What's beneath all the buzz about internal "portfolio management," and how does it relate to the popular concept of "managing expectations?"

In IT circles, portfolio management is being used to describe a wide range of initiatives, from project-approval processes to project management methods and tools.

What's the real meaning of the term, and what should IT leaders be doing about it?

The Problem

Imagine this: You go to the grocery store and hand its manager $50, saying that's all you can afford for the week. You then explain that you're hosting a dinner party for 12, and you want to serve caviar, steak, and chocolate truffles.

What happens in the real world? The manager laughs and walks you over to the hamburger!

But isn't this exactly what many companies expect of their IT departments?

IT is given a fixed budget for the year; then, clients feel free to ask for anything they think they need all year long. They demand virtually infinite products and services for a fixed price. And it's the CIO's fault when the IT department can't deliver.

Hence, the CIO feels the need to manage clients' expectations downward so that IT can appear successful.

The Real Meaning of the Term

Of course, "managing expectations" doesn't really mean controlling other people's feelings. It refers to the processes that reduce clients' demands to fit within available resources. "Demand management" is another term for exactly the same concept.

So let's get to the root of the problem.... Unreasonable expectations are created when we give IT a budget and then expect IT leaders to decide what to spend it on. As hard as they try to make the right decisions, it becomes their fault when they can't please all the clients all the time.

The key to fixing this problem is to view IT as a business within a business, working in a marketplace of diverse clients with unlimited needs but finite spending power.

In this context, the IT budget is a "pre-paid account" -- a checkbook of money put on deposit with IT for clients to buy products and services throughout the year.

Instead of IT leaders writing the checks, clients should decide what they will and won't buy from IT. The checkbook (the IT budget) is like an investment portfolio, and it's up to clients to decide what investments they'll make -- hence the term "portfolio management."

When clients manage the checkbook, they don't blame IT when they can't have all they want. The IT organization is not the constraint; it would be happy to sell clients anything and everything. The constraint is the size of their checkbook; clients just can't afford all they want.

In this spirit, many IT organizations have established a client steering committee to decide priorities. But there's a lot more to portfolio management than this.

Implementing portfolio management involves two key steps:

1. Full Cost

Portfolio management begins with the budget. Instead of deciding IT spending based on prior years, executives allocate funds based on the investment opportunities at hand.

This requires an IT budget that estimates the full cost of each product and service -- each deliverable -- instead of forecasting the various expense codes for each group as in traditional budget processes.

Costs include both direct costs and a fair share of indirect costs such as overhead. Thus, IT can build in necessary expenses for sustenance activities like professional development and product research, within the limits of competitive pricing.

The costing processes is well defined in the Full-cost Maturity Model (FMM), and the tools are now available.

A budget that describes the cost of your deliverables positions clients to defend the funding for the projects and services they need. This is only appropriate, since clients are the ones who suffer when the IT budget is cut -- they're constrained to buy less in the year ahead.

2. Checkbook Management

Budgeting fills up "checkbooks." Then, clients "write checks" throughout the year for the products and services they need. This dynamic portfolio-management process keeps IT priorities aligned with ever-changing business strategies.

To set this up, business units appoint "pursers" to manage their checkbook. This is often called the IT portfolio management process. Pursers are trained, and clients are informed of the process for gaining approval of their requests.

There are also some minor accounting changes. IT budget is held in a "checkbook" account (rather than distributed among IT managers). As work is delivered, an invoicing process moves money into IT managers' revenue accounts to offset their expenses. Rates (with or without actual chargebacks) are extracted directly from the budget to ensure consistency and avoid redundant cost analysis.

Thus, clients (specifically, their pursers) manage a budget that dwindles to zero by year end. IT managers, on the other hand, are measured by their revenues versus expenses -- not the traditional "actual versus planned expenses" which are a function of what clients choose to buy from them.

The Result

Portfolio management has proven to be the most effective way to manage clients' expectations.

In fact, portfolio management does more. It adjusts the IT budget based on investment opportunities. It dynamically aligns IT with business strategies. And it empowers IT staff to set prices that are sustainable.

The key to effective portfolio management is this: Design a comprehensive set of resource-management processes based on market economics and the business-within-a-business paradigm.