Balancing portfolio’s without buckets

Balancing, buckets, and budgets

FLIGHTMAP BalanceIn our FLIGHTMAP portfolio management tool, we struggle to support the creation of  strategic buckets prior to the portfolio management process. One of our clients put it quite well: “How do we translate strategic importance into a budget if we do not know what it takes to reach our strategic goal?”. As an example, they cited a high-priority strategic topic that could be addressed with a relatively cheap innovation: a subsidized process “greenification”.

The flaw of buckets is that they focus on allocating costs, whereas strategy should start with putting in targets. In our portfolio management practice, we do work on assessing each (tentative) portfolio composition in terms of its balance. In a way, this is similar to the strategic bucket approach, but it directly looks at all balance dimensions, not indirectly via costs.

Assessing portfolio balance

I think of balancing the portfolio as a way to address multiple goals and as a way to reduce risk. This leads to the following balance options:

  • strategic contribution per horizon/geography/market;
  • value creation per horizon/geography/market/risk level;
  • costs (or resources allocated) per stage/horizon/geography/market/risk level.

Whereas most portfolio literature suggests to look at bubble plots or pie charts to assess balance, we have found the need to quantify balance. This makes it tractable to some form of analysis, and it stimulates up-front discussion about desired balance. This quantification has been addressed in a recent research project with Eindhoven University of Technology’s Innovation Management education program.

The Portfolio Balance Key Performance Indicator has a value between 0 and 100, where 100 means perfect alignment between actual portfolio balance and desired balance, and 0 means maximum deviation:

Balance KPI
Portfolio balance KPI (Schaminee, 2013)

Let me explain the formula in a bit more detail:

  • RMSD is the root of the mean squared deviations of actual versus planned balance values
  • MAXRSMD is the theoretical maximum over all actual distributions of this same deviation

The ratio between these two translates into the Balance KPI. The right half of the formula indicates how to calculate RMSD (by summing all the squares of the differences between actual and planned per bucket, indicated by the delta symbol), and MAXRMSD (by summing the squares of the Desired Distribution DDi values in a special way, with DDmin indicating where the desired balance has its minimal value).

With this KPI in place, alternative portfolio compositions can now be compared not just on their value and their cost, but also on their balance. Portfolio’s with a poor balance can be filtered out of the decision-making process. The research is available from Bicore or TU/e on request, and the KPI has been implemented in FLIGHTMAP 4.0.

How important is balance?

Across portfolio management implementations, balance plays a different role. On one hand, we have business portfolio’s where balance is almost ignored, where on the other side we run a public-private international portfolio portal where the balance view is the most popular one (and distribution of funding across the participants is a main portfolio composition driver).

How about your portfolio, what are the main balance targets?

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