To understand Portfolio Management, we must first consider what a portfolio is. The Oxford dictionary defines a portfolio as “a range of investments held by a person or organization”. With management being defined as “the process of dealing with or controlling things or people” we can combine both and assert that Portfolio Management is the process of dealing with and controlling the people and things related to a range of investments held by a person or organization.
While intuition in investment choices still has a part to play in the dynamic decision process of choosing investments, Portfolio Management has become more of a science than an art. The portfolio must be considered in terms of investment mix, aligning investments with strategy, achieving the right balance of risk against performance, and the allocation of assets both for institutions and individuals. Portfolio Management offers centralized management systems to analyse both current and future investments against such inputs as finance, risk, change, strategy, opportunity, and resources.
While drawing on many of the processes, methods, and technologies of Financial, Product, or Investment Portfolio Management, this report will focus on the area of IT Portfolio Management.
Application Portfolio Management
APM is to the intangible asset portfolio what fixed asset management is to tangible assets, (Gartner). Organizations make investments in IT to achieve both efficiency and effectiveness, and pursuing the right investments can be key in sustaining viability and prosperity. IT Portfolio Management focuses on doing the right projects to bring about IT-enabled change. Selecting projects for investment that are linked to corporate strategy can be a challenge considering the proposed investments can consist of projects running into the hundreds, or even thousands, and their occurrence can span multiple functions, business units, and physical locations. The portfolio typically consists of all direct and indirect IT assets and projects, outsourced projects, software licenses, and infrastructure.
Application Portfolio Management, also referred to as IT Portfolio Management, manages a portfolio of assets in the same manner as managing a financial, product, or R&D pipeline portfolio, with the emphasis on continuous portfolio improvement, and striving to achieving the right risk and reward balance. Many of the business tools, practices, and techniques from other portfolio disciplines are also applied to IT Portfolio Management. The portfolio would include all IT investments, both direct and indirect, in existence or at the planning stage, and cover such areas as infrastructure, outsourcing, software, hardware, service level agreements, and strategic IT investments.
McFarlan’s Strategic Grid
McFarlan`s Strategic Grid is a grid which is designed to bring order, structure, and meaningful information to business processes, with regard to Information Systems. Organizations make investments in IS to achieve both efficiency and effectiveness, and pursuing the right investments can be key in sustaining viability and prosperity. Project Portfolio Management focuses on doing the right projects to bring about IT-enabled change. With McFarlan’s Strategic Grid providing a framework for IS investment decisions, the organization can be assessed through each quadrant.
As technology has become the lifeblood of most businesses, it is important to establish the levels of IS utilized in the company as a whole, as well as how individual projects fall into the scope of the business plan. McFarlan`s strategic grid provides clear guidance for IT and business processes, and allows businesses to identify how much Information Technology is currently involved in their business, and allows them to build a roadmap to where they want to take IT into the future.
The x axis demonstrates the impact on Business operations, and the further left, the greater the impact that IT has on operations. The y axis demonstrates the impact that IT has on company strategy, with impact increasing with height.
Each quadrant in the grid represents an aspect of how IT impacts on the business. The lower right hand quadrant is typically labelled Support, and denotes the low utilization and impact of IT on business processes. Support is where the processes are focused on local processes or individual users. IT is present in this area of business to support the company, and improve local performance, but does not play a key role in operations or the strategy of the company. Support systems should only be touched when absolutely necessary (Ward, 1987). Decisions to invest in this quadrant are based on financial drivers, and many of the functions in this area such as payroll, accounting and benefits are candidates for outsourcing.
Moving across the x axis from right to left has a greater impact on core operations, and the quadrant with the highest impact on operations is labelled Factory/Operational. IT in this area is important as a function of operations, but has low strategic value. Factory systems need tight control of quality and change to avoid disruption to the business (Ward, 1987). “Consistent dependable support is important with this level of IT integration, as failure causes major disruption. If systems fail for a minute or more, there’s an immediate loss of business” (Nolan M, FW McFarlan, 2005). Investment decisions in this area focus on efficiency and business continuity, “Systems costs can also be reduced by replacing legacy systems, which tend to have a high maintenance cost associated with them. New technologies also tend to be more flexible, opening up future options…. Operational benefits, particularly process efficiencies and cost savings, generally emerge more rapidly.” (Peppard J, Ward J, 2005).
Turnaround/High Potential is the quadrant where the company is taking IT from a support role to integration into strategy which will become critical to the success of the business. The goal in this quadrant is to initiate new projects, and identify new IT teams to lead these ventures. New systems promise major process and service transformations (McFarlan and Nolan, 2005). Once a firm moves into this quadrant, they become more dependent on uninterrupted response time, and will need fast cost effective functioning from IT applications to achieve the strategic objectives. Outsourcing is the most likely route to be adopted for SME’s to achieve economies of scale, and a higher quality of service with backup. This quadrant allows the organization to exploit new technologies, and to close the gap with competitors.
Strategy is the quadrant where IT plays a crucial role in operations as well as in the company’s strategy for the future. “Strategic mode firms need as much reliability as factory mode firms do, but they also aggressively pursue process and service opportunities, cost reductions, and competitive advantages” (McFarlan and Nolan, 2005). Coupled with strategic integration and the need for performance, new IT applications are crucial to competitive success, and as such can completely transform the organization. Outsourcing should not be a presumption in this quadrant, unless there is a critical issue with an internal IT unit. Outsourcing strategy in general should only be considered in certain specific cases and with specific vendors.
Companies that consistently succeed in selecting what can be outsourced to their advantage usually distinguish between the contribution that an IT activity makes to business operations and its impact on competitive positioning-M.C. Lacity
The McFarlan grid provides us with the means to be aware of the company’s processes, interaction, and integration of IS to determine governance. If IS are playing a support role and dont contribute to the strategic value of the business, maybe the choice will be to outsource. The grid also gives us a way to determine what to expect from IS and how they will affect the company’s future.