APPLYING A PORTFOLIO MANAGEMENT PROCESS IN THE ENTERPRISE SHARED SERVICES ENVIRONMENT

Proceedings of the 2005 Project Portfolio Management National Conference APPLYING A PORTFOLIO MANAGEMENT PROCESS IN THE ENTERPRISE SHARED SERVICES ENVIRONMENT Michael J. Stratton, PMP, SCPM The Boeing Company P.O. Box 3707, MC 7A-44 Seattle, WA 98124-2207 USA Copyright © 2005 The Boeing Company All Rights Reserved ABSTRACT Applying Portfolio Management principles through implementation of a robust process is no easy task in a corporate environment. This is especially true in the unique area of corporate shared services where the business unit is not a profit center. This presentation will explore the steps in developing a sound process for managing a portfolio of investments and how it applies to the challenging environment of the shared services business unit. 1 INTRODUCTION Portfolio Management (PfM) has become a hot topic in business. Many types of companies are implementing a PfM process because: 1) Resources are limited; 2) Investments need to be prioritized; 3) Budgets have been, or are being, slashed; 4) Investments, projects, programs and initiatives need to be treated holistically, including funding and tracking. Proper application of PfM principles assists business leaders in making crucial decisions by meeting the reasons noted above. This paper will explore Portfolio Management first, and then tackle how the process relates to the area of corporate shared services. 2 CORPORATE SHARED SERVICES Corporate shared services refers to the business unit within a company that provides the company's other business units with common services that support the production of products and/or services marketed for profit. These services may range from computing resources, payroll, telecommunications, e-commerce and informationmanagement security to services including transportation, facilities, and purchase of non-production goods and services. The group may also direct safety, health and environmental planning; security and fire services; printing; creative services (e.g. photography, graphics), the hiring, training and motivation of the company workforce; provide travel services to employees; and be responsible for disaster preparation and response. Generally, the shared services business unit operates as a cost center, not a profit center. This means it must recover all costs incurred for its services from the other business units. The mechanism is often referred to as chargeback. The chargeback methodology ranges from fees for services to allocations based on transactions or proportions (e.g. number of employees, number of personal computers). Page 1 of 19 Stratton 3 WHAT IS PORTFOLIO MANAGEMENT? Portfolio Management is the process of actively, and dynamically selecting, prioritizing and tracking investments. The process is used to ensure investments align with the strategies, goals and objectives of the business. The Portfolio Management Process facilitates: 1. Communication of investment details. 2. Management of all investments as a whole. 3. Measurement of the progress of funded investments. An investment begins with an idea and moves through its lifecycle until the project implementing the investment is complete. The proper use of a business case and sound project management practices are critical to the success of the Portfolio Management Process. Figure 1: The Investment Lifecycle Page 2 of 19 Stratton The following diagram shows the context of PfM in relationship to the business case and project, or program or initiative. Figure 2: Portfolio Management Context Diagram Page 3 of 19 Stratton 4 PORTFOLIO MANAGEMENT PROCESS DEVELOPMENT Development of the PfM Process for a company must be balanced between detail and simplicity. If the process is too difficult or complex, then it will fail to be used within the company. There are several keys to successfully developing and implementing the process. The steps noted in the table that follows give a high-level outline for this effort. Step 1 2 3 4 5 6 7 8 9 5 Action Obtain executive sponsorship for the process development and implementation. Form a cross-functional team for development and implementation. (This includes a charter, etc.) Develop process requirements. Define process steps, inputs, outputs, customers and suppliers. This includes identification or roles, responsibilities and accountability for those involved in the process. Document the process. This includes tools and templates. Develop implementation plan. Obtain executive approval and participant buy-in for the process. Communicate the process. This includes waterfall communication and training. Web sites and portals are helpful for disseminating communication, process documentation, tools and templates. Implement the process. PORTFOLIO MANAGEMENT PROCESS DEFINITION The following figures illustrate two different ways to view the Portfolio Management Process Flow. The first figure shows the process steps and associated inputs and outputs. A brief description of each process step, inputs, outputs, the participants involved and the tools which can be utilized, once developed, follows the first figure. The second figure shows the process steps, associated outputs and inputs and the participant’s responsibilities within the process. Page 4 of 19 Stratton Figure 3: The Portfolio Management Process Flow Process Steps The inputs noted in the process flow diagrams trigger the Portfolio Management Process. After moving through the various process steps, the result is the Investment Portfolio. 1. Manage Criteria & Process Flow Role(s): Investment Board, Investment Analysis and Portfolio Management Specialist, Corporate Headquarters, Process Councils Input: Criteria; Lessons Learned; Existing Portfolio; Investment (Project and Program) Status and Performance; Strategy and Directions; Market, Industry and Technical Trends. Output: Decision Criteria (Qualification or Screening, and Evaluation or Prioritization), Portfolio Management Process Flow and documentation. Process: Develop, review, approve and maintain decision criteria (DC). Decision Criteria consist of: Qualification or Screening, and Evaluation or Prioritization. Develop and maintain the investment portfolio status process Update investment portfolio. Request update to strategic and tactical plans, as required. Tools: Page 5 of 19 Stratton   2. Portfolio Management Criteria Guide Investment Proposal Template Qualify Investment Proposal Role(s): Shared Services Leaders, Customer Support, Investment Board, Investment Analysis and Portfolio Management Specialist Input: Investment Proposal Output: Qualified Investment Proposal, Unqualified Investment Proposal Process: Evaluate Investment Proposal against Investment Screening Criteria. Review investment proposal. Decide if Investment Proposal qualifies for possible inclusion in the shared services portfolio. Tools:  Portfolio Management Criteria Guide Reference Only. Produce Business Case Role(s): Shared Services Leaders, Customer Support, Investment Analysis and Portfolio Management Specialist Input: Qualified Investment Proposal; Templates for Business Case Document, Business Case Presentation, Cost/Benefit ROI Model; Business Case Process Guide Output: Business Case Recommendation, Business Case Document, Business Case Presentation, Cost/Benefit ROI Model Process: Develop: Business Case, Business Case Document, Business Case Presentation, Cost/Benefit ROI Model. Utilize templates and guides. Tools:         3. Business Case Process Guide Portfolio Management Artifact Tool Map Portfolio Management Document Tool Map Business Case Document Template Guide Cost/Benefit ROI Model Business Case Presentation Template Business Case Presentation Template Guide Prioritization Scoring Template Review, Validate and Authorize Business Case Role(s): Investment Board, Investment Analysis and Portfolio Management Specialist Input: Business Case Recommendation, Reporting Requirements, Resource Availability, Affordability Output: Business Case Authorized Recommendation Process: Review Business Case recommendation with management and customer. Validate Business Case with current environment. Obtain Business Case Authorization as required from management and customer. Finalize Business Case summary and recommendation. Tools:  Business Case Process Guide  Prioritization Scoring Template Page 6 of 19 Stratton 4. Create Portfolio Recommendation Role(s): Investment Analysis and Portfolio Management Specialist Input: Business Case Authorized Recommendation, Resource Availability, Affordability Output: Portfolio Recommendation, Investment (Project or Program) Status and Performance Process: Assign portfolio ranking. Normalize portfolio ranking. Revalidate affordability. Collect portfolio project status. Collect customer and supplier input. Provide visibility reporting. Perform gate reviews. Maintain portfolio. Tools:  Portfolio Management Action Log  Portfolio Management Decision Memo Template  Portfolio Management Matrix 5. Approve & Authorize Portfolio Role(s): Investment Board, Corporate Headquarters Input: Portfolio Recommendation, Resource Availability, Affordability Output: Portfolio, Approval to Proceed, Funding Process: Review and confirm Portfolio ranking of investments. Provide direction on each investment to proceed, cancel, suspend or continue. Provide funding for investments. Tools:  Shared services Portfolio Management Action Log  Shared services Portfolio Management Decision Memo Template  Shared services Portfolio Management Matrix Page 7 of 19 Stratton Figure 4: The Portfolio Management Process Flowchart, Including Participant Responsibilities Page 8 of 19 Stratton 6 THE PORTFOLIO MANAGEMENT PROCESS DECISION CRITERIA The PfM Process is enabled by two different types of decision criteria with two distinct purposes: 1. Decision Criteria type: Screening (also called qualification). Purpose: determine entry into the PfM Process. 2. Decision Criteria type: Evaluation (also called prioritization). Purpose: determine the order of project activation, suspension, and/or continuation. Each of these decision criteria are applied to all investments during their lifecycle, most usually from the business case on. The screening criteria are applied at the earliest stages of the investment lifecycle. These criteria may vary from company to company, and organization to organization, depending upon business operation and strategic objectives. These criteria determine whether an investment is even considered for transformation by the investment board into a project, program or initiative to implement the idea. The evaluation criteria become the foundation for comparison of investments that have passed through the entry sieve. The criteria aid in the decisions about the projects by the Investment Board, but do not dictate or automate the decisions themselves. Rather, the criteria offer a guide to priority based upon an agreed-upon weighting for the criteria as it applies to projects being considered and monitored in the portfolio. The criteria should carry a weighting established by the Investment Board based on importance of that criteria to the company. This weighting of the criteria may be modified at any time to reflect changes in the: business environment; company or organization strategic direction; availability of funding; and/or current project status. The scoring gives the Investment Board an indication of priority for each of the projects in the portfolio, but the ultimate decision for project placement is still made by human beings. The evaluation criteria and their associated measures used in prioritization of projects must be: 1. Measurable throughout the project life cycle. 2. Comparable between projects. 3. Relevant to the dynamics of the company’s business environment. 4. Be able to be independently evaluated. 5. Be able to be used both in the initial ranking of that project in the portfolio and in the status reporting of that project throughout its implementation and at its conclusion. If any of the weighting of the evaluation criteria changes during implementation, then the relative ranking of that project in the portfolio may also change. The project may move up or down the scale of priority within the portfolio based on the changing measures. There are many possible ways to measure the importance of a project. Fundamental to establishing the importance of individual projects during any business cycle, or in any business climate, are four major categories of evaluation criteria. The categories which drive a sound Portfolio Management Process are: 1. Value – delineated by the Business Case which shows the monetary equation for the investment (Benefit – Cost = Monetary Value). Individually scored criteria may include: Cost Savings, Cost Avoidance and Return in XX Months. 2. Strategy – alignment of the objectives of the investment to the company, business unit and organizational strategies as defined by the Business Case. Individually scored criteria may include: Company, Business Unit and Organizational Strategy. 3. Balance – intangible benefits + probability of success + resource availability = balance of the investment and portfolio. This is detailed in the Business Case. Individually scored criteria may include: Intangible Benefits, Probability of Success (inverse of risk) and Resource Availability. 4. Linkage -- Each project must be defined in terms of its interdependencies with other projects (inside or outside of the portfolio). Even though a numeric scale and measure may not be applied to this criteria, it is nonetheless of critical importance to the whole of the portfolio. Linkage of projects must be considered in the final ranking of the entire portfolio in order to ensure that the absence of funding for a lesser-ranked project does not adversely affect a more critical, funded project. Possible actions associated with this evaluation step include: a. Displacing an otherwise higher ranked project to free up funding for this requisite project. b. Re-evaluating the ranking of the dependent, funded project by combining the values of the requisite project and combining the overall ranking. c. Increase the funding level to include the lesser-ranked project. Use of a standard scoring template aids in the consistent application of values for each criterion by the project teams and the Investment Board. A High/Medium/Low, or 10/5/1 scale serves to sufficiently distinguish individual criterion as each are applied to a given project. Using a defined band and definition for what constitutes a given score is essential to the integrity and consistency of the system. Page 9 of 19 Stratton Further, the compilation of all individual scores on a project into a common database for all projects in a portfolio is key to success of the PfM Process. Once the scores are entered, then application of a normalization formula to the individual criteria and to the summation of the scores is critical for determining not only relative value of a project to the ideal (or top score possible), but also the relative value or contribution of the individual project when compared to each of the other projects in the portfolio. Many times the score against the ideal is not always the best measure of contribution of a project to the whole portfolio. That is why it is essential to include a normalization formula in the portfolio analysis. Computing tools ranging from simple spreadsheet constructs to commercial-off-the-shelf software are available for simplifying this process on a day-to-day basis. These tools also allow comparative analysis to be done on any number of variables contained in the database as determined by the need of the Investment Board to arrive at decisions on the portfolio contents. The weighting of the various evaluation, or prioritization, criteria when taken as a whole can be compared to the equalizer used for a stereo system. As the location of each button or knob is adjusted, the fidelity of the portfolio is changed, just like the sound from a stereo system is affected by alteration of the equalizer adjustment knobs. Portfolio Management Prioritization Criteria for Investment Proposals & Business Cases Criteria Weighting (1 to 10, L to R) Value 1. Cost Savings 2. Cost Avoidance 3. Return Rate for 12 Months Strategy 4. Company Strategies 5. Business Unit Strategies 6. Other Strategies (Organization, etc.) Balance 7. Intangible (non-dollar) Benefits 8. Probability of Success 9. Resource Availability Linkage Figure 5: The Portfolio Management Prioritization Equalizer Page 10 of 19 Stratton 7 MULTIPLE PORTFOLIOS One of the discoveries we made during the implementation and first year of operation using the PfM Process in the Boeing Shared Services Group was that there are actually multiple portfolios within a company, group, and organization Portfolios exist in multiple tiers throughout the company. The differentiator between portfolios is dictated by screening criteria that supports the company, group and organizational business strategies. Not all investments need to be approved and monitored at the highest levels of the company. Rather, with the various levels of accountability, authority and responsibility come the either recognized, or unrecognized, portfolio of investments in their various lifecycle phases. Figure 6: Investment Portfolio Multiple Tiers Concept Page 11 of 19 Stratton 8 BUSINESS CASE PROCESS BRIEFLY EXPLAINED The business case process is a key element in the success of the Portfolio Management Process. This paper will not describe the business case process in depth, but briefly explain it. First, a definition of a business case. A Business Case is a decision support and planning tool that documents the predicted effect of actions under consideration to solve a problem or take advantage of an opportunity. A true business case includes financial, strategic and other commercial, industrial or professional outcomes of the change. The action under consideration must have more than one option to be considered and the need for a decision to be made from among the options for the business. The business case should include a recommendation from among the options. Ultimately, it elicits a business decision from those individuals with the responsibility, authority and accountability for the resources to be allocated to achieve the desired outcome. The following two diagrams show the interrelationship of the various tools, or artifacts, used in the Business Case Process and their relationship to the PfM Process. The business case should be updated regularly throughout the lifecycle of the investment/project. Figure 7: Business Case Document & Template Map Page 12 of 19 Stratton Figure 8: Business Case Artifact & Tool Map 9 BUSINESS CASE FINANCIAL MODEL One of the key elements of the business case is the inherently necessary financial model. The financial model should include the following: 1. Financial Measures: ROI, Net Present Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), before-tax net cash flow, and after-tax net cash flow. These should be totaled in a specific location on the spreadsheet, preferably at the top. 2. Major financial headings: Benefits/Gains, Operating Expense Items (including various forms of labor), Capital Assets Purchased, Cash Flow Summary (including depreciation as applicable). 3. Graphical charts: annual net cash flow, cumulative net cash flow, payback.. 4. Key metric chart updated throughout the lifecycle of the investment: total cumulative planned investment compared over the same time period with total cumulative planned return; and total cumulative actual investment compared over the same time period with total cumulative planned return. This chart works best when it shows both a table of values and a graphical representation of the data. This financial model will be driven by the isolation of the necessary data which drives the business. This allows correlations to be established, estimates done and values calculated for the variables that are isolated. The financial model will aid in a key part of the business case analysis, that of the sensitivity analysis. A Sensitivity Analysis, in a nutshell, asks: Page 13 of 19 Stratton  “What variables (values) can change the option’s outcome?”“Are these values reasonable?” This sensitivity analysis reveals the variables which contribute the most to the final outcome. This information is important in the decision being made for the business case. The analysis provides insight as to the impact of these key variables on the value of the options under consideration in the business case. This analysis tests limits, strengths and weaknesses. It also identifies threats and opportunities, calculates ranges of possible outcomes, and provides other insights. The goal of this analysis is to provide decision-makers with the facts, data and analysis required to make an informed decision. The decision support tool also should clearly delineate the tradeoffs in making the decisions associated with the business case. Completing this analysis will aid the decision-makers in concentrating on the right issues surrounding the business case and not waste time “majoring on the minors.” 10 BUSINESS CASE DOCUMENT COMPONENTS The business case document is the artifact that collects the facts and data surrounding the problem to be solved or opportunity from which the company may benefit. The document becomes useful in the implementation of the project, or program, by providing the necessary scope of the work and its ultimate purpose. This business case document should explain why the funds are needed, and provide sufficient information to help weigh this requirement against other needs (or investment proposals) that are competing for the same funds and other resources. The business case also should explain the root causes or drivers of the situation, list the stakeholders for this proposal, and itemize relevant environmental considerations or factors. The document should show the business value of the proposed investment by examination of the facts and data that are both tangible (often financial) and intangible. In writing the document, be sure to make your conclusions explicit; don’t assume everyone will be able to draw a conclusion, or will draw the same conclusions you did. Finish strong; close with a specific recommendation, especially if the case involves a funding request. Make it very clear that “the ball is now in the decision-makers’ court.” Then, assure them that the progress of both the investment and the benefit noted in the proposal being considered by the company will be measured. Be sure to show the decision-makers how the measures will be communicated back to them. The document contains eight major sections. Each major section includes many subheadings that guide the business case developers through a logical progression of questions, answers, and thought by using the tools noted elsewhere in this paper.. The following major sections should make up the business case document:         Executive Summary Business Case Overview Current Situation Assessment of Options Sensitivity and Risk Analysis Contingencies and Dependencies Recommendations and Conclusions Metrics 11 BUSINESS CASE PRESENTATION COMPONENTS The business case presentation is a distilled version of the business case document. Its intended purpose is to set forth the key facts, data and analysis to the decision-makers about the situation and actions under consideration. In the Portfolio Management Process, the decision-makers are the members of the Investment board. The ultimate goal of the presentation is to obtain a decision about the stated recommendation. The presentation is done in a graphical, but standardized format. The presentation should include the following charts:     Title Page Background (words and graphics) Problem/Opportunity (words and graphics) Purpose (words and graphics that should answer the questions: “Why are we doing this Business Case?” and “Why should we make this investment, both from a company viewpoint and a business unit viewpoint); Page 14 of 19 Stratton         Decision Matrix (tabular content) Options Comparison (tabular content) Recommendation (words and graphics; this is the crux of the presentation) Portfolio Management Prioritization (shows scoring of this investment proposal using the standard Portfolio Management Process decision criteria – not shown in this paper) Payback Graphic (one of the metric charts noted above) Schedule (usually high-level and tentative until detail planning is completed after approval to go forward); Benefits, Risks and Assumptions (tabular content) Background Information (may take a variety of formats based on the necessary facts and data surrounding the investment proposal) Figure 9: Payback Graphic Page 15 of 19 Stratton 12 CONCLUSION AND LESSONS LEARNED TO DATE Portfolio Management is a viable process for business today, if there is a need to address one or more of the following situations in the business environment: 1) Resources are limited 2) Investments need to be prioritized 3) Budgets have been, or are being, slashed 4) Investments, projects, programs and initiatives need to be treated holistically, including funding and tracking. The PfM Process may be appropriate for use in prioritizing and monitoring investments at any level of the enterprise. This decision rests with the individuals charged with the responsibility, accountability and authority for level of the enterprise. Basically, we found that portfolios exist in multiple tiers throughout the company. The differentiator between portfolios is dictated by screening criteria that supports the company, group and organizational business strategies. Not all investments need to be approved and monitored at the highest levels of the company. Rather, with the various levels of accountability, authority and responsibility come the either recognized, or unrecognized, portfolio of investments in their various lifecycle phases. The use of business cases coupled with program and project management best practices are essential in any business unit regardless of whether it uses a PfM Process, or it is either a profit or cost center for the company. Page 16 of 19 Stratton SUGGESTED READING Cooper, Robert G., Edgett, Scott J., Kleinschmidt, Elko J. 2001. Portfolio Management for New Products. Perseus Publishing. Dye, Lowell D., Pennypacker, James S. 1999. Project Portfolio Management: Selecting and Prioritizing Projects for Competitive Advantage. Center for Business Practices. Hammond, John S., Keeney, Ralph L., Raiffa, Howard. 1999. Smart Choices: A Practical Guide to Making Better Decisions. Harvard Business School Press (entire book). Keen, Jack M., Digrius, Bonnie. 2003. Making Technology Investments Profitable: ROI Road Map to Better Business Cases. John Wiley & Sons, Inc. Kendall, Gerald I., Rollins, Steven C. 2003. Advanced Project Portfolio Management and the PMO: Multiplying ROI at Warp Speed. J. Ross Publishing. Knutson, Joan. 2001. Succeeding in Project-Driven Organizations: People, Processes, and Politics. John Wiley & sons, Inc. Matheson, David, Matheson, Jim. 1998. The Smart Organization: Creating Value through Strategic R & D. Harvard Business School Press. McNamee, Peter, Celona, John. 2001. Decision Analysis For the Professional. SmartOrg, Inc. Russo, J. Edward, Schoemaker, Paul J.H. 1989. Decision Traps: The Ten Barriers To Brilliant Decision-Making And How To Overcome Them. Simon & Schuster.(entire book). Schmidt, Marty J. 2001. The Business Case Guide. Solution Matrix Ltd. (entire book). Schuyler, John. 2001 Risk and Decision Analysis in Projects. Project Management Institute, Inc. Skinner, David. 1999. Introduction to Decision Analysis: A Practitioner’s Guide to Improving Decision Quality. Probabilistic Publishing. APPENDIX A: DEFINITIONS Affordability -- Affordability is a proactive approach and ongoing assessment of a program to ensure the satisfaction of customer requirements and company profitability goals. Affordability deals with both what a program is worth in the marketplace and how much the marketplace is willing or able to pay for the program or product. Assumptions -- Factors that, for planning purposes, are considered true, real or certain. Assumptions usually involve a degree of risk. The factors involved are often variables which are difficult to predict. Benefit -- The cash or cash equivalent value of resources attributable to the attaining of an objective or goal. Benefits may consist of either an inflow of resources or a decrease in the expected outflow of resources. Business Case is a decision support and planning tool that documents the predicted effect of actions under consideration to solve a problem or take advantage of an opportunity. A true business case includes financial, strategic and other commercial, industrial or professional outcomes of the change. The action under consideration must have more than one option to be considered and the need for a decision to be made from among the options for the business. The business case should include a recommendation from among the options. Ultimately, it elicits a business decision from those individuals with the responsibility, authority and accountability for the resources to be allocated to achieve the desired outcome. Business Drivers – Those variables within and outside the business entity that affect the efficiency and effectiveness of business investments. These may take the form of internal strategies, goals, objectives, and values. The variables may also involve customer and stakeholder requirements. Other drivers may include environmental factors such as governmental or agency regulations, anticipated impact of items identified as risks to the business, competitor’s actions and plans, and other market influences. Cash Flow -- Dollars that enter or leave the company. Cash flow may be analyzed before or after taxation. Cost Avoidance -- This should be measured as total After Tax/Net Present Value of the expected savings as compared to the expected costs if the project had not been implemented. The expected cost profile (without project implementation) would be estimated from the existing cost structure and the projection of cost increases over time. Starting cost basis, expected cost increases over time (without project action), and expected costs per year (with project action) must be provided in the Business Case. The source of these savings may be the result of any number of avoided costs including, but not limited to, the utilization of existing assets, actions taken to avoid penalties and fees, or increasing facility density to avoid new acquisition. Cost Savings -- This should be measured as total After Tax/Net Present Value of the expected savings. Savings would be based off of the existing cost structure at the start of the project. Starting cost basis and expected savings per year must be provided in the Business Case. The source of these savings may be the result of any number of reduced expenditures including, but not limited to, product acquisition, labor, facilities, consumables, support services and utilities. Page 17 of 19 Stratton Deliverable -- The resulting product or service produced from an investment, project or program. A deliverable should be an item that is specific, measurable, realistic, attainable, testable and mutually agreed upon by the stakeholders. Decision Support – facts, data and analysis which aids in the decision-making process. Decision Criteria – Those standards which guide decisions. There are several types of decision criteria including: qualifying or screening and evaluation or prioritization. Effectiveness -- How well the desired results were achieved by the activities involved in the delivery of a product or service. Efficiency -- How well an activity translates an input to an output. Gate Review – One of a series of management decision points (“gates”) for review, approval, and documentation of key milestones for an investment, proposal, or program. Intangible Benefit -- This should be measured as total composite rating of an established set of non-dollar advantages associated with the project. The set of non-dollar advantages of which each project would be described would initially include; increased end-user productivity, improved product/process quality, employee morale, and technology insertion. Any of these advantages where tangible cost savings or avoidance has been established (above) would not be included in this project’s measurement. These benefits will be evaluated independently of those described in Strategy. Internal Rate of Return (IRR) -- The rate that discounts future cash flows so that the present value of future cash flows equals the initial investment. The IRR assumes reinvestment of cash inflow or savings at the same rate of return as the investment. Investment -- A commitment of resources that is designed to enhance the company’s value or net worth, or comply with regulatory requirements through product changes or process improvements. Investment Analysis -- An assessment process that defines the costs and benefits of an investment and forecasts its financial impact over a specified time period. This analysis includes: definitions of the measurements used, disclosure of any exceptions to the guidelines contained in this procedure and documentation of all assumptions, values and interpretations. Investment Proposal -- The documentation of a potential allocation of company resources for a estimated return. Implementation of an investment proposal becomes a project or program. Linkage -- Each project must be defined in terms of its interdependencies with other projects (inside or outside of the portfolio). This linkage must be considered in the final ranking of the entire portfolio in order to ensure that the absence of funding for a lesser-ranked project does not adversely affect a more critical, funded project. Possible actions associated with this evaluation step include: a. Displacing an otherwise higher ranked project to free up funding for this requisite project. b. Re-evaluating the ranking of the dependent, funded project by combining the values of the requisite project and combining the overall ranking. c. Increase the funding level to include the lesser-ranked project. Modified Internal Rate of Return (MIRR) -- MIRR is the rate that discounts the future cash flows to an NPV that equals the initial investment, assuming returns are reinvested at the discount rate. The discount rate reflects the company’s current cost of capital. Multiple Portfolios -- There are actually multiple investment portfolios in a shared services, or other business, environment. These multiple portfolios create a tiered structure in the actual management of the investments. This tiered structure allows the investment decisions to be made at the appropriate level, while utilizing agreed-to criteria to guide a project or proposal to placement in the correct portfolio. All portfolios use the same processes and many of the same tools, including the development of a business case to enable a decision to be made regarding the investment. Net Present Value (NPV) -- Projected cash flows expressed in current period dollars using a standard discount rate. Payback Period -- The time required for the investment to be recovered from the returns. This is often measured in years. This is sometimes referred to as the break-even point. Portfolio -- A portfolio is a collection of assets or investments, as well as proposed investments. The use of a portfolio enables management of investments as a whole Portfolio Management Process – A strategic planning process that requires new program opportunities to develop business cases to assess their alignment with business strategies, goals, and objectives and to prioritize investment opportunities. It is the process of actively, and dynamically selecting, prioritizing and tracking investments. Probability of Success -- This subjective measure would be based on a checklist that identifies the areas of risk and the level of Risk Mitigation associated with: (1) Technical Complexity of the project and product/service; (2) Degree of Interdependence with other Projects (both inside SHARED SERVICES and outside SHARED SERVICES); (3) Risk due to Availability of Resources; (4) Urgency (Schedule Pressure). Resource -- Anything needed to implement an investment, project or program. This could include: people’s skills, money, raw materials, parts, assemblies, design tools, non-design tools, time, facilities, and other equipment. Page 18 of 19 Stratton Resource Availability -- This subjective measure would be based on a checklist that identifies the areas of resource demands on a project; Office Facilities, Staff, Laboratory Equipment, and Computing. The source of these ratings would be the Business case Team and the Review & Approval authority for each individual Business Case. Return On Investment (ROI), Simple -- The expected gains of an investment. This is determined by dividing the costs by the benefits of the investment. It is expressed in a percentage format. Positive percentage values represent a net gain from making the investment. Return Rate for XX Months -- This should be measured as the percentage, or dollar value, of the total project investment that is returned as Cost Savings or Cost Avoidance in the next XX months (usually a time of shorter duration than the product or service life cycle covered by the entire business case) of the project. The cost savings or cost avoidance (described above) for the next XX months is established in the Business Case. To arrive at a percentage value the cost savings or cost avoidance (described above) is divided by the total (usually multi-year) investment cost (After-Tax/Net Present Value) of the project (which is also included in the Business Case). Strategy -- High-level, broad statement of direction to reach the end of a plan or goal. This can be delineated at the company, business unit and organizational levels. This subjective measure would be based on a checklist that identifies the strategic elements involved and rates the extent that the project addresses and supports these elements. The source of these ratings would be the Review & Approval Authority for each individual Business Case. BIOGRAPHY Michael J. Stratton is a senior project manager for The Boeing Company. He presently works in the Strategic Planning organization of the Shared Services Group, one of the major business units within Boeing. Mr. Stratton was a key player in launching the Portfolio Management Process within his business unit and has developed an extensive Business Case Process Guide and array of templates and tools for use within Boeing. He regularly contributes his expertise in the development of Business Cases throughout the company for projects worth millions of dollars to Boeing. Mr. Stratton’s 25-year career at Boeing includes working in the Boeing Commercial Airplanes business unit on nearly all of the commercial jetliners in a variety of positions including planning and implementing projects valued in the hundreds of millions of dollars. Mr. Stratton holds a B.A. in Communications, specializing in Journalism with a minor in History, from Washington State University and an MBA from City University. He is certified as a Project Management Professional (since 1991) through the Project Management Institute and has presented and published several technical papers in conjunction with that organization’s annual North American Global Congress. Mr. Stratton’s other certifications include: Stanford Certified Project Manager (SCPM) through the Stanford Center for Professional Development, IT Project + through CompTIA and Configuration Management II through the Institute of Configuration Management and the University of Arizona.. Mr. Stratton has presented technical papers at the Annual Project/Program Management Office Summit, the Enterprise Project Management Summit, The Institute of Configuration Management’s Annual Conference, and the Crystal Ball User’s Conference. Mr. Stratton may be contacted at the following e-mail address: mike.stratton@boeing.com. Page 19 of 19