How Enterprise Investment projects compare with investing in stocks and shares
“Projects are like stocks” famously observed the US Government’s first‐ever CIO, Vivek Kundra, on his appointment back in 2009. He then published the Federal IT Dashboard, prominently using terms such as ‘investment’ and ‘portfolio’, so echoing similar Wall Street‐esque and IT‐centric representations of project performance experienced by executives in board rooms all around the world.
Kundra himself moved on to become an Executive Vice President with Salesforce. But, his observation and dashboard remain, still begging the question of how much projects are like stocks, and therefore founded on similar principles and techniques. If so, to what extent should the executive suite be like Wall Street?
By: Chris Potts
The Executive Suite: Investing in Operations, Investing in Projects
Investment means placing something we value at risk to gain something else we value more. Achieving our investment goals as ‘risk‐efficiently’ as possible, by applying tried‐ and‐tested principles and techniques, is the focus of any investment strategy.
Enterprises invest in day‐to‐day operations and in projects. Executives oversee these investments, making sure that ‐ in combination ‐ they deliver the enterprise’s goals.
In reality, operations are the primary investments that executives are accountable for, and usually most interested in. Operations represent the lion’s share of value at risk and deliver the lion’s share of the enterprise goals. The investment in projects is secondary, and required only to deliver results that existing operations cannot, or the equivalent results but at less risk.
Projects are investments, and operations are investments too. Or, are they? Before getting too far into a strategy that is founded on that premise, and compares projects with stocks, let’s check how much the executives agree with it.
Principle One: Projects are Investments (and Operations are investments too)
If projects are investments, a strategy founded on investment‐related principles and techniques makes sense. Otherwise, those principles and techniques are irrelevant, or even potentially harmful.
Enterprise change projects are without doubt implementations, but are they investments? Here are three checks that help clarify how much executives currently regard projects as investments, and not just implementations:
- Projects place at risk something executives value
- Executives expect projects to deliver value, not just implement change
- People are required to present their ideas for projects as business cases, or investment proposals, whether formally or not.
If the first two of these checks are true then the executives agree, at least implicitly, that projects are investments.
If the third check is also true, then your enterprise is using one of the techniques that can lead to successful investments ‐ although never on its own:
Business Cases, or Investment Proposals
(Note: these are two quite different techniques, so for simplicity in this article I will refer to them generically as ‘project proposals’. For more about the differences between them, and why that matters, read DefrICtion.)
As we step further through the principles, more techniques will emerge.
Now, here are three checks for whether the executives also treat day‐to‐day operations as investments:
- Executives require the equivalent of a project proposal before agreeing the annual budget for an operating department
- Operations and projects are driven by, and measured using, the same overall investment goals
- When considering a project proposal, executives robustly challenge whether the value it is proposing could be delivered by existing operations.
In many enterprises, the above checks expose that while projects are treated as investments, operations are not. Yet, any successful strategy for investing in enterprise change projects (an “Enterprise Investment” strategy), recognises that day‐to‐day operations are investments too. Treating only projects as investments can be one of the reasons they struggle or fail. The enterprise may be investing in projects it doesn’t really need, and doesn’t care enough whether those projects succeed or not.
However, for the rest of this article I am going to leave aside the question of whether an enterprise is treating operations as investments, and return to the original theme. To what extent are projects like stocks?
Principle Two: Some Investments Work, Some Don’t
Up to 70% of Enterprise Investment projects fail, according to Cranfield School of Management. This metric suggests that the average probability of a particular project succeeding can be as low as 0.3. However, the probability of all our projects succeeding is close to zero. Just like investing in stocks and shares, some investments will work, and some won’t.
Here are four checks on whether, and how, this principle is being applied:
- Executives factor‐in to their investment decisions the realistic probability of projects succeeding
- Each project has an exit strategy in case it becomes apparent later that it is not going to work
- Executives see it as a success to stop a project if the probability of success drops to zero
- The Enterprise Investment portfolio is designed to achieve its goals on the basis that some of the projects will not work.
These checks, together with the example metric from Cranfield School of Management, highlight the following techniques:
- An overall measure of investment performance
- Probabilities of success
- Exit strategies
- Investment portfolios
Principle Three: The Value of Investments Can Go Up or Down (or Transform)
From the moment someone has the idea for a project, all the way to when the project ceases to exist, the value of that idea can change all the time. Some ideas rapidly turn out to be ‘duds’ while others immediately shine. For any idea selected for investment, the value proposed at the beginning is unlikely to be the same as the value it delivers in the end ‐because the environment changes, the project itself changes, or both.
In Enterprise Investment projects, as well as the value going up or down, it can also transform into a different type of value. For example, a project that initially proposed an increase in revenue might eventually deliver an improvement in brand reputation instead; one that proposed cost savings might deliver an essential structural change; and so on.
Projects may be like stocks in some ways, but we are starting to discover why they may be unlike stocks too. Does that mean our change projects would suffer if we applied too literally some of the techniques for investing in stocks and shares? Let’s hold that thought, and see where the next three principles lead us.
Meanwhile, here is how you can check how the extent to which your enterprise is applying the principle that the value of investments can go up or down (or transform):
- When executives approve a project for investment, the proposed value is considered to be speculative – both the type of value, and much the project will eventually deliver
- Projects have a value‐range, from the minimum viable level up to an optimistic maximum, rather than an absolute value
- ‘Stop‐loss’ criteria are agreed for each project, so that the exit strategy can be applied if its value falls below the minimum viable level, or transforms into value that is not required
- During the execution of a project, executives expect the investment manager to routinely report on how its estimated value has risen, fallen, or transformed.
Some more investment techniques these checks bring into play:
- Value ranges
- Stop‐loss criteria
- Investment managers (Note: these are different from implementation managers, and from project sponsors).
Principle Four: The Aim is to Achieve the Investment Goals as Risk‐Efficiently as Possible
People don’t make investments for the sake of making investments. They do it to achieve one or more goals, and it’s entirely up to the investor to decide what those goals are.
A stock market investor’s primary goal is to make money. It is likely that some of the money they make is for re‐investment, some (and I am speculating wildly here) may be to buy a new yacht, fund their children through education, take vacations in exotic locations, donate to charity, and so on. These are the investor’s goals for what they want to do with the money their investments make, but the goal of the investment itself is to make money.
Enterprises invest in projects to achieve different goals from stock‐market investors. An enterprise invests, for example, to grow revenues, reduce costs, enhance their brand reputation, comply with laws and regulations, and sometimes simply to survive. Most of the investment goals are not financial, and some are not even measureable as numbers.
Either way, whether the investment is in stocks or projects, the aim is to achieve the investor’s goals and as risk‐efficiently as possible.
Here are how you can check the application of this principle in the context of your enterprise:
- Executives agree the Enterprise Investment goals, and communicate them to enterprise managers and staff
- Simply ‘making money’ or ‘increasing profits’ are not considered useful goals for Enterprise Investment, although ‘growing revenue’ and ‘reducing costs’ may be
- The primary measure of the enterprise’s performance at Enterprise Investment is about whether it is achieving the investment goals – not, for example, the success versus failure ratio of projects
- Executives agree what value they are prepared to put at risk (e.g. time, money, reputation, anything else), to achieve the Enterprise Investment goals
- The portfolio of investments is designed to achieve the Enterprise Investment goals as risk‐efficiently as possible, and frequently reviewed to ensure this remains the case
- The organisation includes an Investments Management Office, whose role is to monitor the achievement of the investment goals, and to guide executive decisions.
Once again, these checks give us some more techniques we can use:
- Setting and communicating investment goals
- Agreeing what value the portfolio can put at risk
- Frequent review of the portfolio’s goals and risk‐efficiency
- An Investments Management Office (IMO) (Note: an IMO has a different purpose and scope compared with the typical Programme Management Office).
Principle Five: Diversification, Up to a Point, Makes Investments More Risk‐Efficient
Imagine your enterprise had only one mega‐project, through which to achieve all of its Enterprise Investment goals. What if the project failed? What if it achieved some of the goals and not the others? What if there were other potential projects that could achieve the goals at a lower level of risk, but no resources available to invest in them?
Now imagine the opposite scenario. That your enterprise is investing in thousands of small projects. What if there are not enough competent investment managers, implementation managers, technical staff, or other people, to make sure the projects succeed? What if it becomes too time‐consuming or difficult for executives to make informed and reasoned judgements about which new projects to invest in, which existing ones to keep investing in, to modify, or to cancel?
If investing in one mega‐project or in thousands of small projects both look like high‐risk strategies, how do executives ensure, instead, that they have the most risk‐efficient portfolio, somewhere between those two extremes?
In 1952, the American economist – and Nobel Prize winner – Harry Markowitz introduced Modern Portfolio Theory (MPT), helping investors in stocks and shares to deal with this challenge. MPT is founded on the technique of selecting investments based how they relate to other investments in the portfolio, rather than one‐by‐one on their individual merits. Compare this with how your enterprise currently expects people to propose projects, and how projects are selected for investment. To what extent are projects being proposed and selected based on a pre‐1952 approach to investment?
The principle MPT uses is that the diversification of investments, up to a point, reduces the overall investment risk. Beyond that point, any further diversification increases risk. In the one‐mega‐project scenario, there is probably not enough diversification; in the thousands‐of‐small‐projects scenario, probably too much, which is why they both look risky. In either case there is a high probability of the investment not achieving the enterprise’s goals, and inefficiently.
For Enterprise Investment projects, a modified interpretation of MPT is needed. It’s not possible to apply MPT literally, and risky to even try. Most change projects do not deliver a true financial return, so unlike stocks and shares it’s not realistically possible to trade‐off one project against another based on a mathematical calculation. Nor is it possible to cash‐in a change project in order to buy a different one.
In the diversification of investments to create a risk‐efficient portfolio, change projects are definitely not like stocks. Instead, the first‐level diversification is created by the enterprise’s investment goals themselves. Hands‐on experience consistently suggests that 10‐12 diverse goals, with similarly diverse measures of success, create the foundations of a risk‐efficient portfolio. The second‐level diversification in an Enterprise Investment portfolio is via the projects for meeting each goal.
Here are some checks on whether your enterprise is applying the fundamentals of portfolio theory in a way that’s likely to ensure success:
- Executives consider the value of a project based on its contribution to the portfolio, rather than its individual merits
- The Enterprise Investment goals represent the diverse types of value that the enterprise invests in to achieve (experience suggests 10‐12, typically)
- Comparing projects that are driven by different, or non‐numeric, goals is recognised as depending on executive skill and judgement, rather than a mathematical calculation
- Within each investment goal, the projects are sufficiently diverse to ensure the goal is achieved as risk‐efficiently as possible.
- The techniques that this principle highlights, and which have not already appeared in previous principles include:
- Assessing projects based on their contribution to the portfolio, rather than individual merits
- Building the portfolio using the diverse goals that the enterprise invests to achieve
- Diversifying the projects within each goal, until they are considered to be as risk‐efficient as possible
- Executive skill and judgement (rather than unrealistic mathematics).
Principle Six: We Invest x to Gain y
For a stock‐market investor, the primary type of value being put at risk (x) is the same as the type of value being gained (y). Both are money, and the attractiveness of an investment can be calculated based on the net value formula y‐x.
Enterprise Investment also involves putting money at risk, and sometimes delivers money in return. Therefore, it’s tempting to think that both kinds of investment are the same that Enterprise Investment projects are, after all, like stocks, and we can calculate their attractiveness as a net value, and in a similar way.
Here are two reasons why trying to calculate the net value of an Enterprise Investment project is not realistically possible, and potentially harmful to our strategy. Firstly, the vital investment in a change project is people’s enterprise ‐their determination to take a risk to create some new value. Enterprise Investment is exactly what is says it is. Money (a form of Capital Investment) buys the products and services that projects need, but it money isn’t the investment that delivers the value.1 Secondly, as I’ve already highlighted,
change projects deliver about 10‐12 diverse types of value, most of which are not financial and some are not even numeric.
The investment ‘formula’ for change projects is “We invest people’s enterprise (plus some money and other forms of capital) to gain 10‐12 diverse types of value”. While a stock market investor can calculate the net value of an investment based on subtracting x from y, the same is not realistically true of investing in change. Were executives tempted to try, they would be obscuring the actual investment decisions they are there to make, and increasing the risk of making the wrong ones.
Here are three checks you can use to observe whether your enterprise recognises the fundamental differences in ‘x and y’ between change projects and the stock market:
- Executives regard people’s enterprise as the primary investment in creating value from projects
- Executives expect transparency of both the investment required and the value proposed
- • Executives are healthily sceptical about any ‘net value’ calculations (y‐x) in project proposals.
- The final techniques that emerge from these checks are
- Treating people’s enterprise as the primary investment
- Transparency of both the investment and the proposed value
- Being sceptical about ‘net value’ calculations.
In Conclusion: A Pragmatic Strategy for Success
Executives that have made a careful comparison between investing in change projects and in stocks and shares will know that the two types of investment are similar in some ways, yet very different in others. If not, they may be missing‐out on some valuable key principles and techniques or applying them too literally, which could be why their enterprise’s projects are underperforming.
Based on my experiences of working with executives on their strategies for Enterprise Investment, the principles and techniques in this article constitute key elements of best practice, as far as we know it today. Achieving best practice is not, however, the objective.
The objective is to achieve measurable improvements in the collective performance of projects ‐where performance means achieving the investment goals as risk‐efficiently as possible. That can be harder to measure than a success versus failure ratio but, accepting that some projects work and some don’t, if the ones that work deliver our goals, and the ones that don’t we can live without, then our strategy is succeeding.
The most effective strategy is one that notices the principles and techniques that are currently driving decisions, and through careful tactics, introduces changes that demonstrably improve results. The tougher strategic challenges are those that have to address the principles being used, rather than the techniques. If the principles need changing, then just introducing new techniques, or changing the ones already in use, will most likely lead to disappointment.
Are projects like stocks? Is the executive suite like Wall Street? Not really, but these are great strategic questions, since both are about achieving our goals through investment. They lead us to some key investment principles, and some valuable techniques. As long as we know which to apply unchanged, which need to be modified, and which to carefully avoid, our projects will perform better as a result.
What of the IT Dashboard? How much does that help us towards achieving our goals for Enterprise Investment? As I wrote in my chapter for the book “State of the eUnion – Government 2.0 and Onwards”, IT‐related investments can be a useful place for our strategy to start, provided it rapidly moves on from there. Just as money, on its own, doesn’t deliver the investment results we need, nor does technology. Enterprising people deliver results, using money and technology.
As one of the characters in the Wall Street movie sequel, Money Never Sleeps, reflects: “If it weren’t for people who took risks, where would we be in this world?”.
About the Author
Chris Potts is a hands‐on corporate strategist, a mentor to CIOs, their executive colleagues, Enterprise Architects and Portfolio Managers. He is also a speaker and a writer. He specialises in strategies for Enterprise Investment, which combine Enterprise Architecture with Investment Portfolio Management. He works with people around the world in a diverse range of industries, cultures and corporate strategies.
Chris is the author of three business novels, on the transformation of IT into Enterprise Investment, The FruITion Trilogy.
Write to him at: [email protected]
Visit his website at: www.dominicbarrow.com