


Thursday, June 30, 2016

In Tech, Portfolio Management is a Metaphor, Not a Way of Life

A few years ago, I wrote about the chronic misuse of the word "governance" in technology. The word "portfolio" is suffering the same fate.

The reason for introducing the word "portfolio" into tech management is that some portion of tech spend is really an investment in the business, something that differentiates it and gives it a competitive edge - for example, mobile or web client-facing apps, or internal software that codifies workflows to capture efficiencies. This is fundamentally different from utility tech, the basic technology a company needs to function, such as ERP or email. To get a better return from our strategic opportunities, we should think in terms of investing-like behaviors and outcomes, as opposed to traditional project-oriented ones (such as time and budget). The word "portfolio" enters the lexicon because when we have multiple technology investments, we logically have a collection of them. Since most firms have more opportunities for investment than capital to invest, there is a degree of selectivity of what gets included in the investment portfolio.

While I was writing chapter 8 of Activist Investing in Strategic Software, it occurred to me that the use of word "portfolio" in technology has increased in recent years. Unfortunately, the activity described by aspirant "technology investment portfolio managers" are a very small fraction of those characteristic of financial portfolio management. The principal problem is that the word "portfolio" suggests a degree of decision-making flexibility that the captive technology investor doesn't really enjoy. Consider:

  1. Although we can create diversity of our investment outcomes, the strategic software investor is limited to a single investment type - e.g., an operationally-based delivery. A financial investor has many more choices of vehicles and outcomes than a captive investor does. There are no fixed income products available to the captive technology investor, it's all equity. Plus, although we can run multiple experiments to qualify an investment and accelerate our delivery frequency to get things in production faster, all of our investment positions are inherently long. The only short position we can take in something is not to invest.
  2. While there are countless investment opportunities, it's rare that a company can pick and choose every investment it makes. Some investments are forced on it by regulation; others by competition; still others by reliability of dilapidated legacy assets; and sometimes because the boss says this or that is what we're going to do and that's all there is to it. A captive technology investment portfolio isn't as discretionary as a financial one.
  3. Our investment goals are denominated in different and sometimes only quasi-economic measures of value. All financial investments denominate their performance in the same measure, even those that have explicit non-financial goals. As I've written before, it's futile to concoct synthetic measures like "business value".
  4. Most often, we can't measure the impact of any given investment in isolation of all other changes a business makes to itself and those that happen in its commercial ecosystem: we change the economics, processes, technology, and policy of our business all the time, while our commercial partners are also making the same changes to theirs. Isolating an outcome to a single decision or action (like a specific tech investment) is very difficult. In addition, because counterfactuals are unprovable, we can't measure whether an alternative investment would have yielded a better or worse outcome. In contrast, we can measure our results of financial portfolios against how well "Hindsight Capital Partners" performed over the same time period.
  5. Venture capital is a high risk business that has more misses than hits. The success rate doesn't improve when the VC is corporate rather than financial. A company doesn't have unlimited capital to experiment at scale and can't afford to have a low success rate on investment decisions.

As much as we may want to be investors, the portfolio metaphor is very limited in captive investing situations. It lacks diversity, is inherently imprecise, and both performance and competency as investors are as much a matter of opinion as fact. It's potentially dangerous, too, because managed poorly it can damage its operational solvency (that is, the capability to get things done through technology) by making a mess of its capital management.

The premise of the book I'm writing - that activist investing behaviors yields better performing tech investments - is also substantially a metaphor. There are real aspects to it, specifically that shareholder activist behaviors - being investigative, inquisitive, interrogative and invasive - are highly suitable to captive technology investing. But "shareholder activism" only goes only so far: we can't buy out other "investors" and we don't gain control of the board through proxy fights. We have fewer levers to throw to change outcomes, and virtually all of them are operational (process, scope, personnel) in nature: few are the captive investments that can show better performance on the basis of financial engineering alone.

While metaphors are limited, they do help us to interpret our world differently. When we think in investment terms, we see financial expectations and possibilities much more clearly than when we think strictly in operating terms. When we think in shareholder activism terms, we understand the importance of good governance structures and mechanics, and the need for diligence by those investing in the business through technology. Interpreting delivery of strategic software through these lenses adds dimensions that make the operations that create them more value-generative to their host businesses.

But we do ourselves no favors by getting carried away with it. As helpful as the portfolio metaphor is, it's just a metaphor - not a way of life.