Strategic portfolio management at Hydromax

Abstract

In the Wall Street Journal of June 13, 2006, Jim McNerney, Chairman, President and Chief Executive Officer of The Boeing Company, stated, “A leader charts the course, translating strategy into workable plans; sets high expectations and raises the bar continuously; inspires others by creating a winning atmosphere; faces reality and adjusts to keep commitments; delivers results and does not rationalize shortfalls.” (Lunsford, 2006, B1)

To paraphrase Jim McNerney: Strategic Portfolio Management is all about charting the course, translating strategy into workable plans, and delivering results.

Companies typically realized only about sixty percent of their strategies' potential because of defects and breakdowns in planning and execution. In what follows, we offer a Strategic Portfolio Management framework for closing the gap between strategy and results.

To illustrate the Strategic Portfolio Management process, this paper uses the Hydromax Seaplane Company, a composite of the authors' experience with over one hundred publicly-traded companies and government agencies. The Hydromax Seaplane Company is set in today's real-world context as described in Thomas Friedman's book, The World Is Flat (2005).

This paper: 1) Outlines two frameworks for establishing effective governance over a strategic portfolio; 2) Provides a method for evaluating the inherent value—and risk—of projects in the portfolio, and; 3) Suggests a feedback methodology to assure continuing alignment of the individual projects with strategic objectives.

The Gap Defined

The Current Focus on Project and Program Management (PPM)

As illustrated in the Hydromax case study, increasing project complexity, outsourced supply chains, and geographically dispersed teams makes timely visibility into project performance and the resulting demands on human resources more important than ever. As a result, project and program management (PPM) has moved to the center of project-intensive enterprises. According to Gartner, PPM is one of today's fastest growing disciplines. Businesses are re-engineering around PPM to achieve breakthrough value in areas such as project and resource management, business process fusion and agility, workflow solutions, and many other core business processes. According to Kraft Bell, VP Gartner Research: “In the face of accelerating market turbulence in the form of competitive pressure, shifting regulations and rising customer expectations, executives must rapidly change strategies, business models and products. But organizational culture and information systems can be slow and hard to change.”

Evolution from DPM to PPM to SPM

Today, most organizations use some form of desktop project management (DPM) software with varying degrees of effectiveness. Many organizations have moved beyond the desktop to implement server-based PPM systems to plan, monitor and control the organization's projects. Generally these PPM implementations begin life as tools for the IT department to manage both project and non-project work. Frequently that is as far as the server-based PPM toolset and methodology goes – it use begins and ends in the IT organization. We are still very early in the adoption cycle of the PPM toolset and methodology in support of enterprise strategy.

To achieve strategic results from a series of programs and projects it is necessary to move from project and program management to Strategic Portfolio Management. SPM requires an advanced skill-set based on a solid program and project management foundation; in other words, without a solid PPM foundation, SPM cannot be successful.

The focus of SPM is on strategic and cultural issues with an emphasis on collaboration. SPM focuses on end products, customers, outcomes, and thought leadership. In the globally-competitive economy of today, adaptability, flexibility and rapidly capitalizing on innovations are keys to strategic success (think of Google versus Microsoft in the search engine revenue generation business, and Boeing and its 787 versus Airbus and its A380 in placing huge strategic bets on fuel economy versus passenger load).

Disconnect between Business Strategy and Project Strategy

Strategically it is more important than ever to be able to rapidly adapt to market changes. However organizations are also more complicated than what was the case historically due to globalization, shortening product life cycles, margin erosion due to online price comparison and purchasing, etc.

Organizations create portfolios, programs, and projects to achieve the development objectives emanating from enterprise strategy. Portfolio and program management focus on prioritizing resources, managing a technology base, and optimizing business benefit. Strategy management has been dealt with by numerous authors, most of whom address the concepts and processes associated with strategy analysis, strategy creation, strategy evaluation and strategy implementation. Few, however, explicitly connect corporate and business strategy with project strategy (Morris & Jamison, 2004, p 109).

Companies typically realized only about sixty percent of their strategies' potential because of defects and breakdowns in planning and execution (Mankins & Steele, 2005, p 1). This shortfall is frequently caused because business strategy planning, portfolio management and project selection are a senior management responsibility, while project planning and execution processes are performed by project managers and the project team. Each of these functions and processes is executed separately by a different set of people within the enterprise. In many cases, these processes are not aligned, and for this reason, projects may not be tied directly to either the business strategy or the enterprise portfolio (Milosevic & Sabin, 2005, p 1).

Strategic Alignment

Strategic Portfolio Management is about the selection and prioritization of programs and projects, including aligning resource demand with resource availability to achieve a set of strategic goals. SPM is primarily concerned with choosing the right projects in accordance with a pre-established set of business drivers. Strategic Portfolio Management has a broader focus on business strategy and enterprise-wide integration than project management, which is more typically about doing the right project. The Strategic Portfolio Management process provides a means of consistently and objectively evaluating each proposed project that is vying for a limited pool of resources, thereby helping make the most effective use of resources ((Morris & Jamison p 110).

The portfolio management market is evolving rapidly to address these all too frequent disconnects between strategy and results. Vendors are marketing increasingly integrated suites and PMI has recently published global standards for portfolio and program management. The dynamics in the portfolio management market are leading to more comprehensive, but more costly implementations (Gartner, 2005, p 1).

The Hydromax Seaplane Company is a case study in Strategic Portfolio Management: All projects and operations are strategically aligned with the company's vision, mission, strategy, and objectives.

A New PMI Global Standard: Portfolio Management

At the Project Management Institute (PMI^®) Global Congress EMEA held in Madrid in May 2006, PMI officially released The Standard for Portfolio Management (Exhibit 1). This new PMI Standard provides a framework for “Closing the Gap between Strategy and Results,” the subtitle of this paper.

This Portfolio Management Standard aligns closely with the authors' real-world portfolio experience (one of the coauthors of this paper has been continually involved with portfolio management since the mid-1970's (Garfein); and the other coauthor (Du Toit) has extensive experience implementing global management information systems.) This paper reflects many of the techniques and lessons learned in those implementations.

The Hydromax Seaplane Company: A Strategic Portfolio Management Example

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 is 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.

Benefits of Strategic Portfolio Management at Hydromax

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.

Strategic Drivers of Hydromax Success

The strategic drivers identified in the Hydromax business plan, as approved by the initial investor group and the executive leadership team (ELT), are:

1. Market Share. Achieve ninety percent of the worldwide market for a simple, low cost, forty passenger, cargo-only or mixed usage, amphibious seaplane.
2. Manufacturing. Design the Hydromax to be easy to assemble in subsidiaries around the world.
3. Rating. Become number one on the FORTUNE magazine list of most admired companies in our segment.
4. Delivery. Deliver an outstanding product and product support.
5. Employment. Offer excellent employment opportunities for the citizens of the host countries where the Hydromax is manufactured and assembled.
6. Returns. Provide exceptional returns to Hydromax investors due to the seaplane's low manufacturing costs coupled with a market share of ninety percent.
7. Risk. Minimize investor, host country, owner, and passenger risk.

Portfolio, Program and Project Management at Hydromax

Exhibit 1. Strategic Portfolio Management offers a significant opportunity to achieve and sustain competitive advantage.

Since it founding in 2004, Hydromax has been recruiting its executive leadership team (ELT); and that team is now in place. The team is well versed in program and project management. Several of the executives have a Project Management Professional (PMP^®)certification from PMI. These senior executives are all familiar with the first generation of desktop project management applications such as Microsoft^® Project and Primavera. Several members of the executive team have had some exposure to server-based, enterprise project management applications; however they have little experience employing these capabilities strategically.

Exhibit 2 shows the evolution of desktop project management beginning in the early 1990's, followed by server-based enterprise project management (EPM) deployments beginning in 2000, and the Strategic Portfolio Management system being implemented at Hydromax today.

Convergence of Professionalism, Globalization, in a Flat World

The major factors influencing the design of the Strategic Portfolio Management system at Hydromax are depicted in Exhibit 3. 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 (see ➊). A summary outlining how Hydromax is capitalizing on Friedman's ten forces that have flattened the world is provided in Appendix I.

Exhibit 2. Convergence of capabilities and global events driving Hydromax strategy.

PMI. The Project Management Institute (see ➋) has grown to 250,000 members worldwide with over 200 chapters in 60 countries. Hydromax has encouraged its management team to join PMI, participate in their local chapters, and obtain the PMP® certification.

Global Standards. PMI has developed and published three important standards: A Guide to the Project Management Body of Knowledge (PMBOK^® Guide), The Standard for Program Management and The Standard for Portfolio Management (see ➌➍ and➎). 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.

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 (see ➏). Hydromax has provided financial incentives for all of its program managers, project managers, and aspiring project managers to obtain their PMP certifications.

Solutions. Today there are a number of powerful enterprise project management solutions offered by companies such as IBM, SAP, Microsoft, Primavera, PlanView and CA-Niku (see ➐). 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.

Adoption. The authors believe we are very early in the Strategic Portfolio Management adoption process as depicted earlier in Exhibit 2. To date, few organizations have successfully implemented SPM. 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 (see ➑). This is not the case at Hydromax where the ELT recognizes that SPM is an essential element in providing competitive advantage to Hydromax in its drive to dominate the global seaplane market.

Readiness. Since we began implementing portfolio management systems in the late 1970s, the authors 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 the largest 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. See Appendix II, Strategic Portfolio Management Readiness Assessment, which also includes brief descriptions of several implementation successes and failures.

The prerequisite for successful implementation of a Strategic Portfolio Management system – without which failure is almost assured – is support of the executive leadership team (ELT), particularly the support of the president, CEO, or agency head in government (see ➒). The SPM implementation was initiated by the Chairman and President of Hydromax and is fully supported by the ELT (the President of Hydromax has extensive hands-on project and program management experience).

Two Strategic Portfolio Frameworks

Framework One: A Preferred Future State

This is the first of two frameworks for the development of a Strategic Portfolio Management capability. This framework is based on a methodology developed by William Davidson and Eric Anderson of the Mesa Research Group, and is aligned with the PMI PMBOK^® Guide and the new (2006) PMI Global Standards for Portfolio and Program Management. Using this framework, enterprise initiatives were developed by the Hydromax ELT. These initiatives are long-term strategic undertakings that underpin and support the achievement of the Company's vision, “Affordable Transportation for a Flat World.” These initiatives focused on market coverage, product offerings, competitiveness, market position, infrastructure, capabilities, and financial performance. This preferred future state methodology and its alignment with the three PMI standards is shown in Exhibit 4.

Exhibit 3. SPM to Achieve a Preferred Future State

At Hydromax, each Initiative Team identified the “Preferred Future State” (PFS), or vision, for Hydromax in the team's area of responsibility. Initiative planning focused on the competitive, resource and cultural realities; and defined the highest achievable aspirations, reflecting expansive, aggressive thinking.

The vision developed by each initiative team was separated from the current state by a set of gaps. Each Initiative Team, after developing their Preferred Future State, then looked back from that future state to identify the “building blocks” needed to reach it from today's current state. This required identification of key capabilities, systems, resources and other elements needed to realize the team's vision. In summary, each Hydromax Initiative Team:

1. Developed its vision of the Preferred Future State
2. Identified the capabilities, resources, infrastructure, systems and other elements that must be in place to reach the PFS.
3. Coordinated proposed projects with the efforts of other initiative teams to eliminate redundant efforts and capitalize on synergies between initiatives. The ultimate goal is a time-phased roadmap of projects needed to achieve the Preferred Future State of the Initiative.
4. Scored for strategy, risk and finance, each proposed project within the initiative was then submitted to the ELT for evaluation and possible funding, given the objectives and constraints of the overall Hydromax portfolio.

The initiatives consisted of components that include new capabilities and competencies; new systems, tools and processes; new offerings and businesses; and new channels and markets. These initiatives serve as the primary guiding focal points for defining enterprise-wide projects. Each Initiative is shown as a separate color-coded arrow in Exhibit 5. Exhibit 6 shows a simplified generic example of how an initiative is further broken down into its constituent components, programs and projects (these component diagrams are almost always more complex than the one shown in Exhibit 6).

Exhibit 4. Hydromax strategic initiatives leading to the Hydromax preferred future state.

Exhibit 5. Identification of components required to reach the preferred future state (Mesa Research Group, LLC. Used with Permission).

The Hydromax executive leadership team has identified five strategic initiatives. Organizational Development (OD), Manufacturing Technology (MT), Regional Strategy (RS), Management Systems (MS), and Business Growth (BG). Once the preferred future state and their related component diagrams were completed for the OD, MT, RS, MS and BG initiatives, cross-initiative meetings were held to eliminate duplication of effort and to identify synergies between initiatives.

The initiative teams then developed scorecards for each component they wanted to present to the executive leadership team for funding (the PMI Standard for Portfolio Management, page 4, states, “The components of a portfolio are quantifiable; that is, they can be measured, ranked, and prioritized.” (PMI 2006, p 4)). These scorecards quantified three aspects of each component; strategy, risk, and finance. Later in this paper an example is provided showing how Hydromax developed a defensible and traceable risk scoring methodology and reported against it once the project was funded by the ELT.

Framework Two: The PMI Portfolio Management Standard

The PMI Portfolio Management Standard (May 2006) provides a diagram showing “Cross-Company Portfolio Management Process Relationships” (Figure 1-4 p 9). Exhibit 7 shows one approach to implementing a portfolio management process. The overall process is depicted in the “live” buttons on the control panels at the top of this Exhibit. Clicking on one of these buttons, drills down to a lower level tab – in this case the Portfolio Balancing tab which, in turn, show the inputs and outputs to the Portfolio Balancing process. Each one of the live buttons on the tab open the appropriate forms and documents – for example “Capacity Constraints” may open a Word document, an Excel spreadsheet, or a Project resource pool.

Exhibit 6. Implementation Framework for the PMI Portfolio Management Standard

You Still Have to Run the Railroad

Hydromax is a project-driven enterprise; nevertheless, day-to-day operations are absolutely critical to its success. Building the prototype aircraft must transition into building production aircraft at an increasing rate, with on time delivery, and within aggressive learning curve-based cost targets. Hydromax projects and operations are frequently competing for the same scarce resources; be they people, facilities, or materials.

At Hydromax strategic planning is divided into two categories; 1) operational planning and 2) portfolio, program, and project planning (Exhibit 8). Both operational and portfolio planning frequently draw from and competed for the same scarce internal and external resources.

Exhibit 7. Hydromax planning takes two paths; one is through recurring operations, and the other through nonrecurring programs and projects.

Hydromax is organized around the strategic principle of “Affordable Transportation for a Flat World.” In today's rapidly changing world, Hydromax must integrate decentralized decision making with coherent strategic action (Gadiesh and Gilbert, 2001).

This strategic principle, Affordable Transportation for a Flat World:

1. Empowers workers to innovate, take risks, and create products and services that meet subtle shifts in customers' needs.
2. Sets clear boundaries within which employees operate and experiment and seize fleeting opportunities.
3. Forces trade-offs between competing resources.
4. Tests the strategic soundness of particular decisions by linking ELT strategic insights with line operators' pragmatic sense.

Before reviewing the Hydromax enterprise portfolio, Exhibit 9, provides a simplified overview of enterprise portfolio, portfolio, program, and project hierarchy (The Standard for Portfolio Management, 2006, pp 3-5). In this standard, and at Hydromax, programs are groups of related projects managed in a coordinated way to obtain benefits and control not available from managing them individually; and projects (versus ongoing operations) are temporary endeavors undertaken to create a unique product, service or result.

Exhibit 8. A generic view of a project hierarchy based on the PMI Global Standard for Portfolio Management.

The Hydromax OSM and EPMO

Most companies have ambitious plans for growth; unfortunately few ever realize them (Kaplan & Norton 2005). In a sample of 1,854 large corporations between 1988 and 1998, seven out of eight of the companies studied were unable to achieve a 5.5% annual real growth in revenues and earnings while earning their cost of capital – yet 90% of these companies had detailed strategic plans with much higher targets (Zook & Allen, 2001). This gap arises, according to Kaplan and Norton, from a disconnect between strategy formulation and strategy execution.

Recognizing the danger of this type of strategy disconnect, the Hydromax executive leadership team established an Office of Strategy Management (OSM). This is not just a new name for the familiar strategic planning function. At Hydromax the OSM works in conjunction with the Enterprise Portfolio Management Office (EPMO) in providing leadership in seeing that strategy gets executed, in other words, closing the gap between strategy and results. The OSM executive reports directly to the Hydromax CEO. The Hydromax OSM, EPMO, and the four portfolios with related programs and projects are shown in Exhibit 10.

Exhibit 9. Portfolios, programs, project structure at Hydromax.

OSM responsibilities include: 1) communication of corporate strategy; 2) ensuring enterprise-level plans are translated into plans for the various units; 3) executing strategic initiatives to deliver on the grand plan; and 4) assuring that the Hydromax ELT and the portfolio review board receive timely reporting tied back to the pre-approved metrics contained in the strategic initiative proposals.

Exhibit 11 shows the relationship of the Hydromax ELT to the OSM and EPMO. Program and project management at Hydromax is based on a close collaboration between project managers and resource managers

Exhibit 10. The matrix nature of portfolio management.

Scorecard Criteria: Defensible and Traceable

To be meaningful to senior management, enterprise-wide reporting must be based on a common set of measurement standards. What follows is an example of how Hydromax has instituted a closed-loop risk identification and reporting system providing the executive leadership team with standardized, enterprise-wide visibility from strategy formulation to the results. Exhibit 12 shows the risk reporting thresholds as shown in the PMI PMBOK^® Guide (2004, p 245).

Exhibit 11. An example of enterprise-wide risk reporting criteria.

A high level portrayal of the major risks identified at Hydromax is shown in Exhibit 13. Hydromax categorized risks as technical, external, organizational, and project management. These risks were initially identified using the Delphi technique and were subsequently assessed for their probability of occurrence and severity if they were to occur. Where warranted, in terms of probability of occurrence and severity, plans were developed to mitigate known risks.

Exhibit 12. Categorizing risk at Hydromax.

Shown below in Exhibit 14 is a display of status indicators, including the Risk Indicator statused in accordance with the pre-established thresholds shown earlier in Exhibit 12.

Exhibit 13. Scorecard indicators become the basis for monitoring and control reporting.

Conclusions

Executive Team Leadership

It has been the authors' experience, over a wide range of industries, that five factors are essential to successful Strategic Portfolio Management implementation and its ongoing usefulness to the entire organization.

1. Top management's awareness of the strategic implications at a systemic level
2. Vision, clarity and communication
3. Urgency of driving forces
4. Availability of funding
5. Executive leadership and the ongoing support by the ELT is the most important component in SPM success.

Identify All Gaps – And Fill Them

Some – perhaps many – aspects of SPM implementation are likely to be beyond the organization's organic capabilities. Although the technology is mature, it is complex and yet has to be transparent and fast from a user's perspective. It is essential for SPM success that the organization identify, as early as possible, all gaps in their implementation capability and then supplement internal staff with appropriate external resources.

Exhibit 14. Closing the Loop. Hydromax developed and uses its closed-loop SPM system to close the gap between strategy and results. The ELT receives timely reporting of metrics that were validated as part of the original scorecarding process conducted prior to project funding. The technology infrastructure at Hydromax provides a real-time, easy-to-use, globally available foundation for its SPM system.

Appendix I: Hydromax in a Flat World

The Hydromax Seaplane Company takes advantage of the ten forces that have flattened the world as described in Thomas Friedman's 2005 book, The World is Flat. Friedman argues that a triple convergence has taken place:

1. A global, Web-enabled playing field that allows for multiple forms of collaboration, open today to more people in more places on more days in more ways than anything like it ever before in the history of the world.
2. Development of new ways to collaborate horizontally.
3. The opening up of the societies of China, India, Russia, Eastern Europe, Latin America, and Central Asia.

This “triple convergence” is “the most important force shaping global economics and politics in the early twenty-first century.” The following list outlines the ten forces that have flattened the world, according to Tom Friedman.

Appendix II: Strategic Portfolio Management Readiness Assessment

Exhibit 15. Strategic Portfolio Management Readiness Assessment

Our Experience Using the Assessment

We have been employing the Readiness Assessment as a checklist since 1993. It has proven a reliable leading indicator of portfolio implementation success. Our experience using this assessment instrument, across a broad array of companies, has shown that where there were significant gaps in capability, and where those gaps were not remediated as part of the portfolio implementation, the implementations almost always failed. What follows is one example of an outstanding Strategic Portfolio Management implementation, Case 1, and Case 2-4 that are representative of major readiness gaps that were not remediated and resulted in failed Strategic Portfolio Management implementations.

Case 1. The highest score ever achieved in this assessment was by Yellow Roadway Corporation. For a description of their success see Garfein, S. J., Witty, T., (2005). Breakthrough: From FORTUNE's Least Admired to Most Admired in Five Years.

Case 2. The Absent CEO: A Failure of Leadership. The portfolio initiative was sponsored by a well-meaning middle manager, but never gained the support of the CEO. Lesson learned: Do not begin a Strategic Portfolio Management implementation without support at the most senior levels of the enterprise.

Case 3. Sabotaged by Lack of Support: A Failure of Information Technology. The senior executive of a major governmental agency effectively lead the development of a comprehensive portfolio management system. Unfortunately, and as is frequently the case in public agencies, the information technology organization did not report to this executive. Although IT support was identified as a major gap in the Readiness Assessment, the gap was not closed and the portfolio implementation failed due to slow system response times – a problems that would have been inexpensive to fix, but was not due to political infighting between organizations.

Case 4. Not in My Backyard: A Failure of Structure and Relationships. The chief executive of this national organization wanted to manage the portfolio of all projects across eleven regions. The portfolio management system was implemented and despite paying lip service to it, the regions passively resisted using it. Each region was already using its own, home-grown, portfolio system that was unique to the region. The powerful regional executives were unwilling to give up their islands of information and use the enterprise-wide system. The enterprise executive was to retire soon. The regional executives prevailed.