So, how's your portfolio doing?

There are some businesses that thrive because of heroes who are willing to go the extra mile. And there are others that thrive because of careful planning and management.

Three years ago, the Sacramento-based California Public Employees' Retirement System (Calpers), which handles the retirement investments for California's state, county and municipal employees, was determined to move its IT department from the hero approach to the careful-planning model with help from project portfolio management.

As its name implies, project portfolio management pulls projects together so that they can be managed as a portfolio, much like an investor would manage his stocks, bonds and mutual funds. The obvious benefit is that it gives executives a bird's-eye view of projects so they can spot redundancies, spread resources appropriately and keep close tabs on progress. But what's most appealing to many CIOs is the focus on projects as a portfolio of investments. Discussions aren't just about how much a project will cost, but also about its anticipated risks and returns in relation to other projects. This way, entire portfolios can be changed to produce the highest returns based on current realities.

"You can't manage effectively making decisions once a year or twice a year in markets that move every day," says Howard Rubin, executive vice president at consultancy Meta Group Inc. in Stamford, Conn.

But project portfolio management is by no means a simple process. For starters, it brings a new level of accountability that may not be welcome by all. The forms used to collect data on projects are like "tattle-tale reports," says Kim Gibbs, who runs Calpers' IT resource management division. Managers can say that everything is running smoothly, but portfolio reports tell the real story, she says.

Then there's the extra work associated with capturing data. If portfolio reports become too complex, departments can become bogged down in bureaucracy, says Rubin. The key? Keep reports brief and processes simple, he says. Gibbs suggests taking "baby steps." For instance, Calpers required managers to enter only one of their projects into the portfolio the first year; the second, they entered all their projects; and the third year -- starting last October -- time-sheet tools were built into portfolios so that every employee could input the number of hours spent on each activity.

Despite the challenges, portfolio management is helping Calpers meet its goal of better allocating staff resources, says Gibbs.

Sometimes, the return on investment is not having to rely on one person working a 70-hour week to get the job done, Gibbs says.

Tough times, tough measures

Project portfolio management isn't a new concept. It dates to the 1950s, when economist Harry Markowitz developed the theory that earned him the 1990 Nobel Prize in economics. He found that a diverse portfolio of investments is more likely than individual investments to reduce risk and produce higher returns. The finance community has embraced this concept for years. But it has caught on among CIOs only in the past two years, says Rubin.

"When the prerecessionary pressures of 2000 kicked in, companies started to scrutinize IT spending," he says. IT leaders for the first time "had to express value; they had to talk about risk."

Another factor that's fueled the growth, says Rubin, is the increasing number of vendors offering portfolio management tools. Calpers uses a system from Primavera Inc. in Bala Cynwyd, Pa. It provides a standard template form for managers to enter data about projects, then its analyst tool uses a stoplight approach that breaks portfolios down to red, green or yellow fields to indicate whether projects are proceeding, slowing down or at a standstill. Stoplight reports can be pulled for entire portfolios, individual projects or specific criteria, such as the amount of staff resources being used departmentwide.The stoplight system can be priceless in terms of IT's ability to account for its resources, says Gibbs. For instance, a business unit leader may need only two hours of IT time, which seems reasonable. But with the stoplight reports, IT can graphically illustrate that its resources are already tapped.

"Red, yellow or green: Everybody understands that," says Gibbs.

Jim Parker, engineering project control supervisor at Energy Northwest, a public utility in Richland, Wash., turned to project portfolio management to guide his group out of the "terrible maze" it created for itself after the company's massive budget cuts. Since 1994, Energy Northwest has reduced the annual operating budget at its commercial nuclear plant from $251 million to $158 million. There was a 59% workforce reduction at the plant, including engineering's 10-person project scheduling team. That left the project-driven department working off a checklist, says Parker. "We were continually missing every deadline that came along," he adds.

Using portfolio reports, Parker can now determine what resources are needed on each project, whether projects are running on schedule and which engineers have too much or too little on their plates. "I can look out six, seven months in front of me and know where I'm going to be," he says.

Adding it up.

Some metrics that can be tracked in project portfolios:

  • Staff resources
  • Labor costs
  • Project deadlines
  • Milestones accomplished
  • Hardware and software costs
  • Training costs
  • Production failure rate
  • Equipment maintenance costs
  • Yields

Parker's group established 10 milestones, such as "project plan approved" and "design work complete." Those milestones are tied to performance indicators and bonuses for project managers. If someone misses one, he has to write a trouble evaluation report explaining why. "You've got to lay your laundry out all the time," says Parker.

Previously, Energy Northwest's engineering projects met an average of 10% of those milestones. Now they're hitting 85%, says Parker, and those that are missed are often due to changes in project scope.

"To me, the return on investment is the smile on my customers' faces," he says. On second thought, he jokes, "They probably don't smile, but at least they don't beat us up so bad."

Show me the money

Shortly after project portfolio management was introduced in 1992 at Nynex (now part of New York-based Verizon Communications), IT managers determined that they were spending $1.50 to maintain each line of code. The industry standard was $1. Today, Verizon has that down to 25 cents, says Skip Patterson, executive director of business planning and development.

"You keep a spotlight on performance through quantifiable measures," he says.

Verizon has a central IT department that's broken down into groups of related projects. So, for instance, all the finance- and administrative-support projects comprise a portfolio that's maintained by one IT team, Patterson explains.

The CIO and portfolio managers develop a set of centralized metrics, and each month, the managers review each portfolio's progress on those metrics.

"You can create a kind of friendly competition between and among the portfolios," says Patterson. "It's highly effective. For some, it's a religion."

For instance, one metric looks at production failure rates. In 1994, 18% of all production projects failed. Now that figure is 0.5%, says Patterson. "If you're at 18% and all your peers [within the company] are at 0.5%, you're in the doghouse."

The toughest part of portfolio management was developing the metrics, says Patterson. The cultural challenges are also a hurdle. Project portfolio management is old hat for former Nynex employees, but those who came to Verizon through mergers and acquisitions are still getting used to it.

"We refer to it as herding the cats," says Patterson. "Don't expect quick results. But stick with it because the payoff can be huge. It's worth the pain."

Howard Rubin
Howard Rubin
"Companies used to do this [analysis] once a year. Top-endcompanies are now doing this once a quarter or once a month."

The upside of a 'portfolio' approach.
Imagine playing the market without a stock ticker. "You'd be blind," says Howard Rubin, executive vice president at consultancy Meta Group Inc. in Stamford, Conn. Sort of like managing an IT department today without the metrics and competitive benchmarks that lie at the heart of project portfolio management, he adds.

Portfolio management helps IT departments group all their projects into portfolios that are aligned with business objectives. Each portfolio must help run the business, grow the business or transform the business. The projects within those portfolios are gauged based on their projected risks, costs and value, and they're regularly evaluated based on the company's strategic needs at the time and the projects' performance within the competitive marketplace, Rubin explains.

"Companies used to do this [analysis] once a year. Top-end companies are now doing this once a quarter or once a month," says Rubin.

Questions about cost, risk, value and return are necessary before a project gets approved, he adds. Often, companies find that a large percentage of projects aren't necessary either because they're not important in the larger scheme of things or because they're already being done in some other part of the business, says Rubin.

"That's what business alignment is all about," he says.

Meta Group polled IT executives at 1,300 midsize to large firms in December and found that only 8% have a solid IT portfolio management system in place. But 54% said they would like to create such a system.

The cost savings can be tremendous, Rubin adds. One telecommunications company he worked with but couldn't name invested $600,000 in a portfolio management system and saved $6 million by cutting or optimizing inefficient projects, he says.

Copyright © 2002 IDG Communications, Inc.

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