Help is here for Investile Dysfunction

If your organization suffers from an inability to allocate resources to the best projects and investments, you maybe suffering from Investile Dysfunction. Most organizations do suffer from this so you needn't be ashamed.

Treatment is available and 100% safe.

To learn more, goto www.investiledysfunction.com

Corporate Portfolio Management Association site launches

For those interested in beginning or advancing their IT Portfolio Management or Corporate Portfolio Management efforts, you maybe interested in the Corporate Portfolio Management Association.

This blog has moved. Just click on this link.

I've decided to move this blog to another service provider so you can just click here to be taken to the new home of this blog.

My author site just launched

I've just launched my author site to support and augment my book. You can learn more by clicking here or by just going to http://www.anandsanwal.com.

Order a pre-release copy of the book - Optimizing Corporate Portfolio Management

The book is now available for pre-order on Amazon.com. Just click here to purchase it.

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?

Looking at cost benefit analyses for design the Whirlpool way

Even as a major proponent of Corporate Portfolio Management, I am worried by the current ROI zeitgeist. While measurement of an investment's potential efficacy is important, forcing an ROI on every investment is not advisable as it will ultimately lead to an organization taking less risk because innovative investments are often difficult to provide any credible ROI to. It also leads to a more insidious impact of making investment owners come up with far-flung return estimates which are not justifiable or measurable in their efforts to justify their investments.

Ultimately, what organizations must realize as they put together their cost benefit analyses (CBAs) is that benefits are not strictly financial. There are strategic and risk benefits that can be quantified but which may not fit neatly into an ROI construct. That said, merely saying you need to do an investment because it is "strategic" is not enough and actually a cop out. You should be able to articulate and measure this strategic or risk impact even if it doesn't translate into direct bottom line impact.

The February 2007 issue of FastCompany magazine contains an interesting article which looks at how Whirlpool has begun to measure the impact of good product design. Like brand advertising, loyalty/retention investments, many IT investments, etc, investments in product design can be difficult to ROI-ize. As the article states, Whirlpool and the design world in general "lack objective financial metrics to help them calculate whether increased investment in design will generate increased profits."

Chuck Jones, Whirlpool's design chief, realized the need to quantify the impact of better design when "the company's resource allocation team asked him to estimate the return on investment, but Jones couldn't produce the numbers to make such a forecast. As a result, he was forced to fall back on a rationale that was simultaneously elitist and lame: Trust me. I'm a designer."

Jones didn't give up and instead of trying to force ROIs on design investments, his team "created a standardized company wide process that puts design prototypes in front of customer focus groups and then takes detailed measurements of their preferences about aesthetics, craftmanship, technical performance, ergonomics and usability."

Jones believes that "this metrics based approach is also transforming Whirlpool's culture." The process has actually yielded its first product and the first product is showing profits up 30% over the previous model.

The done by Whirlpool highlights several different key items worth learning:

1. Benefits are not strictly financial. It is important that you think of benefits holistically and develop a way to measure the impact of investments even if those benefits are not financial.
2. It is important that the measurement of these metrics & benefits be constructed in a robust and rigorous way so that they can defend against attacks that will invariably come in most organizations from the introduction of a metric or process that is not widely known.
3. Development of a credible new metrics-based approach or any type of corporate portfolio management effort takes time. In the case of Whirlpool, Jones' team has worked on the development of their methodology for two years before the first product was launched.
4. Build a repeatable capability and competency. Whirlpool has built their consumer-generated measurements into a database so they can continue to leverage this data on an ongoing basis to make design decisions. Data underlies good decisions and ensuring this data is captured and available is very important.
5. Make sure the metrics you capture don't always point to a decision to undertake an investment. Your new process will be more credible if certain projects get killed along the way as well.

If your organization has developed innovative ways to demonstrate the value of and scrutinize investments which don't fit neatly into an ROI construct or which don't have measurable financial benefit, I'd love to learn more. Please drop me a note or leave a comment on this post.

Sarbanes-Oxley and IT portfolio management to help manage risk

There is an interesting contention made in a recent article in the Sarbanes-Oxley Compliance Journal. (Note: I read that sentence over and realized I used the word interesting in a sentence mentioning SOX compliance. That is a first. I apologize to any of you who are riveted by SOX compliance). The author, Jan Sondergaard (VP of Products, HP) correctly asserts that many IT organizations are viewed as "black holes" or "bottlenecks" but takes it one step further and say that this is reflective of the inability of many IT organizations to "automatically capture, view, and report on all of the work IT is doing." And as a result, this deficiency creates real corporate risk making "sustainable Sarbanes-Oxley compliance impossible."

The author further contends that the "best way to implement standards across an organization is to take a top-down project and portfolio management approach that allows you to define and enforce 'control points' throughout the processes" and to "take project and portfolio management solutions that offer real-time alerts and indicators."

So a couple of interesting points/questions this raises:

1. I'd love to hear from any organizations who are using their portfolio management discipline as a source of SOX compliance. In general, I don't think I've seen that as the purpose behind a corporate portfolio management effort, but if the CPM discipline can aid in SOX compliance, it's an obvious benefit. Please leave a comment and let me know if you are doing this, and perhaps we can get a dialogue going.
2. Of course, those of you with opinions on this topic of any kind should also leave your comments.
3. Regarding the article itself, I like and am intrigued by the idea as I do feel that the rigor that a CPM effort would instill around IT investments can definitely help mitigate risk and offer insights into the behavior/nature of IT spending.
4. That said, the article does come from the "portfolio tool as savior" school of thought with dashboards, workflows and real-time alerts all being highlighted as the means to get at "accurate, reliable information that IT professionals at all levels can more effectively respond to the demands of the business while creating a culture of accountability that can support current and future regulatory requirements." This I disagree with on multiple levels:

• Technology solutions are not a panacea to any type of problem - regulatory or not. You must understand what your objectives are, what process you are trying to enable, etc and then think of how technology might aid in this effort.
• Portfolio management solutions do not magically create accurate, reliable information nor do they force accountability. They create rules (good or bad) which people, if not properly educated and incentivized can circumvent and/or ignore.
• If building a portfolio management process, you should aim to build it as a capability -- not as a process to enable just support of regulatory requirements. CPM is a powerful discipline which has widespread organizational uses and so building it in a sufficiently robust way will enable it to offer insights into SOX compliance but will also give it significantly more ability to contribute to the organization on other pressing fronts including ensuring achieving financial, strategic and risk-oriented goals.

I am glad that Mr. Sondegaard raises this idea around CPM and SOX as it is quite interesting and has some merit. I think the means to achieve what he is talking about maybe enabled by a technology solution, but that is not the first priority.

Additional details about the book

The description of the book available on Amazon.com is below. I'm also happy to report that the book will contain five great case studies on organizations who are leveraging a CPM strategy & discipline. The case studies will be of the following organizations:

1. American Express
2. Cisco Systems
3. Hewlett Packard
4. State of Oregon: Department of Human Services
5. TransUnion

As you can see from the list, there is great diversity amongst the types of organizations chronicled. As you will see in the case studies that ultimately will be developed, each organization has undertaken CPM in different ways with all, however, realizing significant benefits.

Let me thank the following practitioners who helped make these case studies happen. Bill Bien of Cisco Systems, Michael Menke and Kevin Yorks of HP, Dennis Wells of the State of Oregon, and Piyush Sanghani of TransUnion. These are the people who are out 'in front' of the still burgeoning space of Corporate Portfolio Management - the pioneers. I'm indebted to each for their time, insights and openness. I learned a great deal and thoroughly enjoyed our interactions.

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The book's description as given on Amazon.com is given below.

Optimizing Corporate Portfolio Management: Aligning Investment Proposals with Organizational Strategy goes beyond the typical plain vanilla discussion of corporate portfolio management (CPM) and its many benefits to actually offer a set of pragmatic and proven steps to help executives, managers and current and prospective practitioners understand and ultimately bring this powerful strategic discipline to their organizations. Step by step, this book shows one how to build a CPM discipline within their organization based on their organization’s strengths/competencies and development areas. The book eschews simplistic one-size fits all approaches to detail a dynamic capability that can be deployed across organizations of various sizes, industries and readiness.

The book’s foreword is also written by a major proponent of CPM – Gary Crittenden, CFO and EVP of American Express.

Optimizing Corporate Portfolio Management details how the CPM discipline can be applied to an entire company or specific functional areas including information technology, marketing/A&P, capital expenditure, R&D/innovation, salesforce and virtually any area grappling with where to invest discretionary investment dollars. Finally, Optimizing Corporate Portfolio Management demonstrates actual utilizations of CPM within several prominent and diverse organizations through case studies which help readers see firsthand how CPM is enabled, utilized and the benefits it imparts.

The book draws on portfolio management expert Anand Sanwal’s years of research and work in this area at American Express where he led the deployment of CPM across the entire company. The practice known as Investment Optimization within American Express is patent-pending. He has been a featured speaker on this topic to many individual companies and at many seminars and conferences held by the CFO Executive Board, Beyond Budgeting Roundtable, Gartner, Enterprise Portfolio Management Council and others. The discipline he has helped spearhead has also garnered several external awards for its significant and tangible impacts to American Express. His knowledge is further enhanced through best practices research and discussions with other leading organizations engaging in CPM.

Within this essential corporate portfolio management resource, Sanwal methodically covers CPM offering the following:

1. A description of Corporate Portfolio Management and its importance
2. A framework for CPM success
3. The seven and a half deadly sins of CPM
4. A detailed four step process to bring CPM to any organization
5. Utilizations of CPM within various functional areas including IT, Innovation/R&D, Marketing/A&P, Capital Budgeting/Capital Expenditure, Salesforce
6. Case studies of leading organizations using CPM including American Express, Hewlett Packard, Cisco Systems, TransUnion, State of Oregon: Department of Human Services
7. Several additional resources and tools available with the book and at http://www.corporateportfoliomanagement.org

Followup on Gartner ITxpo 2006 Program & Portfolio Management panel

I had the opportunity yesterday to participate in a panel at the Gartner ITxpo on the topic of Corporate Portfolio Management. I was pleased (and surprised) to see the room was standing room only so obviously the area of corporate portfolio management is a hot one. The focus was, of course, on IT portfolio management given Gartner's deep expertise and relationships with IT professionals.

Besides myself, there were 3 other panelists who I had the pleasure of meeting including: Michael Menke of HP, San Retna of Transformaction and Mark Stabler of AAA of Northern California, Utah and Nevada. Each of us were asked to speak about our own organizational efforts around CPM and then we had a lively session of Q&A facilitated by Matt Light of Gartner.

A couple of observations from the discussion:

• Many organizations are still defining their portfolio management efforts around IT.
• Organizations seem focused on governance first and process second. So I heard much alphabet soup around PMOs and various IT councils, but this seems counter-intuitive. If the process is well-defined, the governance can then be established around this. If you don't what you are trying to enable, governance structures are pointless. Additionally, much of the governance structure seemed bureaucratic.
• I received a couple of questions about how American Express' Investment Optimization effort is enabled, i.e. what technology/software are we using? Again, as previously mentioned in prior posts, technology should not be your first concern. Understand the process and change behavior. But it seems that there is still a huge focus on "what tool should I use?" Matt Light probably summed up the over-focus on tools with his statement - "A fool with a tool is still a fool."

All in all, it was a great session, however. It was nice to see so many people in attendance who are also passionate about Corporate Portfolio Management. I also had the opportunity to meet many trendsetting prospective and existing practitioners moving their organizations towards realizing the benefits of CPM.

For anyone in attendance at the panel, were there any other insights you gleaned from the session that are worth highlighting?