Enterprise Investment Portfolio (Part 1) – Improving Performance

Posted on July 9, 2009

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IMGP3466Looking at  Internal Investments as a portfolio put in perspective the way Enterprises are internally investing in changes considering risk and opportunity at a global level rather than at project level.

The following classification of investment (introduced in  “How to fight “Business Urban Legends”) follows this approach: 1- Improving Performance 2- Sustaining the current Performance 3 – Survival & Adaptation to context

Improving Performance

THINK PORTFOLIO OF VALUES: Chris Potts, a well-known corporate strategist, suggested to approach the performance of portfolio as a set of values rather than the cumulative NPV (Net Present Value)generated by individual projects (I recommend his book “FruITion: Creating the Ultimate Corporate Strategy for Information Technology“) . Using this approach, arbitration of investments is appropriately Aligned With The Overall Company Strategy. Each organization can define its own strategic measurements dashboard and consider it as a validation point whilst investing in changes. Concepts such as “Balanced Scorecard” are perfectly adaptated to this.

THINK RISKS & OPPORTUNITIES : Back to the proposed classification, “Improving Performance” investments are specific in nature as they challenge the way an Enterprise is generating value. Processes, organizations and technologies will need to be overhauled to reach a better level of performance. These changes creates Risks, that need to be mitigated, & Opportunities, that need to be exploited in the future.

THINK UNCERTAINTY OF RETURN: Another uncertainty to consider is linked to reaching or not the level of performance expected by the investment at a specific time. This has to be managed according to the “risk profile” of the company. Two classes of variables are usually responsible for this situation: The Execution Alea (Initiative on time, on cost, performance expectation fullfilled etc…) and the Context Alea (Expected Market growth, variation of the competitive landscape, regulatory environment, Industry Economics etc…).

LET SEE HOW IT WORKS: Let’s have now a closer look at the footprint of this type of investment, and how other categories might be impacted. For example we could consider improving our market reach by investing in expanding international dealer/distributor agreements, restructuring a division by industry, implementing a Customer Analytic System, developing promotional materials in different languages. All of this make sense and priorities will have to be established.

Most of the time companies are looking at the amount to invest, when they can expect a return and what are the risk (Execution Risk) and make their decision. This is rather a limited view of economical decision as it push them to choose the shortest term return – hence minimizing the risk. In addition when designing the investment, it is common to only integrate the one time cost of the initiative and new recurring costs they might incurred.

By using the suggested approach, organizations should look at the Impact of such grow and :

– Understand the necessary adjustments to sustain, in the future, such level of performance. For instance, how our back-office is going to handle an increase level of orders, or talking with people that are not English native.

– Understand that new practice adjustment will need to take place; for instance doing business with dealer abroad might required specific regulatory and market expertise that an organization does not have today.

– Understand that implementing a quick IT package could generate redundancy of data which could further create inconsistency and negative productivity impact.

Conversely,

– understanding that dealers or industry associations might be interested by getting some analytics and paying for this could generate a future stream of revenues if we are investing in the right infrastructure.

– Understanding that investing in the comprehension of market network, and industry network work could lead to earlier leads and thrive the company branding.

SO WHAT? All of this is common sense, when a Disciplined Approach is used and we are looking the Value Created Globally not project by project; it becomes rather evident,  that analyzing investment thru the cumulative list of expected returns from individual initiatives could lead to an increased Risk and missed Opportunities.

I hope you enjoyed this first section.

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