Value

For many chief information officers (CIOs), IT portfolio management has clear benefits as a business tool. At the top of the list: it provides a holistic view of a company's IT strategy and helps align IT assets with business goals.

The concept of IT portfolio management has its origins in financial portfolio management, where managers balance riskier investments with conservative plays. An IT portfolio manager "in this case a CIO or an IT decision-maker" constantly monitors the performance of the portfolio. Are projects on track? Should project A be discontinued? Does project B need help?

But some CIOs are taking this concept to the next level: managing their projects not as a conservative investor would, but as a venture capitalist (VC) might. In this way, CIOs up the risk/reward ratio, treating projects as startups and using VC funding and management strategies to help quickly differentiate between winners and losers.

After all, CIOs and venture capitalists have a primary shared value: achieving superior returns, whether its from an investment of cash into a startup or an investment in IT assets.

"Companies often continue pushing through IT projects even though business needs and IT requirements change," says Brad Boston, CIO at Cisco Systems. "As a result, the company doesn't always realize the business rewards that were originally expected."

How to Act Like a VC

Managing technology projects as a venture capitalist requires CIOs to tolerate a higher level of risk, says Jim Noble, CIO for Altria Group, the parent company of Kraft Foods, Philip Morris International, and Philip Morris USA.

"Portfolio management for high yield essentially has the CIO acting as a venture capitalist," Noble says. "Instead of managing for efficiency, which would be analogous to managing a low-risk, low-yield index fund, the venture capitalist CIO aims to beat the market. This requires him or her to evaluate the risk and reward and green-light fast execution projects with high rewards."

Venture capitalist CIOs find and create a mix of low-, medium-, and high-risk projects. They then adjust the risk profile within the portfolio to align with their overall corporate business strategy. The critical factor, according to Howard Rubin, a senior Gartner advisor at Gartner in Stamford, Connecticut, is to mix the levels of risk throughout the portfolio. "CIOs as VC fund managers don't always put their investment into safe bonds "they want junk bonds in the portfolio, too," says Rubin.

Managing projects as a venture capitalist also affects the planning of long-term projects. The VC CIO will put in place several levels of funding reviews for each high-risk project, much as a VC has rounds of funding with an "up or out" mentality. In this way, the project can respond to changing business or technology issues. And, the usefulness of individual projects clearly aligns with the overall business objectives.

"You can borrow several important VC characteristics "for instance, he will have an aggressive portfolio of projects and will take positions on those high-risk projects," says Noble. "In this scenario the CIO has to know when to cancel troubled initiatives, and this means his funding must come in rounds, much like funding a startup company. You have to be able to walk away, or withhold the next round of funding, if the project will not fulfill its business outcomes."

The higher the risk, the more aggressive the CIO should be with the funding rounds for a project, says Rubin. "You manage them differently according to risk category," he says. "Lower risk projects are more like long-term bonds, while higher risk projects require more project milestones and different rounds of funding."

Noble uses what he calls "real options" as a crucial part of assessing and managing the portfolio.

"Real options convey the right, but not the obligation, to obtain the benefits of a future ownership," he explains. "Using real options in IT means that CIOs will institute a series of scale up or out evaluations for each project, like the reviews at most VC firms. This avoids escalating commitment to troubled projects, and buys time to decide whether the option will be in the money when exercised."

As a result, you don't have to make one of those all-or-nothing decisions on projects. Instead, you can continue to gather data as the project progresses, using that to inform your decision in each funding round.

"The ability to take a position on an IT project allows you to evaluate up-to-the-minute data and make critical, informed decisions on an ongoing basis," says Cisco Systems Boston. "It's like being able to adjust your course in a boat race based on the weather or wind speed, and generally be adaptable to changing business conditions, which all successful managers need to be able to do."

The Payoff

Managing portfolios like a venture capitalist will ultimately result in IT projects and technology choices that prove to be a better fit for your business strategy "and the bottom line. Noble, in his role as president-elect of the Society for Information Management (the professional association for CIOs) feels that the profession has become excessively risk-averse, having lost much of its appetite for innovation and risk-taking through the dot-com bust. "A VC mindset could allow us to restore technology innovation to its proper role as a driver of business change, rather than IT simply being an order-taker," Noble says.

"By taking positions in emerging technologies, the information technology function has an opportunity to exert a major influence on the prosperity of their company," says Noble.

That should prove to be the ultimate goal for any CIO.

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