on thinking through the company's formal strategy and more attention on the processes by which the company allocates resources."

The upshot of this is that if finance can enable the process to enable better resource allocation (which is strategy), they will have succeeded in becoming a de facto strategic partner to the business.

The Two Levers of Corporate Portfolio Management
So now the question turns to how to build a corporate portfolio discipline and ensure its success. A successful corporate portfolio effort is predicated on two dimensions.

1. Modern Portfolio Theory (aka the process) - This is what people generally think of when they think of corporate portfolio management. It is comprised of:
Investment valuation - This includes defining what an investment is. It is worthwhile to take an expansive definition of what comprises an investment because this is not just capital expenditures (capex), but also should include operating expenses (opex). In general, 25-40% of an organization's expenses are discretionary and hence are investments. Investment valuation also requires consistency of valuation methodology which necessitates using driver-based models to create projections and also looking at past NPVs and ROIs to consider strategy and other qualitative aspects that drive investment 'value'.
Portfolio allocation - This requires determining investment areas/themes and the associated allocations. Basically, what are my strategic priorities for investment and how much will go to each area? For example, 25% in customer acquisition, 20% in IT, 55% in customer retention. The allocation should also consider the risk profile of investments, e.g., 60% in low risk, 30% in medium risk and 10% in high risk.
Portfolio optimization - This requires selecting the best investments to support the portfolio allocation and periodically rebalancing the portfolio to ensure consistency with desired portfolio allocations. The aim is to maximize strategic and financial return per unit of risk.
Performance measurement - A key element of successful corporate portfolio is capturing actual investment results to enable promise vs. performance. Doing this ultimately lets an organization improve ongoing investment valuation based on actual results and allows it to rebalance the portfolio based on performance achieved.
Most people with a finance background will recognize the above tenets of portfolio theory. The problem with most of the discussion of corporate portfolio is that it assumes that people behave according to a theoretical/rational construct. While various experts like to offer platitudes saying things like, "Just manage your company's investments like you manage your own investments," they fail to realize that many individuals may not even manage their own personal portfolios as they should. They may know what they should do but emotions, intuition, and other external influences take them off this rational path. What often leads us astray in our personal portfolio is what leads us astray in an organizational setting - behavior. The challenge in an organization is magnified by the fact that it is hundreds or thousands of people whose behavior that needs to be considered. And so this is the second fundamental lever of corporate portfolio - organizational behavior.

2. Organizational Behavior - In order to optimize one's corporate portfolio, the behavioral elements must be understood with:
A data-driven mindset - Organizations often make decibel- or intuition-led decisions and corporate portfolio management, like 6-Sigma, requires data and analytical decision making.
Silos removed - Corporate portfolio success requires people thinking about what is best for the organization and not just what is best for "my world" - silos and organizational dynasties need to be broken down.
Incentive alignment - People should be motivated by similar short- and long-term incentives.
Accountability & transparency - There should be a willingness to share information and effectively create a marketplace for investments.
Moving organizational behavior is the larger challenge and this takes time to change. At American Express, we have actively worked on changing organizational behavior and have made significant inroads over time, but it has not happened overnight. We have conducted cross unit investment reviews, sponsored an internal corporate portfolio conference and even created a resource allocation simulation to visibly demonstrate the benefit of corporate portfolio management.

Bringing Corporate Portfolio to Your Organization
If you think corporate portfolio can be implemented in one month or one quarter, it is not for you. Corporate portfolio is not a sprint and requires the will and heart of a marathoner. You will see benefits along the way, but it takes time to realize the full potential of a well developed corporate portfolio. But once defined and running, an actively managed corporate portfolio discipline will pay immeasurable dividends. For American Express, we can point to stock price out-performance over our benchmark indices as well as our competition since adopting corporate portfolio management. Our resource allocation effectiveness also helps to drive our PE multiple (price to earnings multiple), which is significantly larger than our competitive peers.

Very tactically, the corporate portfolio discipline has helped us understand what businesses we should exit and where we might want to invest more. It has enabled us to reallocate money across business segments for the first time which can be very challenging in large organizations. Most importantly, corporate portfolio has become part of the DNA of the organization with finance and the business talking about their investments on an ongoing basis. Finance leads the corporate portfolio effort but with significant and very direct input and interaction with the business. The chasm between finance and the business has been bridged by utilizing corporate portfolio management, and the benefits to the organization in terms of financial and strategic performance as well as employee engagement have been significant.

If you are serious about making finance a strategic partner with the business, and if you finally want to make some forward progress after being on the treadmill for so long, corporate portfolio offers you a solution to this intractable problem. It requires effort and patience, but, as evidenced by American Express, it can close the finance and business gulf and ultimately generate outstanding performance.

Article Source: http://articlecrazy.com

Anand Sanwal the author of this article on corporate portfolio management. Find more information about IT portfolio management here.

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