The problem of narrowly defining what you manage in your corporate portfolio. What is a discretionary investment?

Organizations generally spend a lot of time optimizing their capital investments/capital expenditures aka CapEx. And this is logical given that these initiatives generally involve significant investment of money, time and personnel resources. But, scrutinizing only CapEx fails to consider a huge discretionary investment pool that exists within most companies - operating expenses.

Most companies consider their operating expenses as business as usual, and they look to minimize them instead of managing them. And they often 'manage' them cavalierly with proclamations that operating expenses should only go up by x% this year or demanding they go down by y% over some period. And, unfortunately, this is a very poor way to manage these 'expenses'. Because in reality, a huge portion of what constitutes operating expenses would be better described as "operating investments". Investments because they generate returns, financial or strategic, for the firm and are vital to the long term success of the organization. Missteps in the allocation of operating expenses can put you at a competitive disadvantage and ultimately out of business. If where you invest your money is, by default, your strategy, then isn't not actively managing your operating expenses an indication of poor strategic planning? And from a shareholder perspective, if company managers are stewards of shareholder money, isn't it incumbent on them to actively manage ALL of their discretionary investment resources to maximize shareholder value?

Operating investments include areas like advertising & promotion, IT, salesforce, R&D, and even some operating initiatives. And these investments should be optimized as part of your CPM efforts. And most striking is the portion of operating expenses which are discretionary. Benchmarking several industries and organizations revealed that that 20-35% of operating expenses are discretionary meaning they can be turned on/off, reallocated, and ultimately managed. In fact, at American Express, the amount of discretionary operating investment dollars managed as part of our CPM efforts is squarely in this range and is several billion dollars on a per annum basis.

Of course, there is a portion of operating expenses that are not discretionary, i.e. those things that keep the lights on and keep you in business. For an internet company, it's ensuring that their website is up and available. For an automobile company, it's ensuring their manufacturing assembly line is producing cars. For us at American Express, it's making sure that when someone wants to use their card, the transactions works seamlessly for the consumer and the merchant. But, ultimately, not managing these operating expenses as investments does your firm, the people who run these investments and shareholders a disservice. From a behavior perspective, framing these expenses as investments serves to demonstrate to people that these are not simply areas to be re-engineered and minimized.

In fact, minimizing operating expenses can have very real and very deleterious impacts on share price performance. For discretionary branded consumer goods companies, cutting marketing expenses actually has been shown to lower total shareholder returns in subsequent periods.

Changing your organizational mindset about operating expenses will have major positive implications for your organization so I'd encourage you to begin this transformation asap. I welcome comments from those of you have managed to transform your organization's thinking towards operating expenses to a view that they are operating investments. What did you do in order to enable this behavioral change? For organizations struggling with this, what are the main roadblocks you are facing?

What drives a successful Corporate Portfolio Management strategy?

In order to establish a Corporate Portfolio Management discipline within your organization, you need to focus on two main dimensions -- organizational behavior and process. Below is a useful framework as you think about where your organization is today and where you want to take it.

While myriad consultants and software vendors will offer the illusion that some simplistic scorecard, report or software solution will help optimize your discretionary investment portfolio, they are, simply put, selling you a dream. Scorecards, reports and software solutions can help enable Corporate Portfolio Management if the appropriate process is put into place and organizational behavior is appropriately aligned with CPM. If a scorecard, report or software solution could optimize your portfolio, why would they need you? Silver bullets for CPM don't exist. CPM requires you to get your hands dirty with the promise of significant business benefits. But if you're looking for sanitized and simplistic gimmicks which look good in PowerPoint but don't take into account organizational realities, CPM is not for you.

The framework given above has organizations which are unevolved on both process and behavioral fronts falling into the unconsciously incompetent category, e.g., they don't know what they'd don't know. This is not a bad thing, and I suspect if you are reading this blog, you at least know some thing about CPM, therefore, putting you in the conscious incompetence bucket at a minimum. As you evolve on these two levers, your organization can approach unconscious competence which implies CPM is part of the fiber or DNA of your organization. However, this unconscious competence is unattainable. You can always tweak and improve your CPM capabilities while becoming unconsciously competent being your aspiration.

So what do I mean when I talk about these two dimensions? Let me provide you with a high-level overview of each.

• Organizational behavior - Trying to enable CPM without an understanding of the behavioral changes required is foolhardy if not impossible. Because at its core, CPM is a change-management effort. And it ultimately may make some people uncomfortable because it will ask some previously unasked hard questions that aim to get at better decisions for the overall organization, and it also may instill a sense of competition for resources. In order to move organizational behavior in a way that embraces Corporate Portfolio Management, it is important to understand 3 aspects related to behavior. (1) Incentives - Are people incentivized ($$, promotions, span of control, etc) to give up resources for the 'greater good'? Since the answer is probably no today, is this going to change? (2) Cross-organizational collaboration - Is collaboration across functional or business segments encouraged and occurring? This means collaboration not just in terms of resources but in terms of knowledge sharing. And lastly, there is (3) Decision-making style - Does your organization rely on intuitive, gut instinct to make decisions or use data and analytics to make decisions?


• Process - This is related to how well-defined your processes are around and as related to CPM. If you have a well laid out process, it may make sense, in fact, to enable this with a software solution. But don't be fooled into believing that a software will form the epicenter of a process. At American Express, we relied on a basic, excel based tool for several years. Only after we understood the shortfalls of our existing process and understood what a more advanced software needed did we go out and opt for something more elaborate. From a process standpoint, there are 4 main aspects to consider. (1) Standardization - Is the definition of what is an investment clear within the organization and sufficiently comprehensive? Are cost/benefit analyses (CBAs) across the organization standardized when measuring financial, risk, and strategic returns? (2) Robustness - Are driver-based models used to perform CBAs, and are risks and strategic benefits and concerns sufficiently well-defined and comprehensive? (3) Appropriate centralization - If there are driver-based models, are certain global assumptions such as discount rate or tax rates that are centralized across the organization in a way that promotes consistency in investment modeling? Additionally, is there an impartial group that can serve as the nerve center for the company’s CPM efforts who will be charged with constantly discussing the organization’s portfolio and asking provocative questions of initiative owners? Note: Be careful not to overcentralize as it will demotivate the subject matter experts within your organization. (4) Tracking - Are actual results captured and used to compare past investment performance and improve going forward investments? Is this "closing of the loop" enabled?

If you can make significant progress on these two elements, you're on your way to realizing the immense potential of Corporate Portfolio Management. Be careful not to focus only on one dimension as they are tied to each other. You cannot be highly evolved from a process standpoint and be nowhere on behavior. Behavior generally will lag process as shown below.

I'd welcome your thoughts on what other dimensions you feel might be important in making a Corporate Portfolio Management strategy a reality within an organization. Also, what have you done within your organization to make CPM a success - what tools and tricks can you share with others who are also embarking on this path. And if you've been tripped up on your road to CPM, what missteps might have occurred which you might help others avoid?