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August 29, 2005

Balancing Governance and Strategy with Portfolios

I.

Old-timers and enthusiasts in the camera buff crowd know about the old twin-lens cameras. Back in the day, the camera had two lenses. One lens let you see what you wanted to take a picture of. The other lens let the film see what it was going to take a picture of. The problem was that because the lenses were in two different places, the film didn't always see the same thing that you saw; and the proof of that would come up in the actual picture produced.

If your business is spending a lot of time looking at things through the lens called "ROI", what follows below is for you.

II.

Strategy would be pretty uninteresting if it didn't promise to enhance the state of the business.

Of course, a lot of things can fit under the umbrella of "enhanced states"... Typically, strategy talks about a future condition making the business either more immediately valuable or more secure in its ability to become more valuable. So naturally, the circumstances that strategy tends to address include business inhibitors to resolve, or business opportunities to exploit. The business idea of value is in managing those resolutions and exploits in the desirable direction.

None of this is news, but sometimes it helps to restate the obvious as a way of bringing a line of thought back into focus. This is a good thing to do whenever discussions about something press the notion of that "something" being "strategic" or not.

Did someone say "value"? Much of the time, business discussions decide that something is strategic if it delivers "ROI" -- or at least the assumption is that it better deliver ROI if it is strategic.

This view makes it seem practically easy to distinguish the non-strategic from the strategic, while it allows that the problem of actually determining the ROI might still be a bit gnarly. But a neglected problem, in practice, is that at this very point in the train of thought people too often forget that the actual strategy might be pretty complicated, too.

Why is this a problem? Because, without the framework of the strategy, it is too easy to mistake ROI for actual strategic value. How can that be? Easy: the only payback that is by agreement "strategic" is payback that promotes the objectives defined in the strategy -- yet not consulting the strategy won't prevent getting a payback anyway.

One of those lenses -- ROI or strategy -- is going to generate the picture you get, regardless of what the other lens sees. The trick is to put them in the right positions, and try to get them to agree.

III.

The real point of the exercise for projecting ROI is to maximize approval of the affordability of whatever effort is made. If "strategic" approval, or strategic justification, is the name of the ultimate game, then we must insist on being able to recognize value even if the net cost of the effort doesn't reach zero.

Through example, let's look closer at what this really means. Often there is a set of efforts that are just called "keep the lights on" efforts. These are not usually considered to be "strategic" efforts, although no rational executive would allow them to be ignored -- because of course if the lights are out then nothing else is likely to get done. Clearly, keeping the lights on is critical, and the value of doing that is enablement of something else. But what is the ROI of keeping the lights on?

The point is that ROI is an idea that should "inform" investment but probably should not dictate it. Something more important than ROI should be in control... namely, value. Meanwhile, the main thing to care about regarding investments is that a strategy must be invested in or it likely won't be realized.

IV.

Investments are commitments, so they link the strategy to the reality of managing the business.

With that said, the investment portfolio jumps into the scene.

But what is portfolio management? In "ROI and IT Investment", Tom Pisello of Alinean (via SearchCIO.com) states: "dollars are appropriately distributed between risky and stable investments according to a [portfolio owner's] profile and goals."

Heads up: the most important word in the whole definition is "appropriately"... Along with that, the key thing to understand is that a portfolio is not supposed to determine what is appropriate -- rather, it is supposed to ensure that commitments are in line with what has already been defined to be "appropriate".

Normally, that definition of "appropriate" will come from two sources: outcomes defined by strategy, and constraints defined by governance. What most businesses are after is outcomes that are opportunities, and constraints that are only minimally inhibitors.

This especially makes sense when the constraints and outcomes are aligned explicitly enough for managers to see and explain where their commitments can make the desired difference. The alignment will include prioritizations and trade-offs that decide how much opportunities and inhibitors are respectively allowed to influence actions.

In this situation, portfolios express what is "appropriate" by mapping the alignment of governance and strategy.

V.

Tom Pisello's key points about investing (i.e., commitment) logically start with the task of developing a view that also generates the elements of a strategy:

- Companies need an industry analysis to understand how new initiatives will achieve competitive gain.

As he sees it, IT governance then steps in, fulfilling two tall orders...

- CIOs have a solid grasp of business issues and communicate IT value across the executive team.

Then the portfolio steps in...

- Technology executives have a holistic view of all IT projects and resources across the enterprise.

It might at first seem unlikely that "communicating IT value" would be convincing without the accountability provided by a portfolio, so is this step out of sequence? No -- there is an even more fundamental value-based view to include before the portfolio is constructed: architecture. For the moment let's ourselves just assume that architecture is placed in the mix during governance.

The final two items from Pisello together describe a gatekeeper function:

- Companies take new investment analysis from that business-need perspective first.

- Companies need a foundation of credible third-party ROI analysis on current and proposed projects.

Notably, business-need establishes why a proposed investment should be analyzed at all, while ROI analysis can provide a take on what the economic impact of the commitment might be. However, this is radically different from determining the economic impact of the outcome. There may be no more important thing to understand about a portfolio than this distinction.

Governance and Strategy are two lenses of the same camera. In managing commitments, how does the portfolio assure alignment of governance and strategy?

VI.
We already noticed that architecture is the base level of description for "IT value". This is the case because the technology product and the management agenda together called "I.T." have a single essential purpose: to provide a structured operational environment designed for business functions. Without this purpose, IT is simply another collection of assets. With the purpose, IT is a resource.

But the ability to actively translate that environmental support into business functionality means modeling the assignment of the existing resources to meet the necessary business priorities and trade-offs. Effectively, the demand on the resources must be modeled.

Portfolios represent assets as resources, and represent needs as demand, and synchronize the two, bringing the influence of governance into alignment with the influence of strategy.

Posted by Malcolm Ryder at August 29, 2005 10:53 AM

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