Leverage OKRs to Achieve Breakthrough Portfolio and Investment Performance – Part 3

In the last installment of this series, jointly produced by Adaptivity and WorkBoard we discussed high-level strategy realization processes. In this, the third installment, we’ll discuss how your strategy framework expressed in Objectives and Key Results integrates with your portfolio management process and share a high-level explanation of portfolio management’s key processes. 

In part 2 we discussed the three critical sub-processes and competencies of an effective strategy realization program:  

  • Strategy development (formulation)  
  • Strategy deployment  
  • Strategy execution (tracking and governance)  

Strategy deployment and execution tracking, to achieve success, both require a goal setting framework that includes measures of progress and success over both long-term and short-term time horizons, and a disciplined governance and accountability process to keep things on track to resist the malign force of strategy decay. We propose Objectives and Key Results (OKRs) as the best of the current options available for expressing your strategy and tracking its progress over time. An effective OKR program will dramatically increase the likelihood that your organization will realize its strategic objectives.  

OKRs also provide an excellent means to integrate your strategy realization program with your portfolio management, funding, and investment functions so that scarce resources are allocated to the most strategically impactful initiatives. The interface between OKRs and portfolio management exists at the portfolio vision level. Before we delve into portfolio vision, though, the first challenge of establishing a portfolio management demand-side structures is to define and shape portfolios in the first place. Let’s establish the basics by defining “demand-side” and the other top-level portfolio management functions.  

Enterprise portfolio management has (at least) three major components. Each component has distinct competencies for effectiveness: 

  • The demand side – Portfolios exist on the DEMAND side of the portfolio management equation. Demand is unlimited / nearly infinite in most settings. Demand is instantiated in requests for initiatives, investments, and expenditures to support positive outcomes in various parts of the business. Demand is presented by stakeholders who are trying to win in the market, operate more efficiently, hit targets for bonuses, and impress higher leaders to win promotions. 
    One of the signs of high organizational capability in demand-side management is the ability to run various portfolio scenarios quickly and accurately in order to maximize the value of the top of the portfolio demand queue. Sometimes this requires support from someone with a Financial Planning and Analysis (FP&A) background and some good modelling tools. It also requires stakeholders who are willing and able to decompose large initiatives to enable interleaving and reordering of high value features or components from multiple initiatives (and deprioritizing lower value components).  
  • The supply side – Capacity and resources exist on the SUPPLY side of the portfolio management equation. Supply of capacity and resources is always finite and limited. Supply constraints can take various forms in different business contexts, but a few examples could include: money (capital and expense), stops per day for a truck fleet, team-days of software development, container cubic-feet per trans-Atlantic crossing, hours of machine time on a lathe, cycles per day on a press, mold or form, calls per hour from an outbound call center.  
    While some types of capacity and supply constraints can be increased more quickly than others, it is rare that effective capacity can be added more quickly than the medium term (months+), therefore it is a portfolio management best practice to treat capacity as fixed for the planning horizons typical in portfolio management. Added capacity will be recognized after that throughput or volume has been demonstrated and measured in production.  
  • The matching function – The rules for value assignment, prioritization, and capacity allocation (essentially the creation of a functioning economy) are defined and managed by the portfolio management MATCHING function. These are the critical processes that allocate finite capacity to infinite demand to realize the highest possible returns and strategic impacts from corporate resources and expenditures. In many organizations, this is a fraught, highly political process because it’s a zero-sum conflict over the lifeblood of growth and power in the organization. Portfolio management is an arena where competing executives who are accustomed to hearing “yes” must eventually hear “no more” and “interesting behavior” often ensues!  
    An effective matching function relies upon accurate, demonstrated measures of the actual productive capacity of the resources being allocated, so when a “cut line” is projected on the demand queue (what’s in, what’s out, for a given time horizon), the conversation moves to modelling different demand scenarios (breaking down and reordering items in the demand queue) for optimization, instead of further aggravating common conditions of overcommitment and excess work in process (WIP). Overcommitment creates a tragedy of the commons where all WIP suffers delays and quality problems, and the factors of production (be they people or machines) are overutilized unsustainably. 

Now that the key major functions are defined, it should be evident that there are different competencies to develop in each area, and that most organizations will mature the three functions at different rates. If you are undertaking an initiative to mature the effectiveness of your portfolio management processes there is very important pro tip we’d like to share with you:  

When attempting to mature portfolio management capability in an organization, ensure that the organization has dependable, historically observed measures of capacity BEFORE you push too hard on stakeholders to adopt a disciplined demand-side process. All of us who have been involved in portfolio management (or any asset allocation process) have witnessed a pissed-off executive (maybe yelling and pounding the table) insist somebody is “sandbagging” (that the organization has more capacity than offered) and that his or her precious initiative MUST be that “just one more thing” to squeeze in. When true capacity is presented transparently as mathematical fact based on observed historical evidence, you will have more success demanding discipline and accountability in the value assignment and prioritization processes.  

Back to OKRs and how they integrate with portfolios:  

We’ve established that portfolios are constructs we create on the demand side. Formulating and shaping portfolios is more art than science, but the point of having multiple portfolios is to reduce contention and conflict between stakeholders, and to simplify and improve prioritization within each portfolio. First, top level portfolios align to your high-level asset allocation recipients: business units, product lines, P+Ls, etc. We further decompose those to sub-portfolios (yes, portfolios of portfolios) for other stakeholders who are allocated funds and capacity. Obviously, adjusting allocation percentages from one portfolio or group of portfolios at every level is part of the matching function. Reallocation within portfolios usually occurs quarterly. Higher-level allocations may adjust less frequently. In any case, clarity about allocations, allocation policy and funds/capacity available at any given time dramatically reduces conflict between stakeholders and speeds up the prioritization process.  

Another goal of establishing multiple portfolios is to help us compare similar things to one another. We categorize portfolios (or items within a portfolio) into “sectors” that have measures appropriate to the benefit type and investment horizon being considered. For example, the prioritization rules for disruptive innovation initiatives have a different time horizon, benefit scale (exponential vs incremental) and a different tolerance for variability (hit / miss ratio) than cost-take-out initiatives (which should have a very low tolerance for variability of returns). 

Business units, products and the portfolios serving them need to know what they should optimize for. What does “good” look like HERE? This is where portfolio visions and OKRs come into play. A portfolio vision can be expressed through different lenses – it starts with a statement of the positive longer term future outcomes and impacts an ideally realized portfolio will produce for its stakeholders.   

Other tools to consider:  

  • A value hypothesis is usually helpful  
  • Personas 
  • Value proposition canvas(es)  
  • Lean canvas(es)  
  • SWOT analysis   

Several good representations of portfolio value hypotheses can be memorialized in WorkBoard’s Strategy Application.

Objectives and Key Results (OKRs) can ultimately express all portfolio vision components into a set of goals and measures that both 1. ladder up to the strategic objectives of the company (or BU, product, or department) for strategic alignment, and 2. support tracking, governance, and controls through a robust corporate strategy execution process.  

Especially for investment sectors that are heavily weighted towards achieving strategic objectives, it would be absurd not to express the definition of “where we play” and “how we win” from the business unit or product strategy down to the portfolio prioritization process in an aligned and traceable manner. The strategic initiatives that drive corporate strategy realization live or die in the portfolio management process! Sadly, in many portfolio management examples we’ve witnessed, the deployment of corporate strategy is so vague that poor portfolio managers have virtually no measurable objectives to guide effective prioritization.  

In the next installment, we will get into much more specific and meaty principles and guidelines for effective lean and adaptive portfolio management, focused mainly on the capacity-side (demand and matching to come in subsequent installments). This will include a lot of things you haven’t heard before from PMO school or the big scaling frameworks.  

This series provides a host of (hopefully) intriguing insights to help organizations realize their strategic objectives and get better outcomes from their portfolio management and asset allocation processes. Implementing all the processes, practices, systems, and cultural and behavioral changes to make strategy reality in your organization requires expertise and experience. Adaptivity employs some of the leading experts in the field.  

We’d like to hear about your challenges and goals and help you succeed! 

We can be reached at www.adaptivitygroup.com and www.workboard.com