Monday 29 January 2018

AI, robotics and automation, IoT, block chain, big data: why portfolio management is mission critical in an age of disruption and innovation?

Written by Bryan Fenech, Director - PPM Intelligence.

Disruptive digital technologies, including IoT, AI, robotic automation, block chain, crypto currencies and big data, are impacting all industries and no organisation is immune.

Business and government leaders face increasing demand to respond effectively to the threats and opportunities presented by these developments. This response requires innovation in products, services, internal processes and systems as well as, in many cases, whole-of-organisation transformation.

The more disruption there is in the marketplace the greater the demand for change in organisations, both in terms of volume and complexity.

Finding and articulating these opportunities and threats, and formulating a well considered response, isn’t the hard part. Most leaders understand how:

  • AI can be used to tame complex organisational problems cost effectively
  • Robotics can be used to automate the supply chain to make it more secure, less prone to defects and cheaper to run
  • Product designs can be enhanced through the incorporation of internet connectivity into all of our buildings and infrastructure, automobiles, appliances and gadgets
  • Block chain can be used to digitally automate smart contracts in a way that is secure and reliable,
  • Big data can be used to identify what customers want and how much they are willing to pay for it, and
  • Information security is under increasing threat.

The possibilities are not understood just on a theoretical level. There are working examples of all manner of application, often developed by startups with limited funding, and business and government leaders know that they will get left behind if they don’t act quickly. One revealing example is how Fintech startups are hastening the arrival of open banking, one of the more significant disruptions to the industry ever.

Most organisations have a digital strategy or at the very least a long wish list of initiatives that they would like to pursue.

The greater difficulty lies in executing all of these initiatives successfully. The main challenge is that there are so many change initiatives being put forward, each of which is seen as in some way mission critical, but undertaking them all is well beyond the available human and financial resources of the organisation.

Choices need to be made regarding the prioritisation, sequencing and risk-appropriateness of change initiatives. Organisations that can marshal and deploy their people and assets most effectively to prioritise and execute multiple change initiatives simultaneously have a distinct competitive advantage and are more likely to succeed.

This requires “portfolio thinking”. Portfolio management techniques were originally purpose-developed to help investment fund managers make sense of multiple value drivers, realisable over different timeframes and subject to complex and changing assumptions, constraints, dependencies and opportunity costs, for different classes of financial instrument. Such portfolio management techniques, used by the managers of investment and superannuation funds for selecting and managing portfolios of stocks, options, futures and derivatives for decades, have been found to be highly applicable to selecting and managing portfolios of projects and programs.

Portfolio management provides evidence-based decision-making techniques for making prioritisation, sequencing and risk versus reward choices. The following examples illustrate this point:

  • Financial return models such as NPV and Payback Period can be used to identify what subset of initiatives is the most financially rewarding long term or best supports short term cashflow.
  • Multi-attribute scoring models can be used to identify which initiatives best align with the organisation’s strategy.
  • Critical Chain Method can be used to sequence the execution of initiatives optimally around resource bottlenecks.
  • Monte Carlo Simulation can be used to identify “efficient frontiers” in order to optimally balance risk versus reward.
  • Dependency analysis can reveal the true impact and significance of risks by identifying "domino effects" on downstream dependent change initiatives.
  • Benefits projections can help identify what needs to be done to ensure benefits are realised.

Leaders need to be knowledgeable of and be able to apply portfolio management techniques within a structured process. It is therefore an increasingly critical leadership competency and organisational capability in an age of disruption and innovation.

Just as an investment manager understands the language of stocks, options and futures so too 21st century business and government leaders need to understand the language of portfolio analytics, decision-making and governance in order to ensure that their digital strategies don't end up in the too hard basket or, worse still, use up a significant amount of investment without result.


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