Nothing like the sun?
Should risk management and portfolio management be partners in value management?
In my experience the two disciplines are undertaken by different people and in different forums. Fortunately there was a chance to consider how the two disciplines overlap, at a recent joint IRM/APM session on Risk Appetite.
On the 11th July in Manchester, the Institute of Risk Management and the APM Risk Management SIG discussed a variety of risk appetite topics with the subject of “value” at the core of the discussion, and then listened kindly while I waxed lyrical about portfolio management (PfM) in general, and the overlap of the two disciplines in particular. I think there are three avenues of overlap:
1) Both are about value management. PfM tries to get us to associate value and cost, to determine the optimal configuration of the portfolio. However value should be weighted not just by the intended benefits but also by the risk-to-delivery, ie. the risk of not delivering the benefits. That means using risk assessment as a mathematical adjunct, via efficient frontier analysis, to determine the optimal value of the portfolio. It also means feeding in risk-to-delivery information from project and programme risk assessments.
2) When PfM focuses on strategic alignment it is acting as a form of risk assurance for the portfolio. Strategic risk management is there partly to ensure the organizations strategic goals are well chosen, whereas PfM is about aligning project and programme activity to achieve those goals.
3) In addition, good portfolio accountability ensures financial risk of loss is minimized. In practice this usually means signing off accounts on a regular basis against a senior management review of the entire portfolio.
Turning to the Bard yet again, then ... perhaps our mistress eyes are nothing like the sun, but I think our love as rare as any ... belied with false compare.
Achilleas Mavrellis
A physicist and mathematician by profession, I have been working in government since 2005 as an Operational Research analyst at the Department for Education, the Export Credits Guarantee Department and the Department for Environment, Food and Rural Affairs (Defra). My primary work interests are embedding and supporting the use of management systems in large organisations and the process and behavioural change required to achieve these. For the last four years my work has been focussed on Portfolio Management and Strategic Implementation.
Comments
Portfolio Management (PfM)
Portfolio Management (PfM) and Risk Management (RM) go together like ..........
Most organisations apply RM at many levels and across many aspects of their business, including projects, programmes and portfolios.
The “Power of Portfolios” article supports one of my key tenets for good PfM, in that a portfolio of projects & programmes needs to be balanced (i.e. not having all its eggs in one basket) in order to reduce the risk to delivery of the planned benefits/value.
While having a diverse portfolio may help offset the risk of uncertainties at individual project level, and reduce the overall cost of contingency, there are several risk areas that need active management at the aggregate portfolio level. In my experience, two of these regularly given prominence are:
· Capability
o Resources (including: demand/supply planning, internal v. external skills and aligning funding with resources).
o Infrastructure (particularly capacity and flexibility).
· Impact
o Potential for change within the organisation and the risks posed of change overload on staff (possibly leading to poor implementation).
o Risk of not achieving the desired results through adverse impact on customers, suppliers or the public.
Therefore, even though risks may be adequately managed at a project/programme level, I believe that RM within PfM plays a key role in helping to ameliorate a range of aggregate portfolio risks. When performed alongside the other major PfM disciplines, good RM makes a critical contribution to improving the probability of overall portfolio success.
Achilleas your thoughts most
Achilleas your thoughts most certainly give food for thought. Whilst I don’t profess to understand all the terminology you have used, I have some experience of how badly things can go wrong when a portfolio is managed without giving consideration to risk. Naturally, from my eye, I see the world not just as a set of processes per se, but also as a set of behaviours. The people element of risk manifests itself in many ways, not least of all can be exhaustion or saturation caused by the amount of simultaneous change being undertaken – this is a huge risk and needs to be managed at a portfolio level. Additionally when risk is not identified and proactively managed within a portfolio, projects and programmes may duplicate, offset and/or undo each other when they begin to compete for resources and adopt an inherent sacrificial lamb process based on criteria other than what is best for the strategy – at this point portfolio management starts to fail on the lack of risk management. When faced with such behaviour parochialism can take over from good business judgement and the resultant unplanned failing projects can have an adverse effect on business reputation, revenue generation and general goodwill. Understanding when to stop, start or kill a project in a portfolio may largely depend on strategic resources but being cognisant of the risk of not doing something is equally important as the risk of doing it, and therefore the people risks of either. How can portfolio management and risk management at a portfolio level not walk hand in hand?
@ Achilleas, good post thank
@ Achilleas, good post thank you for sharing. I wanted to suggest that you consider to take a straw poll to obtain evidence whether in a number of organizations whom manage Portfolios of work whether risk managment is integral wth the management of portfolios. From a personal opinion I think risk management is integral with the management of portfolios.
I suggest that criterion are used to rank different projects and across each organizational entity it shall be different as a reflection of a number of factors. What I suggest is common is that resources are considered. The rationale being;
"The purpose of strategy is to force choice regarding the deployment of scarce / finite resources" ~ Llyr Jones
Consequently resources are one of the criterion. The type of resource depends upon the context, typically is capital funding but could be manpower i.e. the driving constraint at that moment in time. Could be too shortage of supply of specialist material or equipment i.e. say you wanted to roll out x number of widgets and you could only manufacture at so much per month. You get the drift ...
Another criterion I suggest is core values. An example of such core value is shown below for the American company I work for;
" The Thought Leadership category recognizes an individual or group who, through their extended participation in highly visible public forums as technical or industry leaders, has contributed to AECOM’s purpose of creating, enhancing and sustaining the world’s built, natural and social environments".
Another criterion I suggest is risk / opportunities. Such could be translated into market absorption in the case of real estate development.
Potentially too if you see merit is conduct a straw poll, by industry what are the core values of a number of organizational entities with the expectation to seek trends in the pattern of changes to core values. For context I look upon the following as terms for value management and value.
Value management
A structured approach to defining what value means to the organisation. It is a framework that allows needs, problems or opportunities to be defined and then enables review of whether these can be improved to determine the optimal approach and solution.
Value
A standard, principle or quality considered worthwhile or desirable. In value management terms value is defined as the ratio of ‘satisfaction of requirements’ over ‘use of resources’.
It's just an idea, hope it appeals. I hope this is of help and thanks again for the thought provoking post. Previously I have seen good initiatives for interfacing risk and earned value which resulted in an APM guide. Have a browse too of the documents:
http://www.best-management-practice.com/Publications-Library/Value-Management-MoV/An-Executive-Guide-to-Value-Management/
In addition consider;
http://www.best-management-practice.com/Publications-Library/value-management-mov/#GEMS6415424
The link between risk
The link between risk management and portfolio management focusing on the ‘averaging of risk’ is discussed in and interesting blog at http://stakeholdermanagement.wordpress.com/2012/07/08/averaging-the-power-of-portfolios/