Portfolio management is challenging by nature, as it is dealing with future events and opportunities – information in project selection is often uncertain and sometimes even unreliable. The decision environment is typically also dynamic – the status and prospects of projects are changing and also market environment. And resources are always limited – resource transfers between projects are not always seamless. In this blog, I wanted to share 4 goals of portfolio management from a classic article Cooper, Robert G., Scott J. Edgett, and Elko J. Kleinschmidt. “Portfolio management: fundamental to new product success”.
Even though article is quite old, and focusing on product portfolio management, I think these goals are still quite relevant. I will highlight some of the key learnings from the article and also add on some reflections. I hope this is useful, and I would also recommend to check out the original article with a lot more insights!
Let’s go through the four goals!
Goal 1: Value maximization
The number one goal of portfolio management is to maximize the value of the portfolio. How to actually do this?
Simple approach used by many companies is to calculate Net Present Value (NPV). For each project in the portfolio, Net Present Value is calculated and projects, with the highest value are selected into the portfolio scope. NPV works well in theory, but in real life, defining the business benefits is always tricky – and not always fully objective. Oftentimes also in the portfolio level, different projects are not easy to compare against each other.
Another method defined in the article is Expected Commercial Value (ECV) – this method takes into consideration probability of technical success as well as commercial success. This is really important, as even the best product or service will not have high commercial value, if commercial model is not successful, and other way around – if product or service is not working well, commercial model cannot fix the issues. Another method, called Productivity Index (PI), tries to maximize the value of the portfolio for the given resource constraints. Calculation within these methods seems to be a bit complex for practical implement, but conceptually really good food for thought!
There are also other scoring models as portfolio tools, where projects are scored on each criteria, such as strategic alignment, market attractiveness, or reward vs. risk. If you are interested to learn more, have a look at the article!
Goal 2: Balance
The second goal is to develop a balanced portfolio. There may be different attributes to achieve balanced portfolios, e.g. balance across different time horizons (See previous blog post: Is Your Development Portfolio Balanced Across Different Time Horizons?), balancing the risk level of portfolio, or balancing across different markets, technologies, product categories or project categories.
A typical scoring model for project selection summarized in the article includes the following factors with scaling from 1-10, anchored scale points 1,4, 7 & 10:
- Reward
- Business Strategy Fit
- Strategic Leverage
- Probability of Commercial Success
- Probability of Technical Success
The article has also nice examples with traditional bubble diagrams, if you are interested to learn more.
In real life, as resources are always limited, portfolios tend to be easily unbalanced. There may be too much investment into certain business unit or product family and lack of investment into some others. There may be too much investment into products and services needed in one geographical area or market and not enough focus on other high potential markets. There may be too much focus on certain process areas and IT tools, and lack of focus on some other equally important. If the lack of balance is due to strategic priorities, that is fine – but if portfolio is not balanced unintentionally, this might cause issues in a long run.
A good practice is to review the portfolio periodically, e.g. quarterly (See previous blog post: Time for Quarterly Portfolio Review?) and check if any balancing actions would be needed.
Goal 3: Strategic direction
The article states that Strategy becomes real when you start spending money! This is true, development portfolios are key vehicles to take strategy into action. Here are two ways to ensure the portfolio is aligned with the strategic direction:
- Strategic fit – are all projects consistent with your business’s strategy?
- Spending break down – does the breakdown of your spending reflect your strategic priorities?
As tools to manage these aspects, two approaches are defined:
- Bottom-Up approach – Strategic criteria is built into project selection tools, such as scoring factors introduced earlier
- Top Down Strategic approach – Strategic Buckets Model – based on the business strategy, buckets of money are enveloped for different types of projects. Examples of strategic buckets defined in the article were buckets per different product line, own buckets for new product projects, platform projects or other (e.g. extensions, improvements or cost reductions).
Typically, when discussing with practitioners, having a clear strategic direction may be one of the challenges: company strategy is so wide, that is not really giving guidance for portfolio prioritization – all of our projects are linked to strategy one way or another. Some organizations have solved also this issue by creating a more detailed portfolio vision (See blog post: Bright Future Ahead – Creating an Inspiring Development Portfolio Vision) or even more concrete Objectives and Key results (See blog post: Closing the gap between strategy and development portfolios using Objectives and Key Results (OKRs))
Goal 4: Right number of projects
Most companies have too many projects in the pipeline and due to limited resources, resulting in pipeline gridlock. This is also one of the key challenges almost every portfolio management practitioner highlights during the discussions.
To solve this challenge, there are two questions:
- Do you have enough of the right resources to handle projects currently in the pipeline?
- Do you have enough resources to achieve your new product goals?
As a solution for both questions capacity planning is based on the current project’s roadmap and future development needs. Mapping resource demand and available capacity is a significant effort with large portfolios and big organizations – portfolio management tools may support these views!
In addition to capacity management, I would also strongly link this goal to prioritization! It is really important to create limit the number of new projects initiated and also kill unsuccessful projects.
Tip! Check out also the blog post: Do you manage a Portfolio Funnel, or Tunnel?
References
Cooper, Robert G., Scott J. Edgett, and Elko J. Kleinschmidt. “Portfolio management: fundamental to new product success.” The PDMA ToolBook 1 for New Product Development 9 (2002): 331-364. Link
Previous blog posts, which might be also interesting:
Strategic Portfolio Management 
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