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Analyze This

The fundamentals of portfolio management are being applied to corporate technology assets.
John Goff and Edward Teach, CFO Magazine
December 1, 2003

In the early 1950s, Harry Markowitz began formulating his groundbreaking theories on modern portfolio management. Applying the concepts of variance and co-variance, Markowitz showed that a diversified portfolio of financial assets can be optimized to deliver the maximum return for a given level of risk. Then, in 1981, F. Warren McFarlan took Markowitz's theory in a different direction. In an article published in the Harvard Business Review, McFarlan argued that, where possible, the fundamentals of portfolio management could—and should—be applied to corporate technology assets.

Two decades later, McFarlan's idea may finally be catching on. Earlier this year, Meta Group Inc. polled 219 IT professionals and found that more than half of them had implemented at least some tenet of portfolio theory—or planned to do so—by the end of 2004. That's a considerable jump-up, notes Howard Rubin, an executive vice president at the research firm.

In a similar poll conducted by Meta three years ago, only 1 in 12 of the respondents said they were interested in IT portfolio management.

This growing allegiance to IT portfolio management is not hard to fathom. Historically, large technology projects have been real dogs for businesses, with an abysmal 68 percent failure rate (according to The Standish Group). What's more, a drop in corporate revenues over the past few years has brought increased discipline to technology spending, with many finance chiefs putting technology budgets on a strict ROI diet.

Technology portfolio management, experts say, may be the perfect tool for this task, since it is designed to steer scarce resources to the projects that will produce the greatest overall value. Rubin claims first-time adopters of IT portfolio management can reduce their existing IT costs by 25 to 30 percent in the first year.

Although some companies—mostly those with large IT budgets—have long been managing their technology investments like a financial portfolio, the approach now appears to be winning supporters in other sectors as well. Las Vegas—based casino operator Harrah's Entertainment Inc., for example, applies portfolio management to its $70 million annual IT budget, says John Boushy, senior vice president of operations, products and services, and information technology. "[Before], projects were running over scope, not hitting [deadlines] or budgets," he says.

Double Down
Surprisingly, the public sector may be ahead of the private sector in embracing IT portfolio management. The Clinger-Cohen Act of 1996 made IT portfolio management mandatory for federal agencies. And the state of Washington, for one, has been practicing it since 1998.

Businesses that do attempt to adopt the approach could find it a tough row to hoe, however. While plenty of software exists to facilitate IT portfolio management (including offerings from Pacific Edge, ProSight, UMT, and Niku), few companies currently track their technology assets.

Indeed, in a recent survey of IT executives conducted by the Kellogg School of Management and DiamondCluster International, nearly half of the survey group said their employers do not have their applications and infrastructure well documented. "That's staggering," says Mark Jeffery, assistant professor of technology at Kellogg.

Given this lack of detail, consultants say newcomers to IT portfolio management would do well to adopt it piecemeal, beginning with a single division or function. Harrah's, which formally approves and tracks projects of more than $250,000, allocates IT spending among functional buckets at the beginning of each year. Boushy says a steering committee for each bucket meets monthly to evaluate project status, placing heavier bets on projects that are exceeding expectations.

Management at the company sets targets based on time, budget, and benefit. About 85 percent of projects hit at least one metric; 80 percent hit two; and 65 percent hit all three. "We think that's pretty good," says Boushy, "although we're constantly striving for improvement."

Falling Short
Gauging portfolio management capability.
Have
Plan

Manage projects and assets as a portfolio

42%

78%

Define and document IT projects and assets

55

90
Use investment results to improve decision making
54
85
Have methods to evaluate investment proposals
53
82
Centrally track key project and asset information
48
79
Have success criteria to evaluate projects
45
79
Track benefits after investments have been made
25
65
Measure value through full project life cycle
25
50
Weighted score to rank IT projects
23
49
Automated software to monitor IT portfolio
14
31
Based on 2003 survey of 130 senior IT executives at Fortune 1000 companies.
Source: Kellogg School of Management/DiamondCluster International/Society for Information Management



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