Leadership

Portfolio management keeps IT aligned with business strategy

Keeping IT synchronized with the corporate business strategy can be much easier if CIOs apply the principles of financial portfolio management to IT investments. Financial expert Peter Hennigan explains how this method can work for your organization.

There’s a great deal of talk these days about how CIOs need to align IT with the corporate business strategy. Yet, as most tech leaders know, it’s not as simple as it sounds.

“Synchronization between IT and business strategy is not the natural state,” explained Dr. Peter Weill, director of the MIT Center for Information Systems Research (CISR).

“[IT organizations] may be aligned now, but you’re likely to go out of alignment because strategies and technology change. Organizations face a never ending quest to keep IT and business strategy aligned.”

A good way to stay in alignment is to apply the proven principles of financial portfolio management to IT investments. Weill detailed this approach at a recent meeting of the Society of Information Management (SIM) and Financial Executives International (FEI).

His research concludes that four types of management objectives drive organizations’ IT investments, and that the objectives, in turn, lead to four types of asset classes that comprise the typical IT investment portfolio. Management must constantly review this portfolio to keep it synchronized with its strategy and to balance its risk vs. return profile.

Portfolio approach
The portfolio approach suggested by the CISR research offers a technique for organizations to monitor the alignment of IT. Organizations can view their IT investments in the four asset classes listed in Figure A.

Figure A


Categorizing IT investments in this manner allows an organization to monitor how its investment mix aligns with its business strategy.

For example, Weill explained that during the current economic downturn many companies weighed their portfolios more heavily toward the transactional class in concert with a greater management focus on cost reduction.

The ongoing balancing of the portfolio also considers the risk/reward profile of each asset class. As shown in Figure B, that profile again differs by asset class. Just as individuals balance the overall risk/reward profile of their financial portfolio based on individual objectives, an organization must balance its IT portfolio to reflect its current appetite for business risk.

Figure B


The need for portfolio management
The CISR research reflects the actual practices of several companies, and places the structure of financial portfolio management around those practices. Many other industry stakeholders, from the IT analyst community to software and professional service providers, also preach the benefits of applying portfolio management practices to IT investments.

Although their pronouncements may differ in scope and level of detail, they all agree on the desired outcome—continual alignment of business strategy and IT investment.

The portfolio approach supports that alignment in three ways. By definition, it forces engagement between the business and IT. It raises that engagement out of a sometimes myopic review of individual projects to a more complete review that looks across all projects in the context of a comprehensive business strategy. Finally, it greatly reduces the emotional aspects of the prioritization discussion and replaces it with criteria grounded in the business strategy.

Implementing portfolio management
The sophistication with which IT organizations apply portfolio management practices varies widely. Some organizations focus on it once a year during the planning season, using it primarily as an annual prioritization tool. Others attempt to embed it in ongoing business processes. Many vendors seek to sell software and consulting to help organizations accomplish that goal.

Regardless of the sophistication level, any organization attempting to apply portfolio management practices must take the following basic steps. The IT organization should not take these steps in isolation. Engaging the business, particularly in steps 2 and 3, is critical for success.
  1. Inventory the portfolio: Identify all existing IT investments. The simplest approach is to view all investments as projects.
  2. Develop investment classifications: Develop the investment classifications to use in managing your portfolio. Weill’s list presents one possibility, but organizations can use any variation that makes sense.
  3. Classify investments: Tag every investment with one of your classifications.
  4. Develop planned cost: Develop the planned cost for each investment.
  5. Store data: Store your investment/project data in a database that will enable you to summarize, sort, and report the data.

The next steps
These basic steps are just the beginning. They will provide CIOs with a planned view of investments and projects, and enable tech leaders to begin prioritization discussions within the context of their portfolio classifications.

The additional steps required to embed the portfolio practices into business processes include developing the capability to report actual spending by project. That capability enables you to continually monitor your actual portfolio and determine if alignment with business strategy remains when business conditions change.

Implementing comprehensive portfolio management practices across an enterprise can be a very challenging undertaking from both a cultural and an operational perspective. You need to sell both IT and business people on the merits of such practices, and in larger organizations you need to provide the tools and training to make it happen.

That challenge, however, shouldn’t stop you from at least introducing portfolio management concepts into your organization. Most business executives are familiar with those concepts, and will welcome a discussion of IT investment in that language. And CIOs as well as other IT managers will obviously welcome a discussion context that facilitates mutual understanding of the alignment between IT investment and business strategy.
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