Portfolio Decisions Inc

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Description

Aren't most companies already using portfolio management? Many companies say they are using portfolio management, however, their decision processes rely more on intuition and experience than on a systematic, analytic approach to assessing their assets as a portfolio. Decisions are usually made on a project-by-project basis. These approaches capture some of the characteristics of portfolio management, but they fail to fully realize the true potential of portfolio management. What makes portfolio management different than project ranking or roll-ups? Portfolio management techniques frame decisions relative to how they help a business meet its strategic goals. Project rankings characterize groups of projects relative to a single factor. Unfortunately, Wall Street evaluates companies' business performance on more than a single factor. Thus, rankings provide a different picture of your business than the financial markets will use to evaluate your performance. Roll-ups may describe your business in terms of the same measures Wall Street uses, but they simply describe what the result of a predetermined group of projects will look like. Issues of project interactions and project timing are difficult to address with roll-ups and may be critical to business performance. Should decision makers rely on a "black box" to give them the answer to their strategic questions or business performance issues? Decision makers should not rely on a "black box" solution. Furthermore, portfolio management should not be viewed as a black box providing "the answer." Portfolio management provides insights and information about the dynamics of the decision maker's business. These insights and information can be framed to supplement the decision maker's standard decision-making processes. The results provide systematic and disciplined ways of evaluating options and comparing options in a consistent manner. A skilled portfolio manager can convert apparent "black box" solutions into insightful, directional information that will allow the decision maker to manage business performance from a knowledgeable perspective. Portfolio managers are responsible for distilling all the learnings and insights into a clear structure for the decision maker to use. Portfolio managers also are responsible for ensuring that the questions being addressed are clear and the data are appropriate for the questions. What business questions are appropriate to address with Portfolio Management? Portfolio analysis is valuable when exploring business questions that tie back to your company’s numeric goals, or that are concerned with setting the appropriate level of those targets. For instance, investment questions concerning the impact of a sale or acquisition -- or of the failure of a key project -- are all ideally suited to portfolio analysis. Portfolio analysis can address strategy questions concerning the probability that your goals can be achieved, how the probability of that success can be increased, or what kinds of projects fill the critical need for cash in years x-y, enabling you to fund expansion. Questions that cannot or have not been expressed in the language of numeric targets are not ready to be addressed by portfolio management techniques. “Should we increase our international exposure?” is a question with many ramifications, not all of which can be addressed using portfolio analysis. However, if you describe the types of projects that increasing international investment will expose you to, then portfolio analysis can be used to describe the effect of that decision on the company’s numeric targets. Portfolio management does not add tremendous value when evaluating a list of very similar projects. For example, a list of projects with the same cash flow profile, same kinds and magnitudes of risks -- any of which could be started in the same time frame -- can be more simply evaluated using a rank table.

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