Portfolio management – from strategy to implementation

Strategy to implementationMany organisations struggle to achieve effective portfolio management. I’ve had a number of project and programme PMO and assurance roles so I’ve seen quite a few large portfolios over the years. And the majority I’ve seen typically lack one thing – someone actively managing the portfolio. There have been some very good examples of portfolios being managed well and these have been where a senior executive has had overall responsibility for the delivery of that portfolio. But often a portfolio will be controlled by or report to a committee and committees are not good at portfolio management.

Here’s an example of how it could work:

  1. The Board set’s the strategic vision for the organisation with a small number of key objectives to be achieved over a 3-5 year timescale. To achieve that vision it sets targets for each Division in terms of revenue and costs which each Division signs up for. It will also have profit and loss targets for each year so the journey to the strategic goals has to be managed within those limits.
  2. To support the scale and objectives of the organisation and Divisions a structure and budget is agreed for support functions and shared services to ensure that efficient and cost effective common services are provided.
  3. Part of the exercise is to take a baseline of the current cost and revenue structures to enable the organisation to measure progress towards the strategic vision.
  4. The annual P&L targets mean you can’t simply throw money at the organisation to hit the target state in 3 or 5 years time. It has to be done in a controlled manner with change spend delivering against moving the organisation towards its target. Managing that change, and how much is spent on it is controlled through change programmes. Each programme is designed to move part of the organisation towards the target P&L numbers. Managing these change programmes at the macro level is where portfolio management comes in.
  5. Each Division and the Shared Functions are mini businesses and each has a set of programmes to achieve their transition to the target P&L. Those programmes are a sub-portfolio of the overall organisation’s change portfolio. The Board needs to monitor each sub-portfolio’s progress towards it’s targets. Over time, the allocation of resources and the expectation on P&L may change depending on performance and market conditions. It’s about balancing the sub-portfolios to achieve the overall strategic goals.

So at the pan-organisation level it is pretty clear. Let’s move on to the Divisional level.

  1. Each Division or Function has its current state budget and a budget for change to move the current state to the target state. It is responsible for managing the change programmes within its sub-portfolio to achieve that.
  2. Where as at the pan-organisation level it was a question of balancing resources – essentially cash to spend on change – at the Divisional level it is about managing which programmes to spend that cash on and ensuring they are delivering the expected benefits.
  3. The key role of the portfolio management team is to identify under-delivering programmes and correct or cancel them. Alternatively, other programmes have to be squeezed to make up any benefits shortfall.
  4. In a well constructed and managed portfolio there are usually options and if things don’t go as planned or the market changes, it is the role of portfolio management to assess and identify this and re-balance the portfolio to achioeve the overall targets for the Division or Function.
  5. Most organisations are cash (or P&L) constrained, so the portfolio management teams have to look at the best way to deploy the cash at their disposal to meet the objectives, adjusting the construction of the portfolio over time to optimise returns.

Common problems

Unused budget – This is particularly a problem in cash constrained organisations. Where a Division or Function is allocated budget for one or more programmes but doesn’t use it two problems can result. Firstly, the expected return on that investment may not now be forthcoming leaving the overall portfolio short of its target. Secondly, the cash is reserved when it could have been used elsewhere in the organisation to deliver other benefits. Realistic and honest forecasting processes are therefore required to identify and free up unused budget allocations.

Reluctance to kill under-performing programmes – Programmes often acquire a life oif their own. A system of regular independent assessments of progress and general health of the programme are essential to challenge such situations

Failure to budget for in-flight programmes – Many programmes will span two or more budget years and there must be budget available in each year for the p[roh

 

Whilst this is a simplification of most portfolio situations, it serves as good basic introduction.

 

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