

There has always been one serious flaw with this logic. It doesn’t work at scale. The information a developer or a product engineer has at their fingertips in a 100-person company is significantly different than the information available in a 100,000-person company. Obviously one of the goals of digital transformation is to close this information gap, but at the moment, we simply aren’t there.

The question then is how do we develop an agile investment decision-making approach that allows us to make timely and appropriate funding decisions across our entire enterprise, regardless of size? The answer is to transform our approach to portfolio management.

Money and people’s time can only be spent once, so we need an efficient way to ensure that these valuable resources can be directed toward the investments we all know should yield the highest value. The easiest way to achieve this outcome is once again portfolio management.

Figure 2 breaks down how information flows into the portfolio through three separate streams to highlight why simply focusing on either top-down or bottom-up information is rarely sufficient.

Thriving in the Digital Age Requires the Right Mix of Operational and Innovative Investment

Figure 2 The Portfolio Information Flow

In the March 2015 issue of HBR, authors Homkes and Sull wrote that the single biggest problem they found with successfully executing strategy was cross-silo impediments.

It is the job of executive management to take the broadest look across the entire market of opportunities to decide what strategy the organization can effectively execute to capitalize on future opportunities. This can mean developing totally new products and services, as well as abandoning current products and services. One of the key hallmarks of the 4th industrial revolution is that current markets are being transformed. Almost anywhere we look we can see signs that products and services that have had a place in our lives are being replaced with other things.

For example, Uber, Lyft, and the certainty that we will someday have self-driving cars have completely changed the long-term outlook for auto manufacturers. Look further down the line and it’s easy to see that this will affect insurance companies (will we need insurance for cars we don’t own?) and even the design of houses (will 2- and 3-car garages still be required?). Executive management has the responsibility of deciding when to begin investing in areas that will help the organization jump the S curve, and the primary tool designed to help them do that is portfolio management.

Early innovation efforts are usually kept separate from current operations to ensure that the products and services that generate today’s revenue stay on track. But as we move further along the curve, these innovation efforts need to be reintegrated across the entire organization (not just the P&S orgs). At this juncture, a key contribution that portfolio management provides is a way to effectively balance where the next level of investment should be spent. This has always been a classic part of portfolio management, but organizational tendencies toward creating siloed operations has made it challenging to implement.

The final area is the input from the product and service teams. It’s easy to lose sight of the fact that an organization needs core capabilities in new and emerging areas if it ever intends to

products and services are going to reach the market. Ensuring that all the interdependent components needed to operate what will effectively be a new organization are developed – based on the needs of the products and services which are being transformed – requires that information be visible to all levels of the organization.

The decisions required to complete the desired transformation are not easy. At some point, the funding allocated to current operations will need to be reduced to fund the emerging products and services. Today, many organizations are taking a tri-modal approach to developing and supporting products – leveraging a variety of execution methods, including traditional, Agile and back of the napkin. Many organizations assume that the decisions around their funding should mirror their execution method. As Figure 2 shows – the execution method (which is specific to the product or service teams) is only a very small part of the funding equation. This is really more of an accounting problem than it is an investment decision problem . In all cases, the portfolio level is where funding decisions must be made to balance the current and future requirements of the business.

compete in the future. It’s also easy to miss the order in which things need to be done if reliable

The old approach to portfolio management has always been weak on showing goals, interdependencies, underlying capabilities, and future plans. One of the benefits of the digital revolution is that software can now fix this problem by allowing organizations to keep simultaneous but interconnected views of the data required to make the best decisions in real-time.

To support today’s rapidly changing environment, we need to add business road-mapping as a new practice into our new more agile and adaptive portfolio process. What does business road mapping entail? Figure 3 shows an example of the type of information the roadmap should contain.

Without trying to define a specific process, a business roadmap needs to include what the business would like to “invest in” for current operations, new products or services (and in this case “new” means really new) and what they will need from other parts of the organization to realize these goals.

How to Manage an Agile, Adaptive, Modern Portfolio

Figure 2 The Portfolio Information Flow

The business roadmap should include investments already underway but not yet completed, along with requested new investment for the foreseeable horizon (commonly two to three years). Obviously not everything on any business unit’s roadmap can and should be done from a top-level organizational perspective. For example, it’s common to see proposals that aren’t in keeping with the current corporate strategy. Rather than reject this input out-of-hand, these proposals should be treated as input from the operational core of the business (middle-up as opposed to bottom-up). As shown in Figure 2, for any organization to successfully navigate the changes that are coming, information from all parts of the organization will be required.

The roadmap stage is fairly information-light, by definition. The focus is on the major activities that will require new funding and new efforts, and the interdependencies between everything within the portfolio. At this point, it becomes possible for the PMO to begin integrating the roadmaps with the strategic plan.

Ideally, in conjunction with the adoption of roadmaps, a more dynamic, continuous planning process will ultimately replace the static annual process typically used by most organizations. This transformation enables all stakeholders to react as conditions change, adjusting the plan periodically to reflect the reality on the ground, as opposed to slavishly staying the course on decisions made months ago. If done correctly, a dynamic planning process still provides the annual fiscal view that enterprise finance prefers, without requiring the PMO and portfolio managers to stop once a year to do annual planning simply for the finance team’s benefit.

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…a dynamic planning process still provides the

annual fiscal view that enterprise finance prefers,

without requiring the PMO and portfolio managers

to stop once a year to do annual planning...

Traditional corporate strategies serve as a way of establishing “true north” for the entire corporation. But the advantage of starting with the business unit roadmaps is that they reveal what each business unit is seeing based on their current operations and their reading of market trends. In a fast-moving transformative environment, understanding what the various business units think is happening in the marketplace is critical for the PPM function to understand, because too much pent-up demand will always adversely impact the working environment. See Figure 4 for an example.

Depending on how sophisticated your current portfolio process is, the additional information you will need, beyond what’s contained in the roadmap, is estimated cost and estimated value for near-term funding requests. If you haven’t already developed a form for collecting this information, take a look at the business canvas concepts from Osterwalder and Pigneur . You also need to understand why the business units are asking for this investment now and what specifically they will need from the rest of the organization to make this investment a success. Previous portfolio practices have trained organizations to overstate their level of urgency in order to ensure they get at least a portion of their request, so it could take some work to change that aspect of your company culture.

With the roadmap, desired investment amount, and desired timing, you should have enough information to cull the list. Or to be more politically accurate, to divide the list into two groups (one consisting of projects to consider for this current investment cycle, and the other comprised of requests to defer for later consideration).

Refine Only the Information That Drives the Next Decision

Figure 4 Key Factor Analysis

Assuming you’ve reduced the list to something manageable, the next thing a modern portfolio system lets you do is model based on a wide variety of criteria. For example, any of the following 10 elements might ultimately be gating factors on whether or not the timing of an investment fits with the rest of the portfolio

1. Strategy

2. Timing

3. Complexity

4. Risk

5. Resource Capacity requirements

6. Core Competencies

7. Level of Innovation

8. Stakeholder Alignment

9. Market Factors

10. Position on Gartner’s Pace Layer model (for IT systems)

Only one or two of these factors may end up being the most important at any one time. But by developing the discipline to understand how the parts (the investments) fit into the whole (the portfolio) over the long term, you’ll find your analysis shrinks as you become more familiar with the process.

Additionally, you’ll begin to see patterns in the data and at some point, you’ll reach the stage where you might even see what all portfolio managers strive to see. That missing critical factor that could turn your portfolio into a house of cards. For example, if the portfolio contains a dependency on a single vendor, and if you have a deliberate strategy of limiting the vendors that you deal with, you may not realize the level of risk you’ve chosen to assume if your five top projects are all critically dependent on the same vendor and an alternate source of supply hasn’t been established (a true story with an unhappy ending).

Portfolio Modeling Allows Your Organization to Make Better Decisions

Supporting Executive Decision Making

Executives don’t want to be buried in data. They need to understand the decisions they have to make. The job of the PPM team that prepares the portfolio is to have first separated the wheat from the chaff to provide executives with a clearer picture. Figure 5 shows one possible way to sort the proposed investments

The advantage of focusing on strategy is that executives know why they chose that strategy and what tacit information they based their decision on. This immediately gives them a context for the decision they are being called on to make. For example, does strategy A seem to be calling for more investment money upfront than they had assumed. Is strategy C being under-invested in? From this starting point it is simple to begin to delve further down into the details and understand clearly what’s driving the picture being painted in figure 5.

Figure 5 Strategic Tactics & Investments

On-going

1H 2020

Investment 1Investment 5Investment 10Investment 2Investment 9

Investment 8Investment 13Investment 7

Investment 4Investment 11Investment 14

Investment 3 Investment 12Investment 6Investment 15

StrategicTactic A

StrategicTactic B

StrategicTactic C Operations

Finalizing the portfolio

At this point the portfolio might appear finalized but the numbers are still based on high-level assumptions and the resources required are generally poorly estimated. Given that much of the work of getting to this stage has been simplified by having the right fit-for-purpose tool, the next step is to get better quality data on the projects that will be starting in the near term. One good approach is to prepare the equivalent of a consulting proposal based on internal resources. With a built-in resource management system, it is now possible to be sure if you have the right staff available or not.

Doing resource capacity planning well is an entirely separate effort that you might not be able to do at the same time you are redesigning your portfolio process. Resource capacity planning (RCP) also varies with your execution approach. Most organizations that use an RCP system tend to only put in the IT staff or the product development resources and then wonder why to project ends up being late. Consistently the individuals who are required for the investment to be completed are underestimated. For some organizations, the limiting resource group could be the legal team, for another it might be the marketing department and of course for IT it’s always subject-matter experts for testing.

Since this is a new approach for most organizations, it’s possible to assert with a 95% certainty that there will be changes at some point along the journey to project completion. Ensuring that everyone knows late changes will happen simply makes the process easier. It also trains everyone in the organization to think through their requests a little better. For example, in the real world, no project that impacts the finance team should be slated to complete during Q4. Other business units have their own busy times, which must be considered. Recognizing and identifying short-term issues like that is actually a feature of the process that helps you improve with every new problem you uncover. The more exposure to how your business works, and where you tend to have problems, the more agile and knowledgeable you will become.

The more exposure to how your business works,

and where you tend to have problems, the more

agile and knowledgeable you will become.

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How to justify the investment in an executive-level portfolio tool

Agility depends on the ability to make fast and meaningful decisions about where to invest money. The most effective way to do this is through portfolio management and the most successful and easiest way to do this is with a good portfolio tool. While portfolio software has been available since the late 1990’s, in 2016 Gartner identified a new class of emerging software tools they labeled Strategy Execution Software . The key difference between this class of software and its predecessors is that it focuses primarily on supporting the entire range of features required to make robust investment management decisions without being dependent on any particular project or product management tracking tool.

By definition, a strategy execution tool is focused on meeting the needs of an organization for investment decision making, and investment execution which entails support of bi-directional communication and distributed decision making. This class of tools allows organizations to make individual choices about their work-tracking tools (such as using their PLM tool, or extending their ticketing tool). It also provides executives with the critical information they need – in the form they prefer – so that they can make decisions and operate at the speed of modern business.

Given the above comments how would it be best to justify this tool? The answer will be completely unique to your organization. If you had been able to use the capabilities discussed in this paper, where could your organization have made better decisions and what would the value of those decision have been?

1. Could a product or service have gotten to the market sooner if a key dependency hadn’t been missed.

2. Would a key dependency project have been completed sooner if it had been given the right resources?

3. Was an aggregated risk missed because it wasn’t possible to realize the breadth of its impact?

This short list of examples barely scratches the surface, but it illustrates the fact that each organization has a long list of decisions that could have been improved if better information were available. From experience, there is no more powerful incentive for change than the knowledge that by doing something differently (in this case working with a new tool) problems that have plagued you in the past won’t occur again.

Your job as a portfolio leader is relatively simple – you just need to know what the right information to capture is and at what time it needs to be captured, in order to support effective executive decision making. Yes, there will still be some analytical work the portfolio staff should perform. But thanks to some of the techniques touched upon in this paper, along with the advent of strategy execution management tools, it will no longer involve weeks’ worth of time spent in front of a spreadsheet. More importantly, given that these modern tools are now flexible enough to seamlessly integrate with your preferred approach to work management, it won’t take a year implement proper portfolio management, so stakeholders can adopt the new processes and payback comes more quickly.

i. D. Sull, R. Homkes and C. Sull, “Why Strategy Execution Unravels—and What to Do About It,” Harvard Business Review, March 2015 ii. http://strategictoolkits.com/strategic-concepts/s-curve/ iii. From a project execution perspective, it is only the methodology by which the time tracking costs are captured that vary by execution method. iv. See Business Model Generation or Value Proposition Design v. D. Fitzgerald “Market Guide for Strategy Execution Software” Gartner: 21 September 2016

Conclusion

About the author

Donna Fitzgerald has been using her unique insights and practical approaches for getting strategic work executed to help organizations of all sizes realize their goals. Having been a Silicon Valley CFO, a program manager, a product manager, and a Gartner analyst, she’s had the opportunity to see the myriad of problems companies can experience when they need to make significant changes in their day-to-day business. In response to these challenges, she has developed simple, straight-forward approaches that help companies

master the three essential elements of strategic execution. Ms. Fitzgerald, as executive director of NimblePM Inc, makes her insights available through her writing, presentations, and customized training offerings.

PH 425.590.9901 sales@umt360.com www.UMT360.com

Multi-year winner of Microsoft’s Partner of the Year award for Project & Portfolio Management (PPM).

Recognized as a Gartner Cool Vendor in PPM for managing and controlling project finances.

Multi-year visionary in Gartner’s Magic Quadrant for Integrated IT Portfolio Analysis.

Featured in Gartner marketscope reports for Strategy Execution, NPD, ITFM,and PPM Services.

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