Enterprise Portfolio Management - Does it go far enough?

• This article appeared in the Computerworld Executive Suite community.

Emerging enterprise portfolio management (EPM) systems are gaining steam as a means to objectively assess the cost and value of an organization's portfolio of assets and investments; and to align decisions with corporate strategy. But what do these systems really tell about the way our actions will actually affect organizational performance? New thinking is required to more fully exploit EPM while recognizing its inherent drawbacks. Specifically, many aspects of today's enterprise portfolio management systems are actually narrowly focused and largely disconnected from the overall performance of an organization in total.

Setting organizational strategy and managing a portfolio of investments (IT or otherwise) is hard work. As industries mature, differentiation becomes more difficult and the risks are high. Mergers, acquisitions, sale of assets and contingency planning add to complexity and the need to understand the effects of decisions (so-called "what if planning") is pressing.

But knowing what I know about today's enterprise portfolio management systems (my firm builds and sells them) I can't help but think we may be fooling ourselves into thinking that we're driving corporate performance to new heights when in fact what we're really doing is a better job of codifying what we intuitively know about our portfolios and reducing the time (and person power) required to reach a consensus.

Don't get me wrong; these are good things, and much more desirable than doing nothing. But the promises of modern enterprise portfolio management are much loftier and industry providers should deliver more. In a recent article published the Harvard Business Review entitled "Don't Trust Your Gut," the author, Eric Bonabeau makes a strong case that "Intuition plays an important role in decision making, but it can be dangerously unreliable in complicated situations." He goes on to describe an emerging field of business analytics that "harness the power of human intuition" by allowing human instinct to be applied to computer-assisted analysis where the human brain is simply incapable of identifying and analyzing non-intuitive trends.

This brings me back to my assertion that today's emerging enterprise portfolio management systems are largely disconnected from the business as a whole.

To support this, consider the following observations:

• Much of so-called enterprise portfolio management is focused on project management or project portfolio management. This trend is perpetuated not only by vendors, but the real need organizations have in trying to streamline the project selection process. Nonetheless, a project portfolio typically represents well under half of a company's investment, with the lion's share allocated to ongoing products and operations. The connection between proposed projects and the rest of the product or service portfolio is barely if ever considered.
  
  
• Proposed investments and asset values are typically measured in two broad dimensions: Benefit and Cost. The latter is measured in hard dollars, that much is clear. Benefit however is most typically measured as a combination of financial and non-financial measures. The Balanced Scorecard is a well regarded methodology and rightly so with successes in virtually every industry. However, the objective of the balanced scorecard is to combine financial and non financial measures to improve corporate performance; yet today's EPM systems while clearly touting a link to organizational KPI's don’t really make a holistic connection, especially when it comes to financial indicators.
  
  
• Today's so-called "closed loop" EPM systems really aren't closed loop feedback systems. Costs may be accurately tracked (in a good system) but benefits typically have no connection to corporate metrics (like the income statement). For example, if I have a $100M IT budget and I consolidate an asset that costs $10M to manage, the system keeps track of my $10M surplus and reports on it. But if the performance of an asset improves or is expected to improve, there’s no real tie back to the corporate financials and users are left to somehow rationalize the corporate forecasts.
  
  
• Most EPM systems aren't organic, meaning as changes occur at the business level; the results of the portfolio analysis aren't reflected until asset values are reassessed. For example, say I establish a series of portfolios, one for my line of big trucks and another for my line of expensive luxury cars. Now let's say in the current quarter, business for big trucks is booming but business for my expensive line of luxury cars is way off. The way most EPM systems work, nothing happens when I load my quarterly data until I re-score my assets to reflect the business change. In today's world of the real time enterprise, such systems seem antiquated.

Enterprise Portfolio Management Systems

How they Should Work

So, what's the answer? First, I strongly believe that the value delivered by today's EPM systems is substantial and can have major positive impacts on organizations. But we need to recognize them for what they are (my company's systems included), be they project management, project selection or automated asset definition, scoring and analysis systems.

I'm looking for, and challenge the industry (consultants, software vendors, scholars and financial professionals) to deliver next-generation systems that provide more explicit links to business indicators such that the entire enterprise can be viewed as a single, organic entity with its piece parts defined, interconnected and measured. This is a vision the team at ITCentrix is actively pursuing - Applying a full life cycle approach for existing assets, investments that are in the pipeline and strategic investments 3-5 years out.

We would also suggest that such a system include the following attributes:

• The ability to define top down goals, objectives and scenarios while allowing bottom up changes to be reflected and reconciled to corporate targets.
  
  
• A truly closed loop for both cost and benefit and a means of linking to organizational KPI's such as income statements and other relevant metrics. As well, this system would dynamically reflect changes in market conditions in defined portfolios.
  
  
• The ability to connect IT and non-IT investments as an integral part of the business, and assess the non-IT components of a business in the exact same manner as the IT piece.
  
  
• The ability to embed industry-specific data and knowledge in order to expand corporate KPI's and enhance relevance. An example might be average sales per retail customer per store visit.
  
  
• The ability to construct sub-portfolios such as products or services and manage those investments from chalk board to end of life.
  

It is important to distinguish this last point from traditional business intelligence (BI) solutions that regularly track and analyze historical data patterns. Rather, this approach proposes leveraging such systems into an analytics engine that assists in providing ongoing “what if” support in complex situations after such relationships are firmly established using proven BI techniques.

There's no replacement for human interaction in enterprise portfolio management systems. But there's plenty of room to augment those factors that intuition and "return on instinct" can't discern. This degree of accuracy is needed in EPM systems to truly streamline investment management.

David Vellante is President & CEO of ITCentrix, a division of Barometrix Software Corporation, a developer of Enterprise Portfolio Analysis and Management solutions for business professionals.. He can be reached at dvellante@barometrix.com