IT Economics Corporation

Ten Myths of IT Portfolio Management

Why do organizations spend much money on IT portfolio management and then miss out on its major benefits? Maybe some of the common myths are getting in the way. Here are ten myths concerning IT portfolio management that organizations must guard against.

Myth 1. IT Portfolio Management focuses exclusively on increasing the return on investment (ROI).

This myth grows out of the fact that implementing IT portfolio management (ITPM), whether it is a limited or a full implementation, nearly always produces a significant increase in the ROI for investments in information technology, and these ROI improvements have received much publicity. Nevertheless, IT research firms point out that few organizations are close to tapping the full potential of ITPM.

Despite the ROI potential, ITPM does not focus solely on ROI. Rather, ITPM focuses on achieving the organization's strategic goals, which include increasing the ROI as well as achieving other goals that determine long term success. Most goals are non-financial in the short term but provide the foundation for future ROI, such as ensuring that the organization is prepared to make the changes required to remain competitive.

By keeping the focus on the organization's strategic goals and objectives, ITPM helps organizations avoid sacrificing future performance for a short-term financial gain (ROI). Instead, it seeks to balance the requirements for present and future success, which helps to ensure that both the current and the long term goals and objectives of the organization are met.

Myth 2. IT portfolio management is only for IT projects.

"Project portfolio management" is different from IT portfolio management (ITPM). Project portfolio management can help to avoid duplicating and overlapping projects, which can mean big savings. But typically 70% of the IT spending in organizations is to maintain the in place systems.

Ignoring 70% of one's investments is not a good idea, because by doing so it is possible to duplicate and overlap new IT projects with existing systems. (A common occurrence.) ITPM encompasses all IT investments so duplication and overlapping can be prevented.

Moreover, ITPM presents executive decision makers with the "big picture" of how the IT in the organization currently supports the corporate strategies as well as how IT can be used to address new opportunities. The ITPM process includes evaluating proposals and selecting those that best meet the priority needs of the organization. In other words, they will focus on closing the critical performance gaps that cannot be addressed by the in-place systems.

The ITPM process continuously monitors the in-place systems to identify any that need to be improved, changed, replaced, or removed in order to improve organizational performance.

The scope of ITPM--and the potential for IT-enabled organizational improvement and transformation--far exceeds the scope of project portfolio management.

Myth 3. The organization can have a number of IT portfolios.

Some believe that certain types of IT investments can be managed separately from other types of IT investments. For example, some believe that IT infrastructure investments can be managed in one portfolio and IT business process investments can be managed in another portfolio. However, this is cumbersome, causes waste, and inhibits the achievement of IT-supported organizational strategies.

For example, chains of results are required to implement organizational strategies designed to achieve critical goals and objectives. In tracing a results chain, it is quickly clear that IT infrastructure systems and the IT business process systems are critical elements in the same results chains. They are interdependent and complimentary. They must make certain measurable contributions if the corporate strategies are to work as planned to achieve the goals and objectives. In other words, the IT used in infrastructure and the IT used in business processes cannot be looked at independently but must be viewed as part of the same portfolio.

Along the same lines, some believe that business units should have their own IT portfolios when they are very different from each other. There is some merit to this argument, but also some qualifications. A closer look at the IT being used by business processes in different types of business units generally reveals a surprising amount of similarity and many opportunities for better IT resource utilization, including the sharing of resources. This means that, while there can be business unit sub-portfolios in large enterprises, there must be a central enterprise IT portfolio that sets the conditions within which its sub-portfolios must function. This supports an enterprise approach, supports a basic enterprise-wide IT infrastructure, and helps to produce optimal results for the enterprise.

Myth 4. IT projects are generally considered to be risky, and that is something that IT portfolio management cannot overcome.

There is risk in everything one does, including conducting an IT project. However, it is not true that IT portfolio management (ITPM) cannot overcome much of the risk associated with IT projects.

For example, lack of alignment is a common risk. ITPM requires proposed projects to be linked to priority goals and it screens them and uses tools to make sure they are linked.

Another example concerns the risks associated with unfounded assumptions and errors in estimating cost, claiming benefits, and preparing schedules. The ITPM process screens proposed projects for these and other risks and employs standards that prevent approving a proposal for funding if it is "too risky" or if it would result in a disproportionate amount of risk in any part of the organization.

A basic function of the ITPM approach is to balance the IT portfolio so no part of the organization has too much IT-related risk. For example, IT innovation projects tend to be risky, but they can give an organization a competitive advantage. An IT innovation proposal for a business process that now has little IT risk is likely to gain approval but such a proposal is unlikely to be approved for a business process that already has a high risk IT project underway.

The ITPM approach makes use of an executive Investment Review Board that makes decisions on funding IT projects and in-place systems. These boards become adept at spotting risk in proposed IT projects as well as risk related to the in-place systems. They have a support staff and use a number of management tools for analyzing and improving the portfolio to achieve the organization's operational and strategic goals. This enables the board to select investments that have the best combinations of benefits, cost, and risks from the standpoint of the enterprise. Simply preventing poor proposals from being funded can greatly reduce an organization's financial risk.

Myth 5. With IT portfolio management, senior vice presidents can no longer decide on the projects they want for their own performance areas.

The ITPM approach uses an executive board to make IT investment decisions because the IT portfolio is enterprisewide. This is actually an advantage to vice presidents because they can gain protection from bad projects and support for good projects. Vice presidents do not want unsuccessful IT projects in their areas of responsibility. Too much is at stake. Under ITPM, a senior vice president can propose an IT project for his or her business area and, if that proposal is too risky, this will likely be detected by the ITPM executive board and its staff. The ITPM process, in other words, protects the executive from projects that are likely to fail and damage the executive's business area. Similarly, a vice president's proposed project that is likely to produce many benefits for his or her business area and the organization is likely to be supported by the board and given priority for funding.

The ITPM approach provides tools that vice presidents and other executives and their teams to prepare good proposals so that their projects are likely to be funded. The proposals received by the ITPM executive board are evaluated, compared, and prioritized in terms of their expected contributions to priority goals, taking into account cost and risk. Detailed feedback is provided to proposal sponsors on the strengths and weaknesses of their proposals, including why they were funded or not funded.

Providing feedback on why a proposal was not selected and explaining how it could be improved helps to improve the quality of the proposals. The improved proposal can then be resubmitted.

One of the important benefits to this approach is that proposals compete with each other for the limited funds, and only the very best proposals in terms of organizational priorities are selected for funding. This, in turn, continuously improves the performance of the organization.

Myth 6. IT portfolio management prevents project failure.

As discussed above, ITPM can reduce the likelihood of project failure by screening out those likely to fail and selecting only the best proposals. However, perfection is never achievable, and the ITPM process cannot prevent all project failures. However, many if not the great majority of project failures can be prevented by stopping poor proposals from being funded. Other project failures are prevented or the negative effects mitigated by identifying on-going projects that are running into a problem and then causing timely action to be taken to resolve the problem.

The ITPM Process recognizes that a project or in-place system that is outstanding today may start to lose value at any time because something changed. In order to prevent the failure of an on-going project or in-place system, ITPM periodically reviews them to determine whether they are still justified and a good use of the funds. It may find that a project or in-place system needs to be modified, supplemented, replaced, or eliminated. In such a case, it prevents project failure or the impending failure of an in-place system, so the organization will not have to contend with potentially serious consequences that would result if the failure occurred.

Myth 7. The CIO is responsible for IT portfolio results.

IT portfolio management is designed to ensure that business people, not the IT people, make the business decisions on how IT is to be used. The ITPM process calls for forming an executive board to make the decisions on IT investments. This board generally consists of the executives heading the principal lines of business, plus the chief officers (e.g., CFO, COO, CIO). This group can provide an enterprise perspective for making good business decisions on the use of IT, while taking into account the recommendations of proposal sponsors, the CIO, and other stakeholders. Since all IT investment decisions are made by the ITPM executive board, the board is responsible for IT portfolio results.

The CIO has an important role in the ITPM approach. The CIO is responsible for managing the IT portfolio, identifying improvement opportunities, and making recommendations to individual executives as well as the board on how IT can help them implement or improve strategies for achieving organizational goals.

Myth 8. It is not essential to have organizational performance measures in place in order to benefit from using IT portfolio management.

This view is prevalent, partly because we don't enjoy having others evaluate our performance with performance measures. Moreover, we are used to using financial measures and not other types of measures when we evaluate business performance. In fact, most organizations rely almost exclusively on financial performance measures rather than more comprehensive measures. Do organizations that rely almost entirely on financial performance measures benefit from adopting ITPM? The answer is yes, but they do not gain all of the potential benefits unless they adopt broader performance measures. It is these broader performance measures that identify changes that will increase value, improve ROI, help manage risk, and make best use of resources.

While financial performance measures are important, superior performing organizations have demonstrated that non-financial performance measures are equally important and necessary. In leading organizations, both financial and non-financial performance measures are used to determine how well various parts of results chains are performing in support of key corporate strategies. As organizations recognize this, it creates interest in the adoption and use of the Balanced Scorecard Methodology, which emphasizes a mix of financial and non-financial measures.

It is now recognized that both financial and non-financial performance measures are needed, not just at the output levels of the organization, but also at key points in the results chains leading to those outputs. The performance measures provide the feedback that executives and the ITPM process need to identify activities that are meeting their targets and those that are underperforming and jeopardizing the achievement of priority goals. The ITPM approach determines the types of proposals needed most to improve the performance, and it selects and prioritizes those proposals according to the organization's needs

Myth 9. Some organizations have had an informal approach to IT portfolio management in place for years; there are few advantages for them to adopt a formal approach.

It is true that some organizations have had some type of informal IT portfolio management in place for years, and it most likely has been beneficial for them. However, those organizations are likely to benefit considerably more by adopting a formal ITPM approach.

Informal approaches lack the standards, discipline, validity, and reliability that are needed to consistently produce superior results. Studies show that adopting a formal approach to ITPM quickly produces substantial costs savings and other benefits starting in the first year of operation.

The results of adopting a formal ITPM approach parallel what happens when organizations that performed project management for many years decided to adopt the Software Engineering Institute's Capability Maturity Model (CMM). These organizations achieved substantial cost savings and other benefits over comparable organizations that did not adopt CMM (now called Capability Maturity Model Integration, or CMMI).

Myth 10. IT portfolio management is simply "scaled up" program management.

This myth grows out of misunderstanding the IT portfolio management (ITPM) approach.

Program management involves managing a portfolio of projects having common or related objectives. Program management can do much to support project managers and make them more effective in their functions. However, program management differs from ITPM in a number of ways.

Program management generally does not encompass the in-place systems, which represent the great majority of the IT spending. It does not evaluate, compare, and select the best use of IT funds, such as funding selected new projects, on-going projects, and in-place systems based on established criteria. Rather, it accepts the projects that are funded, regardless of their program areas and even though some program areas with much greater needs may have been overlooked.

Unlike ITPM, program management focuses on programs, not the combined effects of all programs. Program management does not strive to balance IT investments and their specific risks across all of the priority goals and objectives of the organization. The total IT-related risk even for a single program area is usually not managed. The total risk includes the risks associated with the proposed IT projects, the approved IT projects, the on-going IT projects, and the completed IT projects (in-place systems) in the program area.

While program management does not do these things, ITPM does. ITPM is not a scaled-up version of program management. Rather, program management is one of a number of valuable tools that ITPM uses to accomplish its objective of optimizing the use of IT resources in support of the organization's operational and strategic goals.

For detailed information on planning and implementing IT portfolio management, see the book titled Planning and Implementing IT Portfolio Management.

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