“We can’t talk about the portfolio until you explain why Varmenase revenue is 5% less than last year’s forecast!”
In almost every large organization a huge percentage of the effort in the “portfolio” process is spent “tying out” the new project valuations with the old ones. Teams ardently create reports to explain why the net present value of cash flows (NPVs) have increased or decreased since the last reporting cycle, and exactly what assumptions caused the changes. They even have to explain in detail why the passage of time has changed each project’s value.
The impact of all of this work on decision making? Zero.
Whether the impetus for the tying process is driven by fear, distrust, a lack of transparency, or politics could be another post entirely, so we’ll focus instead on the consequences and remedies. The biggest downside of the wasted hours is the opportunity cost: Instead of focusing on discussions and analyses that lead to decision-making, all of the effort goes into the tying exercise. One company has two dozen analysts who spend a month tying out their projects, and spend, collectively, zero time thinking about which projects are worth doing.
There are also less obvious, perverse impacts. We’ve seen cases where portfolio teams have new numbers but prefer to use the old ones because they don’t want to redo the tie-out analysis. So much for living in an era of real-time information.
How can we solve this problem? The portfolio team needs to:
- Persuade the executives that the inputs, algorithms, and resulting forecasts are credible
- Focus the process on decisions rather than data
There are two methods our clients have used to do this successfully: Holding data review meetings and focusing discussion on the portfolio.
Hold Data Review Meetings
The easiest way to derail a decision-making meeting is to raise questions about the data. To avert derailment, hold a separate data review meeting prior to the decision-making meeting. The meetings can be held at a functional level (e.g. one meeting to review sales forecasts, another to review costs) or at a divisional level (e.g. group similar projects and hold one meeting to review all the data for each group) to review all the data for groups of similar projects). In the spirit of “speak now or forever hold your peace”, invite the decision makers. This isn’t a panacea–there will still be data questions in the review meeting. But there will be fewer questions, and those that arise can be talked down by the those who participated in the data reviews.
Focus Discussion on the Portfolio
We’ve heard story after story of portfolio managers handing executives reams of project information and expecting them to divine a portfolio. The portfolio review meeting is aptly named; its raison d’être to think about the portfolio, not the projects. If you give decision-makers information about projects, you’re implicitly suggesting that they focus on projects and project objectives. Instead, give them portfolio scenarios and focus on how the scenarios achieve portfolio objectives. When the conversation is focused on closing a sales gap of hundreds of millions of dollars, executives no longer feel the need to argue about why Project X’s sales are off by 1%, or even 10%.
No one kills a project because the valuation changes by a certain amount; they kill a project because there are better alternatives. So let’s stop spending time explaining that time passes, costs are sunk, and market forecasts are updated, and instead spend our time thinking about what projects the organization should actually fund.
For more information on improving portfolio reviews, you can find case studies on R&D portfolio management applications of the Enrich Analytics Platform on our website.
