Part 3: Portfolio Intake Review – Understanding How Individual Proposals Contribute to Executing Strategy

December 15, 2020 | By Donna Fitzgerald

Under normal circumstances, organizations should always prioritize strategic programs first and then look at what is being proposed for ongoing operations. With the pandemic, ongoing operations might be the number one strategic imperative.

In our last blog, we strongly recommended changing your intake process to start with a roadmap from each business unit and enough of a project description that it would be possible to evaluate it. In this blog, we’ll discuss what you do with these documents once you receive them.

Classifying investment proposals with a strategy matrix

Our go-to solution is always some variation of a strategy matrix (based on the work of Kaplan and Norton). The columns can be changed, and the rows can be changed. The rows and the columns can even be flipped and still work. In Figure 1.0, The most common strategies companies have discussed with us are listed across the top.

Strategy Matrix

Use this matrix to classify all the investment proposals you receive. If you can’t figure out where to place a proposal, arrange a meeting, show the requestor the matrix, and ask them to pick a column. DO NOT put any proposal in multiple buckets.

The reason for this prohibition is that we want to create a very tight alignment between a strategy and the benefit an investment is intended to deliver. If we assume that Acme (figure 1.0) is a consumer products company with a line of pest control products, we wouldn’t be surprised to find out that investment 17 is intended to develop a better mousetrap. The company has recently learned that the old mousetrap isn’t popular with customers because they don’t like disposing of a live mouse once it’s caught in the trap. Investment 17 would create a trap that injected a small dose of poison into the mouse, making disposal easier. The primary goal of this investment is to raise the gross margin on a pre-existing product by making it more useful to the consumer. If the product designers and the market people are right, a customer will happily pay more for something that makes mouse disposal easier.

There are only two sides to the gross margin equation: lower cost or a higher price. If at any time the product looks like it might fail to produce one or the other, it needs to be terminated immediately.

Suppose the company had mistakenly said that the new mousetrap was “half new product” and “half gross margin,” the odds that it ended up being too little of either become enormous. Investments should always be placed into a single category that will drive the highest value for the company because the value case dictates how and why the investment is being made in the first place.

Assigning value to the result

Before describing the rows, we’d like to say one more thing about the columns. At the initial intake phase, you will always have more projects than you can fund, and you certainly will not have firm estimates of how much each investment will cost.

What you should have is an estimate of how much the requestor is willing to PAY to achieve the result of the investment. For most people, the “willing to pay” number is directly tied to their perception of the benefit. If they can’t give you a number, then ipso facto they don’t have a clear enough concept of value to be proposing the investment at this time, and they should delay submitting it until they are clearer.

In some cases, the sponsor of the investment is adamant that a particular investment project begin now in order to firm up the costs, at which time it can be justified. This is the classic thinking behind a stage-gate process. Without going into a detailed history of the stage-gate process, unless later stage development costs of an investment are astronomically high, it’s the wrong approach for most companies. A better approach is a standalone feasibility project, and then once the idea has been proven, a separate investment proposal should be prepared.

Assigning proposal categories

At this point, all the ideas are formally included at the top of the portfolio funnel (see Fig 2.0). The next step is to review what’s been submitted and begin to position the proposals into the appropriate rows.

Portfolio funnel

Direct Financial Benefit is defined as one where the benefit can be tracked directly in the P&L as product revenue from a specified product or channel, or as a cost reduction (again cheaper materials, or few materials, etc.) This category will generally be small since the inclusion criteria has no wiggle room.

Customer Facing means just what it says. If it doesn’t impact the end-customer, it doesn’t go there.

Better Ways of Getting Work Done would classically be called productivity or process improvements. Examine this category carefully. Using balanced scorecard logic, you don’t want to over-invest here.

Company Culture and Employees is more important now than it’s been in decades. We would offer one caveat. Listen to your employees and invest in fixing the real problems rather than spending money glossing over the symptoms. We’ve spoken to multiple organizations where simple things like celebrating successful project completions and making sure employees aren’t burning out are significantly more important than foosball.

The final step is for senior management to reject anywhere between a third and half of the proposals (assuming you are picking investments for the next quarter or half-year.) The key criteria for acceptance is the decision that “yes, these appear to be the best use of our money and our people’s time NOW.”

In our next blog, we’ll discuss how to do a collaborative value case.

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