Meta Report: Portfolio Management Helps Manage Through Uncertainty

By CIO Update Staff

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By Meta Group Staff

Situation Analysis: The economic boom-and-bust roller coaster of the past three years has been a sharp reminder to business and IT executives about the need for level-headed management and clear vision. During the late 1990s and the first half of 2000, it was a difficult challenge to keep business expectations and spending at realistic levels. When the economic tide changed, the challenge was to ensure that cost control actions were pragmatic (vs. irrational cuts in core business and IT capabilities).


During this tumultuous period, assessing and communicating the value of IT investments has been a constant "reality check" that has enabled managers to resist the siren songs of excessive optimism or across-the-board pessimism. To maximize the reach and benefits of this management discipline, which combines the mathematical purity of statistical analysis with business knowledge and intuition, many leading enterprises have followed the example of the financial industry and applied portfolio management disciplines to business and IT investments.

A business's portfolio of investments may include the following: business units or departments; business activities and processes; knowledge capital (e.g., patents, in-process R&D); physical assets (e.g., buildings, product and part inventories); financial flows and accounts; and human capital (i.e., people).

For IT groups, the portfolio may include hardware (e.g., servers, storage, desktops, networks, mobile devices), software (e.g., applications, databases, operating systems), information/data, processes, budgets, and people. For both business and IT groups, projects are also a key part of the portfolio, because these investments define how different assets within the portfolio will evolve.

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Understanding asset attributes is relatively straightforward in the case of IT hardware, which has qualities such as purchase price, maintenance cost, depreciation algorithm, and residual value. Software typically involves licensing fees as well as ongoing maintenance costs. Processes, budgets, and people are areas where more sophisticated attributes are often required. Project attributes include deliverables, timetables, milestones, resource projections, and overall budgets.

A key challenge has been deciding to what extent portfolio management techniques should be applied. For some organizations, simply categorizing IT investments and using portfolios as a communication tool is sufficient. Others have benefited from applying detailed statistical and management processes to their IT and business investment choices. The need to assess the degree of portfolio management discipline and detail that is appropriate for particular organizations has spurred the creation of META Group's model for business and IT portfolio management.

The first step involves mapping business and IT assets into a portfolio representation. Although achieving this perspective is valuable in itself, the most value to be derived from this exercise is from using portfolio representations as a communication tool among various parts of the business, the IT group, and the executive office. Senior business executives have a firm grasp of portfolio concepts, making this an effective way to bridge the vocabulary gap between the IT organization and business management and explain the key drivers of the IT budget. Specific software packages (e.g., ProSight) provide advanced portfolio visualization and communication capabilities.

Portfolio assets can be categorized either along the lines of assets and projects or higher-level concepts. One common higher-level concept is categorizing IT investments according to their levels of necessity and risk:
- Core: Expenditures that are necessary to keep an organization running, such as paying the power bill
- Non-discretionary: Expenditures that are necessary to support organic growth, such as buying incremental storage for a billing system as additional bills are generated
- Discretionary: Expenditures required to support basic business change, such as supporting a new employee by purchasing a new computer, setting up an e-mail account, enabling file and print capabilities, and accessing relevant business applications
- Investment: Expenditures to support competitive differentiation, typically to deepen market penetration, such as investing in additional retail outlets in an existing market or a new application module that enables salespeople to cross-sell additional offerings
- Venture: Expenditures targeting massive innovation, typically to broaden reach into new markets, such as expanding business to an additional continent, developing a new pharmaceutical product, acquiring a new line of business, re-inventing a government agency, or completely changing out a major business application suite

Of course, leading organizations customize their categorization criteria to their unique circumstances. What falls in a venture category for a conservative organization may be considered an investment or even discretionary spending in a more aggressive organization.

This variation also occurs across the business disciplines within a company, either business divisions/departments or functional areas (e.g., sales, marketing, service, product development, finance, human resources). For example, a company that has product differentiation as its core competency might look at new product expenditures as discretionary or investment portions of its portfolio, while an organization that focuses on operational excellence might view any expenditure on product differentiation as venture.

User Action: IT organizations should inventory and classify their assets, operations, projects, and other expenditures as a portfolio of investments. Many organizations invested considerable resources in defining their IT assets during the Y2K assessment and remediation efforts of the late 1990s, and this data can be leveraged for the portfolio management effort.

The portfolio representation of IT investments should be mapped to the business's portfolio of investments. This value-focused and business-aligned perspective on IT spending should then be used by IT groups to facilitate communications with business decision makers and facilitate sound IT spending decisions that will maximize the return on the enterprise's IT investment, both during economic expansions as well as restrictive budget environments, similar to what the IT industry is currently enduring.

META Group analysts David Cearley, Val Sribar, Howard Rubin, Dale Kutnick, David Lindheimer, and Doug Laney contributed to this article.

Editor's Note: This article is the first part of a two-part series on META Group's IT and business portfolio management model. Click here to read Part 2.