Portfolio Management at the Defense Finance and Accounting Service: the right funding for the right projects.

In answering the President's call for improved financial management, leaders at the Defense Finance and Accounting Service (DFAS) have implemented Portfolio Management to help prioritize initiatives and more closely link its budget to its strategy.

"The DFAS has made huge strides in generating greater value in finance and accounting services for the Department of Defense (DoD) and the American taxpayer," said Audrey Davis, DFAS chief information officer and executive sponsor for its Portfolio Management process.

According to Ms. Davis, "Since 1999, we've lowered the percentage of the Defense budget that goes toward DFAS operations from 0.56 percent in that year to 0.34 in fiscal year (FY) 2003, and we expect that figure to drop to 0.30 percent this fiscal year."

By reducing the costs of DoD finance and accounting operations, the Department is able to put more of its resources toward equipping, training, and protecting the men and women who defend America.

Portfolio Management Disciplines Initiative Funding

How will Portfolio Management help the DFAS continue to deliver greater value in the future? DFAS Portfolio Management is a governance process established by the agency's Strategic Planning Steering Group to support improved decision making, prioritization, and trade-off analysis of all DFAS information technology requirements, as well as non-information technology valued at more than $250,000 (that is, not just technology-driven requirements). While many agencies and businesses use the Portfolio Management approach to govern technology investments, the DFAS is taking a more comprehensive approach by including all high-value initiatives.

As a decision-making tool, Portfolio Management requires essential data about all initiatives to be entered into a central database and requires those initiatives to be scored against basic criteria and risk. "The goals are to provide an objective way for DFAS leadership to view all of its many initiatives, to understand the choices they make by funding one project over another, and to provide a means to evaluate projects against promised results," said Gary Crane, DFAS Portfolio Manager.

The scores and data are reviewed and validated by the Portfolio Management team and then are used both by the Chief Information Officer/Business Integration Executive Group and by the Strategic Planning Steering Group to assess how each initiative supports DFAS strategic goals, its Balanced Scorecard, and other DoD and federal initiatives like DoD transformation, the President's Management Agenda, and the Government Paperwork Elimination Act.

Once entered into the portfolio, initiatives are carried to the process's control phase, where they are reviewed periodically to measure project health and performance against baseline expectations for cost, schedule, risk, and return on investment.

This phase also lets DFAS decision makers identify initiatives and programs performing below expectations; recommend corrective actions; and, as warranted, identify reprogramming actions. In fact, according to Mr. Crain, "Portfolio Management gives DFAS leaders the data to make better decisions and the business intelligence to turn off initiatives if they are not delivering on their promises."

The final phase of the portfolio cycle is evaluation, which assesses and improves DFAS portfolio performance, specific initiatives or programs, and the Portfolio Management process itself. Teams conduct a Post Implementation Evaluation Review (PIER) for each completed project. Each PIER assesses project performance by comparing actual results to original estimates to determine whether desired results, savings, or other benefits were achieved. Resulting data is used to develop and share lessons learned in order to improve decision making about future investments.

Portfolio Management treats existing and new initiatives as assets to be managed instead of costs. The process is dynamic and iterative so that the Portfolio reflects changing agency goals and priorities.

Portfolio Management Today

The DFAS has been developing its approach to Portfolio Management for about a year. In this first year, the agency established the governance process and procedures, created a set of Web-based tools to help manage and weigh initiative data, and completed its baseline inventory of ongoing projects. Even in this early phase, DFAS leadership identified several opportunities to improve current projects and reduce costs.

"Finance and accounting for the Department of Defense is big business," Ms. Davis said. "With an operating budget of more than $1.5 billion, taking steps to improve the stewardship of those resources is the right thing and good for America's national security."

Expanding Portfolio Management Outside DFAS The DFAS is not alone in taking advantage of Portfolio Management. In fact, the Office of Management and Budget (OMB) is tying its budget requirements process to agencies' ability to present business cases for budget requests.

An agency's business case must include a description of the process the agency uses to pick the projects to be included in its submission to OMB, according to David Muzio, procurement policy analyst within OMB's Office of E-Government and Information Technology. Analysts will be looking specifically for a portfolio management process that weighs each investment decision within the context of the agency's overall missions, he said.

The DFAS is also working closely with senior-level management of the Office of the Secretary of Defense, Business Modernization and System Integration Directorate, to capture appropriate data for all DFAS systems, which include capabilities and functions. By implementing Portfolio Management, the DFAS will improve capital planning and investment control processes, which generate additional value for DFAS customers.

According to Ms. Davis, "The challenge ahead of DFAS is to continue its transformation into a world-class finance and accounting organization, drive up value, and push down costs. These efforts make us a stronger, more competitive organization that is more capable of anticipating and meeting the needs of our customers and contributing to our nation's national security."

Finding the Right Measures

The key to assessing portfolio effectiveness is measuring the right things. The scoring criteria require DFAS to choose performance measures that meaningfully reflect the mission of the program, not merely ones for which there are data. As a general approach, we expect these measures to reflect desired outcomes; however, there may be instances where a more narrow approach is more appropriate and output measures are preferable. Because of the importance of performance measures in completing the portfolio requirements, it is crucial for DFAS to agree on the appropriate measures early in the Portfolio Management process. Each initiative receives a weighted score on three dimensions: Mission, Financial and Benefits, and Risk.

The mission assessment examines relationships between the initiative and organization mission, including effectiveness and efficiency, degree of alignment with strategic plans, information technology architectures of the organization, and higher authority. This information is associated with identifying benefits to be gained by funding and implementing the initiative.

The financial and benefits assessment provides numerical quantification of benefits. A positive Return on Investment is a numerical means of stating that an initiative's benefits exceed its costs over time. Net Present Value looks at costs over an extended period and discounts them based on the assumption that resources in the present are more valuable than resources in the future. The payback/break-even point indicates how long it will take projected savings to equal the investment costs.

The risk assessment evaluates adherence to architecture and standards, acquisition, security, and other management factors that can affect initiative success. The evaluation of risk is critical to the value of an initiative.

The author thanks Angela Robinson of DFAS for her contribution and support in developing this article.

Bryan Hubbard is Deputy Director of Corporate Communications far the Defense Finance and Accounting Service. His career in professional communications includes serving as director of Corporate Communications far commercial firms, executive producer for well-known Web properties, and public affairs officer in the Secretary of the Air Force's Office of Public Affairs.