The concept derives from the field of product development. It was designed as a means of managing product innovation activities in a more formal manner, and making sure that product development aligned with strategy and was being appropriately supported through a defined and formal process of decision making. The principles of stage gates (or phase gates, or whatever other flavor of gates you would like to refer to) owe their existence to product development, and in particular to the work of Robert G. Cooper.
In the definition of portfolio management concepts, Cooper and his colleagues acknowledged the existence of strategic planning and also of project management. Strategy set the direction of the organization, and project management was already a tool being used to manage product development in a number of organizations. Portfolio management was really an overlay on all of this to focus on what product development projects should be considered, to ensure that they were being managed effectively and to verify that they produced their desired results. From a focus on product development specifically, this grew to a process to manage the selection and oversight of all projects within organizations. And so was born the concept of portfolio management as most people understand it today.
A big portion of portfolio management is about ensuring strategic alignment. This is where things get a little bit complicated, however. If portfolio management is about ensuring strategic alignment and strategic management is about defining organizational direction, where does one stop and the other start? Specifically, what should we expect a good strategic management process to define? And what does portfolio management expect and require as input in order to ensure that the results of portfolio selection are, in fact, “strategically aligned”?
This is where things get a little fuzzy and a lot messy. To explain, I’m going to start backward and work forward from there. Portfolio management talks about the need to grasp strategic objectives. In particular, what it attempts to understand is the goals of the organization and the funding constraints around those goals. In other words, there is a generalized assumption of, “Tell me roughly where you would like to go, and how much money I have to play with in attempting to get you there.” In particular, it assumes that the actual identification of specific product goals are defined at the business unit level, and that prioritization of potential projects are considered within the process of portfolio management.
This is all well and good, assuming that strategic management actually does focus on defining high-level objectives. If, once objectives have been established and funding has been allocated to the appropriate buckets, the business is then left to its own devices, then we don’t have much of an issue. The challenge is that strategic management doesn’t view its role as simply being a high-level definition of direction. Yes, there is a consideration of vision, mission and overarching strategic objectives. But there is much, much more that is considered in how strategic planning and management is defined.
One of the gurus of strategic planning and strategy management is Henry Mintzberg, a Canadian academic who has been hanging his hat at McGill University for several decades. He agrees with the assessment that one of the major functions of strategic planning is that it has primary responsibility for capital budgets. So we’re aligned so far with the presumptions of portfolio management. But this is where the whole proposition starts to go sideways. His definition of strategic management also includes the identification, evaluation and selection of alternatives to support objectives. He suggests that strategy is concerned with explicit decisions regarding alternatives and action. He argues that strategy is about getting your hands dirty; it’s about elaborating strategies into comprehensible specifics.
In other words, strategic planning is about figuring out what options exist in moving forward on the goals of the organization, making choices about those options and ultimately evaluating, prioritizing and selecting the specific alternatives that will proceed forward. This, of course, sounds a whole lot like what portfolio management claims to do.
This is where we talk about a meeting I had recently with a client. I was in a meeting with my client who indicated that they had just been to a presentation on portfolio management; they were wondering whether it was something that was appropriate for them to consider. Knowing them as I did, my immediate reaction was, “No. Absolutely not. It’s not necessary or relevant.” Actually providing an explanation as to why this was true for them, however, required some thought. They have, over the last several years, invested considerable time and effort in developing a comprehensive process for strategic planning and the development of business plans and financial budgets. Their strategic planning process identifies the objectives and goals for the organization. These objectives and goals result in the definition of strategic initiatives that–with the priorities of individual business units–are objectively defined, evaluated and prioritized by their senior management team. The results of this exercise form the basis for their annual budget, and the collective business plan is then presented for approval by their board of directors. Throughout the year, a comprehensive quarterly review process ensures that the identified initiatives are underway, on track and expected to deliver their intended value.
What they have organizationally is something that sounds a whole lot like what Mintzberg and his various colleagues have defined as an appropriate and effective framework for strategic planning. And it is something that, over time, has evolved into an approach that works really well for them. It also addresses virtually the entire scope of what a portfolio management process would argue that it offers to an organization.
This is the heart of why I see portfolio management being unnecessary and irrelevant for this particular organization. What portfolio management is designed to do is already in place. Creating another level of scrutiny and oversight provides no additional value, and would simply introduce an unnecessary amount of bureaucracy. They have a process that enables them to identify the projects that are most strategically appropriate, they have in place a means of managing those projects and they have ongoing oversight and evaluation of project delivery. Anything more would be inappropriate.
That isn’t to say that in a different organization, portfolio management might not be more relevant. If the strategic planning process was less comprehensive, or if actual initiative identification and prioritization did occur at a business unit level, then a case for portfolio management might be made. But in this case–and arguable in many similar–there isn’t a terribly logical or compelling reason to do so.
This leads to some interesting insights. In the face of a strong process of strategic management that already makes informed and appropriate project decisions, portfolio management may not be a relevant consideration. At the same time, portfolio management implementations routinely fail when they are implemented to compensate for the absence of a strategic planning process. This raises the question of when they might actually be relevant, and it is an important question to consider.
In my experience, the few (and sadly, they have been very few) examples of portfolio management that I have seen that have been successful is where their use is in managing a subset of projects in an organization that already has a solid approach to strategic planning. Just as portfolio management was originally applied to the subset of projects that were focussed on product development, this could be on a specific project type. It could also be related to the projects that are being considered within a specific business unit. Resource-based portfolios have also been successful in helping to balance multiple conflicting demands being faced by a single group of resources, a challenge that many IT departments face. In all these examples, strategy has addressed the organizational needs, while the portfolio then provides additional focus on some relevant subset of projects that the organization cares about.
The implications of this are important and significant. To be successful, portfolio management already requires a strong approach to strategic management. An effective strategic management process, however, may preclude portfolio management from actually being relevant. Where they can work, it is because they both work together. In my experience, however, those situations are less frequent than many would consider–or perhaps like.