Portfolio Management in Cost Reduction

Portfolio Management in Cost Reduction

POWERFUL INSIGHTS

Issue

Organizations around the globe are currently reviewing project portfolios and looking for opportunities to cut costs and maximize value. As part of this process, some projects inevitably will be delayed, put on hold or cancelled outright, causing many executives to question whether the right decisions are being made by the right people and with the right level of objective analysis. During such times, when budgets are squeezed and quick decisions need to be made, IT portfolio management processes are put to the ultimate test.

Challenges and Opportunities

While effective portfolio management can help ensure priorities are in line when budgets are under pressure, it also can improve success rates, drive down costs and ultimately improve operational performance. Three key goals of portfolio management are:

  • Demand management – Are we doing the right things?
  • Value management – Are we getting the right benefits?
  • Program management – Are we doing things well?

Demand management – An IT project portfolio should reflect the strategic direction of an organization and maintain the right balance of projects across the program. Run (i.e., “business as usual”) activities should be complemented with an appropriate level of growth and transformational investment based on business demand and strategy. The right mix will vary depending on a company’s industry and other drivers, such as market conditions, competition and regulation.

When times are good, companies often try to do too many things. A structured approach to project identification ensures they prioritize the right investments and gain maximum value across the portfolio. Investment selection should take into consideration the overall risk profile of each project along with the expected returns, meaning that high-risk projects should provide a higher return than low-risk projects. Risk-adjusted returns help provide a level playing field when evaluating the expected benefits of IT investments with differing levels of risk.

During challenging economic times, the portfolio may need re-adjustment to reflect changing priorities and the need to conserve resources. While organizations look to reduce costs, the overall structure of the portfolio will still require balance to reflect both shortand longer-term needs. This is likely to require project cancellation, rationalization or deferral. Because the business environment often changes, a project that promised good return at inception may no longer deliver value in current conditions.

Value management – To ensure all projects accurately define expected benefits up front, an appropriate culture must be instilled across the organization. This is fundamental to achieving maximum value from IT investments, yet it does not happen nearly enough. In fact, 85 percent of organizations demand business cases for change projects, but only 40 percent of projects that are approved have valid and realistic benefits statements. In addition, fewer than 10 percent of organizations ensure benefits are realized post-project.1 The need for robust selection and value management processes becomes even more important during times of budget cutting and financial constraints.

Management information tools or processes can assist businesses in making value-based investment decisions. It is critical for an organization with a large portfolio to invest in data reporting and management capabilities that enable value measures to be defined, reported and monitored. An effective value management framework ensures ROI and other tangible benefits are understood, continuously monitored and proactively optimized throughout the development lifecycle. When tough decisions need to be made regarding project continuance or rationalization, the availability of such information provides a reliable basis for decision-making.

Program management – Organizations must clearly define accountability for project delivery and benefit realization. According to Gartner,2 fewer than 50 percent of projects are delivered on time, and META Group recently reported that fewer than 5 percent of organizations hold project stakeholders responsible for benefit attainment. Organizations that manage programs inefficiently experience increased costs and reduced ROI. Effective program management supports portfolio processes in delivering value optimization by ensuring projects are delivered efficiently and by providing regular and reliable measures of benefits throughout the economic lifecycle of the project or program. Effective and efficient project delivery with a continued focus on cost controls and delivery schedules should be of critical importance at all times for companies.

Our Point of View

Without a comprehensive approach to portfolio management that incorporates each of these key areas, an organization will fail to optimize the business value of its IT investments. Management information and accurate data are key to enabling the implementation of a successful portfolio management mechanism, as without the ability to understand the dynamics of a project, decisions cannot be made regarding the value they will create for the organization.

PROVEN DELIVERY 

How We Help Companies Succeed

We have devised a metrics-based risk and value management approach to assess current projects consistently against changing business priorities, providing our clients with the ability to visualize where inefficiencies exist and how to maximize the value of IT investments.

Example

Protiviti assisted a client in the financial services industry with a comprehensive review of its IT portfolio management framework. The goal was to implement governance processes and measurement tools to analyze and monitor the value from IT-enabled business investments, leveraging the principles of the Val IT framework published by the IT Governance Institute. This engagement involved:

  • The development of a holistic process to identify, capture and classify all projects to track and monitor the value at risk
  • The implementation of processes to calculate the payback period, net present value and other key indicators for each project to improve the understanding of the value created by the IT portfolio
  • The development of processes for assessing project risk against expected return to help management proactively monitor the balance between risk and reward in the context of changing economic conditions

Key benefits of this approach included the following:

  • A more disciplined approach to project selection, risk management, value measurement and monitoring resulted in an optimized IT portfolio in terms of balancing risk and return.
  • The improved IT portfolio management framework contributed to the identification of obsolete and nonperforming projects, resulting in significant cost savings.
1META Group
2Gartner IT Key Metrics Data 2008

Contacts

Jonathan Wyatt (London)
+44.207.930.8808
[email protected]
Jeffrey Weber
+1.412.402.1712
[email protected]

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