(Extended) Enterprise Portfolio Management / E(2)PM - Methods

What is Enterprise Portfolio Management?

This can best be answered by considering three epochs in the evolution of investment management procedures in both public and private-sector organizations. In the decades before 1990, organizations developed and implemented project-level investment selection and control methods and procedures. These procedures helped decision-makers select the individual projects and initiatives that were most closely linked with the strategic direction of the organization. Once selected, project management and control procedures were put in place to ensure that a funded project achieved its intended objectives within cost, schedule, technical, and performance baselines.

In the second epoch, which evolved in the 1990s, organizations recognized the need for a portfolio management approach to investment decision-making. Here, the focus was at a more aggregate level (rather than at the individual project level). A cornerstone of the portfolio management approach is the select-control-evaluate paradigm put forward by the GAO in 1997. This framework helps decision-makers achieve organizational goals and objectives by identifying, selecting, financing, and monitoring the most appropriate mix of projects and initiatives.

The third epoch-enterprise portfolio management-is now in the evolutionary stage. An enterprise involves an amalgamation of interdependent resources (people, processes, facilities, and technologies) organized to obtain a strategic advantage in support of mission or business objectives. Thus, by its very nature, enterprise investment management is larger in scope and more complex than either project management or portfolio management. This is because, at the enterprise level, decision-makers must not only consider the investment options under their control but also take into account how the alternatives they have analyzed affect, and are affected by, other components of the enterprise.*

IFEAD will conduct in 2005 a research project to address enterprise portfolio management and how it relates to the overall enterprise life cycle and the enterprise architecture of an organization. The emphasis is on developing and integrating value based methods, tools, and procedures. While today much of the focus in the public and private sector has been on business investments and IT cost reductions, the enterprise-level portfolio management process has applicability to other types of investment as well, such as human capital and non-IT assets, addressing all the elements of the Extended Enterprise Architecture Framework.

*Definition by the Mitre Organization, USA

Definition of (Extended) Enterprise Portfolio Management (E2PM)

Extended Enterprise Portfolio Management (E2PM) is an integrated strategic investment planning, portfolio risk analysis and operating system for scheduling, settlement and risk management that facilitates tight alignment of strategic objectives with operational actions, covering business and technology. E2PM works by enabling separate organizational entities to use a common enterprise information management platform, common enterprise analytical methodologies and a common enterprise strategic business framework for optimal business & technology decisions, ensuring successful execution on the corporate enterprise strategy.

The Building Blocks of EPM, Triple-A

The three core values of EPM that allow organizations to become more focused can be summarized as: Alignment, Agility and Action.

Alignment – Executives need to know if organizational units are following the corporate strategy or if they are doing their “own thing”. EPM forces organizational units to use a common decision-making framework at the beginning of each decision-making process, thereby giving the CEO the ability to make sure that the organizational unit is on the same page with the corporate enterprise strategy. In addition, EPM provides the CEO with real-time information that will clearly indicate whether or not the organizational unit is on board with the implemented strategic objectives. The alignment of all organizational units has to be forced by the corporate development and maintenance of the overall Enterprise Architecture.

Agility – EPM is using information from a consistent enterprise-wide framework measured against the organization's risk and tolerance strategy, thus preventing executives from making critical financial decisions blindly. The corporate Enterprise Architecture can deliver the necessary information on the operational and technical risks.If a portfolio is underperforming because of for example, depressed prices, and cash flow is not enough to cover debt, CEO’s need to know when that cash flow is going to turn around. EPM gives executives the information and tools to calculate what the cash flow risk is and to determine if their available options are consistent with their risk tolerance strategy.

Action – Once a strategy is in place, CEO’s need to know if the organization can actually implement it on a day-to-day operational basis. The corporate Enterprise Architecture can deliver the necessary information on the operational and technical risks. The essence of EPM in the operational time horizon is the optimization of the tradeoffs between operational performance, financial performance, technical performance and load and contractual obligations in a fashion that is consistent with overall corporate enterprise strategy. Where are the risks in that portfolio? What day-ahead and real-time decisions have to be made to maximize the value of the generating assets? Has a facility or service gone down longer than originally scheduled? Because EPM links all of the pieces from separate organizational units together, information on each of them can be sent back to the CEO informing him in real-time as to how they are doing.

Sarbanes-Oxley
Public Company Accounting Reform and Investor Protection Act

Supporting Sarbanes-Oxley Compliance with Enterprise Portfolio Management

Michael Lester | Chairman, PMXML Consortium

Under the Sarbanes-Oxley Act of 2002, publicly traded companies are now required to implement processes that support an "adequate internal control structure and procedures for financial reporting." As part of Sarbanes-Oxley, company executives must certify their financial results and disclose information about material changes to their financial condition in a rapid and current basis. Enterprise Portfolio Management (EPfM) provides essential visibility into the portfolio of corporate investments - projects, applications, assets - that can affect that financial condition.

In the last few years, everyone has been affected, in some form, by the misuse of corporate resources and power. As a result of that misuse, Congress passed the Sarbanes-Oxley Act that requires publicly traded companies to ensure the integrity of financial results through a certification by the CEO and CFO. With the support and mandate of executive teams, many companies are investigating and initiating activities to support this new legislation and the regulations established by the Securities and Exchange Commission (SEC). The SEC is requiring organizations to build a framework for information gathering, analysis, and validation.

Many companies have immature processes for gathering information to assess the state of projects, assets and other investments that can directly affect the company's financial condition. In addition, these processes are often inconsistent across business units, the type of information varies, and the information is often outdated by the time it makes it to the desks of the executive team. How can a CEO validate that the business has rapid and current visibility to the changes that can affect the company's financial condition?

The first place most executives will turn to understand what activities can affect the financial condition of the company is the CFO and the Finance Department. The reports generated by Finance can provide an excellent picture into how money is being spent or planned to be spent, but it can't tell you that your major ERP initiative is 2 years behind schedule. Using the information provided by Finance is a little like piloting an aircraft by watching the fuel gauge. You can see that you have enough fuel, but can you tell that you're flying into a headwind, there is a thunderstorm ahead that you need to avoid, or that you're about to experience some mechanical problems with the aircraft? Companies seeking to comply with Sarbanes-Oxley need more than financial reports to understand the material changes that can affect their financial condition.

The information gathering framework required by the SEC is similar to the first critical step for implementing Enterprise Portfolio Management (EPfM). Due to the similarities, EPfM is getting a lot of attention as a business discipline that can significantly improve compliance with Sarbanes-Oxley. At a high level, EPfM leverages a cycle of planning, analyzing, and monitoring investments - projects, processes, applications, and assets - to enable smart decisions that keep the business focused on returning the most value. To support the cycle of planning, analysis, and monitoring, companies begin the process by building a portfolio - an inventory of all current and future investments. This first step is not uncommon to the many reports and spreadsheets that are probably compiled and used today. The key is making and keeping the information about the portfolio up-to-date. A number of software tools exist that facilitate the EPfM process, using integration into project planning systems, financial systems, asset management systems, and others to keep the information in the portfolio current. These tools eliminate the manual processes to build and refresh the portfolio that typically require many people and a considerable amount of time.

Once the portfolio inventory is established, and processes are in place to keep it maintained, benefits can almost immediately be recognized. Visibility into all of the company's investments enables management to identify and eliminate redundant investments, focus resources on critical, strategic investments, and avoid investments that have unacceptably high risk or low return on invested capital (ROIC). EPfM uses this visibility to allow the company to stay focused on business priorities, avoiding the commitment of human and financial resources to investments that may be non-strategic, low value, or just wasteful. Like the new high-tech systems used by the military to redirect resources towards crucial, strategic points in an operation, the real-time monitoring provided by EPfM tools give executives the same abilities with business resources. Businesses must be able to pinpoint and rapidly realign their portfolio of business investments to address competitive, regulatory or internal issues that cause the business to falter or fail.

Once a business has a current portfolio of investments in process, the next step is to begin planning future investments and understanding their impact on the other investments in the portfolio. As time progresses, the status or health of existing investments may falter, making it more appealing to redirect resources from a failing investment towards a proposed or postponed investment. Additionally, businesses can use the portfolio information to prepare possible scenarios to support executive planning, or risk mitigation. It is very similar to the different types of portfolio mixes you see when you discuss your personal investment portfolio with your financial advisor. They will prepare a model of how your current investments are allocated, and then compare it against various scenarios that are optimized to achieve specific goals such as long-term growth or short-term risk avoidance. Portfolio planners for the business can use the portfolio inventory to model scenarios that can help direct the organization towards its goals.

The information gathering framework mandated by the SEC needs to be dynamic and support new or changing regulations, so any processes and tools considered need to support this type of dynamic environment. Because of the nature of EPfM as a continuous business process, it is an ideal way to support the current legislation and support future regulations. In addition, with a proactive EPfM practice, a company can provide real-time results to support Sarbanes-Oxley and leverage that information to become a more agile business, gaining a positive competitive advantage.

Michael Lester is a Senior Product Manager for Pacific Edge Software where he leads product strategy for Pacific Edge's Portfolio Management solutions. Mr Lester has led the PMXML Consortium since joining Pacific Edge. He has over ten years of experience in project and quality management, including personal and enterprise solutions for Microsoft, Dell, BuildNet, The Cobalt Group, and Franklin Covey. He studied Political Science at Brigham Young University.