ANALYZING AND BALANCING THE PORTFOLIO Pertemuan Matakuliah: A0824/IT Investment Portfolio Tahun: 2009 There is only one way to succeed in anything, and that is to give it everything. ~ Vince Lombardi

Introduction Portfolio examines the net effects of a mix of investments, including the interactions between investments Portolio balancing helps the organization to arrive at an optimal mix of investments that will maximize the investment return at acceptable levels of cost and risk Bina Nusantara University 3

ITPM assumptions All of the significant IT investment are in the portfolio. This is necessary because investment interact and because it makes it possible to see which investments are performing well and which are not. It also helps to identify investment gaps as well as opportunities Organization is risk averse. Given two investments that are equal except for the amount of risk, the organizatin will select the one with less risk. Bina Nusantara University 4

Portfolio Analysis and Balancing The basic purpose of IT portfolio analysis and balancing is to maximize the contribution of the portfolio to achieve the organizations’s strategic and operational goals at acceptable cost and risk Bina Nusantara University 5

Objective of Portfolio Analysis and Balancing Maximize the net contribution of IT investments in support of the organization’s strategic and operational goals Balance the IT investments over the principal goals and objectives to help ensure that all important goals and objectives are being met Produce a target net financial return on the portfolio of IT investments Diversify IT investment to reduce risk while achieving objectives at acceptable cost Maintain the alignment of IT investments with the strategic and operational goals Identify new and better ways to use the IT portfolio to improve enterprise performance Bina Nusantara University 6

Computation of Portfolio Financial Return A principal reason for investing in IT is to increase the financial return on investement. The expected total financial return of the IT portfolio can be calculated : The total expected financial return from IT investments is the wieghted average of the expected rates of return for the individual IT investments. Bina Nusantara University 7

Computing Probable Portfolio Financial Return (Example) Investment Amount ($000) Percent of Portfolio Expected Rate of Return Dolkar Amount of Return Portfolio Rate of Return % % (Weighted Average) % % % %270 1, %180 2, %230 2, %0 3, %570 12, $ 1710 Bina Nusantara University 8

Achieving a Target Financial Return Portfolio analysis in combination with the overall IT investment management process can facilitate the achievement of specific objectives. example : ROI (Return on Investment) ROI forecasts in proposals are subject to verification. The expected financial ROI of an IT proposal is first calculated by the proposal team and presented in the business case. the proposal team uses the investment assessment instrument approved by the board, which requires an financial ROI calculation as well as the quantification of non-financial ROI calculation as well as the quantification of non-financial benefits and risks. Bina Nusantara University 9

Relationship Between Risk and Return Bina Nusantara University 10

Using Resources Efficiently Aligning the Investment Design of Activities and Processes Adopting New Technology Encouraging Risk Taking Bina Nusantara University 11

Using Resources Efficiently Aligning the Investment –An important test of alignment is the extent to which an IT investment supports the priority objectives of the organization. –An system that is only 20% devoted to priority objectivites could be viewed as not aligned, while one that is 80% devoted to such objectives could be considered aligned. –The strengths of the IT portfolio approach include making unaligned or misaligned resources visible and providing the information needed to realign the resources with the new objectives. Bina Nusantara University 12

Using Resources Efficiently Design of Activities and Processes –A general rule is to never add new IT to an acitivity or process before confirming that its design is efficient, effective, and aligned with the strategic goals –Business processes and work activities that are poorly designed are inherently inefficient. Bina Nusantara University 13

Using Resources Efficiently Adopting New Technology –Timely adoption of appropriate technology helps to maintain competitiveness. –While the technology currently being used may be meeting its performance targets as planned, new technology can sometimes dramatically improve performance. Bina Nusantara University 14

Using Resources Efficiently Encouraging Risk Taking –The IT investment portfolio enables the board to monitor how much risk the organization is taking on and the business processes involved. –A board should not be expected to approve a relatively high-risk frontier project for a business process that already has relatively high-risk projects. –The board should consider approving such a project for a business process that has only relatively low-risk IT projects and is in need of innovation –The IT portfolio can keep the board informed of when IT investments are shifting toward too much or too little risk for a specific business process or for the organization as a whole Bina Nusantara University 15

Portfolio Balancing : Concepts and TEchnique Balanced : IT investments that produces the maximum possible benefits at an acceptanble cost and amount of risk conversely Unbalanced: IT portfolio is one that is too costly, too risky, or produces too few benefits. An objective of portfolio analysis is to determine how to improve the balance of the IT portfolio and thereby increase its contributions to organizational performance at acceptable levels of cost and risk Bina Nusantara University 16

Management Views of IT Investment and Risk The principal reason why Investment Review Boards reject proposals is concern with the risks. Organizations need to become proficient at risk identification, planning, and management so executive boards will have the confidence needed to approve projects with above-average risks Bina Nusantara University 17

Management Views of IT Investment and Risk Plan and conduct, with professional expertise, brief executive seminars on risk identification and management Hire one or more senior level professionals who are expert in risk identification and management Initiate a risk identification and management training program for project team members and prospective team members Review business case preparation guidelines and standards and improve them as needed so that benefits, costs, and risks and their relationships and trade-off will be identified and communicated in business teams Require that a separate high qulaity, professional risk management plan be prepared to accompany every prosoal and business case. The plan must enable non-technical managers to understand the risks associated with the IT investment and how the risks will be managed. Better business cases Bina Nusantara University 18

Better Risk Management Plans and Summaries Risk is the principal reason why proposals are not approved for funding and for good cause – most project failures are due to risks that were not recognized, were misundertood, or were not managed well. Bina Nusantara University 19

Other Mechanisms for Informed Risk Decision Making Checks each proposal and its business case for conformance to standards, verifies claimes, identifies hidden assumptions. It evaluates the risk identification, risk analysis and risk management. The staff group will ask the proposal team that prepared the business case / proposal to strengthen any weakness it identifies. Bina Nusantara University 20

Other Mechanisms for Informed Risk Decision Making After the proposal team incorporates the recommended changes it agrees with, the staff sends its conclusions and recommendation to the board. The board/sponsor question the key team members in detail to confirm that a thorough risk identification and analysis has been done and taht the risk management lan will be effective. The cross organizational makeup of the board is another aid to risk-related decision making to identify and evaluate risk from different perspective, whcih can produce stimulating and informative board discussions Bina Nusantara University 21

Other Mechanisms for Informed Risk Decision Making The cross organizational makeup of the board is another aid to risk-related decision making to identify and evaluate risk from different perspective, whcih can produce stimulating and informative board discussions As a result of the proposal assessment sby the staff group, board members, and other stakeholders and the answers to questions posed by board members during the investment review, the great majority of overly risky proposal will be rejected. Bina Nusantara University 22

Investment Diversification Diversification is a valuable tool for achieving portfolio balance. Limit Investment Amounts Diversifying Among Business Processes Diversify by Investment Phase and Investment Type Bina Nusantara University 23

Trade – Off Considerations Strategic improvements vs maintenance of current operations New projects vs ongoing projects vs implemented systems Types, amounts, locations and timing of risks Project costs, risk, and perfromance tradeoffs Impact of one project on others and net benefits Investment selection vs opportunity cost Budget constraints vs improvement needs External funding requirements vs new opportunities Bina Nusantara University 24

Portfolio Balancing and Line of Business Demands Line of Business (LOB) manager has an interest in achieving the balance of benefits, costs, and risks that will best meeet the goals and objectives of this or her LOB. The greater good is balancing the enterprise IT portfolio, even when it must override some of the balaning efforts of the LOB manager. Bina Nusantara University 25

Strategic Improvement vs Maintenance Infra Structure UtilityEnhance ment FrontierR & DSensitive New Project Ongoing Project Complete Project Bina Nusantara University 26

New vs Ongoing vs Implemented Projects Infra Structure UtilityEnhance ment FrontierR & DSensitive New Project Ongoing Project Complete Project Bina Nusantara University 27

Controlling Portfolio Risk Portfolio Risk Information Monitoring Portfolio Risk Sources of Risk Information Accuracy of Risk Identification Information Bina Nusantara University 28

Project Management Risk Project Manager Competencies and Requirements Project Management Methodology Executive Organizational Change Manager Sharing Assessment Information Bina Nusantara University 29

Impact of One Project on Another One IT Asset Serving Several Business Processes Opportunity Cost Budget Contraints External Funding Requirements Bina Nusantara University 30

Dynamic Nature of the IT Portfolio Balancing the IT portfolio is an ongoing activity because: Operational priorities change and strategic objectives shift over time, requireing portfolio changes. Portfolio characteristics change as investments proceed through their life cycles. Performanance data entiring the portfolio constantly change because of changes in customer preferences, external events, and other factors. Analytical reports generated by the portfolio may identify areas in in which new information or more analysis is required, which could call for new portfolio content categories and the need to capture new or more detailed data from sources. Bina Nusantara University 31

Simulations and Balancing Portfolio Risk Monte Carlo Simulation Trigular Distribution Documenting All of the Risks Bina Nusantara University 32

IT Infrastructure and the IT Portfolio Characteristics of the IT Infrastructure External Public-Private Infrastructure IT Infrastructure Challenges and Implications Bina Nusantara University 33

IT Investment Reviews Scheduled and Ad Hoc Reviews Factors Affecting Review Scheduling –Market Dynamics –Project Chunks –Business Model Used –Depth of Review –Other Factors Preparing for an Investment Review –Role of Investment Criteria –Role of Portfolio Information –Role of the Business Case Bina Nusantara University 34