Operating Models and Portfolio Segmentation

Catching up on some of the comments that have been left on a couple of blog posts recently:

Prasanna Advi wrote:

“I think the key is ‘how’ do you decide what those top 10 (projects in the organization) are, and make every Business Unit agree to the same critera. Especially, in the intersection of Business and IT. I think you should write about the “How” to achieve strategic criterion alignment across a multi-busines unit organization!!” on Does Your Project Matter?

And Josh Milsapps wrote:

“I am very interested in your upcoming post that ties in elements from what I assume is EA as Strategy by Ross and company,” on PMO Symposium 2013 Wrap Up: It’s a Translation Thing.

So there are a couple of concepts here that all appear interrelated.  The first one is portfolio segmentation.  The first step in portfolio management, writes Jeffrey Kaplan in Strategic IT Portfolio Management, is portfolio segmentation.  In this step, we take all of the projects and work authorized by the organization, throw it onto a clean table, and start to organize it by the logical decision making architecture required to optimize the work.  We may end up with a single portfolio.  More likely, we’ll end up with multiple portfolios.   The trick, Kaplan writes, is to ignore the current organizational structure and seek to discern the logical structure.

The second concept is the operating model, as depicted in Enterprise Architecture as Strategy (Ross, Weill, Robertson).  This was (and still is) a seminal book in defining organizational decision making.  The basic gist, as Josh Millsap discusses in his Webinar here, is that organizations tend to follow one of four operating models based on requirements to integrate and standardize business process across various business units.  (Standardize = follow the same process.  Integrate = different processes but resulting data must be married, i.e. different business units from the same company serving the same customer.)

The four models are defined here, and I’d recommend reading the book and/or the Webinar for more information as I won’t do it justice.

  • Coordination
  • Unification
  • Diversification
  • Replication

Now, how do we combine these two ideas?  The operating model provides the fundamental skeleton of the portfolio segmentation.  Depending on how we define our model, we will need to segment our portfolios to support it.  If we have a Unification model, then we would essentially have a single portfolio shared across BUs – or several portfolios by process, but also shared by BU.  If we adhere to a Diversification model, we would then have multiple portfolios spread within each of the BUs.

The trick is, however, and going to Prasanna’s question, anytime we split portfolios into multiple segments, we need to retain an uber-portfolio of some sort, the kind described in Kaplan and Norton’s Execution Premium.  This uber-portfolio, or STRATEX budget, or ePMO, or whatever we call it, exists to fill in the gaps between the portfolios.  This is where the big initiatives that change the organization and that must be implemented across each of the portfolios (note, not BUs) reside.  For example, implementing or standardizing on a new operating model would reside in this uber-portfolio.

Admittedly, that leaves us with a bit of a grey line as to whether or not smaller initiatives in the sub-portfolios that support the strategic design of the company should be part of the ePMO domain or relegated to the subportfolios – and I am sure there are different answers to that question.

Hence, we can always look to find the top ten list of impactful projects and programs in the uber-portfolio.  By definition, that’s where they reside.  I can also perhaps find a top ten list of impactful projects and programs in the sub-portfolios.  Again, by definition, they won’t be as much of a priority as my ePMO projects.

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Operating Models and Portfolio Segmentation

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