Corporate portfolio management (CPM -- not to be confused with corporate performance management) views the resource allocation process as the management of a portfolio of spending opportunities. It leverages data on both projected returns and actuals, and it actively involves investment owners in the process by which the company selects the best investments to meet its strategic, financial, and risk objectives. In far too many businesses, resource allocation decisions are based on which manager shouts the loudest, who develops the nicest PowerPoint presentation, or which project's champion knows the CEO. Data is critical to removing at least some of the personality-driven elements of investment choices. CPM relies on modern portfolio theory to inject data into OpEx and CapEx spending decisions, but it is not so myopic in its use of data that it ignores behavior elements of decision-making. As a result, corporate portfolio management requires the balancing of two critical dimensions: modern portfolio theory and an understanding of organizational behavior.

Modern portfolio theory is what people generally think of when they think of corporate portfolio management. It includes four elements:

Investment valuation. This involves defining what an investment is. As part of the investment valuation process, companies must decide which operating expenses to include along with CapEx within their corporate portfolio. Investment valuation requires a consistent valuation methodology, which means organizations must use driver-based models to create projections and must also look past net present value (NPV) and ROI to consider strategy and other qualitative aspects of an investment's "value."

Portfolio allocation. This requires companies to determine the areas or themes in which they will invest, along with the associated allocations. Basically, a business must decide on its strategic priorities for investment and how much to put into each area. For example, it might spend 25 percent of its total investment dollars on customer acquisition, 20 percent on IT, and 55 percent on customer retention. The company should also determine allocations based on the risk profile of each investment -- e.g., 60 percent in low-risk projects, 30 percent in medium-risk projects, and 10 percent in high-risk projects.

Portfolio optimization. This requires selecting the best investments to support the portfolio allocation goals and periodically rebalancing the portfolio to ensure that it stays in line with desired allocations. The aim is to maximize the strategic and financial return per unit of risk, not to remove risk from the company's investments.

Performance measurement. A key element of successful corporate portfolio management is capturing investment results so that the company can compare promise with performance. Doing this ultimately lets an organization improve its ongoing investment valuations based on actual results, and it allows managers to rebalance the portfolio based on performance achieved.

Most people with a finance background will recognize these tenets of portfolio theory. The problem with much CPM discussion is that it assumes people behave according to a theoretical or rational construct. Experts offer platitudes such as "Just manage your company's investments like you manage your own investments"; they fail to realize that many individuals don't manage their personal portfolios as they should. Even smart "money people" like mutual fund managers are wrong more than 50 percent of the time. And when we know what we should do, emotions, intuition, and external influences take us off this rational path.

The challenge in managing an organization's portfolio is magnified by the fact that the behavior of hundreds or thousands of people affect the outcomes. So accounting for organizational behavior is the second fundamental element of corporate portfolio management. Incorporating an understanding of behavior into CPM involves four activities:

Fostering a data-driven mind-set. Organizations often base decisions on managers' personalities and intuition. Corporate portfolio management, like Six Sigma, requires data to drive decision-making. The aim is to balance intuition and analytics in investment choices.