Structure in Threes: Portfolio Management

This week while I doing my research on Candlestick Charting, I started reviewing the various IT Applications of Portfolio Management I’ve seen the past decade. The current state of practice continues to be a simple prioritization of initiatives by category attributes and pro forma ROI. That is to say one collects a list of projects, characterizes these by a set of several descriptive attributes, then calculates a Return on Investment based upon anticipated benefits, then stack ranks these by the ROI, and finally selects projects to invest in from a pool of funds working from the stack ranked list from the highest ROI down to the lowest until the fund pool is exhausted. This is a simplification of the work Parker & Benson did in their landmark book on IT Economics

While the above approach is simple and easy to implement it often lacks the needed strategic thrust to move a business forward in today’s ecosystem. Basically this approach is biased towards investing in what you’ve always done before. New initiatives that have the potential to become tomorrow’s primary revenue are often left at the bottom of the stack as a short or medium term ROI is often very low. When I designed and implemented a Portfolio Management process at IBM, the best I could hope for at that time given the maturity* of the organization was to create several portfolio pools based upon Baghai, et. al.‘s research on time horizon based portfolios.

At the time while I designed and implemented Time Horizon Portfolios It had several deficiencies that my current methodology R&D is in the process of mitigating;

  • First, each portfolio was a discrete and isolated portfolio as well as the investments in those portfolios. The means to look at the interaction of portfolios and the effects of interaction between these was an area I had called out for further development once the initial process was stabilized. However, my career path took me in other directions at that time. Additionally, the interaction between elements within a specific portfolio were not addressed. Today, some of that concern is now left on the door step of Business Continuity Managers and Corporate Risk Management teams who are basically looking at first and second maturity levels in this arena.
  • Second, deficiency I saw and had active discussions with Bob Watson who was managing the IBM Research Portfolio was on determining value and prioritization of research initiatives. In Baghai’s book, this was included in Horizon 3. However, I could see that there was a difference between Applied Research (True Horizon 3) and Exploratory Research (which I labeled Horizon 4).

I had come to the conclusion after implementing this process at IBM and many customers, that there was not one set of rules to manage the entire portfolio but a several sets of rules; a set that was applicable for each Time Horizon Portfolio as well as a set that governed the entire portfolio as a portfolio of portfolios. As I continued my research the past several years I started to look into the original writings on Portfolio Management which has a decidedly different slant than current IT implementations within an enterprise as previously noted. Markowitz’s book suggested that all the elements in a portfolio were to be looked at as an interconnect whole to optimize the return/risk ratio. Unfortunately research in this arena for enterprise internal investments had been sadly lacking. However, that is the point behind my Candlestick Charting research. Second and similar is the understanding of the interaction between time horizon portfolios, here I see promise in two lines of research; options theory –I’ve a partially completed white paper titles “Optimize Path to an Uncertain Destination” and Systems Dynamics Modeling (Jay Forester). As a scrambled to move and rebuild my personal data center, the first project to host on it will be a systems dynamic model in these arena. I had though about building it on Azure, but the tool suite for such isn’t there. It will likely be an application built at using Mike Riddle’s new programming environment.

*When I left IBM I developed a Portfolio Management Maturity Model to characterized where corporations were in managing investments similar to CMMI for Software Development as part of my consulting practice of my firm.

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