Popularity and Effectiveness of Portfolio Methods

Which methods are the most popular, and which work the best? In practice, not surprisingly, the financial methods dominate portfolio management, according to a portfolio best practices study.19 Finan-

cial methods include various profitability and return metrics, such as NPV, ECV, ROI, EV, or payback period—metrics that are used to rate, rank-order, and ultimately select projects. A total of 77.3 percent of businesses use such a financial approach in portfolio management (see Figure 7.2-9). For 40.4 percent of businesses, this is the dominant method.

Other methods are also quite popular:

• Strategic approaches: Letting the strategy dictate the portfolio is a popular approach and includes strategic buckets, product road mapping, and other strategically driven methods. A total of 64.8 percent of businesses use a strategic approach; for 26.6 percent of businesses, this is the dominant method.

• Bubble diagrams or portfolio maps: Slightly more than 40 percent of businesses use portfolio maps, but only 8.3 percent use this

Figure 7.2-9 Popularity of Portfolio Methods

Financial methods

Strategic approaches

Bubble diagrams

Scoring models

Checklists

Others

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of Businesses Using Each Method

Source: Cooper, Edgett, and Kleinschmidt, Portfolio Management for New Products.

Figure 7.2-9 Popularity of Portfolio Methods

Financial methods

Strategic approaches

Bubble diagrams

Scoring models

Checklists

78%

177%

78%

73%

65%

39%

21%

38%

23% 21%

1 1 Worst Performers 1 1 Average Business 1 1 Best Performers

19%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of Businesses Using Each Method as their dominant method. The most popular map is the risk-versus-reward map in Figure 7.2-7, but many variants of bubble diagrams are used.

• Scoring or scorecard models: Scaled ratings are obtained by using scorecards at gates and are added to yield a project attractiveness score. These models are used by 37.9 percent of businesses; in 18.3 percent, this is the dominant decision method.

• Checklists: Projects are evaluated on a set of yes-no questions. Each project must achieve either all yes answers or a certain number of yes answers to proceed. The number of yes answers is used to make go/kill and/or prioritization (ranking) decisions. Only 17.5 percent of businesses use checklists, and in only 2.7 percent is this the dominant method.

Popularity does not necessarily equate to effectiveness, however. When the performance of businesses' portfolios was rated on six metrics in our study, those businesses that relied heavily on financial tools as the dominant portfolio selection model fared the worst. Financial tools yield an unbalanced portfolio of lower-value projects and projects that lack strategic alignment. By contrast, strategic methods produce a strategically aligned and balanced portfolio. And scorecard models appear best for selecting high-value projects and also yield a balanced portfolio. Finally, businesses using bubble diagrams obtain a balanced and strategic aligned portfolio.

It is ironic that the most rigorous techniques—the various financial tools—yield the worst results, not so much because the methods are flawed but simply because reliable financial data are often missing at the very point in a project where the key project selection decisions are made. Often, reliable financial data (expected sales, pricing, margins, and costs) are difficult to estimate in many cases because the project team simply has not done its homework. As one executive exclaimed as he referred to his business's sophisticated financial model being applied to projects with very soft data, "We're trying to measure a soft banana with a micrometer." In other cases, an overzealous project leader makes highly optimistic projections in order to secure support for his project.

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