Run budgets as investment portfolios

One of the secrets to maximising the value of your IT budget is to treat it as an investment portfolio.

One of the secrets to maximising the value of your IT budget is to treat it as an investment portfolio.

Like all investments, IT spend is risky - there is no guarantee of success. Some will pay off, some will not.

Like most good ideas, portfolio management has been around for many years. It means treating your projects as an investment portfolio, and grouping individual projects according to their primary business objective, or value (for example, customer retention, sales growth or cost reduction). There are real benefits to be had from this approach, especially if it is used to manage all business investments, not just IT.

For a start, it creates an investment plan that people can discuss in purely business terms. They don't need to know about technology to decide how much to invest in a given business objective. IT planning can become a truly collaborative process. It also helps everyone prioritise projects based on relative cost, value and risk, within each grouping and across the entire portfolio.

Managing investments as a portfolio helps cut wasted investment and ensures that projects don't double-count benefits. I once worked in a company where a number of projects were promising to improve customer retention. When we added them together to create a portfolio, we found that the total number of customers that they expected to retain exceeded the number they were losing. Each business case looked fine on its own, but nobody was managing the overall investment in customer retention or checking that the value and risk was worth the total cost.

A portfolio approach helps everyone to identify common themes and economies of scale across the investment plan as a whole. It also provides a business framework for assessing the potential of technology trends and driving suppliers to deliver to your agenda.

Investment portfolios can be created bottom-up or top-down. A bottom-up portfolio builds groupings out of your existing projects. A top-down approach starts by assigning investment to business objectives and then determining the best portfolio of projects in which to invest.

Building a bottom-up portfolio is typically a one-off activity. Each project may be trying to deliver to a number of objectives, making it difficult to build a "clean" portfolio. So your first step will probably be to create a matrix that shows the complex links between your existing projects and the overall business objectives.

A practical place to start is a simple spreadsheet with the business objectives listed on one axis and IT projects on the other. With the help of your project teams, place a tick where there is a link and you will quickly start to see how well the business objectives are being delivered. The next stage, when things can start to get more complicated, is to replace those ticks with investment money.

Once the initial portfolio is created, and people start to understand the benefits of the technique, it is usual to switch to a top-down approach.

Either way, the objectives that drive the portfolio must come from your business strategy. It is also vital that the IT investments are seen as just a subset of the wider investment plans. Nobody should be taking IT investment decisions in isolation of their impact on the business plan as a whole.

Chris Potts is a director at IT strategy consultancy.
This was last published in November 2001

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