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Eggs, baskets, and IT investments

Combining IT projects into a portfolio helps the senior leadership make better decisions for the firm.

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Combining IT projects into a portfolio helps the senior leadership make better decisions for the firm.

Everyone knows that you shouldn’t put all your eggs in one basket. Allowing the baskets to offset against each other, though, makes far more practical business sense.

This was the notion penned by Harold Markowitz, a self-confessed nerd from Chicago, who explained the fundamental trade-offs between risk and return and between asset concentration and diversification in investment, concluding that a wide spread of investments would yield the best overall profit. Money managers around the world still follow his precepts daily to reduce risk and improve returns on invested assets.

Of late, though, the profitability of financial services firms come to depend on a factor beside their financial know-how — IT. A survey by the IBM Institute for Business Value found that the major banking firms are consigning 15-22% of their global non-interest expenditure — a total of €235 billion — to a wide range of projects. Unfortunately, their investments too often fail to generate anticipated returns — and worse, according to the aforementioned study, many firms do not even know which are paying dividends and which are losing money.

In this case, thought some of the smarter companies, why not apply Markowitz’s portfolio management techniques to the management of IT projects as well as their other investments?

Although some of the leading firms have already begun the migration towards managing their IT investments as a portfolio rather than as a set of distinct, unrelated projects, the majority of the financial sector still suffers from:
A lack of structured risk evaluation on a portfolio level
Insufficient transparency in managing projects that go over budget
Scarcity of systematic methods to track project performance.
Combining IT projects into a portfolio helps senior leadership and IT managers make better decisions for the firm as a whole, and helps make sure that IT investments meet the strategic needs of the business.

It also reduces total contingency requirements by offsetting over- and underperforming projects against one another.

Even though it is already proving successful for some companies, it is likely that portfolio management will be further refined, as progressive financial institutions make it an integral and overarching part of their IT investment management practices.

IT investment management encompasses a number of disciplines which are combined in portfolio management. Portfolio management itself is the umbrella concept, which establishes a clear portfolio of initiatives to achieve strategic goals and manage dependencies. The essential disciplines are:

Alignment: Close co-operation between business and IT through the establishment of the appropriate mechanisms. Joint ownership of project between the business and IT sides of the company in order to ensure budget, priorities and planning cycles are acceptable to both sectors.

Accountability: Creating a chain of responsibility, and creating individual and team targets at each stage of the chain. Well-defined roles are crucial.

Program control: The consistent use of standard process measures to manage and determine effectiveness of the overall program on a portfolio basis. Reporting is defined and differentiated for various management levels — revealing deviations early, allowing quick action and monitoring. Effective program control can also reveal defects in the organisational structure of the portfolio, so that change can be implemented more quickly and with less upheaval.

Project management: The usage of standardised project management methodology, encouraging certification and establishing professional development programmes.

Post-project evaluations and other means should be used to share knowledge and lessons learned among project teams. At the end of the day, managing a portfolio of badly performing investments is never going to deliver satisfactory results, so a balance must be struck, ascertaining the value of each project without adding needless bureaucracy.

Value realisation: Measuring and communicating how well the projected benefits of key IT initiatives are being, or have been, achieved. The commitment of the CFO in determining Key Performance Indicators will, in this area of the concept, be crucial. Through monthly tracking of project progress, financial services firms can uncover any deviations from expected performance early on. Post-implementation evaluation, too, can give an important insight into successes and failures, and can help to give kudos to claims of success for the project. Customised tools are increasingly being used to communicate the realised value of an IT investment in business terms.

Every self-respecting institution has a means of evaluating and prioritising business cases, and this, in and of itself, is usually well done. However, few firms develop structured risk assessments and determine risk mitigation measures - and the costs of such measures - prior to the execution of IT projects.

Even fewer use the risk assessment to evaluate business cases and determine priorities. In other words, the evaluation and prioritisation is being done without full and complete information — something that would be unacceptable in other parts of the business, and a situation that will need to be overturned with this new approach.

Furthermore, standardised measures need to be defined for risk and return, with established mechanisms to evaluate them before, during, and in particular, after project execution. By using these measures in the same way for each new project, a portfolio approach will develop.

It must be noted that although portfolio management of IT investments is becoming crucial to an efficient financial organisation, it will result in incremental, rather than drastic, improvements in efficiency.

However, its real value lies in preventing any unwelcome surprises: by means of balancing the baskets of investments, and managing those investments more transparently, portfolio management should ensure that nobody gets egg on their face.

(The author is director, FSS — IBM)

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