In our previous post on lean portfolio management, we talked about how traditional portfolio management was slow and expensive. We also talked about how traditional methods increase risk. Now let's talk about why and what to do about it.
Traditional portfolio management encourages organizations to fund work in large batches. Organizations often tie approval of that work to an annual budgeting process, and total ROI is the primary metric used to determine which initiatives to fund. While it makes sense to support the most valuable work for the organization, evaluating value based on total ROI incentivizes stakeholders to submit large projects with high overall returns. The larger and more complex the initiative, the higher the total ROI a single business case can claim to expect, making it more likely to get financial approval.
Capabilities lose potential value over time as market conditions change.
We'll ignore the compounding effect of lost value in long lead times for now so we can focus on risk here. All capabilities tend to lose value over time for a variety of reasons. Competitors release similar capabilities, market needs change, and our understanding of customer needs evolves. The longer it takes to deliver the intended capabilities, the less valuable they are. The larger the batch, the longer it will take to produce a given capability, and the higher the risk of value degradation over time.
These large batches don't just increase the risk of value degradation; they also increase the risk of more significant numbers of errors being present in the batch. As batch size increases, the number of possible undiscovered errors within a batch also tends to increase. These could be errors as you might traditionally think of them, such as bugs in software or defects in a manufacturing process. They can also represent the risk of merely building the wrong capability or failing to understand the actual needs of your customers, which can be far more dangerous.
Large business cases are typically made up of many layers of unvalidated assumptions. Until a capability reaches the market and comes into contact with customers, it's impossible to know with certainty how that capability will be received.
By contrast, lean portfolio management practices encourage making the funding decision more frequently. More frequent investment evaluation encourages smaller batches of capabilities that can be delivered more quickly to capture the full potential value. In the above example, Capability A would have a dedicated lean business case, be prioritized independently of the other capabilities, and begin to return value to the organization once introduced into the market. Once we've exposed the capability to actual customers, we can better validate underlying assumptions we used to create the business case. Often, many other capabilities we plan to build are based on the same or similar assumptions. By validating those assumptions, we can reduce the overall risk of investing in the development of capabilities that don't satisfy customer needs.
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