By Don Creswell, SmartOrg
Last month in ValuePoint, we covered the second of the Six Principles of Strategic Portfolio Management: Value Creation Focus. This month, we address the principle of Credible, Comparable Evaluations.
When it comes to portfolio management it can be easy — in many cases, too easy — to explore the theory side of the equation without looking at how companies in the real world are living the principles of value creation. Let’s take a look at how one of the largest petroleum companies benefited from implementing them.
The managers of R&D/technology portfolios were pressured by management to accelerate the deployment of technology to business opportunities. The business needs for technology were not being met in a timely fashion while at the same time corporate growth bottom line objectives were demanding more for less money. Projects were being kept alive too long, and there was an inconsistency in how projects were evaluated. Senior managers were having difficulty comparing projects of different types, and the company was experiencing significant limitations of a subjective “thumbs up/thumbs down” approach to prioritization of projects in the development portfolio.
The existing portfolio management process was primarily a roll-up of business cases to justify projects, which as noted above led to inconsistent project evaluation, making it quite difficult to objectively compare projects within the portfolio. The process was competitive and adversarial, supported by little quality data.
A senior manager of a major technology portfolio decided to meet the challenges by implementing SmartOrg’s value-based portfolio-management process, supported by Portfolio Navigator(R) software. The new process made project evaluations transparent to all team members, clearly identifying key value drivers and addressing the impact of uncertainty on the NPV of each project.
- A peer and expert review process emphasized transparency, creditability and comparability.
- Uncertainty tracking included baseline assessments of the ranges of uncertainty around each factor in the model. Updates were based on evidence and learning as projects moved through development.
- This transparent process helped address “garbage in, garbage out”, which had historically been one of most challenging issue.
In one year following implementation of value-based management, the portfolio manager reported a 60% increase in new ideas screened, a 50% improvement in new projects initiated, and a 100% increase in projects deployed and projects terminated. By stopping one project a year earlier, funding and resources were made available to accelerate development of more promising projects, adding $10 million in value to the portfolio — 30% of the annual budget.
An additional benefit: credible, comparable evaluations allow every member of the team to view the importance of his/her contribution to creating value and to understand and accept decisions that may reject their pet projects when other projects can be shown to have higher value potential for the organization.
Next month, we will address the fourth principle, Embracing Uncertainty and Dynamics. Principles one through three are available on the SmartOrg web site.