Seven dimensions of portfolio management

Why portfolio management is inherently complex

bubble chart

This week, I discussed the various reasons why portfolio management is tough to implement with two different FLIGHTMAP clients. Where one of the talks focused on the behaviour side (the role of politics, intuition, culture), the second one was more about the inherent (almost mathematical) complexity. In our view of portfolio management as a decision-making process, it requires the analysis of a number of options (projects, or better alternative portfolios) against certain criteria to get to better decisions.

To get this analysis right, I am convinced it requires no less than 7 (seven) dimensions. Let me quickly introduce these dimensions:

  1. cost: how much do money we need to invest in the options
  2. value: how much do we get in return (in savings, profits, revenues)
  3. risk: what are the (main) uncertainties
  4. time: where do costs, value, and risk lie over time (short and long-term)
  5. resources: which people, supplies, equipment is involved (versus who do we have)
  6. strategy: how well does each alternative contribute to the business or company strategy
  7. market (or customer): where does the value come from (from outside)

Portfolio management requires seven-dimensional attention

The simplest (and most erroneous) portfolio management advice is to force-rank projects in a list from most to least important. This essentially tries to tackle portfolio management as a one-dimensional problem. Fortunately, most portfolio management tools and techniques have evolved beyond, This is confirmed by the popularity of the bubble plot with its capability to visualize four dimensions in a practical way: the two axes, the bubble size, and its color (see this post). Well-known examples include the risk-reward bubble, the cost-benefit analysis, the efficient frontier (plotting portfolios’ return versus their risk). Attempts to include even more dimensions in one chart (such as moving bubbles to include time passing, or attaching meaning the shape or gradient of the bubble) tend to be analytically correct but beyond useful for real decision support. It is not the visualization that is the bottleneck for dealing with seven dimensions, but the human brain…

This means the solution should not be found in a single more complex picture, but in a structured, stepwise treatment of the seven dimensions, two or three at a time, with the appropriate visualizations. The roadmap, linking markets, resources, and time, as well as the funnel, linking time, costs and risks, as well as time series for costs, value, and resources complement the right set of bubble charts. Have a look at FLIGHTMAP to see how this is implemented in a practical portfolio management application.

Do we really need all seven?

Let’s finalize with a check: can we miss one of these dimensions?

  1. Cost: with unlimited budgets we would not need portfolio management in the first place, so this one is in.
  2. Value: without looking at value creation from our investments, we might as well decide to do nothing, so this must be in as well.
  3. Risk: without including risk (or better uncertainty), the future is perfectly predictable so we only ever need to create one plan.
  4. Time: ignoring the time dimension (at all, or more common, looking only one year ahead) may give portfolios that are poor in the longer term, or unbalanced. Portfolios with an overemphasis on short-term projects (risking continuity in the long-term) are almost as bad as portfolios with only long-term projects (risking survival in the short-term).
  5. Resources: in many portfolios, resources are the real bottleneck, even with enough budget not all resources can be “instantly” made available to work on projects; this holds for people such as technical experts as well as “hardware” such as test sites.
  6. Strategy: without strategic alignment, random value creating portfolios can be assembled, and sustainable strengths not developed. Also, without a strategy filter, the amount of options to consider as candidates for the portfolio easily explodes, and hence makes the analysis on the other six dimensions intractable.
  7. Market (or customer): without market forecasts, or better the customer analysis, all of the above data lacks an external source for verification (initially as well as periodically).

Does this mean that all these dimensions are equally important for any given organization, at any portfolio review? Not at all. Some of the dimensions are also related (or correlated, in  mathematical terms). However, a sound portfolio review will at least briefly need to touch upon all seven dimensions. Let me know how you see the seven dimensions?

 

 

 

 

 

4 thoughts on “Seven dimensions of portfolio management

  1. Hi Jac – This is a very helpful starting framework for a group to gather common information about their candidate projects. One dimension I have used explicitly is urgency, which may be a combination of strategy and time. Of course there are ratios that can also be helpful, such as efficiency, e.g. risk adjusted value / cost or resources, or 2×2 views, e.g. value vs. risk, or constraint graphs, e.g. resources over time, etc.

    It will be interesting to read about your thoughts on various ways to assess each of the parameters in a high quality way, and the various graphical or tabular formats you have found for productive conversations with decision makers.

  2. Hi Jac,

    Long time no see (DS).

    Interesting article. It leaves me with a couple of questions and remarks.

    Risk:
    I definitely agree that risk is one of the dimensions in portfolio management.
    Risk however consist of attributes likelihood and impact, which may be expressed in financial terms.
    This would leave the option to omit the dimension it by adding it to the cost dimension.

    Value:
    Where would you place values that are more difficult to quantify like image and goodwill?
    Would you express them in financial term under value, or would you capture them under strategy (e.g. as image of one of the strategic goals) and/or risk (e.g. one of the risks is a damaged image)?

    Technology:
    Technology evolves over time, which may impact the expected cost to execute a project over time.
    e.g. With current technology a project is likely to cost 1M, however considering technical developments it is expected that it can be executed one year later for half the cost, due to the new technology.
    Where is this aspect addressed: In time/cost, market, risk or strategy? Or would an additional dimension be appropriate?

    Regards,

    Harald

    1. Hi Harald,

      Long time no see; thanks for contributing with some excellent questions and suggestions. They confirm that the dimensions are probably not final and not independent, but they trigger the right analyses and thereby improve portfolio decisions.

      Your point about risk is clear, however, uncertainty (or risk) is not just cost-related, also each of the other dimensions may be uncertain to some degree (value, strategic alignment, timing, etc.). For me, risk is so inherent to forecasting and it is so easily and conveniently discarded from most analyses that it “deserves” an explicit position in the seven dimensions.
      Regarding value, I usually make sure that all benefits are covered either by value or by strategy. In a way, you could say that the strategy dimensions captures the “hidden” (long-term) value creation, or the value that cannot (yet) be quantified in a financial way.
      In some portfolio management environments, technology would deserve its own eighth dimension. In others, it is captured by the combination of cost over time, or by resources over time. And in case of a technology strategy, well, the phrase speaks for itself.

      Jac

  3. Jac – I agree with your seven. Aside from the political challenges, which are always present, it is important to integrate these factors into a cohesive model that can be readily understood by decision makers. If done well, the model structure (logic) and outputs are transparent to all and can go a long way towards minimizing politics.

    You are probably aware of what we call “value maps” that derive from “influence diagrams” that address each of the factors and include the impact of uncertainty on key variables. Templates derived from value maps are fundamental to assuring apples-to-apples comparison within a portfolio. A well-designed model and template is the foundation for consistent evaluation and prioritization throughout the development process. One of our clients, for instance, is managing a “strategic” portfolio of some 3,000 projects, 200+ sub-portfolios and a master portfolio globally, 24/7 based on a single template – in the cloud.

    On another topic: have you seen my series of articles on the Six Principles of Strategic Portfolio Management? They are appearing in current issues of ValuePoint ™. I always respect your opinions and would welcome any comment you may have on the six principles.

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