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EXHIBIT 4.2 Application Portfolio Example
Applications Portfolio
Unit of Work





of Use



Sales Force Automation # Transactions S 3 Trans/Day 25 3 1 Low
Sales Decision Support # Transactions S 1 Invoice Days 42 5 4 Low
Sales/Marketing Database # Payments S 3 $ In Process 12 1 2 High
Accounts Payable # Invoices B 5 Call Wait 39 1 2 Med
Financial Consolidations # E-Inquiries B 3 Billing Days 16 4 2 High
Five-Year Customer History # Clients S 1 Client Proc Qual 43 2 2 Med
Marketing Geographic Planning # Sales S 3 Inquiries 11 1 1 High
Human Resources Planning # Retained B 1 Retention Rate 15 1 2 Med
General Ledger # Accounts B 1 Customer Sat. 32 2 4 Low
Customer Information # Account Inquiries S 4 Percent Online Data 15 2 3 Med
Origins of Portfolio Management

Exhibit 4.2, a manager can correlate the cost of the application (column 4) with
its Service Level and Quality (columns 7 and 8). In this example, the highest-
cost application (Accounts Payable) is also almost the lowest quality and serv-
ice. The manager could ask why is the company spending so much to use a
resource (the application) that performs so poorly?
This example, however, does not demonstrate the real power of portfolio
analysis. Rather than examine an individual case, a portfolio enables manage-
ment to look at the entire portfolio holistically and identify the set of resources
that are poorest performing, or weakest in quality, and so forth.
Exhibit 4.3 captures the intent of this analysis. The exhibit lists a portfolio
of applications, ordered in “business impact” sequence. The items at the top are
those that have the highest business impact.

EXHIBIT 4.3 Portfolio Management Objectives:
Improve Performance of the Portfolio

In this example, the purpose of portfolio management is to reduce the num-
ber of low-impact applications. By examining the entire set of lowest-value appli-
cations, management can determine which should be abandoned or replaced.
Further, combining business impact information with cost information could
focus on the major targets of opportunity for improvement, which would be
those low-impact applications that have high cost.

Portfolio management originated as a general approach to managing a set of
financial resources.
The term “portfolio management” originated in financial asset management.
Fifty years ago, the economist Harry Markowitz introduced the idea (and won
the Nobel Prize in 1990) as a way to manage a set of financial investments. His

conception included the mathematics to evaluate each individual investment in
a consistent way, evaluating returns and risks.3
Today, most people are familiar with portfolios as an ingredient of personal
financial management. Exhibit 4.4 shows a typical portfolio presentation for an
individual™s investments. The presentation gives the individual an idea of the
present allocation of resources to different types of investments. The underlying
idea is that the individual may wish to manage the investments by setting tar-
get percentages for each type of investment; the target percentage may change
with different investors and different investment objectives.

EXHIBIT 4.4 Example of Simple Portfolio Management
in Personal Finance

Real Estate Precious Metals

10% 20%

Money Market




The idea of portfolio management has since been applied in many business
functions. In a strategic planning context, the Boston Consulting Group applied
the idea of portfolios as a way to manage and assess the lines of business (or
strategic business units) that a corporation may hold. As a result of their work,
the terms “star,” “cash cow,” and “dog” became parts of a common jargon for
defining the potential a line of business may have. Other business functions also
adopted this idea. Many marketing departments, for example, use portfolio
management to manage and assess marketing campaigns and products. Some
product development activities use it to manage and assess their portfolios of
product development projects.
In IT management, managing information technology resources as a set of
portfolios is an idea that has been emerging for 30 years. The idea originated
in the 1970s, with the work of Warren McFarlan4 and others, who wrote exten-
sively about the idea, applying it to application development portfolios. More
IT Portfolio Management in Prioritization

recently, the federal government has promoted the idea of portfolio manage-
ment as a senior management tool for prioritizing and managing application
development projects.5

In the mid-1980s, we applied portfolios and portfolio management ideas to IE
Prioritization.6 Essentially, Prioritization works on the individual items that
make up a portfolio: Which are the highest priority projects, and which should
we invest in?
One problem we faced was that application development really isn™t a sin-
gle thing, subject to a single set of rules. Some application development proj-
ects represent new strategic development, while other projects only enhance the
capabilities of existing applications. Still other projects exist simply for the main-
tenance and support of existing applications. Strategic and enhancement proj-
ects are typically mid-size to large projects. They usually result from planning
and should be connected to business strategy. Maintenance projects are typically
very small; they are usually not the result of planning but rather responses to
needs that pop up as an application matures, typically not in support of a busi-
ness strategy but rather in support of an application and the business process it
supports. In the context of Prioritization, these differences cause problems if we
attempt to apply the same rules and processes. See Exhibit 4.5.

EXHIBIT 4.5 Early Portfolio Management in
Information Economics ” Separate Pools
of Application Development



The practical problem for many companies is that the dollars spent on main-
tenance projects are much larger than the development projects costs and often
are not easily prioritized by business impact. Whereas development projects can
be prioritized effectively by looking at the strategic intentions of the company,
maintenance projects are oriented more toward keeping the doors open and the
lights on. Many were necessary simply to keep key applications up and running.
As a result, in Information Economics we developed the concept of “pools”
to give management an understanding of their investment patterns. Pools are

defined according to the specific requirements of the company, but most typi-
cally have been development, enhancement, and maintenance. (What constitutes
maintenance compared to enhancement is one of those historical discussions
that may never be finally settled. Most companies use some kind of project size,
such as 30 days or less, for maintenance.) These pools, of course, were portfo-
lios, as shown in Exhibit 4.5.
To manage these portfolios, management first decides on the size of each
pool (e.g., in dollars or in development staff count), and then prioritizes proj-
ects within each pool. For each pool, or portfolio, the same Prioritization rules
(e.g., risk assessments, decision factors, and valuation techniques) are applied
to all members of the portfolio. Having multiple portfolios allows different rules
for each portfolio. Within a given portfolio, however, the same rules are applied.
From this early development of portfolio ideas, Information Economics and
the NIE Prioritization practice have further evolved the application of portfo-
lios and portfolio management to address several difficult problems. For exam-
ple, companies with multiple lines of business (LOB), or strategic business units
(SBU), can have difficulty in prioritizing projects across LOBs or SBUs, partic-
ularly if project implementation occurs by separate IT units within those LOBs
or SBUs. Using separate portfolios for LOBs makes it possible to prioritize and
allocate resources separately. Similarly, companies can find it difficult to prior-
itize IT infrastructure projects together with strategic business projects. Again,
using separate portfolios for applications and infrastructure can make prioritiz-
ing possible. Similarly, mixing back-office applications with front-office strate-
gic applications can be troublesome in planning and in prioritization. Portfolio
management offers a way to prioritize these applications in two separate port-
In the next sections, we discuss how the solutions to these difficult problems
have evolved into a complete portfolio management approach to IT resources
and investments as implemented in NIE practices.

Portfolios are the foundation for NIE practices.
We stated in Chapter 1 that our goal is to translate the company™s business
strategies and goals into the right IT actions to produce the right bottom-line
impact. This is done by effective planning, appropriate resource decisions, and
workable budgets and operational plans. The tools of portfolio management,
implemented through the NIE practices, make this possible.
Development/enhancement and lights-on portfolios support NIE Planning,
Innovation, Prioritization, Alignment, and Performance Measurement practices
with consistent and complete information about IT resources. The information
includes specifics such as how many applications there are and where they are
being used, quality and service levels, and information about the business impact.
See Exhibit 4.6.
Portfolios in NIE Practices


FTE Proj# Project Title Value
23 FTE97-07 Simulation Project Title 100Value
45 23 97-14 Order Sequencing
97-07 Simulation 95 100
61 45 97-16 Line Order Sequencing
97-14 Diagnostic 95 95
100 61 97-15 Line Line Diagnostic
97-16 Balancing 89 95
20 100 97-17 Guided Vehicle
97-15 Line Balancing 89 89
15 20 97-22 Paint Shop Area Mngr
97-17 Guided Vehicle 85 89
Future Budget


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