Best Practices in IT Portfolio Management

Business executives love to hate information technology, yet IT expenditures continue to increase. In 2002, $780 billion was spent on IT in the United States alone, with IT budgets of individual companies, such as Citigroup Inc., reportedly as high as $4 billion. At the same time, accounts of wasted investments make headlines, providing fuel for IT skeptics: An estimated 68% of corporate IT projects are neither on time nor on budget, and they don’t deliver the originally stated business goals. Some even claim that during the last two years, $100 billion to $150 billion of U.S. IT projects have failed altogether.1

Considering that IT budgets comprise hundreds or even thousands of projects running simultaneously across functions, business units and geographies, it’s a challenge to select projects for investment that are synchronized with corporate strategy. Charged with managing such projects effectively, executives are asking, “How do we maximize the business value from IT investments?”2

The answer may be IT portfolio management (ITPM) —that is, managing IT as a portfolio of assets similar to a financial portfolio and striving to improve the performance of the portfolio by balancing risk and return.

Analogies that build on financial-portfolio theory or on concepts about product and research-and-development pipeline portfolios (which are more akin to IT portfolio management than to financial portfolios) are not new.3 ITPM has evolved into a combination of practices and techniques used to measure and increase the return on individual and aggregate technology investments — existing and planned — and to reduce risk. An investment portfolio comprises all direct and indirect IT projects and assets, including infrastructure, outsourcing contracts and software licenses.

To find out how extensively ITPM is used in large U.S. companies, we conducted research from November 2002 to March 2003. The research — consisting of a survey of 130 Fortune 1000 chief information officers and in-depth interviews with selected respondents — measured ITPM adoption, identified implementation hurdles, assessed benefits, defined best practices and formulated strategies for success. (See “About the Research.”)

About the Research »

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References

1. For a comprehensive review of IT project failure rates, see “CHAOS Chronicles v3.0,” published by Standish Group International, Inc., West Yarmouth, Massachusetts. For related articles, see T.H. Davenport, “Putting the Enterprise Into the Enterprise System,” Harvard Business Review 76 (July–August 1998): 121–131; and D. Rigby, F. Reichheld and P. Schefter, “Avoid the Four Perils of CRM,” Harvard Business Review 80 (February 2002): 101–109.

2. For other recent research on strategy and technology alignment, see C.K. Prahalad and M.S. Krishnan, “The Dynamic Synchronization of Strategy and Technology,” MIT Sloan Management Review 43, no. 4 (summer 2002): 24–33. For a discussion of the alignment of IT objectives with corporate strategy, see P. Weill and M. Broadbent, “Leveraging the New Infrastructure: How Market Leaders Capitalize on Information Technology” (Boston: Harvard Business School Press, 1998); and P. Weill and M. Broadbent, “Management by Maxim: How Business and IT Managers Can Create IT Infrastructures,” Sloan Management Review 38, no. 3 (spring 1997): 77–92. For research on the link between productivity and information technology, see E. Brynjolfsson and L.M. Hitt, “Beyond the Productivity Paradox,” Communications of the ACM 41, no. 8 (August 1998): 49–55. For a review of the research literature, see B. Dehning and V. Richardson, “Returns on Investment in Information Technology: A Research Synthesis,” Journal of Information Systems 16, no. 1 (spring 2002): 7–30.

3. F.W. McFarlan, “Portfolio Approach to Information Systems,” Harvard Business Review 59 (September–October 1981): 142–150; and H. Markowitz, “Portfolio Selection,” Journal of Finance 7, no. 1 (March 1952): 77–91. For a compilation of research papers on project portfolio management, see L.D. Dye and J.S. Pennypacker, eds., “Project Portfolio Management: Selecting and Prioritizing Projects for Competitive Advantage” (West Chester, Pennsylvania: Center for Business Practices, 1999). For an executive management text, see C. Benko and F.W. McFarlan, “Connecting the Dots: Aligning Projects With Objectives in Unpredictable Times” (Boston: Harvard Business School Press, 2003).

4. L. Bannon, “Harrah’s Names Loveman as CEO — Former Harvard Professor Applied Math Models To Build Brand Loyalty,” Wall Street Journal, Sept. 5, 2002, sec. D, p. 5.

5. To benchmark the ITPM process within companies for our research project, we created the maturity model. The framework was loosely based on the capability maturity model (CMM) for software development. See M.C. Paulk, B. Curtis, M.B. Chrissis and C.V. Weber, “Capability Maturity Model, Version 1.1,” IEEE Software 10, no. 4 (July 1993): 18–27. Several consulting companies and U.S. federal government agencies have proposed ITPM maturity models. However, none has rigorously validated the frameworks with research data. For example, see U.S. General Accounting Office (Accounting and Information Management Division), “Information Technology Investment Management: An Overview of GAO’s Assessment Framework,” document GAO/AIMD-00-155 (Washington, D.C.: U.S. GAO, May 2000).

6. For additional information about the scorecard approach, see R. Kaplan and D. Norton, “The Balanced Score Card — Measures That Drive Performance,” Harvard Business Review 70 (January–February 1992): 71–79.

7. Weill, “Leveraging the New Infrastructure,” 244–255.

8. For a discussion of business analytics at Harrah’s Entertainment, see G. Loveman, “Diamonds in the Data Mine,” Harvard Business Review 81 (May 2003): 109–113.

9. The analysis follows P. Weill, “The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector,” Information Systems Research 3, no. 4 (December 1992): 307–333.

10. Depending on the responses to survey questions, we scored individual companies to indicate their ITPM maturity relative to other companies. Statements such as “A centralized project office monitors current and future IT projects” and “My IT department actively tracks and monitors benefits realized after a project is complete” were scored on a seven-point Likert scale with 1 corresponding to “strongly disagree” and 7 corresponding to “strongly agree.”

11. The authors would like to thank Sandeep Shah, research associate at the Kellogg School of Management, Northwestern University, for his help with the data analysis.

12. For a review of finance applied to IT projects, see M. Jeffery, “Return on Investment Analysis for E-Business Projects,” in “The Internet Encyclopedia,” vol. 3, ed. H. Bidgoli (New York: John Wiley & Sons, 2004), 211–236.