A Rigorous Analytical Framework For Resource Reallocation Decisions

Yuval Atzmon of McKinsey and Company recently wrote a blog calling for a rigorous analytical framework to support resource reallocation decisions: where to reallocate resources, how much to reallocate, and how to execute the reallocation.  We wholeheartedly agree, as the creators of a framework to deal with just these issues.  In this article, we’d like to build on Atzmon’s blog to show a practical path forward.

From a McKinsey survey of executives, Atzmon cites the barriers to resource reallocation:

  • Inability to assess and compare value creation potential. This stems from the uncertainties inherent in each business.  Without the proper tools to tame uncertainty, forecasts of value creation can depend on poor assumptions and unsupported forecasts.  The inability to compare value creation potential stems from using incompatible metrics from one business to the next.
  • Lack of focus, spreading resources too thin. This is a consequence of seeing too many opportunities as truly worth pursuing.  The compulsion to invest in every opportunity that promises a sufficiently high return leads to having too many good opportunities in one’s portfolio.  Soon enough, there are more projects than there are resources to work on them.  Resource allocation becomes unfocused, ad hoc and even political.
  • A weak decision-making process. A weak decision-making process doesn’t provide sufficient structure and doesn’t give all involved parties a chance to be heard fairly.  It leads to arbitrary decisions.  Parties that feel ignored often undo these decisions through a lack of commitment and even active attempts to reverse them.

SmartOrg’s analytical framework enables users to overcome each of these barriers.  The correct tools and decision framework enable decisionmakers to:

  • Assess and compare
  • Focus on what matters
  • Decide powerfully

Assess and Compare

The proper tools for assessing value creation evaluate each opportunity by a standard set of parameters of importance to the enterprise.  Each assessment measures the opportunity’s value creation potential in a way that is directly comparable with other opportunities in the enterprise’s portfolio.

These metrics measure the essential aspects of the enterprise’s mission and strategy, which encompass much more than monetary targets.  They must be calibrated so that each opportunity can be compared fairly to other opportunities.  All of the value creation opportunities in the portfolio must be on a level playing field for comparisons between them to be meaningful and useful.

vp_tornadoNext comes a reassessment of each individual value creation opportunity.  This step teases out the factors that control project success and estimates best, worst and realistic values for each.  The ranges of potential outcomes based on uncertainties point to the factors that make the biggest difference in project value.  Those factors become the focus of learning plans to explore uncertainties and unlock upsides.

This lets managers and executives explore the real value of each opportunity.  Does the opportunity support the enterprise’s long-term strategy and goals, or does it pull focus away from that core work?  How much value will it create in the best, worst and realistic cases?  Is there upside potential that can be unlocked by reconfiguring the opportunity?  How much investment would the reconfigured opportunity require?

 

Focus on What Matters

Sharpening the enterprise’s focus requires the understanding that a good project may not be good enough.  The enterprise should focus on the set of value creation opportunities that put its available resources to the best use.

vp_innovationOnce the reassessment of the opportunities is complete, the next step maps them onto an innovation screen that shows their relative size and level of required effort.  The innovation screen rates the growth-creating potential of the opportunities, and supports an aggregate estimate of the value creation potential of the portfolio.

The innovation screen shows which opportunities are most worth pursuing for their growth potential (Pearls and Oysters), which are acceptably valuable (Bread & Butter), and which ones are not worth the invested resources (White Elephants).  To sharpen the enterprise’s focus on opportunities that matter, project managers should pivot White Elephant projects – and some Bread & Butter ones – to move them to the Oyster quadrant.  For those White Elephants that can’t pivot to higher value, the portfolio manager should look at reallocating resources away from them and into higher-value projects.

 

Decide Powerfully

A good decision framework puts as much emphasis on conflict resolution as it does on analytics.  To be effective, resource reallocation decisions must have the support of those who will carry them out.  That’s not an issue for those whose projects and programs have been selected to receive resources.  Rather, those who see their resources being reallocated to other opportunities can feel like they are losing power and prestige.  That can foment conflict.

vp_cfo-chartSometimes the remaining opportunities in the portfolio require more resources than the enterprise currently has.  Ranking the opportunities by their ROI reveals the most efficient set of opportunities that can be pursued with current resources.  This “CFO Chart” also indicates how much growth can be gained or lost by increasing or decreasing, respectively, the resources allocated to the portfolio.

The CFO chart and the other tools in the analytical framework play a significant role in reducing and resolving conflict.  First, they depend on input from all affected parties, so that everyone has a voice in the analysis and evaluation leading up to the final decisions.  Second, they document an objectively fair process for comparing opportunities on a level playing field.  The resultant decisions are evidence-based, not arbitrary or ad hoc.  Those whose resources are reallocated to others can see why those decisions were made and how those decisions align with the enterprise’s goals and strategy.

The Power of The Framework

The decision framework described in this blog is a powerful tool to drive an objective decision process.  It lets managers and executives compare opportunities on the basis of value creation potential, using metrics calibrated to reflect what’s most important to the enterprise.  It points out how to sharpen the enterprise’s focus and reveals hidden upsides.  And it does these things in a way that lets all participants in the process feel that their views have been heard and valued, so that they can support the resulting resource reallocation decisions.