How to Stand Up a Portfolio Management Office - Part 1
Updated: Oct 19, 2018
“All time management begins with planning.” Tom Greening
“Few things are harder to put up with than a good example.” Mark Twain
What is a Portfolio Management Office, and how do you know if you need one? That is an excellent question and one that I see argued about in many organizations. Most organizations default to either a Program Management Office or a Project Management Office, both of which are completely different things. It is incumbent on the trained Project Manager to help management understand that there are distinct differences in how you run a project, a portfolio and a program.
The PMBOK Sixth Edition is defines a portfolio as: Projects, programs, subsidiary portfolios and operations managed as a group to achieve strategic objectives.
PMI further defines Portfolio Management as the centralized management of one or more portfolios to achieve strategic objectives. There is also a “Standard for Portfolio Management” that contains additional details about the practical aspects of running a Portfolio Management office.
I wrote about the differences between a project, a portfolio and a program in one of my first posts. You can take a look at that here:
If you are studying for one of the project management certifications, please note that I occasionally take a different position than PMI based on over 20 years experience in the field.
What is a portfolio? Let’s describe a portfolio using a simple example. As stated above, activities (I am intentionally using a vague term) within the portfolio should all be aligned to a strategic objective. In our daily lives we do this all the time, we just don’t think about it in these terms.
Consider the portfolio “My Investments”. The strategic goal of this portfolio as I define it is to ensure that I can retire and live in relative comfort until I die. Given this strategic goal, what is in my portfolio?
My home is the first thing in the portfolio. For this specific investment, the goal is to provide my family shelter, accrue equity and take advantage of the tax benefits that home ownership offers. If the property appreciates in value, that is certainly a bonus but appreciation is not the primary purpose of the investment. As a home, there are other metrics to consider such as proximity to work, quality of schools and the design itself. Also notice that the "accrue equity" goal has a significant asset allocation component. Do I apply extra payments to accelerate equity, or do I allocate those potential resources elsewhere in the portfolio?
The next thing in the portfolio is a 401(k), and this activity has several objectives. I need a good rate of return, but as I get older I also need to shift my focus toward asset preservation. I want to maximize both my employers benefits and the tax advantages of this type of investment. Notice how these metrics can be completely different than for the investment “home” while still remaining aligned to the strategic goal of the portfolio.
The next thing in this portfolio are equity investments outside of the 401(k). As with the 401(k), I am looking for a good rate of return, but because this is outside of a tax sheltered vehicle I need to consider the tax impact of purchases, sales, dividends, etc. Even though this is almost exactly the same investment (equities) as the 401(k), the strategy, metrics and proposed resource allocation are different.
The next thing is gold and silver. This is pure a pure wealth preservation investment, so my expectations are completely different than when I purchase an equity. Notice that even within the fairly bounded category of “gold and silver”, I can choose to physically hold and store it, or I can invest through a fund that physically holds it. Which strategy I choose depends completely on my worldview. If I believe that there may be a time when “the system” collapses (think Venezuela), then I will want to be able to go to my safe and pull out my gold and silver to buy things. If I don’t believe that is a possibility, I will invest in a fund. Regardless of strategy, the investment is clearly aligned to the strategic goal.
I could go on, but you get the picture. Within these 4 simple examples, you can see that the activities, metrics, timelines and resource allocations all differ, however they are all aligned to the strategic goal of the portfolio “My Investments”.
Another common portfolio discussion focuses on inclusions and exclusions. For example, would you include the purchase of a new car in the portfolio “My Investments”? I could argue either way! And it matters, because once you decide it is “in”, then you need to determine the resource allocation, performance metrics and timeline.
That is the beauty of Portfolio Management. You can allocate resources, determine individual metrics and compare and evaluate dramatically different activities by assessing how they are contributing to the stated strategic goal as reflected through those individual metrics.
Over the next couple of weeks, I am going to logically go through the steps required to stand up a Portfolio Management Office. This will include the politics, measures, controls and resource issues.
Process matters. I have been a bit shocked and horrified by the spectacle of the United States SCOTUS nomination hearings. Whether you believe the nominee is fit to sit on the bench or not (I try not get into political issues!), the process matters and core principles must be followed. It says in Galatians, “Whatsoever a man soweth, that shall he also reap.” The modern interpretation of that is “what goes around, comes around!” If you are going to undermine a core principle like the presumption of innocence, then don’t be surprised when you find yourself on the wrong side of an unfounded allegation. Process matters.