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A Framework for Portfolio Management

A Framework for Portfolio Management 13
A Framework for Portfolio Management Daniel Saaty August 2013 Proprietary & confidential. © Decision Lens 2010 A Brief Introduction Daniel Saaty  CTO, Decision Lens Background  Founder, Decision Lens − Enterprise Resource Optimization Company − Founded 2005 − 80+ clients – Fed, State & Local, Commercial  Areas of Decision Making − Strategic Planning − Product Portfolio Management − Capital Planning and Budgeting About Decision Lens Decision Lens provides a powerful resource allocation solution based on a proven decision-support methodology. A software solution and an advanced process for collaborative decision-making and resource allocation based on the proven scientifically based methodology, Analytic Hierarchy Process (AHP) and a set of proprietary core algorithms. Dr. Thomas Saaty A technique for quickly collecting and synthesizing qualitative Father of AHP and quantitative information from multiple data sources and • PhD Mathematics Yale stakeholders for trade-off, prioritization and/or resource • Professor U of Pitt allocation decisions. • Professor Wharton • US State Dept An approach to quantifying and making explicit the subjectivity • MIT at The Pentagon • Office of Naval that is part of all decision-making in order to use experience Research and judgment more effectively. • Interesting Fact (Shortest PhD Thesis A system of record for strategic decisions and a method to In Yale History- 21 continuously enhance the resource allocation process page math theorem) Our Customers Commercial State & Local Federal For most everyone, These are challenging times and the pressure is on to accelerate the pace of innovation and drive growth Does any of this exist in your organization? 6 A Long Term Trend Source: APQC Benchmark Study Shift Happens Projected Revenue Example: Portfolio Lifecycle Actual Revenue Middle of P&L Squeeze Max Resource Flexibility Net Income What’s Putting the “NO” in InNOvation Pipeline Gap Neglect Budget Short Term Cuts Focus Amplifying Feedback Need for Speed Increasingly Risky Environment (limited due diligence) Resource Sub-Optimal Burn on Performance Close In Changing the Game Pipeline Portfolio Investment of Options Selective Managed Strategic Risks Investment Balance of Return on Short –Long Investment Term Acceptable Resource Mix of Efficiency Performance Key Question: Where are you and which way are you moving? Closing the Innovation Gap When portfolio diversification is needed It all starts with strategy… Determine strategic allocation targets Take inventory of the organization’s activities Categorize the work within the strategies Stop and redeploy off strategy efforts resources Start multiple, small, milestone based initiatives  (take an options approach, stage gating) Continue to back the winners and manage portfolio balance and reassess strategic environment How Do We Get There from Here? Measure current actual allocation against next 100% 0.05 time horizon target 0.15 90% 0.15 0.25 allocation 80% Next time horizon target 0.27 70% 0.21 time increment depends Strategic Bucket 4 60% 0.35 on program cycle times 0.11 Strategic Bucket 3 50% Populate the pipeline Strategic Bucket 2 40% 0.1 with ideas and activities Strategic Bucket 1 30% 0.59 that can support the 0.47 20% shifting priorities as 0.3 10% current programs close 0% This requires rapid idea 2010 2015 2020 screening and lean resource deployment in early phases Scenario Planned Portfolio Evolution A Project Portfolio Management Framework Proprietary & confidential. © Decision Lens 2010 High Level Process Overview Portfolio Governance Framework Top Down Environment Project Resource Capacity Effective Prioritization Assessment Responsive Productive Bottom Up Optimize the Portfolio Value Creation Funding Hierarchies Determine the project funding and approval processes and supporting organizational structures that facilitate them Classify the types of projects in the organization  New Product/Service Development  Cost Improvement  Strategic Infrastructure  Etc. Document the funding hierarchy and align it with the Portfolio Management Team and Sponsors (e.g., Executive Leadership Team)  If one doesn’t exist, create it An Example Hierarchy (as you’ll find it) CEO CFO VP R&D VP Americas VP Europe CIO 1. New Product 3. Line Extension 4. Geographic Expansion 6. Website Product 2. Quality Improvement Line 1 5. Line Extension 7. New Product 8. Geographic Expansion Product Line 2 9. New Product Product Line 3 10. New Product 11. Line Extension 12. Geographic Expansion Product Line 4 13. Process Improvement 14. Supply Chain Cost 15. Enterprise System Infrastructure Project 1 Project 3 Project 4 Project 15 Project 2 Project 5 Project 8 Project 7 Project 6 Project 12 Project 9 Project 11 Project 14 Funding Project 10 Project 13 An Example Hierarchy (as you’ll find it) CEO CFO VP R&D VP Americas VP Europe CIO 1. New Product 3. Line Extension 4. Geographic Expansion 6. Website Product 2. Quality Improvement Line 1 5. Line Extension 7. New Product 8. Geographic Expansion Product Line 2 9. New Product Product Line 3 10. New Product 11. Line Extension 12. Geographic Expansion Product Line 4 13. Process Improvement 14. Supply Chain Cost 15. Enterprise System Infrastructure Project 1 Project 3 Project 4 Project 15 Project 2 Project 5 Project 8 Project 7 Project 6 Project 12 Project 9 Project 11 Project 14 Funding Project 10 Project 13 Decision Rights R.A.P.I.D. Create the Top Down Portfolio Framework Analyze the funding hierarchy and create the portfolio framework, may be multi-leveled  Examples − Base versus Innovation, or New versus Existing − Innovation Horizon 1, Horizon 2, Horizon 3 − Probability of Market and Technical Success (4 Box) − Business Unit A, Business Unit B, Business Unit C − Cost Improvement, Quality Improvement, etc. Create a cascading portfolio structure that allows comparison of “like versus like” projects  It is not critical that structure is exact, it is important that classification of projects to buckets in the structure is done consistently Some Common Models for Portfolios Growth –Share Matrix  Dogs (low-low), Cash Cows (low-high), Stars (high-high), Problem Child (high-low) Business Assessment Array  Industry Attractiveness versus Business Competitive Strength Business Profile Matrix  Competitive Position v. Stage of Industry Maturity Most Interesting are Custom Models  Management determined matrix of criteria  These are easily assessed using AHP Important Questions How do we determine the buckets?  P&L Structure  Product Lines / Tech Platforms  Business Units  etc. How much information is needed to support the assessments of the strategic buckets?  Depends… Amount of background requested seems to vary amongst participants, for instance  Data Driven types  Synthesis/Intuitive types A couple of thoughts on this however  Blink, by Malcolm Gladwell  Wisdom of Crowds, by James Surowiecki Key Concept in Top Down-Bottom Up Portfolio Models Don’t compare apples versus oranges ≠ Compare how to split the land between size of the orchard, and the size of the grove vs. A Theoretical Foundation Using AHP, pairwise comparisons can accurately determine the relative size of these shapes to a common attribute, in this case “area” The algorithm can accurately determine the allocation of “area” units to each shape as a fraction of the total shape defined area We may be more used to this view… Fraction of Total Area 0.05 0.05 0.47 0.24 Triangle Circle Rectangle 0.10 0.47 Diamond 0.15 Square 0.1 0.24 0.15 This same principle can easily be used to allocate on a different basis… Dollars Fraction of Total Budget Dollars 0.05 0.05 0.47 Japan US 0.24 UK 0.10 0.15 0.47 LATAM 0.1 China 0.24 0.15 Determine a Portfolio Structure Level 1 Innovation Base Level 2 Innovation Bucket 1 Base Bucket 1 Innovation Bucket 2 Base Bucket 2 Innovation Bucket 3 Base Bucket 3 Innovation Bucket 4 Level 3? Overall Level 3 Strategic Bucket 1 Strategic Bucket 2 Strategic Bucket 3 Strategic Bucket 4 Breakouts: Investment Bucket 4 Investment Bucket 3 Investment Bucket 2 Investment Bucket 1 Bottom Up Model Develop models to rate and compare similar projects against each other because their criteria may differ in type and/or weight  Cannot effectively compare − Cost savings against New Product Development in the same model − Infrastructure against Research & Development in the same model The Top Down model allows a strategic level discussion about the appropriate level of activity between different “buckets” in the hierarchy The Bottom Up model evaluates the attractiveness or importance of the alternatives within each individual “bucket” of the hierarchy Determine the Bottom-Up Model Criteria Customer Strategy Technical Market Other… Sales Need Fit Competency Risks Profitability Benefit Leverage Lifecycle Time to Market Growth Interest Synergy IP Environmental Competition Rate/Compare Alternatives (Projects/Programs) How we address the challenge A solution for quickly synthesizing qualitative and quantitative information from multiple stakeholders to gain buy-in and assess the relative value of opportunities. Determine Project Cost Model What is the basis for resource comparisons?  Single Budget (often R&D) as Proxy? FTE’s only?  Rolled up Commercialization Costs (Cost to Launch)? − R&D Budget − CapEx Budget − Marketing Entry Costs − Etc. Once established, allocate out the available funding to the portfolio structure (ring fence the resources) and assess project resource demands to enable balance and optimization Resource Allocation Identify the best bang-for-the-buck projects to deliver the greatest value to your organization. Sample Decision Structure (Top Down) Innovation Bucket 4 Model 1 Strategic Innovation Bucket 1 Innovation Bucket 3 Allocation Target Setting Innovation Bucket 2 Strategic Bucket Allocations 30% 10% 15% 45% Innovation Bucket 3 Innovation Bucket 4 Innovation Bucket 2 Innovation Bucket 1 (Bottom Up) Priority 1 Priority 1 Priority 1 Priority 1 Priority 2 Priority 2 Priority 2 Priority 2 Model 2 Priority 3 Priority 3 Priority 3 Priority 3 Priority 4 Priority 4 Priority 4 Priority 4 Priority 5 Priority 5 Projects Priority 5 Priority 5 Priority 6 Priority 6 Priority 6 Priority 6 Priority 7 Priority 7 Prioritized by Priority 7 Priority 7 Priority 8 Priority 8 Priority 8 Priority 8 Priority 9 Priority 9 Priority 9 Bucket Priority 9 Resource Capacity Band Stop/Shelve Consider Trade-Offs Approve & Resource Across Buckets Establishing a Return on Investment (ROI) 34 Summary of the Value Proposition 35 Why? Comparing the 2 Scenarios… Because all the other indicators combined better describe the likelihood of financial success than the biased financial calculation alone The Financial dimension is the only one that is better in the financially based portfolio selection % Difference of scores on key dimensions of the cost/benefit vs. financial metric selected 36 portfolios Benefits This approach reconciles the shortcomings with purely top down or bottom up methods  Top Down Disadvantage: Artificially splitting resources without an eye on the opportunities  Bottom Up Disadvantage: Failure to drive strategic alignment and protect high risk-high return, longer term bets Top Down-Bottom Up Approach  Provides strategic targets to isolate resources and “protect” strategic bets, while also showing what could be left on the table in order to pursue them  In other words, it frames very important trade-off decisions Let’s look at an example model using this approach Proprietary & confidential. © Decision Lens 2010 Allocation Summary Value Returned on Investment Project Y Project X Pareto Analysis Pareto Table Target Budget Level Project Y Project X Technical Risk vs. Strategic Value (Bubble = Cost) 1725 Combined Spending Shortfall Project Y ? ? Project X 530 Combined ? Spend ? Big Innovation Core Renovation Margin Improvement Unfunded Trade-off Analysis Possible Trade-off Project Peroxide Tooth Whitening Gum Nex Prtoj Gener ect X ation Processing - Advanced Gum Forming Encapsulation Systems for Flavors Cost Reduced Cooling Blends for Developed & Emerging Markets Possible Trade-off Project Possible Trade-off Project Commercial Platform 0.30 0.20 0.10 Technical Risk 0.00 Geographic Alignment These projects gain their value from a mix of Geographic OR Financial impact Financial Contribution Q&A Thank You Proprietary & confidential. © Decision Lens 2010 A Theoretical Foundation Using AHP, pairwise comparisons can accurately determine the relative size of these shapes to a common attribute, in this case “area” The algorithm can accurately determine the allocation of “area” units to each shape as a fraction of the total shape defined area We may be more used to this view… Fraction of Total Area 0.05 0.05 0.47 0.24 Triangle Circle Rectangle 0.10 0.47 Diamond 0.15 Square 0.1 0.24 0.15 This same principle can easily be used to allocate on a different basis… Dollars Fraction of Total Budget Dollars 0.05 0.05 0.47 Japan US 0.24 UK 0.10 0.15 0.47 LATAM 0.1 China 0.24 0.15
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