Here we are again. We just don’t know where we stand. Here in middle earth (Australia) trying to work out if we are going to be pulled under water by the US economy or held above water by metals, minerals and our friends to the north in China. Ironic isn’t it? That metal can keep a country afloat! The share markets are responding with most investors hanging tight to cash, worried about their property investments and remembering the not-so-distant past where they watched investments shed value quicker than a New York minute. So how did we get here again? Did we simply not recover from the bout a few years ago? I don’t think anyone has the exact answer, but I think it would be interesting to have a look at how the US government spent their money and think about it in the context of portfolio management practices.
The US government added $12.7 trillion to their debt over the last decade. In fact, it was only recently reported that Apple has more cash than the US Government http://www.bbc.co.uk/news/technology-14340470 . If you look at the chart from the White House (seen below - as published on July 26, 2011 ) you can see that most of the Americans money was spent on wars (Afghanistan and Iraq), tax cuts and natural movements in the economy. Let’s not forget that there is also a smattering of corporate bail-outs as well, but these are small in comparison to the other areas. I will try to oversimplify something that is very complex to make a point about portfolio management. Many of these policies are driven by what is perceived by the leadership to be best for the country. So what are the guiding principles behind sound portfolio management that we can gauge these decisions against?
First it is worth noting the difference between Portfolio Management (from the financial investment world) and Project Portfolio Management (PPM). PPM is a way to analyse and manage a series of current or proposed projects based upon key characteristics. For example looking at the money, time, capacity, people, resources in order to maximize these investments in project work. In the context of a software solution, this would be akin to the capability to the portfolio management capability in Oracle’s Primavera P6.
Portfolio Management is broader, has more of a corporate flavour. PPM is a subset of Corporate Portfolio Management. Portfolio Management is more concerned with scenario and portfolio analysis for both projects and investments in resources as it relates to corporate objectives or strategy. Of course programmes and projects are important inputs into the strategy as well but generally it can be summarized as managing capital allocation from a risk-return perspective. Once again from a software and tools angle, this capability is enhanced with tools such as Oracle’s Primavera Portfolio Management with the main benefits being that it makes scenario analysis, transparency and collaboration easier for members in the organization.
So back to the question at hand, if the US government used sound portfolio management principles to maximise its capital investments and support its strategy would they have made the decisions it did relating to the trillions spent in the last decade? Since I am not an expert in US government policy and not close to the decision makers, I cannot say without understand the metrics that they used to develop their portfolio hierarchy. As with any portfolio of investments, it is difficult to gauge so early in the game whether the investment decisions have paid off. Their concerns would have been economic, but also focussed around security and well being of the American people. One thing is for certain. The voting population (with any government) could benefit from transparency in how these decisions were made, and what are the priorities in their investment portfolio. We assume that it relates to the demands by the voting population, although there are instances where democratic governments diverge from what the majority may want. Getting re-elected is often a driver, but let’s be confident that the science of portfolio management is driving decision making on where our tax dollars are spent as well.
How does your company decide where to spend capital to achieve its corporate strategies? If you want to understand more about how you can enhance your capital investment decisions, drop me a line. In the meantime, it looks like we’ve got an interesting year ahead to see what portfolio promises are made in the lead-up to the 2012 elections in the US!
