Saturday 2 August 2014

Change the world with project portfolio management

In Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919) a US superior Court held that pioneer car maker Henry Ford owed a duty to profit his shareholders, rather than to benefit the community as a whole or employees. Ford was prevented by the Court from investing a $60M capital surplus “to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes”, and was required to pay special dividends to shareholders.

While the Corporations Law in Australia, and similar legislation in other countries, has over time broadened the duties owed by Directors, the primacy of shareholder return nevertheless remains the chief lens through which company decisions get made.

This was very strongly borne out in interviews I conducted recently with 7 CEOs (2 of whom are also Chairpersons), 3 CIOs and 1 CFO. All of the leaders I spoke to work for large organisations ranging in size up to $87B by market capitalisation and 40,000 employees. One of the practical constraints on the power of these leaders to implement change is risk aversion in the broader industry context, particularly amongst large institutional shareholders and creditors such as banks and superannuation funds, to anything that might potentially impact steady returns. As one CEO put it
In the world’s business model today that’s a major thing for any chief executive, you get up in the morning saying you want to change the organisation you probably won’t have a job in a couple of weeks … you’re not going to deviate from my risk versus return thanks very much.
It is no wonder that corporate social responsibility and environmental sustainability objectives struggle for priority with initiatives that bring a financial return. Unfortunately, stories about companies engaged in environmental damage, sweatshops and anti-competitive practices in the pursuit of profit are all too common.

If this is to change, businesses need a broader conception and longer term view of value built into their DNA. Putting this into practice also requires businesses to adopt entirely new valuation techniques that are aligned to this more developed notion of value. Today’s most popular techniques, such as Net Present Value and Payback period, are designed to select for short term financial return. The challenge is to be able to measure value in a more flexible, nuanced and multifaceted way that strikes a better balance between profits and other objectives.

Project Portfolio Management (PPM) has an important and emerging role to play here. There are 3 PPM techniques, in particular, that can help business strike this balance between their corporate social responsibility and environmental sustainability objectives and the need to be profitable:
  1. Portfolio segmentation
  2. Multi attribute scoring models, and
  3. Portfolio balancing.

Portfolio Segmentation

Portfolio segmentation refers to splitting the funding available for undertaking projects and other initiatives into segments that reflect high level strategic choices. Projects are prioritised within each category rather than all of them competing for the same investment dollar. This ensures that there is a guaranteed level of investment in each strategic category.

These categories can be defined to reflect an intelligent balance between profitability and other objectives. For example, a business might segment its capital budget as follows:
  • Customer satisfaction (25%)
  • Employee engagement (10%)
  • New revenue (20%)
  • Cost savings or avoidance (20%)
  • Carbon neutral (5%)
  • Indigenous communities programs (10%).
In this example, projects that contribute toward carbon neutrality do not need to compete directly for funding with projects that grow revenue or reduce costs.

Multi Attribute Scoring Models

Multi attribute scoring models measure the relative potential contribution of projects and other initiatives against a set of strategic objectives or parameters. Parameters are created for criteria that are important to an organization – e.g., improving customer service, productivity improvement, new product development and growth, cost savings or avoidance, strategic market positioning, and so on. Scoring against these parameters may involve a numerical scale or use natural language that is mapped back to a numerical scale.

Parameters can be defined that reflect corporate social responsibility and environmental objectives alongside profitability objectives. Models can be refined over time and objectives weighted to reflect the relative importance that the organisation places on them. A high degree of sophistication can be achieved with such models, bringing greater precision to the way organisations go about determining which projects and other initiatives they invest in.

Portfolio Balancing

Finally, portfolio balancing refers to assessing whether a portfolio is optimal taking into account timing, spread of strategic objectives served, business impact, risk versus reward, and resource availability. This often involves undertaking “what if” analysis and comparing the results.

This “helicopter view” of the overall portfolio affords opportunities to adjust and improve the portfolio and here is also an important opportunity for an organisation to assess its role as a responsible corporate citizen. It can ensure, in effect, that it puts its money where its mouth is.

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