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?

Taking Corporate Portfolio Management beyond IT

I remain amazed at how the entire portfolio management discipline has become largely focused on enabling corporate portfolio management for IT investments. Granted, most organizations do struggle with their IT expenses. Many (most) do not even fully understand that these IT expenses are in fact investments, but this fixation on IT is a bit stifling - as it minimizes the impact that CPM can have on an organization.

Corporate Portfolio Management should be used for any area where discretionary expenditures and hence investments are occurring including advertising & promotion, innovation/R&D, operations, sales, IT, capital expenditures, etc. This means looking past just your capital expenditures but also looking at operating expenses which, today, maybe considered business as usual, but which in fact, can be highly discretionary.

Conversations with numerous companies shows that 25-40% of a company's operating expenses are in fact discretionary (industry dependent). While the added scrutiny will likely not appeal to people who've become used to a certain size treasure chest to play with, this huge percentage does underscore the massive opportunity organizations have before them if they can optimize their portfolio. For owners of these expense pools, CPM lets you articulate where you are spending your money from the lens of an investment - not as a discretionary expense that should be cut if and when the environment requires.

At American Express, we've defined anything that is not required to keep the machine running as an investment and so are able to introduce tweaks to our portfolio within and across business segments as well as functional areas. Why limit oneself to optimizing within one narrow mini-portfolio of the organization? Starting with a mini-portfolio might be the right way to start and pilot the concept of Corporate Portfolio Management, but ultimately, CPM is about thinking and achieving BIG.

I'd love to hear from those who've successfully introduced Corporate Portfolio Management to other areas of their organization and the successes and challenges you've faced. Also, if someone can articulate why IT seems to be receiving all the attention around CPM, that would be very useful to understand. It seems to me that this has been driven by the ecosystem of consultants and software vendors that have emerged, but I'd love to hear other insights and thoughts in this regard.