Matakuliah : A0824/IT Investment Portfolio
Tahun
: 2009
ANALYZING AND BALANCING
THE PORTFOLIO
Pertemuan 15-18
There is only one way to succeed in anything,
and that is to give it everything. ~ Vince Lombardi
Introduction
• Portfolio examines the net effects of a mix of
investments, including the interactions between
investments
• Portolio balancing helps the organization to arrive at an
optimal mix of investments that will maximize the
investment return at acceptable levels of cost and risk
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ITPM assumptions
• All of the significant IT investment are in the portfolio.
This is necessary because investment interact and
because it makes it possible to see which investments
are performing well and which are not. It also helps to
identify investment gaps as well as opportunities
• Organization is risk averse. Given two investments that
are equal except for the amount of risk, the organizatin
will select the one with less risk.
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Portfolio Analysis and Balancing
• The basic purpose of IT portfolio analysis and balancing
is to maximize the contribution of the portfolio to achieve
the organizations’s strategic and operational goals at
acceptable cost and risk
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Objective of Portfolio Analysis and
Balancing
• Maximize the net contribution of IT investments in support of the
organization’s strategic and operational goals
• Balance the IT investments over the principal goals and objectives
to help ensure that all important goals and objectives are being met
• Produce a target net financial return on the portfolio of IT
investments
• Diversify IT investment to reduce risk while achieving objectives at
acceptable cost
• Maintain the alignment of IT investments with the strategic and
operational goals
• Identify new and better ways to use the IT portfolio to improve
enterprise performance
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Computation of Portfolio Financial Return
• A principal reason for investing in IT is to increase the
financial return on investement. The expected total
financial return of the IT portfolio can be calculated :
The total expected financial return from IT investments is
the wieghted average of the expected rates of return for
the individual IT investments.
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Computing Probable Portfolio Financial Return (Example)
Investment
Amount ($000)
Percent of
Portfolio
Expected Rate
of Return
Dolkar Amount
of Return
100
0.83
20%
20
200
1.66
30%
60
400
3.32
25%
100
700
5.81
40%
280
900
7.47
30%
270
1,200
9.96
15%
180
2,300
19.09
10%
230
2,450
20.33
00%
0
3,800
31.54
15%
570
12,050
100.00
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Portfolio Rate
of Return
14.19%
(Weighted
Average)
$ 1710
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Achieving a Target Financial Return
• Portfolio analysis in combination with the overall IT
investment management process can facilitate the
achievement of specific objectives.
example : ROI (Return on Investment)
ROI forecasts in proposals are subject to verification. The expected
financial ROI of an IT proposal is first calculated by the proposal
team and presented in the business case.
the proposal team uses the investment assessment instrument
approved by the board, which requires an financial ROI calculation
as well as the quantification of non-financial ROI calculation as well
as the quantification of non-financial benefits and risks.
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Relationship Between Risk and Return
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Using Resources Efficiently
•
•
•
•
Aligning the Investment
Design of Activities and Processes
Adopting New Technology
Encouraging Risk Taking
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Using Resources Efficiently
• Aligning the Investment
– An important test of alignment is the extent to which an IT
investment supports the priority objectives of the organization.
– An system that is only 20% devoted to priority objectivites could
be viewed as not aligned, while one that is 80% devoted to such
objectives could be considered aligned.
– The strengths of the IT portfolio approach include making
unaligned or misaligned resources visible and providing the
information needed to realign the resources with the new
objectives.
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Using Resources Efficiently
• Design of Activities and Processes
– A general rule is to never add new IT to an acitivity or process
before confirming that its design is efficient, effective, and
aligned with the strategic goals
– Business processes and work activities that are poorly designed
are inherently inefficient.
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Using Resources Efficiently
• Adopting New Technology
– Timely adoption of appropriate technology helps to maintain
competitiveness.
– While the technology currently being used may be meeting its
performance targets as planned, new technology can sometimes
dramatically improve performance.
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Using Resources Efficiently
• Encouraging Risk Taking
–
–
–
–
The IT investment portfolio enables the board to monitor how
much risk the organization is taking on and the business
processes involved.
A board should not be expected to approve a relatively high-risk
frontier project for a business process that already has relatively
high-risk projects.
The board should consider approving such a project for a
business process that has only relatively low-risk IT projects
and is in need of innovation
The IT portfolio can keep the board informed of when IT
investments are shifting toward too much or too little risk for a
specific business process or for the organization as a whole
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Portfolio Balancing :
Concepts and TEchnique
• Balanced : IT investments that produces the maximum
possible benefits at an acceptanble cost and amount of
risk conversely
• Unbalanced: IT portfolio is one that is too costly, too
risky, or produces too few benefits.
An objective of portfolio analysis is to determine how to
improve the balance of the IT portfolio and thereby
increase its contributions to organizational performance
at acceptable levels of cost and risk
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Management Views of IT Investment and Risk
• The principal reason why Investment Review Boards
reject proposals is concern with the risks.
• Organizations need to become proficient at risk
identification, planning, and management so executive
boards will have the confidence needed to approve
projects with above-average risks
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Management Views
of IT Investment and Risk
•
•
•
•
•
•
Plan and conduct, with professional expertise, brief executive seminars on
risk identification and management
Hire one or more senior level professionals who are expert in risk
identification and management
Initiate a risk identification and management training program for project
team members and prospective team members
Review business case preparation guidelines and standards and improve
them as needed so that benefits, costs, and risks and their relationships and
trade-off will be identified and communicated in business teams
Require that a separate high qulaity, professional risk management plan be
prepared to accompany every prosoal and business case. The plan must
enable non-technical managers to understand the risks associated with the
IT investment and how the risks will be managed.
Better business cases
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Better Risk Management Plans and Summaries
• Risk is the principal reason why proposals are not
approved for funding and for good cause – most project
failures are due to risks that were not recognized, were
misundertood, or were not managed well.
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Other Mechanisms for Informed Risk Decision Making
• Checks each proposal and its business case for
conformance to standards, verifies claimes, identifies
hidden assumptions.
• It evaluates the risk identification, risk analysis and risk
management.
• The staff group will ask the proposal team that prepared
the business case / proposal to strengthen any
weakness it identifies.
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Other Mechanisms for Informed Risk Decision Making
• After the proposal team incorporates the recommended
changes it agrees with, the staff sends its conclusions
and recommendation to the board.
• The board/sponsor question the key team members in
detail to confirm that a thorough risk identification and
analysis has been done and taht the risk management
lan will be effective.
• The cross organizational makeup of the board is another
aid to risk-related decision making to identify and
evaluate risk from different perspective, whcih can
produce stimulating and informative board discussions
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Other Mechanisms for Informed Risk Decision Making
• The cross organizational makeup of the board is another
aid to risk-related decision making to identify and
evaluate risk from different perspective, whcih can
produce stimulating and informative board discussions
• As a result of the proposal assessment sby the staff
group, board members, and other stakeholders and the
answers to questions posed by board members during
the investment review, the great majority of overly risky
proposal will be rejected.
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Investment Diversification
Diversification is a valuable tool for achieving portfolio
balance.
• Limit Investment Amounts
• Diversifying Among Business Processes
• Diversify by Investment Phase and Investment Type
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Trade – Off Considerations
• Strategic improvements vs maintenance of current
operations
• New projects vs ongoing projects vs implemented
systems
• Types, amounts, locations and timing of risks
• Project costs, risk, and perfromance tradeoffs
• Impact of one project on others and net benefits
• Investment selection vs opportunity cost
• Budget constraints vs improvement needs
• External funding requirements vs new opportunities
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Portfolio Balancing and Line of Business
Demands
• Line of Business (LOB) manager has an interest in
achieving the balance of benefits, costs, and risks that
will best meeet the goals and objectives of this or her
LOB.
• The greater good is balancing the enterprise IT portfolio,
even when it must override some of the balaning efforts
of the LOB manager.
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Strategic Improvement vs Maintenance
Infra
Structure
Utility
Enhance
ment
Frontier
R&D
Sensitive
New
Project
8
10
0
0
0
0
Ongoing
Project
6
8
0
0
0
0
Complete
Project
78
64
5
0
0
1
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New vs Ongoing vs Implemented Projects
Infra
Structure
Utility
Enhance
ment
Frontier
R&D
Sensitive
New
Project
1
2
1
0
0
0
Ongoing
Project
2
3
0
1
0
1
Complete
Project
93
110
22
1
1
2
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Controlling Portfolio Risk
•
•
•
•
Portfolio Risk Information
Monitoring Portfolio Risk
Sources of Risk Information
Accuracy of Risk Identification Information
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Project Management Risk
•
•
•
•
Project Manager Competencies and Requirements
Project Management Methodology
Executive Organizational Change Manager
Sharing Assessment Information
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•
•
•
•
•
Impact of One Project on Another
One IT Asset Serving Several Business Processes
Opportunity Cost
Budget Contraints
External Funding Requirements
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Dynamic Nature of the IT Portfolio
Balancing the IT portfolio is an ongoing activity because:
• Operational priorities change and strategic objectives shift over time,
requireing portfolio changes.
• Portfolio characteristics change as investments proceed through
their life cycles.
• Performanance data entiring the portfolio constantly change
because of changes in customer preferences, external events, and
other factors.
• Analytical reports generated by the portfolio may identify areas in in
which new information or more analysis is required, which could call
for new portfolio content categories and the need to capture new or
more detailed data from sources.
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Simulations and Balancing Portfolio Risk
• Monte Carlo Simulation
• Trigular Distribution
• Documenting All of the Risks
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IT Infrastructure and the IT Portfolio
• Characteristics of the IT Infrastructure
• External Public-Private Infrastructure
• IT Infrastructure Challenges and Implications
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IT Investment Reviews
• Scheduled and Ad Hoc Reviews
• Factors Affecting Review Scheduling
–
–
–
–
–
Market Dynamics
Project Chunks
Business Model Used
Depth of Review
Other Factors
• Preparing for an Investment Review
– Role of Investment Criteria
– Role of Portfolio Information
– Role of the Business Case
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