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Project and Portfolio Management in a Federated Governance Model

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UMT
UMT

This document describes an approach for managing project portfolios across multiple business units using proportional and binary optimization. It discusses how corporate and business unit CIOs can use these techniques to prioritize projects, optimize spending, and align investments with corporate strategies. Binary optimization allows business units to select optimal project portfolios, while proportional optimization gives corporate CIOs a way to adjust program funding levels without eliminating them entirely. The methodology provides a framework for effective portfolio management in complex, federated organizations.

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Project and Portfolio Management in a Federated Governance Model A UMT White Paper This paper describes an approach for managing budgets of complex organizations using a methodology and tools that enable prioritization and optimization of projects and programs at the corporate and division levels. Corporate Chief Information Officers (CCIO) of large organizations often oversee technology investment programs across multiple global business and functional units. They depend on complex layers of reporting relationships (technology, operations and business managers responsible for projects and financials day-to-day within a business, geographic or product area). In the case described below business unit CIO’s (BCIO’s) are the CCIO‘s representatives within each line of business; they make the complex task of technology management possible. Reducing the complexity lies in filtering and aggregating relevant information at each decision making step for the CCIO and BCIO’s. The CCIO’s influence the degree of investment in programs (unique aggregations of projects) while the BCIO’s determine which projects to include or exclude in a specific planning period. The Organization Structure The BCIO represents the link between the business and the technology group: Identifying, Planning, Implementing and Managing technology projects and communicating their value to the line of business and to the CCIO. BCIO’s work together and in accordance with the corporate infrastructure and architecture guidelines, aiming to eliminate duplicative efforts and leverage each other’s work. Still, each BCIO has the detailed knowledge and the mandate to independently manage the planning and the implementation of his/her technology project portfolio and is accountable to the business management he/she supports. The BCIO’s performance is measured by the level of satisfaction of their business client and the adherence to financial (and other corporate) objectives. Therefore, the technology investment decisions that a BCIO makes are typically driven by the necessity to satisfy business needs and financial metrics (internal hurdle rates, IRR, ROI, and/ or NPV). Figure 1: Relationships in a Federated Organizations
<2> In this environment, the information needs of a BCIO and a CCIO are inherently different. The BCIO is responsible for key business deliverables, for managing projects “on time, on budget and in scope,” and for supporting the CCIO in achieving the corporate goals. He/she juggles cost and resource constraints, project scheduling conflicts, and changing business requirements. The CCIO focuses on the “big picture”, there is little need for exhaustive detail on hundreds of technology projects. What is essential, however, is a global portfolio view of all planned investments: including combined strategic value, total financial spend (both Capital and Direct P&L) and projected benefits. The CCIO needs to be able to influence the investment to assist the CEO and the board in optimizing the business outcome and increasing the Share Value Added (SVA). What is Project Portfolio Management? Project Portfolio Management (PPM) is a valuable approach and toolset for both CCIO’s and BCIO’s. A two-step prioritization approach is used iteratively: Binary Optimization for a detailed project-level analysis and Proportional Optimization for a corporate wide program-level view. Combining the two in a Governance process improves decision making transparency and effectiveness for planning and budgeting investments and minimizes the emotion in portfolio selection. The PPM methodology helps create alignment between IT and business strategy, select an optimized portfolio of investments, plan, and manage the project portfolio implementation (see chart below including a central repository). The focus of this article is on the ongoing selection of projects in a portfolio. UMT’s Portfolio Optimizer, uses a sophisticated mathematical algorithm to calculate each project’s value in a common currency called: strategic value. The portfolio selection process has several stages that require the active involvement of business, technology, operations, and finance professionals. Figure 2: The UMT Approach to the Selection Process
<3> UMT’s Portfolio Optimizer supports this process by enabling: • Business driver definition and prioritization • Impact definition and quantification • Portfolio prioritization • Constraint analysis • Advanced analytics UMT’s Portfolio Optimizer maximizes the project portfolio strategic value taking into account budgetary and other constraints ensuring the selected portfolio is aligned with the organizations strategic objectives., The derived strategic value becomes a powerful addition to the list of financial metrics usually evaluated, and helps alleviate the often emotionally charged and political IT budgeting processes. What is Binary Prioritization/Optimization? Under Binary Optimization, the portfolio selection is based on a “yes” or “no” decision: BCIO’s can choose between projects based on their strategic value. A “no” decision on a particular project means that investment dollars are cut completely. The Binary Optimization is best applied at the level in the organization where technology management has the depth of knowledge and the need for decision making is at the project level. The binary selection allows the creation of a portfolio Efficient Frontier, visually representing the portfolio strategic value generated at each level of investment spending. By prioritizing and selecting a preliminary optimal portfolio for their business unit before submitting funding requests to the CCIO, the BCIO’s can effectively minimize the number of projects that need to be discussed with their peers and senior management. Since the selection has already uncovered the projects with the best strategic value to cost ratio, the overall firm’s planning process will require fewer iterations. Selected projects can then be aggregated into a manageable number of larger programs that can be reviewed by the CCIO and the governance committees at the cross-business level. Figure 3: Binary Optimization
<4> Why is the binary approach not good for the Corporate CIO? At the program level the binary approach is no longer a suitable solution. Completely cutting the funding for a multimillion dollar program is rarely an option. While the CCIO may be looking to rationalize the total technology spend,, a more appropriate approach would be to lower the spending for certain programs, not completely eliminate it. UMT’s suggested solution in this case is a Proportional Optimization, the next step in the prioritization process. What is Proportional Prioritization / Optimization? The Proportional Optimization approach presents the CCIO with the ability to optimize investment spending and maximize the strategic value of the project portfolio without under funding whole programs. The Proportional Optimization allows the identification of programs generating lower strategic value and provides a way to “squeeze” (but not completely cut) their funding. Rather than applying the same level of cuts across all programs the investment dollars can be then directed to the programs with higher strategic contribution. This approach does not eliminate the ability to complete a binary decision but only adds functionality and versatility to the selection process. Users can still choose to cut programs, or compare the strategic value of multiple projects across business areas. Figure 5: Proportional Optimization Figure 4: PPM Selection Process in a Federated Organization
<5> How does Proportional Optimization work? While the Efficient Frontier for a portfolio of binary solutions can be easily derived, the program level approach requires the definition of a curve for each of the separate programs. UMT has developed a proprietary method of developing these curves based on their maximum and minimum required spend. Since the relationship between a program’s requested spend and its strategic value is non-linear, the generated curves are unique for each considered program. The mathematical program evaluates the slope of each curve and selects the point where it flattens (the highest possible strategic value generated with the lowest possible spend). The approach takes into account an entire portfolio view of curves and chooses the optimal point along each for the entire portfolio. UMT’s Portfolio Optimizer allows the user to define the minimum requested spend for each program, ensuring that the final dollar allocations do not fall below a critical funding threshold. Summary The above provides an overview of a repeatable process for PPM in Federated organizations. Binary Optimization can be used to streamline the initial projects requests into a manageable portfolio for each business unit. This enables BCIO’s to select a portfolio that best supports the objectives of each business unit. This is done prior to funding requests from the CCIO. Figure 6: Program Level Efficient Frontier Figure 7: Selected Projects Under Binary Optimization
Proportional Optimization is a compelling addition to Project Portfolio Management because it extends the CCIO’s ability to influence the proposed portfolio alignment with the organizations objective using a manageable level of granularity. Organizations can integrate this methodology and toolset with their existing governance process depending on their capability maturity. It enables the development of a framework that is both pragmatic and effective, In the case of organizations with an early stage governance process it is valuable to start with the basics, responding first to the most urgent pain points. This can be accomplished via installation of a central project repository and standard business case which enables the review and analysis of all project requests and their rationale in a central location by organization, type of investment and manager. Once this is accomplished analytics can be applied like the ones described above as decision support tools, plans can be developed to proactively understand the resource demand and supply and time dependencies and the portfolio can be tracked for on schedule delivery and for post implementation benefits. # # # 1 Battery Park Plaza, 4th Floor, New York, NY 10004, (212) 965-0550, www.umt.com Figure 8: Program Funding Thresholds (Proportional Optimizations)

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Project and Portfolio Management in a Federated Governance Model

  • 1. Project and Portfolio Management in a Federated Governance Model A UMT White Paper This paper describes an approach for managing budgets of complex organizations using a methodology and tools that enable prioritization and optimization of projects and programs at the corporate and division levels. Corporate Chief Information Officers (CCIO) of large organizations often oversee technology investment programs across multiple global business and functional units. They depend on complex layers of reporting relationships (technology, operations and business managers responsible for projects and financials day-to-day within a business, geographic or product area). In the case described below business unit CIO’s (BCIO’s) are the CCIO‘s representatives within each line of business; they make the complex task of technology management possible. Reducing the complexity lies in filtering and aggregating relevant information at each decision making step for the CCIO and BCIO’s. The CCIO’s influence the degree of investment in programs (unique aggregations of projects) while the BCIO’s determine which projects to include or exclude in a specific planning period. The Organization Structure The BCIO represents the link between the business and the technology group: Identifying, Planning, Implementing and Managing technology projects and communicating their value to the line of business and to the CCIO. BCIO’s work together and in accordance with the corporate infrastructure and architecture guidelines, aiming to eliminate duplicative efforts and leverage each other’s work. Still, each BCIO has the detailed knowledge and the mandate to independently manage the planning and the implementation of his/her technology project portfolio and is accountable to the business management he/she supports. The BCIO’s performance is measured by the level of satisfaction of their business client and the adherence to financial (and other corporate) objectives. Therefore, the technology investment decisions that a BCIO makes are typically driven by the necessity to satisfy business needs and financial metrics (internal hurdle rates, IRR, ROI, and/ or NPV). Figure 1: Relationships in a Federated Organizations
  • 2. <2> In this environment, the information needs of a BCIO and a CCIO are inherently different. The BCIO is responsible for key business deliverables, for managing projects “on time, on budget and in scope,” and for supporting the CCIO in achieving the corporate goals. He/she juggles cost and resource constraints, project scheduling conflicts, and changing business requirements. The CCIO focuses on the “big picture”, there is little need for exhaustive detail on hundreds of technology projects. What is essential, however, is a global portfolio view of all planned investments: including combined strategic value, total financial spend (both Capital and Direct P&L) and projected benefits. The CCIO needs to be able to influence the investment to assist the CEO and the board in optimizing the business outcome and increasing the Share Value Added (SVA). What is Project Portfolio Management? Project Portfolio Management (PPM) is a valuable approach and toolset for both CCIO’s and BCIO’s. A two-step prioritization approach is used iteratively: Binary Optimization for a detailed project-level analysis and Proportional Optimization for a corporate wide program-level view. Combining the two in a Governance process improves decision making transparency and effectiveness for planning and budgeting investments and minimizes the emotion in portfolio selection. The PPM methodology helps create alignment between IT and business strategy, select an optimized portfolio of investments, plan, and manage the project portfolio implementation (see chart below including a central repository). The focus of this article is on the ongoing selection of projects in a portfolio. UMT’s Portfolio Optimizer, uses a sophisticated mathematical algorithm to calculate each project’s value in a common currency called: strategic value. The portfolio selection process has several stages that require the active involvement of business, technology, operations, and finance professionals. Figure 2: The UMT Approach to the Selection Process
  • 3. <3> UMT’s Portfolio Optimizer supports this process by enabling: • Business driver definition and prioritization • Impact definition and quantification • Portfolio prioritization • Constraint analysis • Advanced analytics UMT’s Portfolio Optimizer maximizes the project portfolio strategic value taking into account budgetary and other constraints ensuring the selected portfolio is aligned with the organizations strategic objectives., The derived strategic value becomes a powerful addition to the list of financial metrics usually evaluated, and helps alleviate the often emotionally charged and political IT budgeting processes. What is Binary Prioritization/Optimization? Under Binary Optimization, the portfolio selection is based on a “yes” or “no” decision: BCIO’s can choose between projects based on their strategic value. A “no” decision on a particular project means that investment dollars are cut completely. The Binary Optimization is best applied at the level in the organization where technology management has the depth of knowledge and the need for decision making is at the project level. The binary selection allows the creation of a portfolio Efficient Frontier, visually representing the portfolio strategic value generated at each level of investment spending. By prioritizing and selecting a preliminary optimal portfolio for their business unit before submitting funding requests to the CCIO, the BCIO’s can effectively minimize the number of projects that need to be discussed with their peers and senior management. Since the selection has already uncovered the projects with the best strategic value to cost ratio, the overall firm’s planning process will require fewer iterations. Selected projects can then be aggregated into a manageable number of larger programs that can be reviewed by the CCIO and the governance committees at the cross-business level. Figure 3: Binary Optimization
  • 4. <4> Why is the binary approach not good for the Corporate CIO? At the program level the binary approach is no longer a suitable solution. Completely cutting the funding for a multimillion dollar program is rarely an option. While the CCIO may be looking to rationalize the total technology spend,, a more appropriate approach would be to lower the spending for certain programs, not completely eliminate it. UMT’s suggested solution in this case is a Proportional Optimization, the next step in the prioritization process. What is Proportional Prioritization / Optimization? The Proportional Optimization approach presents the CCIO with the ability to optimize investment spending and maximize the strategic value of the project portfolio without under funding whole programs. The Proportional Optimization allows the identification of programs generating lower strategic value and provides a way to “squeeze” (but not completely cut) their funding. Rather than applying the same level of cuts across all programs the investment dollars can be then directed to the programs with higher strategic contribution. This approach does not eliminate the ability to complete a binary decision but only adds functionality and versatility to the selection process. Users can still choose to cut programs, or compare the strategic value of multiple projects across business areas. Figure 5: Proportional Optimization Figure 4: PPM Selection Process in a Federated Organization
  • 5. <5> How does Proportional Optimization work? While the Efficient Frontier for a portfolio of binary solutions can be easily derived, the program level approach requires the definition of a curve for each of the separate programs. UMT has developed a proprietary method of developing these curves based on their maximum and minimum required spend. Since the relationship between a program’s requested spend and its strategic value is non-linear, the generated curves are unique for each considered program. The mathematical program evaluates the slope of each curve and selects the point where it flattens (the highest possible strategic value generated with the lowest possible spend). The approach takes into account an entire portfolio view of curves and chooses the optimal point along each for the entire portfolio. UMT’s Portfolio Optimizer allows the user to define the minimum requested spend for each program, ensuring that the final dollar allocations do not fall below a critical funding threshold. Summary The above provides an overview of a repeatable process for PPM in Federated organizations. Binary Optimization can be used to streamline the initial projects requests into a manageable portfolio for each business unit. This enables BCIO’s to select a portfolio that best supports the objectives of each business unit. This is done prior to funding requests from the CCIO. Figure 6: Program Level Efficient Frontier Figure 7: Selected Projects Under Binary Optimization
  • 6. Proportional Optimization is a compelling addition to Project Portfolio Management because it extends the CCIO’s ability to influence the proposed portfolio alignment with the organizations objective using a manageable level of granularity. Organizations can integrate this methodology and toolset with their existing governance process depending on their capability maturity. It enables the development of a framework that is both pragmatic and effective, In the case of organizations with an early stage governance process it is valuable to start with the basics, responding first to the most urgent pain points. This can be accomplished via installation of a central project repository and standard business case which enables the review and analysis of all project requests and their rationale in a central location by organization, type of investment and manager. Once this is accomplished analytics can be applied like the ones described above as decision support tools, plans can be developed to proactively understand the resource demand and supply and time dependencies and the portfolio can be tracked for on schedule delivery and for post implementation benefits. # # # 1 Battery Park Plaza, 4th Floor, New York, NY 10004, (212) 965-0550, www.umt.com Figure 8: Program Funding Thresholds (Proportional Optimizations)