Evidence-Based Portfolio Management (E-B PfM) applies agile principles to the process of deciding where to invest funds for maximum benefit to the business. Traditional portfolio management tends to focus on activities and outputs, with less consideration given to outcomes that are often poorly defined.
| Element | Description |
|---|---|
| Concept Overview | Evidence-Based Portfolio Management is an approach that relies on empirical data and evidence to make informed decisions about project portfolios. It emphasizes data-driven insights over intuition or gut feelings, helping organizations allocate resources effectively and achieve strategic goals. |
| Empirical Data | Empirical data forms the foundation of Evidence-Based Portfolio Management. It involves collecting and analyzing real-world data, such as project performance metrics, customer feedback, and market trends, to gain actionable insights and make informed decisions. |
| Decision-Making Framework | Evidence-Based Portfolio Management provides a structured decision-making framework. It involves defining clear objectives, collecting relevant data, conducting rigorous analysis, and making portfolio decisions based on empirical evidence rather than subjective judgment. |
| Continuous Improvement | Continuous improvement is a fundamental aspect of this approach. Organizations use ongoing data collection and analysis to refine their project portfolios continuously. By learning from past experiences, they optimize resource allocation and enhance portfolio performance over time. |
| Implications | Evidence-Based Portfolio Management has several implications: – Informed Decision-Making: Relies on data for objective decision-making. – Resource Allocation: Allocates resources based on data-driven priorities. – Risk Mitigation: Identifies and mitigates risks using empirical evidence. – Performance Optimization: Ensures continuous portfolio improvement. |
| Benefits | – Informed Decisions: Enhances decision-making with data-driven insights. – Resource Efficiency: Optimizes resource allocation for better results. – Risk Reduction: Identifies and addresses risks proactively. – Strategic Alignment: Aligns portfolios with organizational goals effectively. |
| Drawbacks | – Data Quality: Relies heavily on data, requiring high data quality and accuracy. – Implementation Challenges: May require changes in organizational culture and processes. – Resource Intensive: Data collection and analysis can be resource-intensive. – Resistance to Change: Stakeholders may resist data-driven decisions. |
| Use Cases | Evidence-Based Portfolio Management is applied in various domains: – Project Management: Optimizes project portfolios for better outcomes. – Product Development: Enhances product portfolios based on customer feedback and market trends. – Investment Management: Informs investment decisions using data-driven insights. – Risk Management: Identifies and mitigates risks in portfolios. |
Table of Contents
Understanding Evidence-Based Portfolio Management
Annual budgeting processes, for example, restrict the ideation process to the point where ideas falling outside of budgetary constraints are discarded entirely.
When managers are asked to estimate the cost of delivering a solution, these estimates often come attached with several caveats. These caveats are typically ignored in favor of meeting hard, non-negotiable schedules and deadlines.
Ultimately, this results in funding decisions being made by people who are far removed from the actual work. These rather optimistic decisions cause the scope of the work to expand once knowledgeable individuals are recruited, resulting in budget blowouts and delays.
Evidence-Based Portfolio Management applies lean and agile principles to the challenge of deciding where to invest funds for maximum ROI. By enabling businesses to quickly test ideas and rapidly deliver benefits in small increments, E-B PfM avoids the bloated, non-collaborative, and over-specified aspects of traditional portfolio management.
Indeed, E-B PfM replaces expensive and inefficient project meetings with direct evidence to continuously evaluate and adapt strategy where necessary.
Principles of Evidence-Based Portfolio Management
The structure, roles, responsibilities, and processes of every organization are different. E-B PfM is thus based on seven general principles that form an agile philosophy.
This philosophy can be used to determine how the business identifies opportunities and considers which of those opportunities to pursue. It also strongly advocates the role of experimentation in guiding whether to increase, continue, or cease investment in those opportunities.
Following is a look at each of the seven principles:
1 – Separate budgeting for capacity from investing for innovation
An organization that takes on new work must add new teams or enable existing teams to be more effective. E-B PfM recognizes that there will always be more ideas than teams, so proper portfolio management is largely about deciding what not to work on.
2 – Make the best decision based on the evidence available
Evidence is often incomplete and unreliable, but an empirical approach makes allowances for this fact by testing assumptions and seeking better evidence. When making important decisions, the amount of money invested should be proportional to the quality of the evidence.
3 – Invest in improving business impacts using hypotheses; don’t just fund activity
Cost, schedule, and output are three variables that drive traditional portfolio management. But each has little relevance to value. E-B PfM instead equates value with delivering products and services that help customers achieve better outcomes.
4 – Continuously (re)evaluate and (re)order opportunities
As new opportunities are discovered, the relative attractiveness of existing opportunities will fluctuate. This means that the business will need to refine the list of opportunities according to their relative importance and invest accordingly. Relative importance should always be evaluated when new evidence comes to hand.
5 – Minimize avoidable loss
To minimize loss, the business must determine which ideas will not work. Project teams can perform experiments designed to actively prove that certain solutions don’t work, thereby providing direction for future development.
For example, a company that is unsure of how a new product feature will be received can run a customer focus-group to gauge initial reaction.
In keeping with agile principles, solution viability should be tested in the simplest, fastest, and most cost-effective way possible.
6 – Let teams pull work as they have capacity
When a business attempts to work on ideas for which it does not have the capacity, it creates a Work In Process (WIP). A high amount of WIP causes a loss of efficiency, project delays, and impedes the flow of work.
By ensuring that teams pull the most valuable opportunity only once they are ready, WIP is reduced. Free to make their own decisions and focus on one opportunity at a time, the motivation and subsequent performance of the project team increases.
7 – Improve status reporting with increased engagement and transparency
Traditionally, portfolio investment is monitored through status reporting that lacks transparency because it is people outside the team that prepare the reports. By replacing this uninformed and subjective approach with E-B PfM, status reports are based on frequent, iterative product deliveries that contain useful, actionable data.
Updated estimates of unrealized value and measures of current value are two such examples. Both help project teams reliably verify assumptions and allow them to reassess priorities with respect to organizational goals and strategies.
When to Use Evidence-Based Portfolio Management:
Evidence-Based Portfolio Management is a valuable approach in various investment scenarios:
- Long-Term Investment Strategies: Use it when crafting long-term investment strategies to maximize returns and minimize risks.
- Risk Mitigation: Apply it to mitigate risks associated with market volatility and economic uncertainties.
- Diversification: Employ it when diversifying a portfolio to achieve a balanced and well-structured investment mix.
- Market Research: Utilize it for in-depth market research and analysis when evaluating potential investments.
- Retirement Planning: Consider Evidence-Based Portfolio Management when planning for retirement to ensure a secure financial future.
How to Use Evidence-Based Portfolio Management:
To apply Evidence-Based Portfolio Management effectively, follow these steps:
- Data Collection: Gather relevant data on potential investments, historical performance, and market conditions.
- Analysis: Systematically analyze the data to assess investment opportunities, risk factors, and correlations.
- Risk Assessment: Evaluate the risk associated with each investment, considering factors such as volatility, liquidity, and economic indicators.
- Portfolio Construction: Build a diversified portfolio that aligns with your investment goals and risk tolerance.
- Monitoring and Review: Continuously monitor the portfolio’s performance, adjusting as needed based on new evidence and market developments.
- Adaptation: Be open to adapting your portfolio in response to changing evidence and market dynamics.
Drawbacks and Limitations of Evidence-Based Portfolio Management:
While Evidence-Based Portfolio Management offers numerous advantages, it also has certain drawbacks and limitations:
- Data Reliability: The quality and reliability of available data can vary, potentially leading to inaccurate conclusions.
- Historical Bias: Relying solely on historical data may not account for unprecedented market events or black swan events.
- Complexity: The process of data collection, analysis, and portfolio construction can be complex and time-consuming.
- Uncertainty: The future is inherently uncertain, and no amount of historical data can predict all potential market outcomes.
- Behavioral Factors: Human emotions and behavior can impact investment decisions, sometimes leading to deviations from an evidence-based approach.
What to Expect from Using Evidence-Based Portfolio Management:
Using Evidence-Based Portfolio Management can lead to several outcomes and benefits:
- Informed Decisions: Expect to make more informed investment decisions based on empirical evidence and data-driven analysis.
- Risk Reduction: By systematically assessing and managing risk, you can expect a reduction in potential losses during market downturns.
- Optimized Returns: Evidence-Based Portfolio Management aims to maximize risk-adjusted returns over the long term.
- Portfolio Resilience: A well-structured portfolio based on evidence is likely to be more resilient in the face of market volatility.
- Continuous Improvement: You can anticipate a commitment to continuous learning and adaptation as new evidence emerges.
Relevance in the World of Finance and Investment:
Evidence-Based Portfolio Management is highly relevant in the world of finance and investment, including:
- Asset Management: Asset managers use this approach to construct portfolios for their clients, aiming to deliver consistent returns.
- Personal Finance: Individual investors can apply evidence-based principles when managing their own investment portfolios for retirement and financial goals.
- Pension Funds: Pension funds and retirement plans often employ evidence-based strategies to secure the financial futures of beneficiaries.
- Wealth Management: Wealth managers use this approach to optimize the wealth and financial well-being of their clients.
- Financial Advising: Financial advisors may recommend evidence-based strategies to clients seeking long-term financial growth.
Conclusion:
Evidence-Based Portfolio Management is a data-driven and systematic approach to investment that seeks to maximize returns while managing risk effectively.
By relying on empirical evidence, systematic analysis, and continuous learning, practitioners of this approach aim to make informed investment decisions and construct resilient portfolios.
While it acknowledges certain limitations, Evidence-Based Portfolio Management remains a powerful framework for investors, asset managers, and financial professionals looking to achieve their financial goals and navigate the complexities of the financial markets.
Case Studies
Tech Company: Prioritizing New Features for a Software Product
Challenge: A tech company is developing a software product and needs to decide which new features to prioritize for the next release.
E-B PfM Thinking Process:
- Separate budgeting for capacity from investing for innovation:
- The company identifies that it has a limited development team capacity.
- They decide to allocate a specific budget for innovation, ensuring they don’t overburden their team.
- Make the best decision based on the evidence available:
- The product team collects user feedback, conducts market research, and analyzes competitor features.
- They prioritize features based on the quality of evidence, focusing on those that address user needs and align with their product strategy.
- Invest in improving business impacts using hypotheses; don’t just fund activity:
- Instead of simply allocating resources to feature development, the company formulates hypotheses about how each feature will impact user satisfaction and revenue.
- They fund features that have well-defined hypotheses with the potential for significant business impact.
- Continuously (re)evaluate and (re)order opportunities:
- As they collect more user data and feedback, the company regularly reevaluates the priority of features.
- Features that show promising results are invested in further, while those with less impact are deprioritized.
- Minimize avoidable loss:
- To minimize potential loss, the company conducts A/B testing on new features.
- They actively disprove ideas that do not show the expected improvements in user engagement or revenue.
- Let teams pull work as they have capacity:
- The development team pulls in new feature work only when they have the capacity to do so.
- This reduces work in process and ensures that features are developed with a focus on quality and thorough testing.
- Improve status reporting with increased engagement and transparency:
- The company replaces traditional progress reports with regular product releases.
- These releases contain actionable data on user engagement, allowing teams to make informed decisions and adapt their strategy.
Outcome: By applying E-B PfM principles, the tech company makes data-driven decisions, prioritizes features based on user needs and business impact, and maintains transparency throughout the development process. This approach results in a software product that continually evolves to meet user expectations and drive business growth.
Financial Institution: Optimizing Investment Portfolios
Challenge: A financial institution manages multiple investment portfolios for its clients and needs to optimize the allocation of assets to maximize returns.
E-B PfM Thinking Process:
- Separate budgeting for capacity from investing for innovation:
- The institution recognizes that each portfolio has a limited capacity for diverse assets.
- They allocate separate budgets for portfolio management and innovative investment strategies.
- Make the best decision based on the evidence available:
- The institution analyzes historical investment data, market trends, and economic indicators.
- They make investment decisions based on the quality and reliability of available evidence.
- Invest in improving business impacts using hypotheses; don’t just fund activity:
- Instead of blindly investing in various assets, the institution formulates hypotheses about the potential returns and risks of each investment.
- They allocate funds to investments with well-defined hypotheses and expected positive impacts.
- Continuously (re)evaluate and (re)order opportunities:
- As market conditions change, the institution regularly reevaluates the composition of each portfolio.
- They adjust asset allocations based on new evidence and changing market dynamics.
- Minimize avoidable loss:
- To minimize potential losses, the institution actively manages risk through diversification and hedging strategies.
- They actively disprove high-risk investment ideas through scenario analysis and stress testing.
- Let teams pull work as they have capacity:
- Portfolio managers make investment decisions based on portfolio capacity and asset availability.
- This ensures that each portfolio is managed efficiently, minimizing unnecessary asset overlap.
- Improve status reporting with increased engagement and transparency:
- The institution provides clients with transparent and real-time access to their portfolio performance.
- Clients can see the evidence-based decisions behind asset allocations and investment strategies.
Outcome: By applying E-B PfM principles, the financial institution optimizes its investment portfolios, maximizes returns while managing risks, and provides clients with a transparent and data-driven approach to wealth management.
Key takeaways
- Evidence-Based Portfolio Management is an empirical, principles-based approach to agile portfolio management.
- Evidence-Based Portfolio Management replaces the rigid and over-specified nature of traditional portfolio management with collaboration, autonomy, and continuous improvement.
- Evidence-Based Portfolio Management is based on seven principles. These combine to allows management approaches to be adapted to the specific needs of any business.
Key Highlights
- Agile Approach to Investment: E-B PfM applies agile principles to investment decisions, emphasizing evidence, experimentation, and continuous improvement.
- Outcome-Focused: Unlike traditional approaches, E-B PfM prioritizes outcomes and results over activities and outputs.
- Challenges with Traditional Approaches: Traditional portfolio management can lead to misaligned expectations, budget overruns, and scope expansions due to optimistic estimates and lack of real-time evidence.
- Seven Principles of E-B PfM:
- Separate budgeting for capacity from investing for innovation.
- Make decisions based on available evidence.
- Invest in outcomes using hypotheses, not just activity.
- Continuously re-evaluate and re-order opportunities based on new evidence.
- Minimize loss by actively disproving unproductive ideas through experimentation.
- Allow teams to pull work based on capacity to reduce Work In Process.
- Improve status reporting through transparency and engagement.
- Benefits of E-B PfM:
- Replaces rigid practices with collaboration and agility.
- Focuses on value creation and innovation.
- Adaptable principles for different business needs.
- Informed Investment Decisions: E-B PfM helps organizations make investment decisions based on empirical evidence, reducing risks and enhancing outcomes.
Connected Agile & Lean Frameworks
AIOps
AgileSHIFT
Agile Methodology
Agile Program Management
Agile Project Management
Agile Modeling
Agile Business Analysis
Agile Leadership
Andon System
Bimodal Portfolio Management
Business Innovation Matrix
Business Model Innovation
Constructive Disruption
Continuous Innovation
Design Sprint
Design Thinking
DevOps
Dual Track Agile
eXtreme Programming
Feature-Driven Development
Gemba Walk
GIST Planning
ICE Scoring
Innovation Funnel
Innovation Matrix
Innovation Theory
Lean vs. Agile
Lean Startup
Minimum Viable Product
Leaner MVP
Kanban
Jidoka
PDCA Cycle
Rational Unified Process
Rapid Application Development
Retrospective Analysis
Scaled Agile
SMED
Spotify Model
Test-Driven Development
Timeboxing
Scrum
Scrumban
Scrum Anti-Patterns
Scrum At Scale
Six Sigma
Stretch Objectives
Toyota Production System
Total Quality Management
Waterfall
Read Also:Continuous Innovation,Agile Methodology,Lean Startup,Business Model Innovation,Project Management.
Read Next: Agile Methodology, Lean Methodology, Agile Project Management, Scrum, Kanban, Six Sigma.
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Main Case Studies:
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