Portfolio Management Influence in Decision-making and Risk management

Abstract

Portfolio management is the application of systematic management to the investment of the project and activities of information technology. The portfolio management plays a vital role in a successful project for any organization. This paper focuses on making strategic choices which involve risk management and decision-making in portfolio management. The paper shows that when appropriate strategies are applied, the organization can mitigate the risk and increase profitability.  To deliver successful projects, we need an organization to make the right decision which involves less risk. By implementing decision-making tools, we can prepare the organization for upcoming challenges, opportunities, and overcome those obstacles by minimizing the risk involved. According to our research, we can conclude that portfolio management outweighs the project management outcomes.

Keywords

Decision making, IT risk management, Portfolio management, Systematic project management

Introduction

Portfolio management is the art and science of decision making about investment policy, balancing the performance risk and reward. Additionally, portfolio management is the selection, prioritization, and controlling the projects of organizations with strategy. In V J, & B R (2018), project portfolio management is a new discipline of project management which enables us to organize and manage the projects of the company with the goal to maximize the results.  It also helps us to balance the risk and expected values of the project that lined up with the strategic objectives of the company.  Portfolio management optimizes the return of Information Technology (IT) project investment with improving the strategy and ensuring resource sufficiency. Also, the portfolio is a collection of projects or programs and other work that are grouped for strategic business objectives. Portfolio management is the application of systematic management to the investments of Information Technology. 

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In this paper, we propose how portfolio management has influences on risk management and decision-making processes. Implementing the portfolio management in every organization would lead to maximizing the outcome of IT project investment. The paper also provides a direct comparison between portfolio project management and project management. Portfolio management provides support to managers regarding user-friendly interfaces and functionality. Portfolio management must perform strategy planning in order to understand business drivers and their relationship with decision making (Mark, 2006).  The implementation of the tools helps to better understand the diverse portfolio which in turn reduces risk and increase the profitability of the portfolio.

In Rolney, & Roque (2018) portfolio management has become the vital role in the success of organizations long-term strategies and is also correlated to the role of senior executives and key decision makers who will validate the investments and must evaluate the goals and objectives. For the above mentioned reason, portfolio management has become increasingly essential for long-term success and proves to be a competitive advantage for any organization. According to Emil, & Miroslav (2017) Portfolio works by coordination and optimization of the program. The priorities of the portfolio primarily depend on the relation of the strategic goals of the organization. IT portfolio management is a disciplined and structured approach that is a continuously repeatable and easily sustainable process design to map the technology decision. It enables organizations to align IT spending with an acceptable amount of risk and reward. IT portfolio also contains physical hardware, software assets, and IT projects. 

Figure 1: Life cycle of Portfolio Management

IT portfolio is classified into two types: (i) Assets and (ii) Projects. IT portfolio management as a systematic discipline is more applicable to larger IT organizations; in smaller organizations, its concerns might be generalized into IT planning and governance as a whole. IT Portfolio management is accomplished by creating three portfolios: 1). Application portfolio which is based on the comparison of organization spending vs. IT investment profitability. 2). Infrastructure portfolio: The portfolio specially addresses selective IT sourcing like a desktop server, storage, and Network. 3). Project portfolio:  This type of portfolio management is based on reducing investment overlaps which comply with legal or regulatory mandates. Furthermore, IT project management is based on four golden rules which are strategic, analytical, transactional and Infrastructure.

Types of portfolio management

1. Discretionary portfolio management: An organization authorizes a portfolio manager to handle all the financial need on behalf of the corporate authorities. The portfolio manager is responsible for investment, paperwork, and any decision that is related to investment for the organization.

2. Non-discretionary portfolio: Portfolio managers do research and suggest all investment ideas to the organization. However, the selection of that investment idea depends on the investor, but in the end, the execution is done by the portfolio manager.

3. Advisory Portfolio: Portfolio manager only suggests business ideas to the investor. Finally, the investor makes decision and implementation.

PORTFOLIO MANGEMENT

DISCRETIONARY

NON- DISCRETIONARY

ADVISORY

Figure 2: Types of portfolio management

Why Portfolio management is necessary?

• Strategic alignment of projects to business goals.
• Communication between insight of projects and company’s strategy.
• Maximizing the utilization of resources.
• Identification or correction of performance of problems.
• Balancing risk against performance.
• Enhance decision making in projects.
• Maximize delivery of business values.
• Manage change in organization.
• Higher return on project investment.
• Project repeatable success delivery.
• Maximize project throughput.

In V J, & B R (2018) the main aim of the portfolio management is to increase the financial value of the portfolio, to connect the portfolio to the firm’s strategy and, to balance the projects. There are two main goals of IT portfolio management:

1). Balancing the Risk and expected rewards

•    Portfolio management enables companies to deploy consistent approaches of the decision-making process that systematically risks and rewards in each critical business in IT decision.

2). Strategic Business alignment

•    The organization should approach a Bottom to Up or Top to Down approach or both to combine systematically alignment IT portfolio objectives.

Risk management in IT portfolio management

In Wooje, & Michael (2013) research on IT risk management has been increasing from the awareness of the high level of failure in IT projects. The risk of IT portfolio depends on the cost and benefits of the projects. The Risk is of two types: 1) Systematic risk and 2) Unsystematic risk. Systematic risk is a type of market risk that cannot be diversified away. Market recession and wars are classic examples of systematic risk.  Unsystematic risk is specific to the individual project and can be expanded away. It is also known as specific risk. The elements of risk are an organizational specific risk, business risk, investment risk, technology risk, and market risk. Every investment has the risk of loss, and the research shows that higher the return, higher the risk. Additionally, the portfolio with many projects has risks associated with each project ‘s investment.  Nowadays IT organization depends on project portfolio management to mitigate risks generated from multiple projects (Stefan, 2006).

Decision making in IT portfolio management

The decision making plays an essential role in portfolio management. In V J, & B R (2018) the decision-making process is characterized by the changing data and information, uncertain multiple goals, and interdependencies of projects. Decision making is complex to evaluate in term of performance. Decision making mainly focuses on the strategic objectives of the organization and project. In Wooje, & Michael (2013) Decision making can be done in a more methodological way using the framework which gives a more strategic decision on the IT investment of the organization. Decision making also helps companies to minimize their IT risks. There are numerous software tools that support best project decisions. The common features that decision-making tools include are:

• Calculate potential project benefits.
• Technique the calculate the risk and cost of the project.
• Decision-making tools that provide better project selection based on the weight factor.
• Communities identify and prioritize demands.

Portfolio Management vs Project Management

Here are few of the difference between portfolio management and project management:

Table 1: Comparison table

Conclusion

The main aim of this paper was to understand the advantages of portfolio management which overcomes the limitation of project management in IT organization. According to my research, the risk management and decision-making processes were effective in reducing the risk involved by maximizing the profit of the organization. By implementing the decision-making tools, we can prepare the organization for upcoming challenges, opportunities and overcome those obstacles by minimizing the risk involved. In the IT portfolio management, there is a higher risk for higher return but with the implementation of portfolio management allows the organization to reduce the risks and achieve the better outcomes of the project. My research indicates that the portfolio management has consistency when overseeing multiple opportunities and thus reducing risk. On the other hand, project management focuses on best practices which can involve more risk and therefore inferior to portfolio management.

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