The term portfolio management has typically been applied to managing financial resources in a way that maximizes return and minimizes risk. This includes understanding the investment alternatives available and picking the ones that best meet your overall financial goals.

This portfolio management concept has also become popular as a way to manage business investments. At a high level, many of the same concepts are involved. You have a limited number of resources to apply to your investments. You want to manage these resources as a portfolio to maximize the overall value and to reach your goals.

I’ll discuss the need to first identify the type of work that will be included in your portfolio. Once you know the scope of work, you can examine how the prioritization process works.

Portfolio management series

This is the second article in a series on portfolio management. The first is “Use portfolio management to maximize IT spending.”

Defining the portfolio
Portfolio management can be practiced at the company or organizational level. To practice this concept effectively, you need to understand the scope of work that is included under the portfolio umbrella. With a company-wide portfolio, all the organizations and senior managers must be a part of the process. With one organization, the scope of the portfolio is narrower.

Once you define the organizational scope, examine the work within the portfolio. It makes sense that all project work will be a part of the portfolio. However, you should decide whether your support work (maintenance and all continuous operations) will also be involved. The other category of work is management and leadership.

From a practical standpoint, if you decide to put only project work in the portfolio, you’ll be managing all new investment decisions. If you also include support work, you’ll have an opportunity to balance the project work against the support work. This will allow you to determine, for instance, whether the new investment required for a project is more important than the support of existing applications. It may turn out that you’re willing to live with a lower service level of support in certain areas in exchange for freeing up resources in areas that build new capabilities.

If you place management and leadership activities in the portfolio, you have the opportunity to trade off there as well. For example, you may decide that investing in increasing the project management competency of your organization will provide more long-term value than a specific project for upgrading server capacity. On the other hand, it may not be as important. Having this work on the table for discussion allows you to consciously make prioritization decisions.

Prioritizing work
Generally, there are two points at which organizations make prioritization decisions. The first is at defined points when you’re performing formal business planning. The second is when new work surfaces during the year and must be evaluated at that time. Most companies have a defined business planning cycle. Typically, this occurs on an annual basis. Depending on the size of your organization, this might start four to six months before the end of your fiscal year.

The job might be more difficult in the IT organization because you must first try to understand the business priorities and strategies of the business client organizations and then come up with a plan of attack to enable the business to meet its goals. This should be a two-way discussion between organizational partners, not an order-taking process. The business should explain what it is trying to do, and the CIO and IT organization should offer advice on how IT products and services can help.

Regardless of how the initial planning process proceeds, at some point you will have identified the amount of work that is requested for the coming year. This work is always more than the company is willing to pay for, and it is also more work than you have resources to accomplish. This is where the portfolio prioritization process comes in. It works something like this:

Mandatory
Work that you have to do might be supporting a legal or auditing requirement, for example. Generally speaking, you don’t have the ability to say you are not doing it.

Business critical
Work that is not mandatory, but must be done to support the business, may be classified as business critical. One of the key aspects of this work is that you have some discretion over how much you spend. Support, for instance, could fall under this category. You know you have to support the existing IT environment and business applications, but you may be able to make trade-offs in spending.

High priority
Look at work that you think must get done: high priority work. You might break this work into two areas based on the impact to the business: strategic and tactical. Strategic work is usually larger and more expensive but helps you transform the business. Tactical work usually costs less and has a more short-term payoff. The value is incremental, not transformational.

Everything else
You can break the “everything else” work down into medium priority or low priority, but usually neither category of work will get funded. Low-priority work should definitely not get funded. Approving low-priority work is throwing money away.

The prioritization process takes place with input from IT and the client organizations. The process can be very difficult. The IT organization must facilitate the discussion, since not all of the requested work can be done. Of course, you look at the project ROI, but you also look at alignment with strategy. Projects with a huge ROI may not get funded if they don’t align with strategy. Include internal IT work in the prioritization process.

Discussions may end up trying, for example, to balance the overall business value of a new application to support key marketing programs, against a manufacturing project that will reduce shipping time to the customer, against an IT initiative to upgrade all the company desktops to a new OS, against a human resources initiative to support changes to the employee benefit package.

Once the work is prioritized at a high level, an overall funding request will be made. The company will then tell each organization what its budget will be for the coming year. Normally, you’ll apply this budget funding to the approved list of work, starting with mandatory work and moving down through the priorities until the funding runs out. The remaining work will not be funded unless the business situation changes favorably to allow more funding, or the work priority changes during the year.

Looking at the totality of work as a portfolio allows you to make sure that only the highest value work is funded. It can be a very difficult process because of the competing needs of the many organizations that IT supports. When you are done, you’ll have a full pipeline of work for the coming year.

Next week: managing the portfolio of work.