Quality Money Management : Process Engineering and Best Practices for Systematic Trading and Investment

48 CHAPTER ◆ 4 Managing Design and Development

● Heuristic approaches are better. More strategic approaches seem to work better.

Businesses that rely on strategic methods outperform the rest.

● No one model is perfect. Rather, most experts prefer a hybrid approach that permits

a customized approach to portfolio management. Watch out for an over-reliance on

financial methods and models for project selection.

● Scoring models are effective prioritization tools.

● Bubble diagrams work and should be a part of any model. They help firms achieve

a balanced portfolio.

● Any portfolio management method is better than no method.^5

Portfolio management is complicated by the facts that money, people, and time are lim-

ited, and that different projects, at different stages of development, may be intercon-

nected—shared resources, strategies, technologies, or people.

4.2.2. Effective Portfolio Management

Senior management is the driver of strategy and must be closely involved in new product

project selection decisions. Portfolio methods must mesh with the organization ’ s business

strategies, the decision framework of the business, as well as its core competencies. We

recommend top management:

● Map out the process for determining resource allocations in strategic buckets.

● Design iterative portfolio review processes and define the key portfolio metrics.

● Name a portfolio process manager.

Because speed to market is a pivotal competitive advantage, we recommend the use of

(i.e., valuing projects as real options at gate meetings using) scoring models in a Modified

Delphi-style framework, unless your firm has the quantitative wherewithal to optimize

a portfolio of profit centers in an EVA framework. The strengths of scoring or ranking

models are that they:

● Do not overemphasize quantified, financial criteria that are likely to have doubtful

reliability, especially in the early stages.

● Capture multiple goals, such as strategic importance, competitive advantage, and

potential to raise investment capital.

● Reduce gate decisions and prioritization decisions to a finite number of parameters

and iterations.

● Subject each trading/investment system to critical review on a complete set of

criteria.

● Force managers to discuss strengths and weaknesses of each project in depth.

● In the end yield a single score which is useful for project prioritization.

Using a scoring or ranking model, management can establish consensus among panel

members through repeated problem scoring, discussion, feedback and, if necessary,

rescoring or reranking.