Portfolio 101. Use Balance Points to Optimize the Portfolio
Portfolio Management is a discipline focused on aligning organizational strategy with the projects that are executed. It is a way for you to work and think hard about trading costs. And probably to use an optimizer that allows flexible specification of costs.
“Here's the TenStep guest blog post "Portfolio 101. Use Balance Points to Optimize the Portfolio":
The model for work portfolios is based on the model of the financial portfolio. An important concept in our financial portfolio is balancing our assets. Balancing allows us to spread our financial risks. Just as your financial portfolio is balanced, your work portfolio should be balanced as well. When you read about portfolio balancing, almost all of the literature is focused on balancing risk. For example, you can balance the percentage of projects that you approve based high or low risk. You probably don’t want to approve too many high-risk projects. But high-risk projects have high rewards. (If a high-risk project had low reward it would not make any sense at all.) Therefore you probably want some percentage of high-risk projects in your portfolio. The term “Balance Point” is used to refer to the optimum target percentage for your portfolio balancing.
For example, you may be allocating 90% of your funding today in low-risk projects. Your management team may make a conscious decision to identify and fund more high-risk projects so that in two years you are achieving a balance of 70% low risk and 30% high-risk. These percentage targets (70, 30) are called "Balance Points".
That being said, portfolio balancing is much broader than simply balancing risks. You can use Balance Points to evaluate a number of interesting factors in the makeup of the work in your portfolio. For example, you can balance in the following areas.
- Corporate vs. field projects. If you have a corporate office and field offices, you might be surprised how much of the money for projects is allocated to corporate projects – in spite of the fact the field offices are normally generating the revenue.
- Strategic vs. tactical projects. Some organizations seem to approve too many strategic projects. Since strategic projects tend to be longer, they tie up resources and make it hard to get the short-term tactical projects implemented. On the other hand, some organizations focus too much on short-term tactical projects and have a hard time achieving their goals and strategies. Understanding your allocation today will allow you to set more optimum Balance Points in the future.
- Technology vs. business projects. Some companies spend too much of their money on internal IT initiatives and others do not spend enough. Once you know what you are spending in each category, you can set the optimum Balance Points you want to achieve in the future.
I think you get the picture. Using optimized portfolio management processes, projects are approved based on business value and alignment to goals and strategies. Balancing is a more sophisticated element, but it can be very powerful in changing your organization culture and driving an optimum balance of work.