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The Wall St. CIO

Portfolio management takes the concept of investment fund management and applies it to IT projects

When Ed Setar started using portfolio management techniques to manage IT projects, he had no idea how many projects he had in house, how important they were, or who was the sponsor. Now, two years into his portfolio management odyssey, Setar, the CIO of the Project Management Institute (PMI) in Newtown Square, Penn., knows exactly how many projects are cooking and has a good handle on their status. Most importantly, there's a tight link between the projects that will further his organization's goals, and the projects that get funded.

"I have a clear understanding of all the initiatives out there and can check the portfolio for project plans, what's been accomplished and what resources I have allocated for each project," he says.

Granted, Setar is probably in the best of all worlds when it comes to portfolio management: he works at a company that lives and breaths project management. But Setar's experience is echoed by many IS executives who see portfolio management as a vital new tool in keeping costs under control.

In fact, today's capital-strapped economy is a big reason behind portfolio management's new surge of popularity, says Howard Rubin, the executive vice president of Meta Group, a research company in Stamford, Conn. "In the late 90s, IT organizations were like day traders -- they'd buy anything," says Rubin.

"Then came the crash in IT spending, and people were being asked to exhibit financial responsibility." In fact, Eric Austvold, a research director at AMR Research in Boston, says that companies that embark on portfolio management report a 2% to 5% savings in IT spending after the first year, mainly from discovering easy savings such as shutting down redundant projects.

Portfolio management draws its concept from the financial investment world. The idea is to manage corporate IT projects like a financial portfolio, balancing riskier projects with safer 'blue chip' technology investments, and constantly monitoring the whole shebang to make sure that the risk/reward ratio never gets out of whack.

Portfolio management cannot only save money, but it can help CIOs truly integrate business goals into the IT project planning process.

"Portfolio management helps prioritize what's important," says Austvold. "Done right, it fosters a continual dialogue between IS and business people." The key here is doing it right. While there is no tried and true method for instituting portfolio management, the following tips can get you started:

1. Take a fearless inventory of your IS projects. Yes, we know. Creating order from chaos is never easy, but you have to know what you have before you can figure out what to do with it. Rubin recommends inventorying all existing hardware, software, personnel (and their tasks) and licensing, just for starters.

Setar, who started his job at PMI by conducting a project inventory, says that it took him the better part of a year, but that gaining a clearer understanding of the IT organization made it well worth the effort.

2. Assess the goods. Now's the time to take a hard look at the entire body of goods, says Rubin. Ask questions like, "which of these projects are backed by good business cases? Are there any that are redundant? What's the risk/reward ratio? Assess the projects in terms of business value, risk, reward and budget, and group them in different buckets with similar projects.

3. Prioritize the portfolio. Now's the time to figure out which projects get the go ahead and which are put on hold. When prioritizing, it's important to do so according to the 'investment mix' that works best for your company. In other words, if you work for a risk averse, financially conservative company, don't load the portfolio with big-budget, multiyear implementations.

Rubin advises constant benchmarking as a way of helping the prioritization process. "You need to benchmark things like costs and performance to see if you're getting what you expected," he points out. The results will help CIOs make the constant adjustments necessary to maintain a balanced portfolio.

4. Establish IT governance council of business leaders. "To understand the value and risk of a project, the customer -- in this case, business unit leaders -- have to help you prioritize. People talk about IT program management, but we talk about business initiative portfolio management," says Rubin.

Austvold says that at true portfolio-focused companies, establishing business leaders as portfolio managers is vital to having true business/IT alignment. "In such a council, business leaders have wrested control of the IT budget from the CIO," he says. "Instead of the CIO making the calls, the business leaders hash it out. They should be having the debate about whether the VP of sales gets $5 million for the CRM project or whether the VP of engineering will get his project funded instead." He also recommends a subgroup made up of IT leaders that do more traditional project management. In this scenario, the governance council will allocate funding for projects and hand over the implementation to the project management office. "This is a typical group of detailed, task oriented IT leaders focused on implementation," he says.

5. Consider portfolio management software. Setar, for example, has been getting by on Access and Excel, but with a portfolio of about 75 ongoing projects, he's in the process of evaluating several portfolio management packages.

"There are a variety of characteristics that we must track related to projects," he says, "and software is going to help me do that more than a manual process."

Austvold says that it's fairly common for companies that are several years into the portfolio process to turn to software. "What we're seeing here is that companies working towards doing project assessment get into things that demand metrics that measure resources and utilization. Right now they're using ad hoc tools, but we're starting to see portfolio management software suites being introduced."

Rubin also recommends one final skill: smart CIOs will acquire a thorough knowledge of financial investment skills. After all, he says "The CIOs of the future are really IT investment fund managers."

MORE INFORMATION: A partial list of portfolio management software tools.

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