How to Rationalize a Portfolio of Investments

Portfolio planning is an iterative process. The portfolio manager performs the following tasks that are based on review feedback from stakeholders and others in the company:

Prioritization. Assigns a priority to the investments based on initial default or rule-based criteria.
Note: See the How to Configure the Waterline View scenario for more information about prioritizing investments in a portfolio.
Evaluation. Associates the investments with company values such as cost, benefit, or return on investment (ROI).
Rationalization. Justifies the existence of the investments that are selected by taking into account all of the information from prioritization and evaluation. Not all information that is used during rationalization is from CA Clarity PPM. The experience and advice of stakeholders are important considerations and often outweigh the rankings of investments that you indicate by prioritizing or evaluating.

When creating a portfolio, the portfolio manager initially prioritizes the list of investments using ranking rules that are based on business needs. To evaluate the portfolio, the portfolio manager creates different what-if plans and reviews the waterline views of the plans with the stakeholders. The evaluation of the portfolio uses information from all parts of the business. Based on stakeholder feedback, the portfolio manager reprioritizes the investments and reconfigures the waterline views. When the rounds of prioritization and evaluation are complete, the portfolio manager rationalizes the portfolio with stakeholders. Together they decide which investments to pursue and which ones to defer for the portfolio time horizon.

The following illustration shows how prioritization, evaluation, and rationalization overlap. For example, information that is gathered from either evaluation or rationalization can cause the prioritization of a portfolio to change.

The diagram shows how prioritization, evaluation, and rationalization are overlapping processes.

This scenario shows how one company looks at its portfolio of investments and how it decides to thrive in the marketplace.

Example: Portfolio Planning

Raj Mehta is the new CIO for Forward Inc., a large holding company which owns many manufacturing companies. Raj reports to Lauren, the CEO who has been hired to bring a fresh perspective to the organization. Raj has worked for Forward Inc. for two years and Lauren was hired outside of the company. They have a directive from the Board of Directors to improve the company revenue stream in three years by 10 percent.

Raj and Lauren are preparing the IT budget planning for the upcoming fiscal year. In their first planning meeting, Lauren provides the following list of investments for the IT portfolio:

Administrative Expense System
Back-Office Financial System
Cloud Based Order Intake
Database Upgrades- Oracle
Enterprise Time and Attendance
Federated Security
GUI Redesign- Supplier Internet System
HR System Upgrade
Interface to Material Supplier
JIT (Just in Time) System Upgrade

The list is in alphabetical order. Lauren does not indicate which projects are more important. She wants Raj to prioritize the investments using the rules that are currently in place.

To complete the portfolio planning process, Lauren and Raj must complete the following tasks:

Prioritize the Portfolio

As part of the initial portfolio creation process, as the portfolio manager, you can set up some basic criteria or ranking rules. The ranking rules dictate the order in which the investments appear on the Waterlines view.

Note: The following example assumes that corporate goals for investments have already been defined in the product.

Example: Initial Portfolio Planning

Raj uses the investments list from Lauren and creates a portfolio in CA Clarity PPM. To collect information and display it in a meaningful way, he completes the following tasks:

Adds the list of investments in the portfolio in alphabetical order.
Works with the staff to determine the cost for each investment and enters this information in the portfolio.
Compiles the number of internal resources for the investments in FTE units and enters this information.

The following table shows the portfolio investments and other details:

Investment	Duration (Months)	Cost	Resources
Administrative Expense System	3	250,000	5
Back-Office Financial System	9	750,000	15
Cloud Based Order Intake	3	100,000	3
Database Upgrades- Oracle	3	200,000	6
Enterprise Time and Attendance	5	450,000	12
Federated Security	2	300,000	5
GUI Redesign- Supplier Internet System	4	50,000	1
HR System Upgrade	6	300,000	12
Interface to Material Supplier	9	700,000	30
JIT (Just in Time) System Upgrade	5	100,000	6

In the meantime, Lauren works with the board to determine the discretionary IT budget. Lauren comes back with the following inputs which Raj incorporates into the portfolio:

The board potentially agrees to $2,500,000 for funding. Raj enters this information in the portfolio properties.
Each of the initiatives is aligned with a corporate goal. Raj links the investments with the predefined goals in the investment properties.
The CFO wants to see estimated capital and expense projection for each investment. Raj enters the expense information for the investments in the financial summaries.
The CFO wants to see what the expected benefits for each project. Raj enters the benefit information for the investments in the financial summaries.
Raj syncs the portfolio with the investment information in CA Clarity PPM to capture the latest investment data.

The following table shows the portfolio investments with the latest details:

Investment	Duration (Months)	Goals	Cost	Benefit	Capital Cost	Operating Cost	Resources
Administrative Expense System	3	Improve Office Efficiencies	250,000	20,000	200,000	50,000	5
Back Office Financial System	9	Improve Office Efficiencies	750,000	1,000,000	675,000	75,000	15
Cloud Based Order Intake	3	Increase Sales	100,000	750,000		100,000	3
Database Upgrades- Oracle	3	Better Align Technologies	200,000	100,000		200,000	6
Enterprise Time and Attendance	5	Improve Office Efficiencies	450,000	700,000	400,000	50,000	12
Federated Security	2	Better Align Technologies	300,000	3,000,000	275,000	25,000	5
GUI Redesign- Supplier Internet System	4	Better Align Technologies	50,000	60,000		50,000	1
HR System Upgrade	6	Reduce Costs	300,000	100,000	275,000	25,000	12
Interface to Material Supplier	9	Reduce Costs	700,000	2,500,000	600,000	100,000	30
JIT (Just in Time) System Upgrade	5	Improve Office Efficiencies	100,000	2,000,000	25,000	75,000	6

Evaluate the Portfolio

The portfolio manager constantly evaluates the portfolio investments to keep them aligned with the portfolio goals and within constraints. You can evaluate your portfolio investments on a periodic basis (for example, monthly or quarterly during the planning meetings). If your business needs change suddenly, you can also evaluate your investments on an ad-hoc basis. For example, if your business goals change due to new market conditions. You can reevaluate your portfolio to ensure the investments align with the new strategic direction. You can use the Balance portfolio view to call off investments that have a relatively low business alignment as compared to their completion dates.

Example: IT Budget Portfolio: Plan 1

Lauren reviews the IT Budget portfolio that Raj prepared and provides the following feedback:

The board has approved funding for $2,600,000.
The investments must be sorted by goals, with the Reduce Cost goal being first.

Raj incorporates the feedback into the portfolio by creating a separate plan for the portfolio (Plan1). The plan is a copy of the portfolio that Raj can change to accommodate what Lauren is asking him to do. Raj brings up the plan Waterline view and drags the investments that are associated with the Reduce Cost goal to the top of the list.

The following table shows the Plan 1 version of the IT Budget portfolio:

Investment	Duration (Months)	Goals	Cost	Benefit	Capital Cost	Operating Cost	Resources	Cost Accumulator
HR System Upgrade	6	Reduce Costs	300,000	100,000	275,000	25,000	12	300,000
Interface to Material Supplier	9	Reduce Costs	700,000	2,500,000	600,000	100,000	30	1,000,000
Cloud Based Order Intake	3	Increase Sales	100,00	750,000		100,000	3	1,100,000
Administrative Expense System	3	Improve Office Efficiencies	250,000	20,000	200,000	50,000	5	1,350,000
Back Office Financial System	9	Improve Office Efficiencies	750,000	1,000,000	675,000	75,000	15	2,100,000
Enterprise Time and Attendance	5	Improve Office Efficiencies	450,000	700,000	400,000	50,000	12	2,550,000
JIT (Just in Time) System Upgrade	5	Improve Office Efficiencies	100,000	2,000,000	25,000	75,000	6	2,650,000
Database Upgrades- Oracle	3	Better Align Technologies	200,000	100,000		200,000	6	2,850,000
Federated Security `	2	Better Align Technologies	300,000	3,000,000	275,000	25,000	5	3,150,000
GUI Redesign- Supplier Internet System	4	Better Align Technologies	50,000	60,000		50,000	1	3,200,000

Lauren reviews the Plan 1 waterline view with Raj. She comments that the investments must be prioritized by Better Aligned Technologies as a top priority goal. Raj drags the investments with the Better Aligned Technologies goal to the top of the Waterline view. Plan 1 waterline view now looks like the following table:

Investment	Duration (Months)	Goals	Cost	Benefit	Capital Cost	Operating Cost	Resources	Cost Accumulator
Database Upgrades- Oracle	3	Better Align Technologies	200,000	100,000.00		200,000	6	200,000
Federated Security	2	Better Align Technologies	300,000	3,000,000	275,000	25,000	5	500,000
GUI Redesign- Supplier Internet System	4	Better Align Technologies	50,000	60,000		50,000	1	550,000
Administrative Expense System	3	Improve Office Efficiencies	250,000	20,000	200,000	50,000	5	800,000
Back Office Financial System	9	Improve Office Efficiencies	750,000	1,000,000	675,000	75,000	15	1,550,000
Enterprise Time and Attendance	5	Improve Office Efficiencies	450,000	700,000	400,000	50,000	12	2,000,000
JIT (Just in Time) System Upgrade	5	Improve Office Efficiencies	100,000	2,000,000	25,000	75,000	6	2,100,000
Cloud Based Order Intake	3	Increase Sales	100,000	750,000		100,000	3	2,200,000
HR System Upgrade	6	Reduce Costs	300,000	100,000	275,000	25,000	12	2,500,000
Interface to Material Supplier	9	Reduce Costs	700,000	2,500,000	600,000	100,000	30	3,200,000

Rationalize the Portfolio

To substantiate or justify the existence of the investments in the portfolio plan, rationalize them. For example, you can link the investments to specific high priority corporate goals or business alignment factors to justify their current priority.

Example: Rationalizing Investments Based on Current Priorities

The board of directors reviews the updated portfolio plan and provides feedback. For tax purposes, the company must recognize as little expense as possible. Therefore, the higher capital dollar amount must be considered. To incorporate this feedback, Raj creates Plan 2 from Plan 1 and reworks the waterline view manually. He drags the investments with higher capital costs to the top of the list to rank them higher.

The following table shows the Plan 2 version of the portfolio:

Investment	Duration (Months)	Goals	Cost	Benefit	Capital Cost	Operating Cost	Resources	Cost Accumulator
Back Office Financial	9	Improve Office Efficiencies	750,000	1,000,000	675,000	75,000	15	750,000
Interface to Material Supplier	9	Reduce Costs	700,000	2,500,000	600,000	100,000	30	1,450,000
Enterprise Time and Attendance	5	Improve Office Efficiencies	450,000	700,000	400,000	50,000	12	1,900,000
HR System Upgrade	6	Reduce Costs	300,000	100,000	275,000	25,000	12	2,200,000
Federated Security	2	Better Align Technologies	300,000	3,000,000	275,000	25,000	5	2,500,000
Administrative Expense System	3	Improve Office Efficiencies	250,000	20,000	200,000	50,000	5	2,750,000
JIT (Just in Time) System Upgrade	5	Improve Office Efficiencies	100,000	2,000,000	25,000	75,000	6	2,850,000
Cloud Based Order Intake	3	Increase Sales	100,000	750,000		100,000	3	2,950,000
Database Upgrades- Oracle 3	3	Better Align Technologies	200,000	100,000		200,000	6	3,150,000
GUI Redesign- Supplier Internet System	4	Better Align Technologies	50,000	60,000		50,000	1	3,200,000

After investment reviews, the board and the legal department weigh in and make the following recommendations for the plan:

Due to the company direction and some previous legal dealings, the Federated Security investment is mandatory.
Because the current Oracle license is near expiration, the Oracle databases must be upgraded.

Raj configures the Plan 2 waterline view to display an extra Mandatory field on the view to flag the mandatory investments. The following table shows the extra Mandatory field for the investments:

Investment	Duration (Months)	Mandatory	Goals	Cost	Benefit	Capital Cost	Operating Cost	Resources	Cost Accumulator
Federated Security	2	X	Better Align Technologies	300,000	3,000,000	275,000	25,000	5	300,000
Database Upgrades- Oracle	3	X	Better Align Technologies	200,000	100,000		200,000	6	500,000
Back-Office Financial System	9		Improve Office Efficiencies	750,000	1,000,000	675,000	75,000	15	1,250,000
Interface to Material Supplier	9		Reduce Costs	700,000	2,500,000	600,000	100,000	30	1,950,000
Enterprise Time and Attendance	5		Improve Office Efficiencies	450,000	700,000	400,000	50,000	12	2,400,000
HR System Upgrade 6	6		Reduce Costs	300,000	100,000	275,000	25,000	12	2,700,000
Administrative Expense System	3		Improve Office Efficiencies	250,000	20,000	200,000	50,000	5	2,950,000
JIT (Just in Time) System Upgrade	5		Improve Office Efficiencies	100,000	2,000,000	25,000	75,000	6	3,050,000
Cloud Based Order Intake	3		Increase Sales	100,000	750,000		100,000	3	3,150,000
GUI Redesign- Supplier Internet System 4	4		Better Align Technologies	50,000	60,000		50,000	1	3,200,000

After reviewing the latest investments list in the portfolio plan, Lauren makes the following observations:

The portfolio lacks initiatives that support increased sales.
The JIT Upgrade investment promises a large return on the investment. Lauren decides to add this investment to the funding mix.
Lauren hopes to receive a total funding of $2,600,000.

Raj creates Plan 3 from Plan 2 and incorporates the feedback into the Plan 3 to come up with the final rationalized list of investments. The following table shows the final list of approved and unapproved investments that are based on the latest priorities and budget constraint of $2,600, 000. The waterline for funded investments is drawn at the JIT System Upgrade initiative where the portfolio runs out of funds.

Project	Duration (Months)	Mandatory	Goals	Cost	Benefit	Capital Cost	Operating Cost	Resources	Cost Accumulator
Federated Security	2	X	Better Align Technologies	300,000	3,000,000	275,000	25,000	5	300,000
Database Upgrades- Oracle	3	X	Better Align Technologies	200,000	100,000		200,000	6	500,000
Back Office Financial System	9		Improve Office Efficiencies	750,000	1,000,000	675,000	75,000	15	1,250,000
Interface to Material Supplier	9		Reduce Costs	700,000	2,500,000	600,000	100,000	30	1,950,000
Enterprise Time and Attendance	5		Improve Office Efficiencies	450,000	700,000	400,000	50,000	12	2,400,000
Cloud Based Order Intake	3		Increase Sales	100,000	750,000		100,000	3	2,500,000
JIT (Just in Time) System Upgrade	5		Improve Office Efficiencies	100,000	2,000,000	25,000	75,000	6	2,600,000 (Funding cut off)
HR System Upgrade	6		Reduce Costs	300,000	100,000	275,000	25,000	12	2,900,000
Administrative Expense System	3		Improve Office Efficiencies	250,000	20,000	200,000	50,000	5	3,150,000
GUI Redesign- Supplier Internet System	4		Better Align Technologies	50,000	60,000		50,000	1	3,200,000