The 4 Pillars of Portfolio Management

Organizations implement portfolio management for many reasons. Some are looking for great returns, others want to focus on delivery, while some just seek to bring control to an ever-spreading range of projects.

Regardless of the reasons why an organization wants portfolio management, there are four fundamental aspects that a portfolio manager must master before they can be effective. I refer to these as the four pillars; each describes a specific focus area. Portfolio managers that develop a detailed understanding of each of these four areas will be better positioned to manage their portfolios—and be able to answer the specific questions that executive managers are fond of asking.

Pillar 1: Value 
Key question: What will I get for my investment?

Every sponsor handing over a project budget wants to know what they are receiving in return. The gold standard for measuring this outcome is to calculate the net present value (NPV) of the project. This expresses the total revenue attributable to the project as a series of discounted cash flows directly attributable to the project.

NPV requires projects to dig deep into the business rationale for the project. This can be difficult in specific areas like IT, where a system may be sold on the basis of improved team efficiency. However, it may be hard to provide verifiable proof of labor hours being saved.

Public sector organizations don’t always look for capital returns on the money that is invested in projects; they may instead be seeking improved societal outcomes. In purely economic terms, social benefit is referred to as a marginal utility. In other words, a benefit that is not directly quantifiable from the investment. For example, projects that reduce air pollution produce a societal impact on health and productivity. This cannot be directly measured, but can be assessed using statistical assessment of the population.

The portfolio manager can measure all projects in the portfolio using NPV or marginal utility to identify the set of projects that will deliver the greatest value. These are the prime candidates for delivery, but value should not be the only deciding factor.

Pillar 2: Capacity
Key question: Can we do this project?

The second view of a portfolio is to consider organizational capacity constraints. No company can do every possible project that is presented for consideration, and neither should they. Even tech giants can make this mistake (Yahoo’s well-known “Peanut Butter Manifesto” is a good example.)

Constraints take different forms across organizations. In some cases, the limit is the number of people available to do projects; in others, it’s the size of the budget or the limits of acceptable risk. The portfolio manager’s challenge is to identify these limits and appropriate policies to manage them. How is budget allocated within the organization? Which projects get priority when there is resource contention? What additional criteria must high-risk projects meet before they can proceed?

Pillar 3: Spread 
Key question: Are we doing the right projects?

This pillar concerns the overall mix of projects in the portfolio. Are they similar in budget and duration, or are there some that are very different? If projects are roughly homogeneous, there is more latitude around which project is selected and when it is done. By contrast, if there are one or two high-profile projects, then the portfolio manager needs to consider if they are treated as part of the portfolio or managed separately. Some portfolios create streams that single out large, high-risk projects for additional governance.

Spread is also concerned with the overall characteristic nature of projects in the portfolio. Some portfolios concentrate on incremental improvement, while others are aimed at disruption. For example, finance and property portfolios focus on incremental growth in assets, whereas a portfolio of pharmaceutical development may be aiming for the “next big thing.”

The choice of projects in the portfolio is usually structured to mirror corporate strategy. The relevance of projects that do not align with strategic intent should be deeply questioned. Statutory and risk imperative projects are often claimed as an exception to following strategy. However, an underlying strategy in any corporation is to stay in business.

Developing a feel for spread is as much an art as a science. It is therefore better to aim for an optimal mix of projects rather than the perfect portfolio. Bear in mind that there will always be last-minute additions—and the occasional senior manager pet project that takes priority.

Pillar 4: Health
Key question: Are we delivering?

A portfolio is not only about selecting the right projects, but also ensuring that they are done right. It’s a good idea to include metrics in portfolio reporting to keep track of how delivery is proceeding. Metrics such as percentage slippage in budget and time provide early warning of impending project problems. I have also seen portfolios that measure project manager professionalism in more subjective terms such as quality of reporting and communication with stakeholders.

The ultimate answer to the question of delivery lies in the assessment of benefits post-delivery. Did the project earn as much as it predicted? Has crime gone down in this neighborhood? How many watts of solar power were delivered? These are questions that can only be answered after delivery has completed, but it is useful for the portfolio manager to know these as a means of obtaining feedback on how effective delivery has been.

Final Thoughts

Portfolio management is a lot like juggling crystal balls—very impressive when you get it right, and horribly messy when you fail. The four pillars provide stability that helps you get it right more frequently.

I have run portfolios that ranged from construction investment to IT using control frameworks based on the four pillars presented above, and these portfolios have delivered. I hope these ideas help so that the next time the chief executive meets you in the corridor and asks one of these key questions, you are ready with a detailed answer.


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