The business case of portfolio management
Decision makers in companies are sometimes reluctant to introduce Portfolio Management and supporting systems. They wonder if the costs involved, time spent and additional formal processes will outweigh its benefits. They wonder about the following:
What is the business case of Portfolio Management?
In this paper I will share my view on the Portfolio Management business case. I will use the Business Model Canvas to sketch the business case for portfolio management and show which factors need to be taken into consideration.
Portfolio Management is becoming rapidly an important tool for managing complex project environments. Also, in my domain, innovation management, portfolio management is introduced to manage innovation in a structured way to increase chances of success.
The benefits of Portfolio Management are commonly summarized as following .:
- Better strategic alignment
- Reduce organizational complexity
- Increase project success rate
- Improve utilization of organization's resources
The business case of portfolio management
The business model canvas (Osterwalder et al) is used to sketch a simplified version of a company's business strategy. A business model 'describes the rationale of how an organization creates, delivers and captures value'. In our innovation management practice, we use it to assess whether a new business idea is a 'hobby or business'.
But you can use this canvas as well to assess all kind of 'internal' initiatives. The benefit of a canvas is that it makes things visual and brings together all related items on a single sheet of paper. Therefore I will use the business model canvas to prove the Portfolio Management Business Case.
It is intended for innovation, portfolio and project managers that want to have extra ammunition in making the case for portfolio management towards senior management. But foremost I hope to convince senior management themselves that portfolio management potentially is one of the largest contributors to strategic success.
In the business model I have tried to summarize the elements that need to be considered when deciding if portfolio management can be a suitable approach.
The building blocks of the portfolio management business case
Let's discuss the business model in the order that Osterwalder promotes.
Portfolio management is a discipline that is focusing on strategic and tactical decision making. Therefore the 'customers' of portfolio management are all stakeholders that are involved in this kind of decision making.
In order to generate the relevant info, input is required. This input is generated on the operational level, that is the team members working on the initiative, the project manager, the supporting staff etc. They must too buy-in into the benefits of portfolio management, so that they are willing to provide accurate data . I have put them in the customers box, because I feel they should be treated as such. If portfolio management is not of added value to them, implementation will become difficult.
But when does portfolio management become relevant to a company?
I like the below model which indicates that the need for PPM is related to the organizational project complexity and the number of projects. Companies in the above right quadrants already had to deal with the complexity and probably have already some kind of PPM process. It might be possible tough to improve their current process applying the latest knowledge and software. For smaller companies with a low number of projects, the introduction of PPM will only increase complexity and has limited added value.
The biggest win is for larger SMEs and corporate companies that work in an increasingly complex environment (multiple business units / subsidiaries) and have a lot of projects (or epics if they work agile).
- Overview of all change initiatives in a single place: for most organizations the growing amount and complexity of projects is the key reason to start with portfolio management. Indeed, simply having an overview of what is happening can already provide insights in overlapping projects, projects that have lasted way too long or that are not aligned to strategy anymore. Which helps in stopping projects or to put them on hold.
- Define the strategic buckets to support innovation strategy: A company's innovation strategy should normally define in which areas it is looking to innovate. Also, it should depict what the balance between incremental and transformative innovation should be. We work a lot with the 3 horizon model. Seeing the existing portfolio in these strategic buckets identifies overlaps, too much or too low emphasis and shows gaps. In this way strategic alignment can be achieved. Also, projects that are not worth pursuing can be stopped.
- Apply the right development process & governance recognizes that for different type of projects (incremental vs transformative) a different process and KPI's should apply. You cannot judge a transformative initiative on 1 year ROI. By making clear which process and KPI's apply, and by logging decisions based on these criteria, decision making is objectified.
Especially in the implementation stage, face-to-face communication is important, next to the regular communication channels. Also, supporting software can be helpful as a channel to promote portfolio management internally. That is, if the software is user friendly, intuitive and visual. Unfortunately most portfolio tools are variations on spreadsheets and excel planning sheets, and are less suitable for this purpose.
The "what's in it for me?" is different for all parties involved in portfolio management. In alignment with the customer centric approach towards portfolio management that I promote, you have to adjust your messaging and the intensity of the relationship to the personal benefit of your internal customer.
I have made a distinction between the tangible, financial benefits and the intangible benefits. Tangible benefits include
- Increased portfolio value (and hence results) due to better selection process
- Reduction average budget per project because of earlier identification of misaligned projects (and killing them!)
- Avoiding wasting resources on the wrong projects
- General savings in improved coordination and streamlining
Intangible benefits are strategic and long-term in nature. They will also impact the company culture in a positive way:
- Identify strategic gaps and develop new initiatives. Because of the innovation strategy and strategic buckets definition, it will be easy to identify the areas where you underperform. Now you know where to launch new initiatives and / or find partnerships to develop that area.
- Drive engagement toward innovation: by being more successful in developing new products, by working on the right projects, by applying the right processes and metrics, and by being more objective in decision making, people will become more motivated. They will enjoy working on new initiatives and be more willing and energized to come up with new ideas.
- You will free up resources to lauch more projects, and the new engagement will help to find more new ideas. This will increase your chance of finding THE successor to your current star product.
It is important that portfolio management is recognized as a specific responsibility. Preferably a dedicated person (s) is responsible for it. They can't do it by themselves. They need the help and buyin of internal and external customer segments.
Of course you can start with excel spreadsheets, but life can be much easier (not to speak more efficient) and customer friendlier by applying the right kind of portfolio management software. We use software that can be implemented in days, and of which you can reap the benefits from the start. Implementation should be a gradual, step-by-step process that is iterative. Big bangs don't work.
There are a number of activities that need to be done to implement continuous portfolio management. Starting point should always be the strategy, more specifically the innovation strategy. Lack of a clear direction will make it impossible to take decisions, other than on gut feeling.
When you get started first all information needs to be gathered about all existing projects. Some organizations do already have that overview, but for many (larger) organizations the project organization has been delegated to smaller units and a couple of cross-functional ones. General overview is then lacking. And when you have been able to retrieve the information, it also has to remain up-to-date. New initiatives must be added, stopped initiatives registered (plus reason why), progress and metrics need to be up to date. That's why we need people to be convinced of the added value, so that they are willing to contribute.
In terms of governance, we start with existing processes and KPIs. However, given the strategy, the strategic buckets and the type of innovation, different processes and metrics may be required. As said before, you cannot judge a transformational or even disruptive initiative on ROI.
If you don't have the buy-in of senior management, don't even start. Senior management must have defined what they want to achieve with portfolio management and how they are going to use it. Only with this confirmation and support, you will be able to convince stakeholders to - in their perception- let go a bit of their autonomy. If you ask this info and it is not used, this will cause frustration.
You also need catalysts for change. I call this the innovation drivers. These are the people that want to move the company forward and are the internal drivers for innovation and change. They don't necessarily have an appetite for structure, but as soon as they see how portfolio management can help them driving the innovation agenda, they become a key partner.
The portfolio management can either be championed by one of these innovation driver or by an engaged member of the PMO office. Alignment between the two is important.
Often it is very helpful to get a portfolio management consultancy (like ours) on board.
Of course there are costs associated with the introduction of portfolio management. Next to time spent on internal resources, there will be out of pocket costs. A good consultant will cost you money, as will a good portfolio management software package.
However, if we compare the revenues with the costs, portfolio management - if implemented well- will not only earn itself back. Portfolio management will contribute to an increased profitability / cost reduction and improve your longer term competitive position.
The portfolio management business model provides a good overview of the elements that need to be taken into account when making the business case for portfolio management.
Given that you recognize yourself in the described customer segment, the potential benefits of portfolio management outweigh the costs of implementation by far.
All in all, we can conclude that the business case for portfolio management is a positive one!
 Filippov, Sergey & Mooi, Herman & Van Der Weg, Roelof. (2017). The Strategic Role of Project Portfolio Management: Evidence from the Netherlands.
 Viki, Toma, Gons, The corporate startup (2017)
 Osterwalder & Pigneur, Business Model Generation (2010)