The new PMI global standard for portfolio management

Introduction

From an executive perspective, the PMI Global Standard for Portfolio Management is the most important publication to come from PMI in the last decade. As the three forces of 1) globalization, 2) changing technology, and 3) demanding ownership have converged, many executives have concluded they have no choice but to equip their corporations for rapid response to whatever changes may occur next in the competitive environment.

Corporate executives have come to see the ability to change as key to organizational survival. Executives are scrambling to adjust to the new environment by demolishing traditional corporate policies and practices and introducing new strategies and structures, all with an eye to facilitating perpetual organizational transformation. The PMI Global Standard for Portfolio Management offers a framework for introducing new strategies and closing the gap between strategy and results.

Objectives

This paper has three objectives:

First, in Part I, a framework is suggested for selling portfolio management to senior executives;

Second, in Part II, the factors influencing senior executive decision-making are outlined; and

Third, in Part III, a case study, the Hydromax Seaplane Company, is used to illustrate how one company

implemented the PMI Portfolio Management Standard and then integrated the resulting system with its strategic

initiatives create a powerful strategic portfolio management capability.

But before we go further, what is the difference between tactical and strategic portfolio management?

Strategic Portfolio Management Defined

The original project charter for the PMI Portfolio Management Standard, written in 2003, provided guidance to the working group developing the Standard. This charter identified two types of portfolio management: 1) tactical, and 2) strategic (PMI, 2003).

Part I. A Framework for Selling Portfolio Management to Senior Executives

Continuum of Senior Executive Values

If an organization is not already committed to and using some form of portfolio management, how can the senior executive leadership team be convinced of the value of portfolio management, and more specifically strategic portfolio management? Exhibit 1 portrays a continuum of senior executive values impacting the adoption of strategic portfolio management. This exhibit is based on research conducted by the Economist Intelligence Unit and IBM Global Services (Thomas, Delisle, & Jugdev, 2002). The elements on the right-hand half of the Exhibit are most frequently the drivers leading to the adoption and success of an strategic portfolio management system. They are market expansion, to create new markets and develop a global presence; advantage creation; to change industry and market practices. To illustrate think of Starbucks in terms of creating new markets; or the Boeing 787 in terms of developing a global presence in the worldwide team of engineering and manufacturing partners; or Apple iTunes for the way it changed industry and market practices in terms of pricing and distribution.

Exhibit 1. Continuum of Executive Values and Outcomes

Part II. Factors Influencing Senior Executive Decision Making

Although they are usually broken down into one or two year programs and projects, strategic initiatives tend to be longer-term undertakings. It is frequently the case that it takes three to five years or longer before the end product if finally realized; think of a new bridge over a major waterway such as the Tacoma Narrows Bridge (see http://www.wsdot.wa.gov/TNBhistory/#4), or the introduction of a new operating system such as Windows Vista (see http://en.wikipedia.org/wiki/Development of Windows Vista), or a new aircraft such as the Boeing 787 (see http://en.wikipedia.org/wiki/Boeing_787) – all of which have time frames significantly longer that five years from conception to first use. What are the characteristics and thought processes of managers and executives working across the time spectrum from near term projects to long-term strategic initiatives? Exhibit 2, Conceptual Ability in High Performance Leaders, breaks these characteristics down into four time horizons, 6- months, 18 months, 3-years and 5-years and longer (Center, W. & Thompson, H.L., 2004).

Six Month Time Horizon

In this timeframe the focus is on concrete problems with a tendency to look for one black and white answer. The approach is straightforward using concrete and linear reasoning. This approach works well at the supervisor and lower manager level with a focus on the team.

Eighteen Month Time Horizon

This time horizon requires a qualitatively different, more sophisticated, approach to complex problems. In this time frame problems are frequently so large they can't be constructed in a single, coherent mental picture and require creating a series of time slices to view a piece of a problem at a time. Time slices are viewed in concrete terms and used to link individual situations into overall patterns. Leaders at this level are senior managers through junior executives who focus on the organization.

Three Year Time Horizon

In the three-year timeframe executive thought processes move from concrete to conceptual and involve complex problems with time frames out to three years. A systems approach is used for understanding and solving problems. An ability to work with gaps in information makes it possible to begin with something known and construct something totally new. At this level neither projects nor outcomes can be seen in concrete terms. Projects are of such duration and complexity that they can only be partially constructed mentally and take shape as the project evolves. This is the senior executive, system integration level.

Five Year and Beyond Time Horizon

In five year and beyond timeframe executives tackle extremely complex challenges (here, for example think of the time it would take to negotiate and agreement to build a major aircraft production facility in China, build it, get it into production and begin profitable operations). Problems of this complexity rely on intuitive mental theories built through experience that search for relationships between apparently unrelated information. Gaps in understanding provide a source of information and encourage looking for new links. There is a tolerance for ambiguity and an expectation that the problem will change before the solution can be found. Executives with these abilities are the institution creators who seek solutions to problems that have yet to be identified. Who of us really understood that we needed a graphical user interface to our computers before Steve Jobs introduced one on the first Macintosh in 1984? Who of us understood the potential of the Internet when it was first invented in the 1960s?

Exhibit 2. Conceptual Ability in High Performance Leaders

Part III. Strategic Portfolio Management at Hydromax

The Gap between Strategy and Actual Results

Senior executives generally recognize project management is an operational component of the overall strategic process; however portfolio management is not as yet widely recognized. Software solutions to facilitate portfolio management are in the early stages of deployment. The PMI Global Standard for Portfolio Management was first published a year ago in 2006.

All too frequently this results in a significant gap between planned strategy and actual results. Companies typically realized only about sixty percent of their strategies' potential because of defects and breakdowns in planning and execution (Mankins & Steele, 2005).

In the following example the Hydromax Seaplane Company is used to illustrate best practices in strategic portfolio management.

NOTE: To protect proprietary information, Hydromax is a composite of our experience across a range of enterprises: from pharmaceuticals to medical devices; from aerospace to railroads; from federal governments to municipalities.

Overview of the Hydromax Seaplane Company

The Hydromax Seaplane Company, based in Seattle, was founded in 2004 by a group of senior aerospace engineers and managers, to address an underserved segment of the aviation market. The principal markets for the Hydromax are developing and third-world countries. The aircraft does not require a runway; it is at home on modest-size lakes and protected harbors. The aircraft has retractable landing gear enabling it to roll out of the water onto a ramp to facilitate loading, unloading and maintenance.

Design. The Hydromax makes extensive use of advanced composites, thus eliminating corrosion problems that plagued earlier metal seaplane designs. The initial design team was based in Seattle; however a significant portion of the design will be completed by the Hydromax subsidiary in China.

Production and Sales. Primary production and assembly will occur in China. Once the China facility is fully operational, in about two years, assembly kits will be delivered to co-production facilities in Chile and Egypt for final assembly, flight test, sales and support. The Chinese subsidiary has sales responsibility for Australia and Asia; the Egyptian subsidiary for Europe, the Middle East and Africa; and the Chilean subsidiary has responsibility for the Americas.

Closed-Loop Strategic Portfolio Management

To close the gap between strategy and results identified by Mankins and Steele, the executive leadership team at Hydromax implemented a closed-loop portfolio management system based on four global standards from the Project Management Institute that are listed below and illustrated in Exhibit 3. This closed-loop system is at the core of the Hydromax strategic portfolio management model that will late in this paper (Exhibit 8).

1. A Guide to the Project Management Body of Knowledge
2. The Standard for Program Management
3. The Standard for Portfolio Management
4. Organizational Project Management Maturity Model

Exhibit 3. Closed-loop portfolio management system based on four global standards from the Project Management Institute

Hydromax has implemented a comprehensive strategic portfolio management system that: 1) provides a coherent enterprise-wide understanding of the company's vision, mission, and strategic objectives; 2) automates and enforces governance processes; 3) employs proven best practices; 4) captures all investments within a central repository; 5) objectively prioritizes business strategy; 6) helps to effectively evaluate competing investments, and 7) perhaps most importantly, once funded, tracks project performance to assure continued alignment with strategy. The executive leadership team at Hydromax developed the model shown in Exhibit 4 to illustrate to all stakeholders the convergence of capabilities and global events driving Hydromax strategy.

Exhibit 4. Convergence of capabilities and global events driving Hydromax strategy.

❶The World is Flat

The major factors influencing the design of the strategic portfolio management system at Hydromax are depicted in Exhibit 4. Thomas Friedman's best seller, The World Is Flat, has been read by all members of the executive leadership team and the middle managers at Hydromax. A summary outlining how Hydromax is capitalizing on Friedman's ten forces that have flattened the world is provided in Appendix I (Friedman, 2006).

❷Project Management Institute

The Project Management Institute has grown to more than 200,000 members worldwide with over 200 chapters in 125 countries. Hydromax has encouraged its program and project management personnel to join PMI, participate in their local chapters, and obtain the PMP® certification.

❸❹❺ Global Standards.

PMI has developed and published four important standards: A Guide to the Project Management Body of Knowledge (PMBOK® Guide), The Standard for Program Management, The Standard for Portfolio Management, and the Organizational Project Management Maturity Model (OPM3). The importance and usefulness of these standards cannot be overemphasized; they provide a global frame of reference, a common language, and a closed-loop management process. Hydromax has aligned its terminology and strategic portfolio management methodology in accordance with these standards.

❻ PMP Certification.

In addition to these standards, PMI provides a rigorous certification program granting a Project Management Professional (PMP®) designation to qualified individuals based on their years of hands-on project management experience and passing a thorough exam on the PMBOK® Guide. As of this writing (mid-2006) there are almost 200,000 individuals worldwide holding the PMP certification. Hydromax has provided financial incentives for all of its program managers, project managers, and project team members to obtain their PMP certifications.

❼ Enterprise Project and Portfolio Management Solutions.

Today there are a number of powerful enterprise project management and portfolio management solutions offered by companies such as IBM, SAP, Microsoft, Primavera, PlanView and CA-Niku. It is not the purpose of this paper to recommend any particular product; but rather to provide a generic framework for successful strategic portfolio management implementation, independent of software.

❽ Adoption of Strategic Portfolio Management

Strategic portfolio management as depicted in Exhibit 2 is in a very early stage of the adoption cycle. To date, few organizations have successfully implemented strategic portfolio management. Many executives today still view project management software as only producing resource-loaded schedules rather than the powerful collaboration, workflow and document management solutions they have become. Our experience indicates that senior executives today are largely unaware of these powerful, rapidly emerging new capabilities and how to use them strategically. This is not the case at Hydromax where the executive leadership team recognizes that strategic portfolio management is an essential element in providing competitive advantage to Hydromax in its drive to dominate the global seaplane market.

❾ Readiness

Since we began implementing portfolio management systems in the late 1970s, we have all too frequently witnessed a disconnect between strategic planning and execution. The latest generation of software solutions have all but eliminated the technical problems associated with portfolio aggregation, resource management, and problems such as latency (slow network and database response times) when collaborating on global projects. Our experience indicates today's greatest challenges are not in the realm of information technology, but in (in descending order of importance), top management commitment, procedures and processes, and finally in structure and relationships.

The first prerequisite for successful implementation of a strategic portfolio management system – without which failure is almost assured – is support of the executive leadership team, particularly the support of the president, CEO, and COO or in government agencies, the agency heads and their direct reports.

Implementing the Portfolio Management Standard

Hydromax has developed a web-based interface to their strategic portfolio management system as illustrated in Exhibit 5. This system provides the feedback required to close the gap between strategy and actual results.

Exhibit 5. Implementation Framework based on PMI Portfolio Management Standard
(see Figure 1-4, page 9, Cross-Company Portfolio Management Process Relationships).

Exhibit 6. The Authorization process step in Portfolio Management showing Inputs and Outputs.
This exhibit is typical of the inputs and outputs found at each process step.

The Key: Allocation of Resources by Managers

The Hydromax executive leadership team recognizes that frequently the cumulative impact of the allocation of resources by managers at any level has more real-world effect on strategy than any plans developed at headquarters. At the same time that corporate staff is beginning to roll our initiatives, operating managers invariably are already acting in ways that either undercut or enhance them. Division managers view the resource allocation process as a way to protect their turf. Hydromax executives recognize that they need to reach down to operational managers if they want units to cooperate (Bower and Gilbert, 2007, pp 72-79).

The Hydromax Solution

Exhibit 7 illustrates how the Hydromax executive leadership team communicates strategy and ensures a closed-loop feedback system to minimize the gap between their strategic vision and actual results. Concise definitions of the roles identified in this Exhibit can be found in the PMI Standard for Portfolio Management, pages 17 – 19,. However, not defined in the PMI Portfolio Standard is the Office of Strategy Management (Kaplan and Norton, 2005) Kaplan and Norton have found that organizations that have achieved better and longer-lasting improvements than others, and sustained their strategy focus have typically established a new unit at the corporate level to oversee all strategy-related activities. They call the new corporate-level organization the office of strategy management (OSM) as shown below.

Exhibit 7. The matrix nature of portfolio management

OSM and EPMO

The office of strategy management may also include another organization, typically referred to as an EPMO, the enterprise program management office. Alternately, the OSM may be a relatively small corporate function with a separate EPMO. The OSM and the EPMO work together to assure:

1. Communication of a coherent enterprise-wide understanding of the company's vision, mission, and strategic objectives
2. Automation and enforcement of governance processes
3. Application of best practices project, program and portfolio management
4. Aggregation of all investments within a central repository
5. Objective prioritizing of business strategy opportunities
6. Assistance in effectively evaluating competing investments
7. Tracking program and project performance to assure continued alignment with strategy

Hydromax Integration of PMI Standards and Terminology

The Hydromax Seaplane Company encourages and financially contributes to employee membership in PMI and achieving their PMP certification. As shown earlier in Exhibit 1, PMI standards are at the core of Hydromax processes. The prior exhibit, Exhibit 7, illustrates the use of PMI standard terminology; i.e. control accounts, work packages and planning packages. Standard PMI-based terminology facilitates communication across Hydromax, despite native language differences between the various stakeholders and production sites (PMI has chapters in more than 125 countries). The Hydromax closed-loop strategic portfolio management system is be built on a sound foundation of metrics; metrics that provide meaningful and timely feedback indicating whether or not the strategic initiative is progressing satisfactorily.

The PMI Standard for Portfolio Management, pages 61-63, provides a list of criteria associated with various business outcomes. Exhibit 8 portrays some of these business outcomes as Desired Outcomes on the left-hand side of Exhibit 8. These desired outcomes may be achieved through a wide range of Venues (as mentioned earlier, it is frequently the case that the cumulative impact of the allocation of resources by managers has more real-world effect on strategy than any plans developed at headquarters). To minimize the aforementioned gap between strategy and actual results, Hydromax emphasizes to all stakeholders the closed-loop strategic portfolio management process of governance the linking strategy to initiatives to programs and projects and metrics – metrics that relate back to the originating strategy. There are six Disciplines required for successful strategic portfolio management. They are strategic planning, performance management, portfolio management, financial management, capacity management, and project management. Although a number of the disciplines may be collocated within one organization, each discipline requires a different skill-set and a different focus.

Exhibit 8. Strategic Portfolio Management Model: Outcomes, Venues, Processes and Disciplines

In Conclusion

Between 1988 and 1998, in a global sample of 1,854 large corporations, seven out of eight companies failed to achieve profitable growth; with profitable growth defined as the ability to deliver 5.5% annual real growth in revenue and earnings while earning their cost of capital. Yet 90% of these companies had detailed strategic plans with much higher targets (Zook and Allen, 2001). This gap arises from a disconnect in most companies between strategy formulation and strategy execution (Kaplan and Norton, 2005). Research indicates that 95% of a company's employees are unaware of, or do not understand its strategy. In this paper in Exhibit 7 we illustrated how strategy is communicated down to the control account and resource level and then in Exhibit 8, in the strategic portfolio management model, we have shown how the closed-loop, PMI standards-based, strategic portfolio management process fits with the framework desired outcomes, venues, and disciplines.

Ultimately it is of little consequence if the gap is closed between strategy and actual results if there was not a great strategy in the first place (Davidson, 2004). Development of great strategy is domain of executive management as shown earlier in Exhibit 5. Properly implemented, strategic portfolio management will materially aid senior executives in developing a successfully carrying out great strategy.