Federal overseers aim to guide IT investments toward higher yields

'In IT, we have expanded the notion of portfolio management beyond just risk and returns. ... It is a matter of effectively allocating strained resources to achieve greater returns,' GAO's Lester Diamond said.

Henrik G. de Gyor

Agency officials who manage IT investments through a portfolio can thank Harry Markowitz.

Markowitz started working in the 1950s on the hypothesis for portfolio management, which statistically measures the expected risks and returns of investments and seeks to combine them to maximize returns. In 1990, he won the Nobel Prize in economics for his theory of financial economics, which includes portfolio management.

IT experts have taken his theory and applied it to technology investments, where managing an IT portfolio means looking across the entire systems architecture and seeing how all investments fit together and complement one another.

'In IT, we have expanded the notion of portfolio management beyond just risk and returns,' said Lester Diamond, the General Accounting Office's assistant director for IT management. 'In making decisions about IT, you must also look at human capital or other resources you have available and make sure you don't have too many resources focused in a particular area. It is a matter of effectively allocating strained resources to achieve greater returns.'

GAO will define IT portfolio management more precisely this fall when it releases the second version of its IT investment management guide, Diamond said. Officials are working with federal managers and private-sector experts to more clearly describe it.

The Office of Management and Budget has emphasized portfolio management for the last few years, but agencies still are in the early stages of learning how to administer their IT portfolios, federal officials said.

In its 1994 Strategic Information Management Guide, GAO was one of the first federal agencies to specifically use portfolio management as it relates to IT.

Congress followed that up with its own definition two years later when it passed the Clinger-Cohen Act. While the 1996 law does not specifically mention portfolio management, it does require OMB's director to develop a process for analyzing, tracking and evaluating the risks and results of all major IT capital investments.

It's the only way

'What Clinger-Cohen is asking can't be done for just one project,' said an OMB official, who asked not to be named. 'Capital planning and investment control can only be implemented through portfolio management.'

And over the past three years, OMB and GAO have placed a stronger emphasis on how agencies manage their IT investments by requiring more specifics through OMB circulars A-11 and A-130 and GAO's initial IT investment management guide.

'Portfolio management requires careful attention by agencies and OMB,' the official said. 'Agencies should use the capital planning and investment control process to make decisions on projects, which OMB will look carefully at. All investments should touch on priority funding.'

In A-130, OMB delineates the information agencies must include in their IT portfolios:
  • Demonstrate the impact of alternative IT investment strategies and funding levels
  • Identify opportunities for sharing resources
  • Consider the agency's inventory of information resources.
    Circular A-11, meanwhile, is the bible for agency- and governmentwide portfolio management.

    In Section 53, OMB details agency portfolio reporting procedures, special terms agencies need to know, the reporting schedule and how a portfolio must relate to the President's Management Agenda.

    OMB then uses all of the agencies' submissions to form a governmentwide IT portfolio, the OMB official said.

    The short project descriptions are reviewed to determine which IT initiatives need a more-extensive business case. 'We can't make a project-level decision based solely on Section 53 descriptions,' the official said. 'We use it to provide a context of all projects.'

    Agencies must develop business cases for all major projects, which, according to A-11, is any 'system that requires special management attention because of its importance to any agency's mission.'

    That description covers major initiatives carried over from the last fiscal year, financial management systems worth more than $500,000 or systems tied to the Business Reference and Performance Reference models of the Federal Enterprise Architecture.

    Ask, check, identify, map

    'We begin by asking questions whether investments will lead to improved agency performance or program outcome,' the official said. 'We check for redundancies, identify where agencies can consolidate or work together more effectively and map all investments to the Business Reference Model.'

    The business cases provide a more detailed look into projects, which lets agencies and OMB officials manage investments more effectively.

    GAO, on the other hand, looks at portfolio management from a broader perspective, Diamond said.

    Diamond, who helped create a March 2002 report on portfolio management for the CIO Council's Best-Practices Committee, said agencies should consider the trade-offs and the basis for the trade-offs when developing an IT portfolio.

    He listed some important components of portfolio management:
    • Develop selection criteria to represent mission and goals of the agency

    • Select projects according to those criteria

    • Manage the portfolio by observing its performances

    • Develop performance expectations and determine how the projects are meeting them.

    'Portfolio management is at the core of Stage 3 of our investment guide,' Diamond said. 'Few agencies have applied Stage 3.'

    Diamond said that, of the agencies GAO analyzed, only the Postal Service has met half of the key practices in Stage 3.

    Although OMB and GAO differ slightly in their view of portfolio management, officials from both agencies said their approaches complement each other.

    'OMB is talking about a more comprehensive list of investments, which is something you need and the portfolio would provide,' Diamond said. 'But it doesn't capture all the advantages of managing an IT portfolio.

    'By taking OMB's and GAO's guidances together, agencies have more to work from than by taking either separately.'

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