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Tenet #5 - Ten Tenets of Portfolio Management

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by Larry Pendergrass, Principal

Tenet #5: Balance goals.

In last week’s blog, the essential nature of uncertainty analysis in the PPM process was shown. While few companies are well practiced in uncertainty analysis, the use of uncertainties in PPM discussions can illuminate decision-making and prevent many ills that are often taken as “necessary evils” in product development. In this week’s blog, we will address the need to balance many goals through the PPM process, and speak specifically about some of these goals.

Every firm tries to balance a set of conflicting goals in its efforts to maximize stake-holder value. And each firm will choose a different balance based on many things such as the maturity of the industry, the nature of their customers and of their stake-holders, the general philosophies of the management team, the current economic climate both in and outside the company, the competitive landscape, and so much more. One firm’s risk-averse nature may be very appropriate for the setting where another’s high risk approach may be called for in a different setting.

The PPM process is that place where this balancing act is most active and essential. The PPM process is the bridge between the theoretical strategic discussions and the daily activities that are necessary to execute the plan. In the PPM team, real balancing takes place as the team struggles with such decisions as accepting new projects in the portfolio, cancelling projects that have become either ineffective or no longer support the strategy, and making tactical changes to resources to further the highest priority projects. The PPM process is that place where the conflicting goals of the organization meet the realities of implementation, and a balanced portfolio is the ideal output.

 Among those goals a firm may wish to balance are:

  • Quick wins vs. long term investments
  • Market risk vs. technology risk
  • Revenue growth vs. profit margin growth
  • Current customers vs. new markets
  • Portfolio risk but with big rewards vs. conservatism and incremental gains
  • New-to-world or new-to-firm projects vs. projects well understood
  • Disruptive markets or technologies vs. current markets or technologies
  • Fulfilling long term strategy vs. taking care of operations needs
  • Products requiring new sales channels vs. projects that need new core competencies
  • Not doing enough vs. trying to do too much

This is, of course, an abridged version of the list of goals your PPM team will need to consider. But the PPM process should spell out these needs explicitly, have an understanding of the appropriate portfolio position for the firm, have tools to illuminate where projects lie on the spectrum for each of these needs and keep this information front and center during the decision-making process. It is essential that the PPM team has frank discussions and is well aligned with top leadership on what balance the firm should strike in each of these areas. Without explicit efforts to keep balance in the forefront of your PPM process, a firm is likely to tip out of balance in at least one dimension.

Many years ago I worked for a division of a company that had significant success in a product area. They were in fact the world leader, had a large revenue stream, extremely powerful customers and a well-documented roadmap. Clearly their practices for business management and technology investment were among the best in the world. They had great strategic management and execution processes, and it showed in their dominant position, a position we had held at that time for over 40 years. And yet, the seeds of our success made us blind as we focused on where we were successful, risking the unseen disruption in technology or market, and perhaps overlooking areas of new and lucrative investment. So when the bottom dropped out of the market and our biggest customers stopped buying products overnight, this division needed to scramble for new revenue.

We needed a shift in our revenue stream to more sales into the commercial markets. Fortunately these markets were poised to have explosive growth. This shift required a well-balanced investment plan, one that continued serving our current customers while investing in several new areas. And yet, the issue was time critical. 40% of revenue had been lost nearly overnight! Placing all of the new investment in long term research and development was not an option. We needed short term wins as well as a great long term investment plan. We needed PPM processes to assure the right balance. In addition to major reorganizations and other actions, significant attention was placed on creating such a PPM process. Among the items to balance were especially:

  • Quick wins vs. long term investments
  • Revenue growth vs. profit margin growth
  • Current customers vs. new markets
  • Not doing enough vs. trying to do too much

The story has a great ending. This division went on to build new revenue in a balanced way and come out of the crisis even stronger than ever. The PPM process helped illuminate, focus, communicate and drive execution in an orderly way into a new business model.

Identify, agree upon, and balance your goals through the PPM process. I will talk about visual methods for revealing a project or a portfolio’s position against these balanced goals in our next tenet, Tenet #6: “Use visual analysis”.

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