Comparison: IT portfolio management and financial portfolio managment

Leveraging best practices from the financial marketplace

This article is excerpted from IT Portfolio Management Step-by-Step: Unlocking the Business Value of Technology, by Bryan Maizlish and Robert Handler. Used with permission of the publisher John Wiley & Sons Inc.

Stock traders and money managers of mutual funds tailor a portfolio of investments based on their customers’ risk and reward profile, with a keen understanding of the fundamentals associated with investments in the portfolio. Regardless of whether money managers oversee a risk-averse or a highly risky portfolio, the objective is to maximize investment return at an acceptable risk level. As conditions change, money managers must make buy, sell, and hold decisions concerning individual projects and initiatives within portfolios. Money managers are able to communicate in real time the overall performance and value of the portfolio they manage. The liquidity of the majority of their investments means that investments can be bought, sold, or traded with minimal effort.

In addition, money managers have many metrics to compare their performance with other fund performance and investment alternatives. It is important to note that money managers have an immense amount of relatively reliable and standardized information regarding individual assets within their portfolio such as annual reports, financial statements, industry and analyst reports, competitor information, and so on. The tools used for analysis of financial portfolios are generally well established. However, Enron and Worldcom remind us that surprises can occur from time to time.

IT portfolio management leverages many of the rigorous constructs and best practices from the financial marketplace. But there are numerous differences due to the complexities, high exit costs, low salvage value, and lack of securitization associated with some elements of IT. As opposed to a portfolio of investment that might consist of treasury bills, bonds, precious metals, money market, fund shares and private and public equity, IT portfolio management is applied within companies and government agencies to assess and arbitrate alternative investments that compete for limited resources. Unraveling IT investments is usually more complex and takes more time than a publicly traded instrument.

A failed IT investment could have a sizable impact on business continuity and mission critical operations. Some IT investments may not produce the optimal level of financial return due to mandatory, legal, safety, and regulatory constraints, which can trump ROI calculations. The decision support tools and information regarding an IT portfolio are not as well established or as robust as the resources available to money managers. IT portfolio management involves more factors than financial portfolios. Similar to how money managers operate their financial portfolio, IT portfolio management provides reporting and performance metrics that constantly assess, reprioritize, and rebalance a series of buy, hold, and sell decisions related to a suite of technology, process, and tradecraft investments as market conditions and corporate needs change.

An important similarity between a money manager’s financial portfolio and an IT portfolio has to do with correlation, or the interdependency between investments in the portfolio. With constrained and limited resources and constant change, it is important to understand not only the risks associated with each individual investment but also the impact, dependencies, and uncertainty across investments. Understanding these relationships and effectively diversifying high-, medium-, and low-risk investments in short-term, medium-term, and long-term initiatives across business and functional areas will minimize the level of risk associated with a portfolio at any given time. The Efficient Frontier, a tool that was originally established for the financial market, is being used to calculate risk versus value of the entire IT portfolio and the effect of individual investments on the IT portfolio.

Related Content:

IT Portfolio Management Step-by-Step: Unlocking the Business Value of Technology

By Bryan Maizlish & Robert Handler (For Gartner Inc.)

ISBN 0-471-64984-8

Copyright © 2005 by Bryan Maizlish and META Group LLC, a subsidiary of Gartner Inc. All rights reserved.

Used with permission from the publisher, John Wiley & Sons Inc.

Copyright © 2007 IDG Communications, Inc.

7 inconvenient truths about the hybrid work trend
Shop Tech Products at Amazon