Direction
Money already spent gets no vote.
Where strategy becomes machinery
A strategy is a set of intentions. A portfolio is a set of choices. Between the two sits a translation problem that most organisations never solve: how to turn what the strategy says matters into something that can actually decide, month after month, which investment gets the money and which does not. Strategy is written in the language of ambition — grow in this market, modernise that platform, become the kind of company that does this. Choosing is done in the language of comparison — this one or that one, given that we cannot afford both. Direction is the stage that performs the translation. It takes the strategy as given and builds the apparatus that will apply it, automatically and consistently, to every decision the portfolio makes.
This is worth being clear about at the outset, because it marks the one thing Direction does not do.
Direction does not write the strategy. It assumes a strategy exists and turns it into the machinery of choice: the criteria, the weights, the risk appetite, and the funding buckets. If there is no strategy, that is a problem to solve before the portfolio can function — not a gap the portfolio can fill by inventing direction of its own.
The output of Direction is not a plan, a roadmap, or a list of approved work. It is a small set of durable instruments that the rest of the loop runs on. Get them right and the later stages have something solid to push against. Get them wrong — vague criteria, weights nobody believes, a risk appetite that permits everything — and every subsequent decision becomes an argument, because there is no agreed basis on which to settle it. Most portfolio dysfunction that looks like a problem of deciding is really a problem of Direction: the decisions are hard because the basis for them was never built.
There are four instruments. We take them in turn.
The reference framework
The first and most important instrument is the set of selection criteria — the lenses through which every candidate investment is judged. In the canon these were named as a kind: the measures used to choose what to fund, as distinct from the performance measures used to check how chosen work is doing. Here we make them concrete.
Four families of criterion cover almost every portfolio. They are not a rigid template — an organisation may name them differently or split them finer — but if your framework is missing one of these, it is probably missing something it will later regret.
| Criterion | The question it asks |
|---|---|
| Value | How much benefit does this create, of the kind the organisation counts — and how confident are we in that number? |
| Strategic fit | How directly does this advance a current strategic priority, as opposed to merely being useful? |
| Risk | How likely is this to fail, and how damaging if it does — to the investment itself and to the rest of the portfolio? |
| Cost | What does this consume from the limited pool — money, yes, but also scarce skills and management attention? |
The agreed set of criteria, together with the weights attached to them, is what this book calls the reference framework. It is the constitution of the portfolio. Every investment is judged against it; every funding argument is, ultimately, an argument conducted in its terms. Because it is constitutional, it should be small, stable, and understood by everyone who proposes or decides. A framework with fourteen criteria is not more rigorous than one with four; it is less, because no one can hold fourteen things in mind while comparing two investments, so in practice they collapse it back to the three or four that actually move the decision — only now they do so privately and inconsistently. Keep the set small enough to be used honestly.
“A criterion nobody can apply consistently is not a criterion. It is a decoration that makes the spreadsheet look thorough.”
Two cautions on building the framework. The first is the vanity criterion — the lens that sounds impressive and measures nothing, like “innovativeness” or “transformational impact,” which in practice means whatever the most senior person in the room wants it to mean. If a criterion cannot be applied to two real investments to produce a defensible difference between them, it is not earning its place. The second is the double count — value and strategic fit, in particular, tend to bleed into each other, so that a strategically aligned investment scores well twice for the same reason. Keep the criteria genuinely distinct, each asking a question the others do not.
What this chapter deliberately does not do is explain how to score an investment against these criteria, or how to combine the scores into a ranking. That is the work of valuation, and it has its own chapter. Direction’s job is to agree what will be measured and how much each matters — not to do the measuring.
Strategy sets the weights, not the scorecard
Here is the mechanism that makes the framework strategic, and it is the most important idea in the chapter.
The criteria are stable. Value, strategic fit, risk and cost matter to every portfolio, in every year, under every strategy. What changes with strategy is not which criteria you use but how much each one weighs. A strategy that prizes growth above all will weight value and strategic fit heavily and tolerate more risk. A strategy of consolidation after a hard year will weight cost and risk heavily and demand near-certain value. The same four lenses, in radically different proportions, produce radically different portfolios — which is exactly right, because the strategy is different.
Strategy sets the weights, not the scorecard. The criteria are the constant; the weights are the variable. When the strategy changes, you do not rebuild the framework — you re-balance it.
This separation does a great deal of quiet work. It means the framework is durable — you are not redesigning your decision apparatus every time the strategy is refreshed, only re-tuning it — which keeps the portfolio comparable across time and stops every strategy refresh from triggering a methodological civil war. It means the strategic intent is expressed in one visible, debatable place: the weights. And it means a change of strategy can be implemented in the portfolio in an afternoon, by re-weighting, rather than over a year of trying to argue individual investments into or out of favour.
Consider what re-weighting actually does. Suppose strategic fit carried a weight of twenty per cent, and a strategy refresh elevates a particular market to the centre of the company’s plans. Raise strategic fit to thirty-five per cent and several things happen at once, automatically, the next time the portfolio is judged: investments serving that market rise in the ranking, investments that were coasting on raw financial return without strategic relevance fall, and the marginal cases — the ones near the funding line — re-sort themselves. No one had to relitigate each investment. The weight change did it. That is what it means for strategy to drive the portfolio: not exhortation, not a stirring all-hands, but a number that changes what wins.
How often should the weights move? Less often than people fear and more often than most organisations manage. Weights should be reviewed when the strategy genuinely changes — and only then. Re-weighting every quarter because the wind shifted is its own pathology; it makes the portfolio unstable and teaches everyone that the framework is theatre. But a strategy that has visibly moved while the weights sat still is the surest sign that the reference framework has quietly detached from reality, and that the portfolio is now optimising for a strategy the company no longer has.
Risk appetite
The third instrument is the portfolio’s risk appetite — a deliberate statement of how much risk, and what kinds, the portfolio is willing to carry in pursuit of return.
Risk already appears as a selection criterion, where it shrinks the attractiveness of an individual investment. Risk appetite is a different and higher-level thing. It is not about any single investment; it is about the shape of the whole. A portfolio of nothing but safe, certain, incremental investments is not a prudent portfolio — it is a portfolio quietly guaranteeing that nothing important will ever happen, because everything important is uncertain at the outset. A portfolio of nothing but bold bets is not a brave portfolio — it is one likely to deliver nothing at all. Appetite is the statement of where, between those poles, this portfolio is meant to sit.
A useful risk appetite does two things. It permits — it tells the portfolio that a certain amount of failure is not only acceptable but expected, which is the only thing that makes genuine bets fundable. And it forbids — it draws the lines the portfolio will not cross, whatever the apparent return: the concentration it will not allow, the categories of risk it will not accept, the floor of run-the-business reliability it will not trade away for upside.
“A risk appetite that permits nothing funds only the obvious. A risk appetite that forbids nothing is not an appetite — it is a shrug with a letterhead.”
The commonest failure here is the appetite statement that has been carefully drafted to mean nothing. “We have a balanced appetite for risk” is the corporate equivalent of saying the weather is sometimes nice. A real appetite is specific enough to change a decision: it says, in effect, we will tolerate this much exposure to this kind of failure, and no more, and here is the room we are deliberately leaving for bets that may not pay off. When the time comes to choose the mix, the appetite is what keeps the portfolio from quietly defaulting to a wall of safe incremental work — the natural gravitational pull of any group of people whose mistakes are punished more reliably than their successes are rewarded.
How risk appetite is applied — how it shapes the actual balance of the chosen set — belongs to the chapter on choosing the mix. Direction’s job is to set it: to make it explicit, specific, and agreed, before any individual investment is on the table to distort the conversation.
Funding buckets
The fourth instrument is optional, and powerful, and frequently abused. It is the funding bucket.
A funding bucket is a deliberate pre-commitment that slices the total pool into parts before any investment competes for it. The classic split is three ways: run the business (keeping the lights on, the existing operation funded and reliable), change the business (improving and extending what exists), and innovation (bets on what might come next). Other splits exist — by market, by horizon, by capability — but the principle is constant: you decide, in advance and at the level of the whole portfolio, roughly how much of the pool each part should get, rather than letting every kind of work fight every other kind in a single undifferentiated contest.
The reason to do this is protective, and it solves a specific, predictable failure. In a single undifferentiated pool, the safe, near-term, easily-quantified investment beats the uncertain, long-term, hard-to-quantify one almost every time — not because it is more valuable, but because its value is easier to defend in the room. Run-the-business work, with its concrete and immediate justification, will reliably starve innovation, which trades in possibility. Left alone, the pool eats its own future, one defensible quarter at a time. Buckets prevent this by ring-fencing a share of the money for the kinds of work that would otherwise always lose the argument.
The discipline that makes buckets work — and the discipline that most organisations abandon — is captured in a single rule.
Investments compete within a bucket each period. Bucket sizes are resized between periods. The buckets protect strategic and uncertain bets from being crowded out — but they are not permanent fiefdoms, and they are not an escape from re-allocation.
Both halves of that rule are load-bearing. Compete within means a bucket is not a guarantee of a quiet life: the innovation bucket’s contents still fight each other for the innovation money, on the same criteria as everything else, and weak bets in a protected bucket are still weak bets. The protection is for the category, not for any investment inside it. Resize between means the bucket boundaries are themselves subject to the strategy and the weights: a strategy that shifts toward growth should grow the change and innovation buckets at the expense of run; a year that demands consolidation should do the reverse. A bucket whose size has not changed in five years is no longer a strategic instrument. It is a baron’s territory — and the surest sign of a portfolio where the buckets have stopped serving the strategy and started serving whoever owns them.
Buckets are not free. They add a layer of structure, and a small portfolio may not need them at all — when there are eight investments and one decision-maker, the protective function can be held in a single head. The question of whether to use buckets, and how the within-competition and between-resizing actually run, connects directly to choosing the mix, and is developed there. Direction’s contribution is the framework: deciding whether to slice the pool, on what lines, and roughly in what proportions, as an expression of the strategy.
Direction is where the loop closes
Direction is drawn as the first stage, and in the order of explanation it is. But it is also the last. The loop, as the canon insisted, is not a line: Review feeds back into Direction, and Direction is where that feedback has to land or be lost. This is the second, less obvious reason the weights move — and it is the one organisations almost always miss.
Weights move on a change of strategy. That much we have covered: a deliberate, top-down re-tuning when the company’s intent shifts. But weights should also move on evidence — on what the portfolio has learned about what actually works. The two-way link with strategy is not a slogan; it is a mechanism, and Direction is the mechanism’s far end. When Review reveals that a whole class of investment the framework rated highly has reliably failed to deliver the value it promised, that is not merely a fact about those investments. It is a fact about the framework. A criterion that keeps selecting losers is mis-weighted, or mis-defined, or measuring the wrong thing — and Direction is where it gets corrected.
The reference framework is not just an input to the portfolio. It is the portfolio’s memory of what it has learned about value. If nothing the organisation discovers ever changes the criteria or the weights, the loop is not closing — and the portfolio is learning nothing.
This sets up a useful tension, and Direction’s craft is holding it. The framework must be stable enough to keep the portfolio comparable across time and to resist every passing enthusiasm — and alive enough to absorb hard evidence about what the organisation’s bets actually return. Too stable and it fossilises, faithfully selecting the same kind of work that has been quietly disappointing for years. Too reactive and it becomes noise, re-weighted on the strength of the last loud success or failure, with no memory at all. The standard to hold is simple to state and hard to live: change the framework when the strategy changes, or when the evidence is strong enough to overturn a belief the framework encodes — and not otherwise.
Direction at three settings
Everything above holds at every scale. What changes between Lean, Managed and Enterprise is not the instruments but their weight — how many criteria, how formally the weights are set, how elaborate the appetite, whether buckets exist at all.
| Instrument | Lean | Managed | Enterprise |
|---|---|---|---|
| Criteria | Three or four, written on a single page | A defined framework of four to six, documented | A full framework, formally governed, with definitions and scoring guidance |
| Weights | Set by the owner, in their head or on the page | Set by the portfolio board and recorded | Set with the strategy function, ratified by the governing board, version-controlled |
| Risk appetite | A sentence or two the owner actually believes | A short statement, reviewed each period | A formal appetite framework with explicit limits and categories |
| Buckets | Often none, or an informal split held in mind | Two or three buckets, sizes reviewed each period | Multiple buckets, sometimes nested by tier, formally resized on the cycle |
The temptation at the Lean end is to skip Direction entirely — to start judging investments before agreeing what matters. This feels efficient and is not. A single owner with four products and no written framework is still applying criteria and weights; they are simply applying them invisibly, which means inconsistently, and which means they cannot explain or defend a choice when challenged. The Lean version of Direction is small — a few criteria, a sentence of appetite, no buckets — but it is not absent. It fits on one page, and that page is worth more than its size suggests.
The temptation at the Enterprise end is the opposite: to mistake elaboration for rigour, building a forty-criterion framework with a scoring manual that no one reads and a risk appetite statement long enough to require its own table of contents. The discipline at scale is to keep the constitutional part — the criteria and weights that actually decide — small and sharp, and to let the formality live in the governance and documentation around it, not in the framework itself. A bigger organisation needs more process around its Direction. It does not need more criteria.
With Direction set — the criteria agreed, the weights tuned to the strategy, the appetite stated, the buckets drawn — the portfolio has a basis on which to judge. What it does not yet have is anything to judge. That is the next stage. Demand surfaces the candidates and frames them into a form the reference framework can be applied to — including, crucially, the work already running, which must re-enter the contest rather than assume its place in it.