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CHIPS Articles: Portfolio Management: A Decision-Maker's Tool for Managing IT Investments

Portfolio Management: A Decision-Maker's Tool for Managing IT Investments
By Cmdr. Sarah Standard - October-December 2002
Selecting the right tool for a job is important to completing the job both efficiently and effectively. Portfolio management is the right tool for the job of determining which information technology (IT) investments will best support the organization's mission. It is a tool senior managers need to enhance decisions and to improve management of IT investments.

The Department of the Navy Chief Information Office (DON CIO) has developed a guide to assist organizations in implementing a portfolio management process that helps to balance IT expenditures, avoid duplication of IT investments, and maximize the overall mission performance for an organization. The new guide, The DON IT Investment Portfolio Management Guide, is the latest addition to the tools the DON CIO has developed to support the IT Capital Planning and Investment Control Process. It demonstrates a step-by-step process that a DON organization can use to build and manage an investment portfolio.

The process outlined in the guide is a portfolio management process for all DON organizations. It is also being considered for the long-term legacy application rationalization process for the Functional Area Managers (FAMs). It is a process that can be implemented enterprise-wide at every level in the DON.

What is Portfolio Management?

Portfolio management is a disciplined approach to choosing and prudently managing the best mix of investments to strengthen a mission capability. It is a process that consists of setting goals, priorities, and performance measures for the portfolio, gathering consistent data on all investments, applying standard criteria to these investments in the areas of mission, financial, and risk; prioritizing investments; and approving the investments that provide the best mix to accomplish the mission of the portfolio. Additionally, portfolio management provides a framework for regular monitoring to ensure that portfolio performance is on track.

Portfolio management provides senior decision-makers the ability to view all their IT investments at a glance, prioritize their investments according to standard criteria, and make their funding decisions with more complete, current, and consistent information.

What's Wrong with How We Do Things Today?

Current processes leave serious gaps in information, often resulting in duplication. One organization, for instance, found that they had multiple label-making applications, all serving the identical function.

Decision makers today lack consistent information on their IT investments. IT investments costing more than $30 million in total program costs must comply with the SECNAV 5000 series that requires rigorous reporting. However, the majority of DON IT investments today are under this $30 million threshold and thus do not require the same level of scrutiny and reporting. The consequence is that decision-makers often have little information on the majority of their IT investments. And the information they have is not standardized, making it difficult to compare investments with similar capabilities.

Another issue is the decision-making process itself. Currently, IT investment decisions are made on an individual basis based on the merit of the particular investment. Decision-makers do not have a process to look at all of their investments simultaneously and prioritize investments based on the organization's mission. They need a means to factor in interdependencies, performance improvement, strategic goal alignment, etc., so that the investments they approve provide the best mix to support the mission.

What Can Portfolio Management Do for My Organization?

Portfolio management makes good business sense. Implemented effectively, it improves mission performance, reduces duplication, improves customer satisfaction, and ultimately provides the best support to the warfighter. Effective management of a portfolio provides insight to the decision- maker and a focus on criteria such as interoperability, strategic goal alignment, mission impact, and changes in strategic direction. Awareness of an investment's support of these criteria contributes to informed decision-making and ensures that investments support the organization's strategic goals.

In an environment of constant change, leaders need good information in order to meet the demands of shifting budgets and organizational priorities. The discipline and accountability built into this decision-making approach provides good information to senior leaders who need to substantiate budget requests and build strong business cases for IT expenditures. The strategic requirement for quality information in a constrained resource environment increases the importance of making better-informed decisions.

Additionally, re-capitalization results from smarter choices for investing with limited resources. In other words, when senior managers eliminate duplicative or obsolete investments, those funds are freed up for investments that provide increased capabilities and better support current priorities and mission goals.

Portfolio management is a process that makes sense, not only for IT but also for all investments. Although the DON IT Investment Portfolio Management Guide is focused on IT investments, the process can be used for all capital assets in an organization with minimal modification.

Portfolio management also helps organizations comply with legislation and policy pertaining to IT investments. Portfolio management assists organizations in meeting the various requirements set forth by Congress, the Office of Management and Budget (OMB), the Department of Defense, and the DON.

How Does Portfolio Management Relate to Current DON Processes?

Current DON processes focus on the selection, management, and evaluation of individual investments. By contrast, the portfolio management process is a disciplined methodology for managing IT portfolios. It is a process for senior managers to focus on overall performance and outcomes for a group of IT investments. It is not an acquisition management process, nor does it directly reflect the Select-Manage-Evaluate phases of the Capital Planning Process.

Portfolio management builds on acquisition management through the exchange of investment information. In the portfolio management process, decision-makers draw upon the information collected for investments in each of the phases (Select-Manage-Evaluate) to assist with deciding on the contents of the portfolio of investments. Portfolio management and acquisition management both support and enhance each other. Without effective acquisition management, an organization cannot successfully implement portfolio management.

Who is Responsible for Performing Portfolio Management?

Portfolio management is accomplished through the communication and participation of key cross-functional personnel at all levels of the organization. Senior management involvement, support, and decision-making are critical to the process. Executive-level officials monitor and approve portfolio management actions and forge and maintain relationships to execute related activities. Senior management may choose to delegate some portfolio management responsibilities. In the context of portfolio management, the project/program managers are recognized as investment managers.

When and How is Portfolio Management Performed?

Portfolio management begins when senior management commits to making better investment decisions and to implementing the DON IT Investment Portfolio Management Process. Once implemented, portfolio management is a continuous process that regularly ensures investments are balanced in terms of a set of pre-established portfolio criteria. The criteria enable the decision-makers to compare competing investments objectively and are usually weighted to emphasize the priorities of an organization. All investments are scored individually within each of the criteria with respect to mission, financial, and risk. They are then compared in groups to develop a ranking or prioritization that assists decision-makers. The approved portfolio is regularly assessed using portfolio criteria as well. Used wisely, the process will increase the overall value of investments by surfacing those that are duplicative, too risky, or ineffective in supporting the mission.

Is the Process Automated?

Automation is critical to the successful implementation of the DON portfolio management process. With automation, investment managers need not collect the same information again and again. When they input the data, an authoritative database stores the information. Senior managers no longer issue duplicative data calls; they query the database. Investment managers simply update the database to ensure that leaders have current and accurate information on their investment.

Automation enables senior managers to "slice and dice" investment information any way they choose. They can search the portfolio to find which investments supply a particular function or mission capability. They can rank the investments by return-on-investment. When there is an issue with one investment, they can immediately see all the interdependencies and gauge the impact of the issue on the interdependent investments.

The automated tool supports the decision-making process by providing senior managers with scores for each investment based on standard criteria. The DON IT Investment Portfolio Management Guide includes scoring forms for each investment in the areas of mission, financial, and risk. These forms explain how an automated tool will calculate scores for each investment. The tool will not make the decision for senior managers. It will simply provide them with a flexible means of collecting and viewing information in order to assist them in making wise investment decisions.

At the time of this writing, the DON CIO is interviewing vendors for automation of the DON process. The tool selected will use the DON authoritative database as the repository for all investment information.

Where can I obtain a copy of the DON IT Investment Portfolio Management Guide?

The Guide will be available in September 2002 at http://www.doncio.navy.mil. Automation information will also be posted at that time.

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