Getting Project Portfolio Management Right!

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PPM is the flavor of the month. Unfortunately, it will leave a bad taste in your mouth after you read this post!
You are doing Project Portfolio Management wrong.
Now that I have your attention, let me tell you why!
The objective of PPM is simple: maximize the return on your IT dollars i.e. produce the most business value for your IT budget. PPM tries to do that in two ways:
1)      Fund projects that produce higher business value. This is finance 101 or “duh” as the hipsters are calling it these days.
2)      Stop projects that are not producing business value. This is essential to stop putting good money after bad or to look at it another way, fund more promising investments
If you were investing in projects that produced the maximum business value then by definition you were maximizing IT ROI. This two pronged approach ensures that.
Simple enough, right? Well, almost!
PPM borrows extensively from the financial theory and practice of investment portfolio management. Simply stated, portfolio management says that to maximize your “overall” returns, instead of investing in one asset it is better to invest in many different assets. This “diversification” ensures that if one or more investments “fail” then the others that “succeed” will compensate for them and your “overall” investment will produce the “desired” returns.
In so far as every IT project/initiative is seen as an “investment” and a company invests in many projects borrowing PPM makes perfect sense. Further, our two pronged approach described above also makes perfect sense and we should maximize IT ROI.
Now you are wondering if you wasted time reading this article! Don’t because it is not the objective or the theory but the way IT organizations are implementing it that is making PPM almost useless.
In the financial world, investment portfolio management is about risk management i.e. hedging your bets because of factors not in your control. For example, does an average investor know if interest rates will go up or down over the next six months? (Technically no investor should know the direction of interest rates but if you are Alan Greenspan you do. If you are George Bush you do as well. If you are Halliburton then you do as well. So there is a class of investors who have this information in advance but I suspect a “vast majority” of investors do not.)
These environmental factors – such as interest rate – affect investment performance of individual assets. More importantly, they affect different assets differently. For example, if interest rates increased would you make more money in stocks or savings instruments? If interest rates dropped, would it make sense to be in real estate or bonds?
In this world of complex financial instruments such as asset backed securities, derivates of all kind and hedge funds, I am going to avoid making this discussion overly simplistic. But I hope you get the point that financial investors are trying to manage their risk in the face of the unknown by investing in a portfolio of assets. The unknown is environmental factors such as interest rates. The same environmental factor can increase the yield of one asset while hurt that of another. Portfolio strategy is to hold different assets to counterbalance the negative impact with the positive one.
You can see how this equation becomes complex because the interrelationship of many environmental factors and the resulting impact on many financial instruments. That is why hedge fund managers make their mega-zillions. That is why some people made a killing in this sub prime meltdown!
In any event, back to PPM and why we are doing it wrong. Simply stated, PPM in the IT world does not take into consideration environmental factors. Indeed, most people would not be able to tell you what these factors are, leave alone using them.
So what are IT investments hedging their bets against?
Should PPM borrow environmental factors from the financial world and hedge our bets against say interest rate movement? Why?
Are their environmental factors specific to IT investments that we should factor in to make PPM really meaningful? Or does the financial theories related to portfolio management break down when it comes to this aspect?
These are both rhetorical questions. There are specific environmental factors related to IT investments that PPM must take into consideration so our IT bets are hedged. Otherwise, PPM is meaningless in the IT world.
Let us take one example – technological obsolescence. If you are investing in a project that implements a technology that is going out the door in 5 years, how do you factor that in the investment decision?
This is a simple and straightforward factor affecting ALL IT projects. However, the answer is neither simple nor straightforward. For starters, how would you even know that a particular technology is going out the door in 5 years? If you are reading Gartner reports then try the “money with a dartboard” approach as that has a better chance of success and even if you fail you had fun along the way!

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