Chapter 4: Using the Model – Project Portfolio Management, Second Edition, 2nd Edition

CHAPTER 4

Using the Model

Introduction

In the previous two chapters, the model for determining portfolio component contribution has been described from two perspectives. ­Chapter 2 introduced the core concepts of the model using fuzzy logic as the ­chosen approach and described how the combined contribution of portfolio components (PCs) to organizational objectives could be determined. The focus was on many components contributing to individual objectives. Chapter 3 demonstrated how the model could be extended to ­consider the total contribution of single components to multiple objectives. The model, as described in Chapters 2 and 3, therefore, addresses the many-to-many relationship between components and objectives and provides a mechanism for assessing or evaluating the contribution of components to organizational objectives. Now we are in a position to use the model in a real-life example.

In order to use real data, the author requested the participation of a large financial services organization in South Africa that he was familiar with. The participant organization provided data and information regarding a subset of their organizational objectives and the portfolio components initiated to address their strategy. The objective of this chapter is to demonstrate how the model can be applied using the information from the participant organization.

The chapter begins with a brief description of the organizational context of the participating organization. The portfolio components and organizational objectives used are also described and a scenario of how the model would be used is presented, observations from the scenario are listed, and the benefit of using the model is discussed.

Organizational Context

The organization chosen for the verification was a large financial services organization in South Africa. Permission to use the strategy definition and initiatives (projects and programs) in this process was granted by the Global CIO (Chief Information Officer). It is necessary to describe the context or business environment in which it operates to appreciate the nature of the organization’s operations, projects, and programs (portfolio components). The business environment within which any organization operates involves its internal environment and external environment. The external environment is divided into the macro and microenvironments. This is illustrated in Figure 4.1 and described in the following text.

Macro Environment

The macro environment involves the local, political, economic, and social aspects, which impact the organization. The case study organization (hereafter referred to as Company A) is a multinational organization based in South Africa. As a result, it has to operate in the various geographic locations in compliance with the relevant country’s political and legal requirements. The global financial environment at the time of writing this book had an impact on the available funds for portfolio component investments and as a result, the portfolio(s) had to be managed in terms of component termination in response to financial pressure.

Figure 4.1 Organizational context

Source: Adapted from Project Management Institute.1

Micro Environment

The micro environment relates to the company’s customers and clients, competitors, and industry regulator. Company A competes with other financial services institutions for market share within South Africa, Africa, and beyond Africa. Customers have more choice in terms of products and services as well as new channels for interacting with financial services organizations, such as mobile phone and online banking through the use of personal computers and tablet PCs. Application forms for bank accounts and insurance policies can be done electronically in a distributed fashion. Signatures on forms can be electronic using digital signatures, signature tablets, or finger print verification. The organization has to optimize its portfolio of projects and programs in a way that enables it to respond adequately and appropriately to market demands.

The micro environment exists within the organizational capacity, capability, and components that are executed to deliver value to the organization.

Organizational Capacity and Capability

The organizational environment involves the organizational capacity (available human and financial resources) and capability (human skills and technology). These factors play a role in determining the mix of portfolio components and the organization’s ability to deliver them. Other factors playing a role in the portfolio component investment choices in Company A’s recent realignment of strategy are the realignment of its performance management systems and the influence of major shareholders on its performance and operational focus. These factors must be considered during the financial period (or subsequent periods) and the portfolio mix of portfolio components must be adjusted in response to the preceding.

Portfolio Components and Organizational Objectives

Information gathering of the portfolio components and organizational objectives required for this process was undertaken by direct contact with the Enterprise Portfolio Management Office (EPMO) Operations ­Manager. This person was able to provide the author with the information related to the projects, programs, and organizational objectives. For the purpose of illustration, it was decided to keep the sample data to a manageable set. Three criteria or input variables, six components, and five objectives were used in this illustration of how the model would work.

Portfolio Components

The portfolio of projects and programs (portfolio components) at ­Company A extended from mega IT (information technology) and ­business projects and programs to small enhancements called work requests. Portfolio components are categorized, firstly, as signature ­programs, if they exceed a certain budget threshold, run over multiple years, or are implemented across multiple geographies. Large projects or programs that are under the scrutiny of the executive management due to persistent issues such as budget overrun, missed deliverable dates, and so on are also included in this category. Secondly, portfolio components are categorized as strategic initiatives. These components are under the purview of the Group Information Technology executive committee as strategic initiatives due to the fact that they were specifically identified as part of the Group IT strategy definition. The remainder of the portfolio consists of components that are (a) a mix of small, medium, and large projects and programs; (b) address a variety of objectives, such as innovation (new products); (c) regulatory and compliance requirements; (d) normal product, process, and systems enhancements; and (e) development and implementation of internal enablement systems (human resources, marketing, finance, risk, etc.).

Organizational Objectives Selected for This Exercise

The objectives identified for this exercise were defined in the Group IT division of Company A. The company followed the balanced score card methodology2 when articulating the strategic objectives and identifying the components required in achieving those objectives. The objectives were identified in response to key issues that the executive management felt needed to be addressed in the short term to move the organization forward.

Table 4.1 describes the objectives, measures, and targets. Table 4.2 lists the components that contribute toward the achievement of the objectives.

Portfolio components are associated with the selected organizational objectives as outlined in Table 4.2. The portfolio components are henceforth to be indicated by their abbreviations.

Mapping of Components to Objectives

Table 4.3 illustrates the mapping of portfolio components (PCs) to organizational objectives. The labels (A to H) in the cells (intersection of rows and columns) indicate which components contribute to what objectives.

While Table 4.3 describes the mapping of components to objectives, it should be noted that where a component contributes to more than one objective, not all of its deliverables are necessarily applicable to all objectives. The following list describes how each component contributes to each relevant objective.

Table 4.1 IT organizational strategic objectives

#

Objective

Description

Measure

Target

Definition and Comment

1

Business Growth

The bank’s vision includes the expansion of its operations (presence) into new global markets.

Growth

550 branches,

2.6 million Customers and 3.1 million active accounts across the rest of Africa in the next financial year.

The local market is fairly saturated with limited movement of customers and clients between existing banks in South Africa. Banks need to seek growth in new markets beyond the country’s borders.

2

Reduce the cost of operations in retail banking

Owing to declining profits and a global financial crisis, it is necessary to focus on reducing costs over the short to medium term to maintain shareholder value.

Cost

Reduce costs by 20% over three years

The cost and risk associated with maintaining aging systems and processes is increasing year on year. It has, therefore, become necessary to replace the core banking systems and processes.

3

Adhere to compliance and regulatory requirements

The banking sector authority introduces or amends regulation periodically. The bank needs to comply to maintain its banking license.

Adherence/regulatory requirement

Fulfil regulatory requirement 100% and within the specified timeframe

The executive has taken the decision to fulfil regulatory requirements 100% to avoid incurring fines or attracting negative publicity.

4

Improve the revenue generation capability

Revenue has been declining over the past three years due to the pressure of the global credit crunch phenomenon as well as new product and service offerings from competitors attracting clients away from the bank.

Revenue

Increase revenue by 10% per annum

The selected portfolio components will focus on new and enhanced product offerings that will generate new revenue.

5

Regain market leadership in the corporate investment banking segment

Increase EQD’s competitive advantage and achieve market share growth.

Market share

Increase market share by 10% in year 1 following technology platform replacement

The current year market share figures will be used as the baseline against which the target will be measured.

Table 4.2 Portfolio component descriptions

Portfolio Component

Abbreviation

Portfolio Component Description

Global Markets e-Commerce

PC1:GMC

The aim of this program is to build an electronic trading platform for Global Markets, which provides clients with research, pre-trade services, cross asset trading, pricing, risk management, liquidity distribution, and post-trade services. The rationale of the programme is for the bank to improve the global distribution of strategic products, facilitate business growth in less established markets, enhance cross-sell opportunities, and defend its existing franchise business.

Core Banking Transformation

PC2:CBT

The Core Banking Transformation Program (CBT) is a vital enabler of the company’s vision. Supported by a burning platform (declining profitability, ageing systems), the CBT program will assist in the transformation of the company by building the next generation bank. This will be achieved through defining and implementing a new business and operating model while rolling out a new core banking application and retiring numerous legacy systems.

Enterprise Content Management

PC3:ECM

This component is focused on the electronic recording, storage, retrieval, and disposal of unstructured data and provision of workflow capability. Deliverables include: Retention Management, Imaging at Source, Document Workflow, Online Finger Print Verification, and Electronic Formal Statements.

Consumer Protection Act

PC4:CPA

The component’s objective is to adjust policies, processes, procedures, and systems to comply with the CPA legislation, while at the same time ensuring the most positive outcomes for the business.

International Trade and Payments Solutions

PC5:ITAPS

The objective of this program is to provide a single integrated solution for Payments, International Trade Services, and non-structured Trade Finance. This solution will enable Global Transactional Products Services (GTPS) to provide clients with a global online channel to process payment and trade requests with straight through processing.

EQD Technology Platform Replacement

PC6:EQD

EQD is currently constrained from achieving its strategic objectives due to limitations in its technology platform. The unique software platform that has been deployed for EQD does not enable EQD to launch new products efficiently and in a cost effective manner. This platform constrains EQD from managing growing trade volumes, minimizing the cost of over borrowing for Stock Borrow facilities and reducing operational risk. From a technology perspective, the software system is unable to evolve and cannot be supported by the vendor. The proposed solution to these challenges is a technology platform replacement.

Table 4.3 Mapping of components to objectives

Organizational Objectives

1

2

3

4

5

Business Growth

Reduce the Cost of Operations in Retail Banking

Adhere to Compliance and Regulatory Requirements

Improve the Revenue Generation Capability

Regain Market Leadership in the Corporate Investment Banking Segment

Portfolio Components

PC1: GMC

A

PC2: CBT

B

C

PC3: ECM

D

E

PC4: CPA

F

PC5: ITAPS

G

PC6: EQD

H

Cell A: Component PC1 contributes to Objective 1 by establishing an electronic trading platform that will facilitate business growth.

Cell B: Component PC2 contributes to Objective 2 by implementing streamlined business processes and supporting technology that will reduce the cost of operations in the retail banking division.

Cell C: Component PC2 contributes to Objective 4 by delivering improved business processes and software applications that will enable the sales force to offer clients value-added services and products thereby improving revenue.

Cell D: Component PC3 contributes to Objective 2 by implementing a system for the electronic recording—(using scanning and e-mail, storage, and retrieval)—of client documents such as application forms and copies of identity and proof of residence documents. Keeping client data and information electronically reduces the cost of operations by eliminating the cost associated with printing, storing, and retrieving paper-based client documentation.

Cell E: Component PC3 contributes to Objective 3 by addressing the requirements of the POPI (Protection of Personal Information) act with regard to the management of client information.

Cell F: Component PC4 contributes to Objective 3 by addressing the requirements of the Consumer Protection Act.

Cell G: Component PC5 contributes to Objective 4 by enabling increased volume of transactions thereby increasing revenue.

Cell H: Component PC6 contributes to Objective 5 by implementing a new software platform that will enable the business to offer new products efficiently and cost effectively, growing trade ­volumes, reducing risk, and minimizing cost of over borrowing for Stock Borrow facilities. This will lead to a gain in market share.

Now that the objectives and components have been described and a mapping of the relationships between components and objectives has been done, we can proceed with illustrating how the model would work.

Applying the Model

Application of the model is achieved through the following phases:

  1. Set up.
  2. Define the membership functions for the input and output variables.
  3. Define the rules to be used in the rule engine.
  4. Describe the evaluation criteria (input variables).
  5. Evaluate each component’s contribution to organizational objectives in terms of the chosen criteria.
  6. Determine the individual contribution value for each portfolio ­component.
  7. Determine the combined contribution of those components that jointly contribute to an objective.
  8. Determine the total contribution of individual components to multiple objectives by aggregating the individual contributions.

Phase 1: Set up

The set up phase consists of two sub-phases. In the first sub-phase, the membership functions for the input and output variables are defined, while in the second sub-phase, the rules to be used in the rule engine are defined. This step is done once by the portfolio management team for the portfolio and was described in Chapter 2.

In preparation for using the model, the portfolio management team needs to define the rules in the rule engine. This team of people will have an understanding of the macro and micro environments, that is, (a) the organization, (b) its competitive, regulatory, and operational environment, and (c) the nature of its organizational objectives and projects and programs. These factors will enable them to define the rules in a way that will be appropriate for their organization. The variables that will be used to evaluate each component and the specific combinations of these variables and how they interact will influence the way in which the rules are defined. The portfolio management team will need to think carefully about how each variable relates to each other.

Phase 2—Describe the Evaluation Criteria (Input Variables)

For the purpose of illustration, the author has chosen to look at three input variables or criteria for evaluating portfolio components. The three criteria used are described as follows. At the end of each description, a table is provided that lists the possible evaluations and provides a guideline description for each evaluation.

PCVAR1: Input Variable 1 (Labeled as PCVar1 to Remain Consistent with the Description in Earlier Chapters)

PCVar1 represents Value. The value that a portfolio component is expected to deliver is an important criterion when determining the portfolio component’s contribution. Value considers the decision maker’s perception of how the component serves the organization’s objectives in the long term with respect to its financial attractiveness, that is, the economic feasibility that is measured by the component cost, contribution to profitability, and contribution to growth. Table 4.4 describes the linguistic values—poor, average, and good—which are used in evaluating PCVAR1.

Table 4.4 Linguistic value descriptions for Value (PCVAR1)

Evaluation

Description

POOR

The expected contribution to profitability is less than 1% of total profit in a given year

AVERAGE

The expected contribution to profitability is from 1% to 2.5% of total profit in a given year

GOOD

The expected contribution to profitability is more than 2.5% of total profit in a given year

PCVAR2: Input Variable 2

PCVar2 represents longevity. Longevity refers to the length of time before the product (delivered by the component) needs to be enhanced. This is relevant for all types of products whether it has to do with innovation or compliance and regulation. The longer a product is expected to last without needing enhancements, the higher the component evaluation. Table 4.5 describes the linguistic values: low, medium, and high, which are used in evaluating PCVAR2.

Table 4.5 Linguistic value descriptions for Longevity (PCVAR2)

Evaluation

Description

LOW

The product has a lifespan less than 2 years

MEDIUM

The product has a lifespan from 2 to 4 years

HIGH

The product has a lifespan of more than 4 years

PCVAR3: Input Variable 3

PCVAR3 represents the probability of successfully implementing the portfolio component. This refers to the likelihood of success in delivering the product of the component fully. The contribution toward organizational objective achievement is higher if the probability of implementation success is high. This variable will take into account the ability of the component to respond positively in uncertain environments. Factors that could influence the probability of implementation success include dependency on other portfolio components, resource availability, organizational restructuring, changes in agreements with third parties, and changes in technology. Table 4.6 describes the linguistic values—low, medium, and high—that are used in evaluating PCVAR3.

Now that we have described the three input variables and how they would be evaluated, we can perform the qualitative evaluation of each input variable per component.

Table 4.6 Linguistic value descriptions for Probability of successful implementation (PCVAR3)

Evaluation

Description

LOW

The probability for successful implementation is less than 30%

MEDIUM

The probability for successful implementation is from 30% to 70%

HIGH

The probability for successful implementation is greater than 70%

Phase 3—Component Evaluation

The first step in this process is to evaluate each component in terms of the three variables. The portfolio management team will be accountable for evaluating each component. They may do this with the help of the business heads or the investment committee. Essentially, a committee will need to assess the components in the portfolio. Then with an understanding of the organizational objectives as well as the portfolio components and the overall strategy of the organization, they can make a consensus decision regarding the evaluation of each component.

Table 4.7 illustrates evaluations that have already been done for each component contributing to the various objectives in the system. In the figure, the input variables described earlier are represented as follows:

V = Value L = Longevity P = Probability of implementation success

When applying the model, these evaluations will form the input to the model. The next step would trigger the fuzzification process, which takes these qualitative inputs and determines the degree to which these inputs belong to each of the respective membership functions. In an organization, the portfolio management team would evaluate the input variables of a portfolio component and determine to what degree it is poor, average, or good (in the case of PCVar1) or low, medium, or high (in the case of PCVar2 and PCVar3).

Table 4.7 Qualitative evaluations of portfolio components

Business Growth

Reduce the Cost of Operations in Retail Banking

Adhere to Compliance and Regulatory Requirements

Improve the Revenue Generation Capability

Regain Market Leadership in the Corporate Investment Banking Segment

Input variables

V

L

P

V

L

P

V

L

P

V

L

P

V

L

P

PC1: GMC

G

M

M

PC2: CBT

A

H

H

G

M

H

PC3: ECM

G

H

H

A

H

M

PC4: CPA

P

M

H

PC5: ITAPS

A

L

L

PC6: EQD

P

M

M

Values used for evaluating each variable:

Value (PCVAR1): P = Poor; A = Average; G = Good.

Longevity (PCVAR2) and Probability for successful implementation (PCVAR3): L = Low; M = Medium; H = High.

Phase 4—Determine the Individual Contribution Value of Each Portfolio Component

In order to determine the individual contribution of each portfolio component to specific organizational objectives, the fuzzification process described earlier is followed by the application of rules defined in step 1, and the result (or output) is defuzzified to obtain a value (number) that represents the individual component contribution.

The crisp contribution values for each of the components in this illustration are shown in Table 4.8.

Phase 5—Determine Combined Contribution

To determine the combined contribution of components that jointly contribute to specific objectives, it is necessary to enter the criteria evaluations for the relevant components into the rule engine simultaneously. For example, to determine the combined contribution of components PC2 and PC3 to Objective 2, their evaluations are entered into the rule engine at the same time. As described in Chapter 2, this is to ensure no loss of information in the fuzzy logic system. The rules described earlier apply when determining the combined contribution of two components to the same objective.

Table 4.8 Individual contribution values

Business Growth

Reduce the Cost of Operations in Retail Banking

Adhere to Compliance and Regulatory Requirements

Improve the Revenue Generation Capability

Regain Market Leadership in the Corporate Investment Banking Segment

PC1: GMC

0.500

PC2: CBT

0.750

0.750

PC3: ECM

0.815

0.500

PC4: CPA

0.245

PC5: ITAPS

0.375

PC6: EQD

0.500

The combined contribution of PC2 and PC3 to Objective 2, PC3 and PC4 to Objective 3, and PC2 and PC5 to Objective 4 are shown in Table 4.9.

Phase 6—Determine the Total Contribution of Individual Components to Multiple Objectives

The preceding phases illustrated the determination of individual and combined contributions of portfolio components to single objectives. In this section, we determine the total contribution of a single component to multiple objectives by adding the component’s individual contributions to multiple objectives. For example, PC2 contributes to Objectives 2 and 4. The total contribution of PC2 to multiple objectives is equal to its contribution to Objective 2 (0.750) plus its contribution to Objective 4 (0.750), which is equal to 1.500. Similarly, the total contribution of PC3 to Objectives 2 and 3 is equal to its contribution to Objective 2 (0.815) plus its contribution to Objective 3 (0.500), which is equal to 1.315. The remaining portfolio components each contribute only to single objectives. This view of the total contribution of portfolio components to objectives is illustrated in Table 4.10.

Table 4.9 Combined contributions—all PCs and objectives

Business Growth

Reduce the Cost of Operations in Retail Banking

Adhere to Compliance and Regulatory Requirements

Improve the Revenue Generation Capability

Regain Market Leadership in the Corporate Investment Banking Segment

PC1: GMC

0.500

PC2: CBT

0.750

0.750

PC3: ECM

0.815

0.500

PC4: CPA

0.245

PC5: ITAPS

0.375

PC6: EQD

0.500

Combined Contribution

0.500

0.940

0.600

0.800

0.500

There are now two perspectives to viewing the data in Table 4.10. Firstly, for each objective we have determined the combined contributions of the contributing components using additive aggregation and the bounded sum method described in Chapter 2. Secondly, for each component, we have determined individual contributions per objective and added these to give the total contributions of individual components to multiple objectives. The total individual component contributions allow us to determine a rank order of components. The ranking informs decision makers that the higher the rank of a component, the more significant it is in terms of its contribution to the objectives. Whether a component contributes to one or many objectives, understanding its total contribution will prevent a scenario where a decision to terminate the component is made based on limited knowledge of its contribution.

Table 4.10 Total contribution per component

Business Growth

Reduce the Cost of Operations in Retail Banking

Adhere to Compliance and Regulatory Requirements

Improve the Revenue Generation Capability

Regain Market Leadership in the Corporate Investment Banking Segment

Total Individual Contribution

PC1: GMC

0.500

0.500

PC2: CBT

0.750

0.750

1. 500

PC3: ECM

0.815

0.500

1.315

PC4: CPA

0.245

0.245

PC5: ITAPS

0.375

0.375

PC6: EQD

0.500

0.500

Combined Contribution

0.500

0.940

0.600

0.800

0.500

The rank order of the components in Table 4.10 based on their total individual contributions is as follows:

  1. PC2 with a contribution value = 1.500
  2. PC3 with a contribution value = 1.315
  3. PC1 with a contribution value = 0.500
  4. PC6 with a contribution value = 0.500
  5. PC5 with a contribution value = 0.375
  6. PC4 with a contribution value = 0.245

The next section discusses a scenario illustrating the impact of terminating a portfolio component.

Scenario—What if a Portfolio Component Is Terminated?

The management of a portfolio entails decision making about the portfolio components. Managing the portfolio involves deciding on which components to stop, delay, or fast track. The model presented in this book is designed to enable better decision making with regard to the portfolio. The researcher illustrates this through means of a scenario.

To begin, let us establish the context for managing the portfolio. Managing the portfolio, in this context, is not concerned with the process of selecting components that an organization would exercise when setting up the portfolio. Instead, it is the management response to a change in the organization’s environment that requires a change in the investment being made in portfolio components. The validity of the portfolio components is not questioned. It is assumed that the components in the portfolio have been selected based on criteria the organization uses for selecting components. It is also based on an investment management process that ensures each component is supported by a business case that has been validated in terms of the alignment to organizational objectives and achievement of financial and other measures.

The recent global economic crisis has caused many organizations to critically evaluate their investment in projects and programs (portfolio components). As a result, budget constraint has become a key environmental factor that has caused investment committees to re-evaluate their portfolios with a view to optimizing them. This leads to the consideration of portfolio components as participants for termination to free up resources (human and financial) for use on components that make a higher contribution toward the achievement of organizational objectives.

When considering portfolio components for termination, stopping, or delaying, investment committees in Company A ask the following questions:

  • How much have we invested in the component thus far and is the cost justified? This refers to the concept of sunk cost and the organization must evaluate whether continuing the project will help the organization regain the sunk cost, or whether it should walk away from the incomplete component (project or program).
  • What percentage of the total cost of the portfolio component is required to complete the component?
  • If the portfolio component has not commenced, can it be delayed to the next financial year?
  • If the portfolio component is in progress but the actual rate of spend (burn rate) is lower than planned due to insufficient resources, can the component be stopped or delayed until resources are available?
  • What has the portfolio component delivered to date and can the remaining deliverables be deferred to the new financial year?

An analysis of the preceding questions reveals that the focus is on what portfolio components can be salvaged rather than on which components should be completed to get the highest contribution toward achieving the organizational objectives.

Let us assume that due to budget cuts, the portfolio investment committee chooses to terminate one of the portfolio components. Table 4.11 shows three possible components for termination as well as the plausible reasons for terminating each component. The portfolio investment committee will consider these reasons, and through a process of discussion and consensus, decide on one of the components to terminate.

Table 4.11 Components identified for possible termination

#

Portfolio Component

Reason for terminating the portfolio component

1

PC1 (GMC)

The portfolio component has been identified for termination due to the continuous technical problems experienced by the project

2

PC3 (ECM)

The portfolio component has a low probability of success and should therefore be considered for termination

3

PC5 (ITAPS)

The portfolio component can be terminated as the cost to implementation exceeds planned budget significantly

None of the reasons given in Table 4.11 consider the degree of contribution toward achieving organizational objectives. Making a decision based purely on the preceding considerations will affect the level of success the organization has in achieving its objectives. The impact of terminating any of the three portfolio components will be illustrated in the following diagrams using the results from applying the model presented in this book. Table 4.12 shows the contribution of the portfolio components before the decision is made while Table 4.13 shows the contributions of the portfolio components after the decision to terminate the portfolio components.

Terminating PC1 would mean that no contribution is made toward the achievement of Objective 1 (business growth), as PC1 is the only component identified toward achieving Objective 1.

Terminating PC3 would result in the rules for determining the contribution to Objective 2 (reduce the cost of operations in retail banking) only being applied to PC2 (CBT Program). The rules for determining the contribution of PC3 will not be considered.

Removing PC3 also impacts Objective 3 (adhere to compliance and regulatory requirements). For Objective 3, only PC4 is considered when determining the contribution toward achieving the objective. The result of removing PC3 is that Objective 3 is achieved to a degree of 0.245 and Objective 2 is achieved to a degree of 0.750.

Table 4.12 Combined contributions before PCs are terminated

Business Growth

Reduce the Cost of Operations in Retail Banking

Adhere to Compliance and Regulatory Requirements

Improve the Revenue Generation Capability

Regain Market Leadership in the Corporate Investment Banking Segment

PC1: GMC

0.500

PC2: CBT

0.750

0.750

PC3: ECM

0.815

0.500

PC4: CPA

0.245

PC5: ITAPS

0.375

PC6: EDQ

0.500

Combined Contribution

0.500

0.940

0.600

0.800

0.500

Similarly, terminating PC5 will result in the rules being applied to PC2 in terms of its contribution to Objective 4 (improve the revenue generation capability).

The impacts of terminating PC1, PC3, or PC5 are illustrated in Table 4.13, which shows the comparative contribution before and after the components have been terminated.

Observations

Terminating PC1 results in no advancement toward achieving Objective 1 as PC1 was the only component identified to achieve ­Objective 1. The degree of change as a result of terminating PC1 is equal to (0.500 − 0.000 = 0.500), that is, the original contribution minus the resultant ­contribution after the component has been terminated is equal to the degree of change.

The degree of change in the combined contribution of PC2 and PC3, as a result of terminating PC3, to Objective 2 is equal to (0.940 − 0.750 = 0.190), while the degree of change in the combined contribution of PC3 and PC4 to Objective 3 is equal to (0.600 − 0.245 = 0.355). By terminating PC3, the combined degree of change in the contribution of PC3 to this set of objectives is equal to (0.190 + 0.355 = 0.545).

Table 4.13 Comparative contributions before and after components have been terminated

Business Growth

Reduce the Cost of Operations in Retail Banking

Adhere to Compliance and Regulatory Requirements

Improve the Revenue Generation Capability

Regain Market Leadership in the Corporate Investment Banking Segment

Before

After

Before

After

Before

After

Before

After

Before

After

PC1: GMC

0.500

PC2: CBT

0.750

0.750

0.750

0.750

PC3: ECM

0.815

0.500

PC4: CPA

0.245

0.245

PC5: ITAPS

0.375

PC6: EQD

0.500

0.500

Combined Contribution

0.500

0.000

0.940

0.750

0.600

0.245

0.800

0.750

0.500

0.500

With regard to PC5, terminating this component results in a change in total contribution to Objective 4 (improve the revenue generation capability) of 0.050 (i.e., 0.800 − 0.750 = 0.050). Terminating this component has a significantly lower impact to the achievement of the objectives than terminating PC1 or PC3.

The portfolio investment committee would want to terminate the component that would result in the smallest impact to the achievement of the objectives. Based on the observations noted earlier, and the expectation that only one of the three components needs to be terminated, PC5 would be the naturally selected component for termination as terminating this component results in the smallest impact (0.05) to the achievement of the organizational objectives.

Representing the Data Using Dashboards

Executive management in organizations make performance management decisions based on critical data and information presented in the form of dashboards, also referred to as scorecards or report cards. Management decisions often consider multiple criteria and large amounts of data. PfM decision making is especially challenging due to its complex and dynamic nature. Due to cognitive limitations of human decision makers, visual techniques can be used to compensate and improve the decision making capability.3 Dashboards present information regarding key performance indicators that management analyzes and makes decisions based on their analysis. The dashboard used here is an aid to show the results from running multiple scenarios providing information to the portfolio investment committee that enables better informed decision making regarding the management of the portfolio. By illustrating the scenarios and the results graphically, it adds to the understanding of what is going on in the portfolio. A graphic illustration makes comparisons clearer as it considers a number of dimensions simultaneously. The graphical representation of data is also easier and faster to process than textually based representation of data.

For the purpose of this illustration, the gauge chart was chosen as a way of representing the degree of achievement of organizational objectives. Gauge charts are well suited to showing the degree to which an objective is achieved as the point at which the needle rests illustrates how much of the objective is achieved. On a gauge chart, the value for each needle is read against the shaded data range or chart axis. (Note: In a color diagram, the shaded regions will likely be red, amber, and green). Gauge charts are useful for comparing values between a small number of variables either by using multiple needles on the same gauge or by using multiple gauges. The shaded data range resembles the fuzzy logic concept of looking at the data in terms of ranges rather than purely static values. Figure 4.2 illustrates how the degree of achievement of Objective 2 (which has a value of 0.940) is represented with the needle pointing close to the end of the white region.

Figure 4.2 Sample gauge diagram

The black, gray, and white regions that appear in the gauge partition the range of values into three segments. These regions provide further information to decision makers. If the needle points anywhere in the white segment, it means that the achievement of the objective is in a positive range. In other words, even though the objective is not being fully achieved, the degree of achievement is more than satisfactory.

If the needle points anywhere in the gray segment, it means that the achievement of the objective is in a warning range. The objective is only moderately achieved and the portfolio investment committee would want to consider enhancing the scope of the component(s) or identifying additional components that would contribute to the objective.

If the needle points anywhere in the black segment, it means that the achievement of the objective is in a negative range. The achievement of the objective is unsatisfactory and much more focus needs to be given to identify additional components that would contribute to the objective. A sample dashboard is illustrated in Figure 4.3, which shows the gauge charts for each of the objectives as well as supporting information. Each section is described as follows:

Section A: In this section, the organizational objectives including the measures and targets are described.

Section B: Here the portfolio components contributing to the organizational objectives are described.

Section C: The mapping of portfolio components to objectives is illustrated in this section. The individual component contributions, as well as the combined component contributions per objective, are listed.

Section D: The gauge charts represent the degree to which each objective is achieved. Each gauge represents a different objective and the needle (arrow) indicates the degree to which the objective is achieved.

With reference to the What-If scenarios in the previous section, we can use gauge charts to illustrate the scenarios. Figure 4.4 through 4.6 show the original position of the degree of achievement of each of the objectives before terminating any component. This is represented by the black arrows (needles) in each of the gauge charts in these figures. The same gauge charts also show what the position would be if any of the selected components were terminated. This is shown such that the needle (arrow) in the gauge chart of the impacted objective appears as a dotted arrow and in a different color. By illustrating both positions on the same gauge chart, it is possible to show what the difference would be after an associated component is terminated.

Figure 4.4 through 4.6 show that:

The black arrows represent the original position before any of the three components are considered for termination.

Figure 4.3 Sample dashboard

Note: The sample dashboard is for illustrative purposes only.

Figure 4.4 Gauge chart showing the original and new objective achievement positions after terminating PC1

Figure 4.5 Gauge chart showing the original and new objective achievement positions after terminating PC3

Figure 4.6 Gauge chart showing the original and new objective achievement positions after terminating PC5

The dotted arrow indicates the position if PC1 is terminated
(Figure 4.4). The difference between the solid and dotted arrow visually illustrates the impact on the achievement of Objective 1.

The dotted arrow in Figure 4.5 indicates the impact of terminating PC3 on Objectives 2 and 3.

The dotted arrow in Figure 4.6 indicates the impact of terminating PC5 on Objective 4.

Furthermore, the new projected contribution values are presented against each scenario below the gauge charts to show quantitatively the expected impact on each objective of terminating the different portfolio components.

It can be seen in the preceding Figure 4.4 through 4.6 that ­Objectives 1, 2, 3, or 4 would be impacted if the selected components were terminated. The secondary arrow in each of the respective gauge charts as well as the new contribution values in italic font in the rows below the gauge charts illustrate this. For Objective 1, the dotted arrow (needle) points to the zero position to indicate that terminating the component (PC1) contributing to this objective will result in zero contribution to Objective 1 (Figure 4.4). Terminating PC3 would impact Objectives 2 and 3. It can be seen from Figure 4.5 that the degree of change in achieving Objective 3 is bigger than the degree of change in achieving Objective 2. Importantly, however, the termination of PC3 impacts two objectives and the cumulative impact would be greater than terminating PC1. The termination of PC5 will result in a small impact to Objective 4. The dotted arrow in the gauge chart illustrates this for Objective 4 in Figure 4.6.

The portfolio investment committee can now monitor the achievement of the objectives and establish the impact a change in circumstances has on the achievement of the objectives. The model enables the portfolio investment committee to make better decisions about the termination of components such that their impact is minimized on organizational objectives.

Scenario—What If a Portfolio Component Is Fast-Tracked?

The previous section focused attention to the impact of terminating portfolio components on the achievement of organizational objectives. Portfolio decision making, however, must also consider the possibility of fast-tracking (expediting or speeding up delivery of) a portfolio component. In this scenario, the extent to which an objective is achieved does not change, as we are not removing or adding portfolio components. The decision to fast-track portfolio components is driven by the ranked importance of the organizational objectives. If the organization wants to place emphasis on achieving a specific objective due to changes in the market or competition, knowing which components contribute to the objective and the extent to which they contribute will enable decision makers to fast-track the relevant portfolio components and, where necessary, initiate new components to close any gaps in achieving the strategy. By means of an illustration, if we refer to Figure 4.3 and nominate Objective 4 as an objective that must be achieved early, then the components that must be fast-tracked are PC2 and PC5. The gauge chart also indicates that there is still a gap in achieving the objective fully, implying that one or more components can be initiated to close this gap.

Benefit of Using This Model

The scenarios illustrate that without a way of determining portfolio component contributions to organizational objectives, it would be quite easy for the portfolio investment committee to terminate a component that makes a significant contribution to organizational objectives while other components, which make a smaller contribution, survive. Similarly, without a clear understanding of the rank order or weighting of objectives, the wrong components can be fast-tracked, drawing resources and attention away from those that do need to be fast-tracked. The model provides decision makers quantitative information, based on their qualitative evaluation of portfolio component contribution to organizational objectives that enable them to make decisions related to managing the portfolio. The portfolio investment committee can now decide with confidence as to which components to terminate or fast-track. This action would ensure that the organization makes the right decisions regarding its investments in portfolio components as they relate to achieving the organization’s objectives.

The model aids decision making by focusing on component contribution. This enables decision makers to choose components for termination with the lowest contribution to organizational objectives, thereby minimizing the impact on the achievement of those objectives. It is acknowledged that this is one of the few considerations that decision makers would take into account when optimizing the portfolio.

Conclusion

This chapter looked at the illustration of the model described earlier in Chapter 2. A participant organization was used to provide information regarding their organizational objectives and portfolio components, which were used in this process. The organizational context was described to provide background for the objectives and portfolio components chosen.

The objective of this chapter was to demonstrate consistency and accuracy in the model by using the information from the participant organization. The illustration of how the model would work included (a) evaluating each component, (b) determining the individual contribution of each component to the relevant objectives, (c) determining the combined contribution of those components that jointly contribute to specific objectives, and also (d) determining the total contribution of individual components to multiple objectives.

In addition, what-if scenarios, including the use of gauge charts to graphically represent the data, were presented. The scenarios illustrated how the impact of decisions regarding portfolio components can be quantified, thereby enabling decision makers to get an insight into their decisions before committing them and thus ensuring better informed decision making.