Ac#ve Por*olio Management

Transcription

1 Ac#ve Por*olio Management th Ave NE, Suite 200 Redmond, WA solu3onsiq.com PREPARED BY John Rudd President, Solu3onsIQ Copyright 2014 Solu3onsIQ Inc. All rights reserved.

2 About Presenter John Rudd» President and Chief Impediment Buster at Solu3onsIQ.» Formerly a partner in a bou3que financial consul3ng & investment banking firm. - Led the firm s financial prac3ce specializing in advisory services, mergers & acquisi3ons, and interim management. - Filled mul3ple interim execu3ve roles including CEO, president, CFO, and chief restructuring officer.» Previously the CFO of a West Coast oil company and a commodity lender for ING.» B.S. in Economics from the University of Minnesota MBA from the University of Southern California Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 2

3 About Today Session: Ac3ve Por_olio Management Objec#ve: To define how you can make ac3ve investment decisions across por_olios when you have Agile capabili3es. Target Audience:» Non- technical individuals on the business side of an aspiring Agile organiza3on» Individuals on the delivery side of the organiza3on who are looking for a way to get the business more engaged Full Disclosure Who s In The Room? Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 3

4 What is the Goal of Por_olio Management?» The sole goal of por_olio management is to maximize shareholder value.» The sole purpose of governance is to keep the por*olio management goal on track.» These goals don t change but the means to obtain them do change.

5 Session Hypothesis» Tradi3onal prac3ces are not working.» We are failing at providing prudent investments for our shareholders.» If we can t do a beeer job, we should give them back their money. Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 5

6 Tradi3onal Approach Draws from Construc3on This works really well when 1. We have a very clear idea of the end state. 2. There s long- term market stability. Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 6

7 Shorter Lifecycles Mean Shorter Return Horizons Investment Expected return Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 7

8 Shorter Lifecycles Mean Shorter Return Horizons Investment Expected return ß Investment Return horizon shrinking Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 8

9 Shorter Lifecycles Mean Shorter Return Horizons Investment Expected return ß Investment Return horizon shrinking ß ß Investment Expected return Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 9

10 Addressing Increasing Market Uncertainty» Shorter cycle- 3me» Smaller investment size» Incremental progress Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 10

11 A New Paradigm Old: Project- Centric New: Con#nuous Feature Flow» Choose the best solu3on» Learn as you go» Do it "right" the first 3me» Incremental progress» Centralize control» Empower teams» Fungible labor» Leverage worker s knowledge Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 11

12 Is Agile Something that Happens to You or is this an opportunity to address the Hypothesis statement? Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 12

13 What If You Had a Magic Box? Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 13

14 Tradi3onal Governance Doesn t Support Leveraging Agile Delivery Capabili3es Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 14

15 Revised Governance: Ac3ve Por_olio Management 1. Investment sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 15

16 Revised Governance: Ac3ve Por_olio Management 1. Investment sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 16

17 1. Investment Sectors and Budget Alloca3on Old» Fixed annual plan» Funding alloca3on by project New» Funding by sectors based on investment risk» Alloca3on based on market opportunity Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 17

18 Investment Sectors: A New Approach Compliance Efficiency Enhancement Innova#on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 18

19 Expected Return Thresholds? Compliance Efficiency Enhancement Innova#on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 19

20 New Look at Por_olio Strategy Capability Market 1. Iden3fy market opportuni3es 2. Direc3on: Harvest vs. Plant 3. Allocate funding across Sectors 4. Small diversified investments Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 20

21 Revised Governance: Ac3ve Por_olio Management 1. Investment sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 21

22 2. Itera3ve Risk Management Old» Predic3on reliable» Risk management largely completed before investment begins New» Predic3on is unreliable» Risk managed con3nuously Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 22

23 Sector Variance Thresholds Compliance Efficiency Enhancement Innova#on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 23

24 Determining Model Risk Assump#ons Low High Average Price per Unit $5.00 $9.00 $7.00 Total Units per Annum 10,000 2,000,000 1,005,000 Cost per Unit $1.50 $2.75 $2.13 Capital Expense $300,000 $600,000 $450,000 Annual Growth Rate 1.00% 7.00% 4.00% Unacceptable level of variance (Risk) Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 24

25 Mi3ga3ng High Model Variance Assump3on #3 Yes Assump3on #2 Yes No Assump3on #1 No STOP STOP Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 25

26 Revised Governance: Ac3ve Por_olio Management 1. Investment sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 26

27 3. Dynamic Business Case Old» Business case result final» Charter: Spend all the money New» Business case result condi3onal» Charter: Proba3onary Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 27

28 Components of the Dynamic Business Case» Meet the organiza3onal return and variance thresholds» Funding is condi3onal» New informa3on used to recalibrate return expecta3on» Each business case needs to con3nue to compete with exis3ng and new opportuni3es Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 28

29 Revised Governance: Ac3ve Por_olio Management 1. Investment sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 29

30 4. Con3nuous Feature Flow Old» Discrete projects» Project- based funding New» Con3nuous delivery of features» Perpetual funding of capacity Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 30

31 What is Con3nuous Feature Flow?» Tradi3onal: The project is a fixed investment to achieve a fixed end.» Agile: The project is a con)nuous flow of features, which: - Eliminates the concept of a project - Breaks work into key- value- based independent features - Builds higher- value features first - Is biased toward entering the market quickly - Allows work to flow into persistent teams that can deliver con3nuously Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 31

32 Revised Governance: Ac3ve Por_olio Management 1. Investment sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 32

33 5. Unified Priori3za3on Old» Locally op3mized or poli3cally nego3ated New» Aligned under a common language Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 33

34 Expected Return Governance 1. Use internal rate of return (IRR) to evaluate investments. 2. Establish minimum Sector- based return threshold (hurdle rate). 3. Within a Sector, the highest return establishes the ini)al priority sequence. 4. More granular sub- features or persistent near- term work should use a lighter- weight approach to priori3za3on (i.e. value points) Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 34

35 Pop Quiz: Which Investment Would You Pick? Investment X Investment Y NPV = $70,000 NPV = $40,000 Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 35

36 Pop Quiz: Which Investment Would You Pick? Investment X Investment Y NPV = $70,000 NPV = $40,000 Investment = $2.0 million Investment = $400K Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 36

37 Pop Quiz: Which Investment Would You Pick? Investment X Investment Y NPV = $70,000 NPV = $40,000 Investment = $2.0 million Investment = $400K IRR = 12% IRR = 22%» IRR as a common language Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 37

38 Quick Example» Sector Hurdle Rate = 15%» Waterfall project approach gives an overall return of 17%» The same features are then compared being delivered using an itera3ve approach: - MVP requires three months before first release - All subsequent releases require one month Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 38

39 By Valuing Incremental Releases, Our Investment Decision Will Change 250.0% 200.0% 150.0% 100.0% 50.0%» 17% IRR 15% Hurdle Rate 0.0% Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R % Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 39

40 Pla_orm Investment Effect 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% 15% Hurdle Rate Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R % Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 40

41 Lower value features may not meet IRR threshold 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% 15% Hurdle Rate Waterfall R1 R2 R3 R4 R5 R6 R7 R8 R9 R % Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 41

42 Business case analysis Avoid being precisely inaccurate. Alan Shapiro, Professor of Finance, University of Southern California Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 42

43 Priori3zing More Granular or Certain Work Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 43

44 Fixed Value Points Allocated 30.0% 25.0% 25.0% 20.0% 16.0% 15.0% 13.0% 11.0% 10.0% 9.0% 5.0% 7.0% 6.0% 5.0% 4.0% 4.0% 0.0% R1 R2 R3 R4 R5 R6 R7 R8 R9 R10 Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 44

45 Priori3zing the Next Level Down 1. List value- based features on the wall. 2. POs independently allocate 1000 points. 3. Delivery teams independently affinity- es3mate effort for each feature. 4. For each feature, divide the PO points by the delivery es3mate to determine the value ra3o. 5. Arrange the backlog by highest to lowest value ra3o. Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 45

46 Revised Governance: Ac3ve Por_olio Management 1. Investment sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 46

47 6. Con3nuous Op3miza3on Old» Annual budge3ng locks in investments» Limited and larger bets New» Ac3ve management» Mul3ple and smaller bets Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 47

48 Desire vs Capacity or Desire Based on Capacity Alignment? Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 48

49 People to Projects or Work to Teams Team momentum maintained Project Team start Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 49

50 Return on Assets (ROA)» Established high performing teams as enduring corporate assets» Maximize return on those assets Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 50

51 Approach to Por_olio Op3miza3on» Investment Considera3ons - Sunk costs - Cost of delay - Cost of early exit» Op3on value» Nes3ng (Sloyng) op3miza3on based on delivery constraints» Por_olio rather than project op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 51

52 Por_olio Simula3on» Company: Solar Systems» Por_olio Team: Responsible for managing investments in Enhancement Sector» Eight Product Lines: - Mercury, Venus, Earth, Mars, Jupiter, Saturn, Uranus, and Neptune Solar Systems» Capacity: One team» Tradi3onal waterfall approach with one release per year Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 52

53 Tradi3onal Annual Planning Product Line IRR Project Dura#on Mercury 76% 7 Venus 34% 4 Earth 49% 7 Mars 50% 5 Jupiter 31% 3 Saturn 46% 5 Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 53

54 Por_olio Simula3on Assump3ons» Change from tradi3onal approach to itera3ve» Features can be released monthly - Unit of Produc3on = 1 team for 1 month» Minimum viable product (MVP) before later features» Por_olio return determined by adding up the monthly returns for the whole year and dividing by 12» Quarterly por_olio review Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 54

55 Tradi3onal Annual Planning Product Line IRR Project Dura#on Mercury 76% 7 Venus 34% 4 Earth 49% 7 Mars 50% 5 Jupiter 31% 3 Saturn 46% 5 Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 55

56 Breaking Value Down by Features Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 76% % 73% 73% 73% 145% 71% 24% Venus 34% % 43% 35% 16% Earth 49% % 65% 65% 65% 98% 22% - 36% Mars 50% % 45% 45% 58% 55% Jupiter 31% % 38% 17% Saturn 46% % 27% 27% 88% 62%» MVP» Varying return by feature» Post- MVP value phenomenon Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 56

57 Team ROA (Based on One Team for One Month) Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 76% % 0% 73% 0% 73% 0% 73% 292% 145% 71% 24%» Why show the average value in each month rather than the total value in the last month?» What is the return on that one team for one month unit of capacity? Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 57

58 Building a 12- Month Plan Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 76% % 73% 73% 73% 145% 71% 24% Venus 34% % 43% 35% 16% Earth 49% % 65% 65% 65% 98% 22% - 36% Mars 50% % 45% 45% 58% 55% Jupiter 31% % 38% 17% Saturn 46% % 27% 27% 88% 62% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Expected Return 73% 73% 73% 73% 145% 71% 24% 45% 45% 45% 58% 55% 65% Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 58

59 With Your Team Create an Annual Plan Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 76% % 73% 73% 73% 145% 71% 24% Venus 34% % 43% 35% 16% Earth 49% % 65% 65% 65% 98% 22% - 36% Mars 50% % 45% 45% 58% 55% Jupiter 31% % 38% 17% Saturn 46% % 27% 27% 88% 62%» Need to achieve MVP before subsequent features» Can nest MVPs and features in any sequence» Goal is to op3mize your por_olio of investments Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 59

60 End of First Quarter Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 1 32% % 24% 24% 24% 127% 0% 0% Venus 34% % 43% 35% 16% Earth 49% % 65% 65% 65% 98% 22% - 36% Mars 50% % 45% 45% 58% 55% Jupiter 31% % 38% 17% Saturn 46% % 27% 27% 88% 62% Uranus 2 57% % 89% 32% 16% 1. Compe3tor just released innova3ve solu3on 2. Marke3ng came up with new feature enhancement Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 60

61 Evalua3ng the Mercury Investment Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 76% % 0% 24% 0% 24% 0% 24% 96% 145% 127% 71% 0% 24% 0%» Did your team choose the Mercury investment in Q1?» How do you determine how to address the lower expected return? Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 61

62 End of Second Quarter Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 34% % 24% 24% 24% 127% 16% 0% Venus 34% % 43% 35% 16% Earth 49% % 65% 65% 65% 98% 22% - 36% Mars 1 20% % 22% 22% 33% 2% Jupiter 31% % 38% 17% Saturn 46% % 27% 27% 88% 62% Uranus 2 33% % 36% 36% 36% 36% 32% 16% 1. Market for Mars tanks. 2. Because of a technology issue, it will take three more months to deliver MVP. Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 62

63 Sunk costs When you have dug yourself into a hole, the best thing you can do is stop digging. Alan Shapiro, Professor of Finance, University of Southern California Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 63

64 End of Third Quarter Product Line IRR Project Dura#on Dura#on to MVP Feature Value Mercury 34% % 24% 24% 24% 127% 0% 0% Venus 1 62% % 98% 35% 16% Earth 49% % 65% 65% 65% 98% 22% - 36% Mars 20% % 22% 22% 33% 2% Jupiter 2 31% % 38% 17% Saturn 46% % 27% 27% 88% 62% Uranus 33% % 36% 36% 36% 36% 32% 16% Neptune 3 189% % 189% 189% 1. Customer will pay premium for features, if delivered in December. 2. VP of Sales made an announcement to the market that these features would be delivered by year s end. 3. Startup acquired: ability to get new product delivered to customers Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 64

65 How Did Our Waterfall Project Fare? Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual Return 34% 34% 34% 34% 34% 34% 34% 20% 20% 20% 20% 20% 28% Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 65

66 Ac3ve Por_olio Management Summary 1. Por_olio sectors and budget alloca3on 2. Itera3ve risk mi3ga3on 3. Dynamic business case 4. Con3nuous feature flow 5. Unified priori3za3on 6. Con3nuous op3miza3on Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 66

67 What If You Had a Magic Box? Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 67

68 Q&A Ac#ve Por*olio Management, John Rudd, Solu#onsIQ 68