Demystifying Project Portfolio Management
Project Portfolio Management (PPM) and Project Portfolio Rationalization are terms that have been much abused. Like any other flavor of the month, these buzzwords are on the lips of everyone who is anyone in IT. Unfortunately, like any other buzzword, they are used more than they are understood.
This series of articles is designed to help you understand this extremely important concept and tool for IT Management.
A Brief History of IT: IT as a Cost
Before we dive into the definition and frameworks for PPM, we need to understand some underlying concepts. These concepts are best understood in the historical context that they developed in.
For the longest time information technology was treated as a cost. You “buy” computers. You “buy” applications. You have IT Payroll. Etc. In other words, one “pays a price” for IT – with little or no thought on why that cost is being uncured or what is the benefit other than “we need computers” or “we need reports”.
Looking cool or keeping up with the Joneses was the order of the day for the first 2-3 decades of IT. Yes, there was a time when just having a computer made you look cool and who does not want to look cool! Companies also bought computers because “my competitor has a computer so I must also have one” was the motivating factor.
There is nothing unusual about the path organizations took to adopt computers because that is the usual path for the adoption of any innovation. The cool kids buy an innovation first. Then their pals follow. The masses are the last to jump on the bandwagon. But we digress…
So, why did this sheep mentality continue? In other words, why did people continue to treat IT as a cost?
For one, the adoption of an innovation takes time as we discussed earlier. But a more powerful reason is that this thinking did not hurt anyone. Everyone was treating IT as a cost and hence no one was relatively worse off than the others i.e. there was competitive parity. In the absence of a clear competitive differentiation – advantage or disadvantage – there is little incentive for change.
Then, the impact of this thinking was not felt in another important area – the pocketbook. IT was still not ingrained in every aspect of business operations. Consequently, IT spending was low and hence so was the attention it grabbed within the organization. IT was not on anyone’s radar as a major imperative or focus of attention.
Flaws in the Paradigm Exposed
Slowly but surely major aspects of every organization were enabled by IT. As IT grew so did the expenditure on IT. Slowly some organizations realized that IT could give them a leg up so they invested in specific areas of IT and gained competitive differentiation. Their competitive advantage became a concern for their competitors.
Suddenly, IT was on everybody’s radar.
“IT as a cost” paradigm has inherent flaws that have been exposed over time:
- Right Spending Level: one does not know how much to spend because there is no connection with anything that tells you how much is enough
- Minimal Spending: Then, the very mention of “cost” is to elicit a natural reaction – spend the least amount! Consequently, organizations kept their spending on IT as low as possible and as a result shifted their expenditure to the wrong things in other functions of the organization. Yes, there is an inherent flaw with money managers – “optimization” is an equation that works back from “acceptable” and “sustainable” returns not forward from “what is the least amount we must spend to generate the maximum returns. The whole “quarterly” reports and their inherent flaws are a direct result of this thinking. But that discussion is for another day.
- Disconnect between business and IT – the former is a creature of value and only understands “returns”; the latter only understood cost and was treated as such. This fundamental difference in thinking turns into a vicious cycle that still hurts value creation in many organizations.
Consequently, the “IT is a cost” paradigm results in missed opportunities for value creation. When, where, how much etc. are the focus of any decent IT Strategy framework!
These flaws were exposed as IT gained in operations and the resulting cost. Now, people started to ask the obvious – what am I getting for this money? How can I get the biggest bang for my IT buck? And other questions with the same focus – is there is value side to this IT equation?
Move to IT as an Investment
Hence, the move to treat “IT as an investment,” i.e. are there returns related to IT expenditure, gained momentum.
This change in the IT value equation has had a fundamental shift in mindset about spending on IT:
- IT Assets: IT components, such as computers and software, are no longer “things” or “commodities” but “assets” i.e. they have value. This is analogous to the difference between buying furniture and stock in a company. Unless you are a furniture store, the former is expenditure in a depleting commodity. The latter is an investment in an opportunity for long term value creation
- IT Value: Consequently, the management of these investments in IT requires more than getting the “best” price. In other words, the IT value equation has changed dramatically – we now have a “return” part to this equation that balances the “cost” side.
- IT Initiatives: Now, we also need to think in terms of units of investment. One cannot gauge the value of buying an IT component such as a computer in isolation. What this computer will be used for determines its “value” – hence, focus on the process that creates a “product” or “sub assembly” that has encapsulated and measurable “value”. In the IT World – a process driven world – we banked upon the familiar concept of initiatives or projects.
Next, we look at each of these in greater detail and see how they got together to create the discipline of Project Portfolio Management (PPM).
1) IT is an investment not a cost
2) All eggs in one basket not a good idea i.e. Risk in the equation
4) theory of limited investment capital and theory of tradeoffs – you invest in something at the expense of NOT investing in something else. The inherent value of the investment in which you do invest is greater than the value in the oppty you chose not to invest ins
5) the theory of zero sum game – when some investments are doing well; some others wont; hedge your bets but also maximize your returns
- you can’t get out of some investments
- you can’t get out of some investments in time
3) Portfolio based analysis – the sum is greater than its parts
PPM or PPR?
Is it IT Governance or IT Strategy?
What is the connection?