Wednesday, October 20, 2010

Optimizing the Portfolio of Investments with Scoring Models

The Business Need for Prioritizing Investments
How can your business maximize return on its investment? How can you balance resource capacity and demand? How can you ensure you are achieving your strategic goals? Can you provide clear justification for your portfolio of investments? These major business concerns drive the need for organizations to develop Portfolio Management to ensure the business is making the best investments.

The Solution: A Scoring Model for your Investments
Portfolio Management is a structured and disciplined process for selecting the portfolio of investments that best meet the strategic goals of the organization, delivering true competitive benefit to the business. This process requires evaluating each requested investment against specific criteria, the scoring model, which reflect the business’ definition of value. The investments are prioritized based on these evaluations and analyzed against budget and resource constraints and other factors.
Formulating the scoring model that reflects the organization’s view of value is the key to ensuring optimized prioritization of investments. For this reason, the task of developing the scoring model should not be taken lightly. Leadership can work with scoring model subject matter experts to determine the requirements for the model.

Scoring Model Benefits
· Provides objective and quantifiable criteria for evaluating and selecting investments
· Provides quantifiable information for optimized investment decisions
· Funding decisions no longer based on intuition, politics or the concept that all ideas are acceptable
· Ties investments to strategic objectives to help ensure strategic goals are achieved
· Balances short and long term gain
· Maintains benefit to risk ratio that best fits the business
· Takes into account the health of projects and programs to lower the loss from failing projects
· Maximizes return on investment



Developing a Scoring Model
Developing a scoring model for investment prioritization ensures the portfolio of investments provides maximum value to the business. Because each organization is unique, every scoring model should be different; however, there are common elements to be addressed across organizations. Guident has developed a basic scoring framework that can be adapted and modified as needed. The model looks at six areas for scoring: Strategic Alignment, Value/ Benefit, Compliance, Capability, Health/ Performance and Risk. Establishing the scoring model that works for an organization begins with defining value for the business based on review and analysis of these six areas.

Scoring model development process:
1. Define specific business drivers in each of the six areas based on the definition of value for the business.
2. Prioritize the business drivers and weight them.
3. Determine survey questions and answers to make up the model based on these drivers.
4. Assign numeric values to each possible answer.
5. Sum the weight multiplied by the value for each answer to provide the total score.
The organization evaluates the new and existing investment candidates using the defined scoring model, basing prioritization and funding decisions on the final scores.

The Six Elements
The Strategic Alignment element addresses how the investment aligns to the overall strategy of the organization. Strategic Alignment is measured against the strategic objectives defined by the leadership of the organization. This establishes a clear view of how the investments contribute to achieving corporate strategy thus identifying the portfolio of investments to enable the organization to meet its objectives. This also provides a view of the level of investment for each objective.

The Compliance element addresses how an investment aligns to the corporate governance requirements. This includes compliance with internal and external mandated regulations, initiatives, and architecture. Initiatives tied to federal and corporate mandates receive highest priority.

The Capability dimension addresses how the investment supports the mission of the organization. The mission provides the course of action that the organization needs to take in order to meet its operational requirements. The mission breaks down further into capabilities or competencies focused on the required systems, products and processes to meet customer needs and provide competitive advantage. Capabilities should be documented and prioritized so that the capability dimension returns the highest scores for investments aligned to the most important capabilities. Gap analysis can determine which capabilities already exist and which are still needed. An investment’s Capability score rewards investments that provide new capabilities required by the organization. If an investment offers a redundant capability, its capability score will be lower unless it is determined to be the most effective in providing the capability.

The Risk element addresses the likelihood of a risk event and the impact if that risk event were to occur. Defined risk categories can significantly improve the identification of risk events. The Risk dimension seeks to establish measurable data that focuses on factors that can adversely affect an investment’s ability to deliver its intended result.

The Value/ Benefit element addresses either the qualitative or quantitative value of the investment. Quantitative Values are financial calculations such as Return on Investment (ROI), or Cost Benefit Analysis (CBA) etc. Qualitative Value relates to intangible benefits that are meaningful to the organization. These values might classify projects as maintenance, transformation or regulatory. Further examples include efficiency improvement, cost savings, cost avoidance etc.

The Performance/Health element can be qualitative or quantitative as well. Health information is typically pulled from project management or operations data to indicate whether the investment is on schedule and on budget. Performance/ Health can be measured using standard earned value calculations for cost and schedule indicators in a strict quantitative approach or simpler variances from plan to highlight trouble areas. Performance analysis also needs to include benefits realization metrics and measures against requirements.

To read the full article, click on the following link:
http://www.guident.com/index.php?page=download&target=Investment_Scoring_Model.pdf

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