If you think about it, projects and investment funds have a lot in common. Both involve an initial outlay of costs but the hope is that they will bring a financial gain to the investor in the future. Given the constraints of finite resources, the investor will need to be clever about his choices. Selecting one project or investment fund will naturally exclude the selection of others. The selections cannot be based on a whim and must be approached in a dispassionate manner that allows each option to be quantified and mathematically compared.
Dr. Harry Markowitz won the Nobel Prize for economics in 1990 for his work on the Efficient Frontier theory. This theory looks at selecting a portfolio of investments so as to maximise the return to an organisation. Project and Portfolio Management (PPM) has its roots in investment fund portfolio management. As with financial investments, the idea is to get the maximum return for the mix of projects that a company can choose from.
This includes both selecting the right projects and periodically reviewing the selection to ensure that the mix continues to be the best possible for the organisation. This optimisation ensures that we neither overspend on IT nor miss revenue generating or cost saving opportunities for further investment.
The Efficient Frontier
The Efficient Frontier helps organisations understand the tradeoffs between portfolio value and cost. It effectively identifies the set of all portfolios that will give the highest expected return for each given level of risk. The organisation can then make a decision about the level of risk that it wants to adopt.
Obviously, to be able to compare portfolios in this way requires that information about projects and project execution be entered into a software application. Mariner is one such application that companies such as Starbucks and Yahoo have used to build successful business models.
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