The importance of diversification has been one of the toughest lessons learned from Enron Corp.'s bankruptcy.
It's nothing new, though. In fact, diversification has been a staple of the financial world for half a century.
But the idea of IT portfolio management has been tossed around academic circles only since the 1980s, and for the most part, it didn't started making its way into IT departments until a few years ago.
As its name implies, project portfolio management groups projects so they can be managed as a portfolio, much as an investor would manage his stocks, bonds and mutual funds. In the 1950s, University of Chicago economist Harry Markowitz wrote that a portfolio of diverse investments is more likely than individual investments to reduce risks and produce a higher rate of return.
In the IT world, the obvious benefit of project portfolio management 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 jiggered to produce the highest returns based on current conditions.
Since the recession began, companies have been looking at the multimillion-dollar IT investments made during the past decade and trying to determine what returns, if any, they saw from those investments and what they can expect in the future.
That's where portfolio management comes in. It takes a lot of details and organizes them in an easily digestible form. It helps executives see where money is spent, why projects are or aren't necessary and what resources are needed.
A growing number of vendors offer project portfolio management software, which has dramatically simplified the process of building a portfolio. But the first step, says Howard Rubin, executive vice president at Meta Group Inc. in Stamford, Conn., is for companies to prioritize their business strategies. Portfolios can then be assembled and assessed based on how they meet those strategic needs.
Previously, projects were approved and then managed independently. They were evaluated as a whole at the executive level only when it came time to put together annual reports. But, says Rubin, in markets that move every day, a company needs that overall view so it can keep an eye on projects in real time to make sure that all of them are working together to meet core business goals.
A Closer Look
Once companies determine the business priorities they want their projects to meet, they need to break down the portfolios.
The California Public Employees' Retirement System (Calpers) includes in its portfolio all projects that last more than 30 days and 100 hours, says Kim Gibbs, who runs Calpers' IT resource management division.
New York-based Verizon Communications has a series of portfolios. IT teams are assigned to different business units, and each of those teams handles a separate portfolio. So, for instance, all of the finance and administrative-support projects make up a portfolio that's maintained by one manager who reports back to the CIO, according to Skip Patterson, executive director of business planning and development at Verizon.
Next comes the hard part: developing the metrics used to measure a portfolio's success.
Energy Northwest, a Richland, Wash.-based public utility, established 10 milestones, such as project plan approval and design work completion. Those milestones are tied to performance indicators and bonuses for project managers. If someone misses a milestone, he has to write a trouble evaluation report explaining why.
"You've got to lay your laundry out all the time," says Jim Parker, engineering project control supervisor at Energy Northwest, which uses portfolio management software from Pacific Edge Software Inc. in Bellevue, Wash.
Calpers uses stoplight reports from Bala Cynwyd, Pa.-based Primavera Systems Inc. that break metrics down into red, green or yellow fields. So if a project is about to fall behind schedule, for example, or the project team's resources are being maxed out, the report will fall into the yellow-light category, indicating that the portfolio needs adjustments.
Verizon, one of the pioneers of IT portfolio management (its predecessor, Nynex Corp., started the process in 1992), uses a detailed set of metrics developed by its CIO and portfolio managers. Once each month, the managers and CIO review each portfolio's progress on those metrics.
"You can create a kind of friendly competition between and among the portfolios," Patterson says. "It's highly effective. . . . For some, it's a religion."