It’s no secret that projects in the earlier stages of the development lifecycle are evaluated and managed very differently than projects in the later stages. One major pharmaceutical company believed these differences to be so great, however, that they split their development organization in two. Over time, the structural gulf became a cultural gulf, leading to downright animosity between the early- and late-stage divisions. Making matters worse, both developed their own portfolio management processes that were not only distinct from each other, but also completely disconnected.
As projects were handed off from the early-stage side, the late-stage side perceived that they were receiving too many “low-value” projects. The late-stage side subsequently starved these projects of resources, which delayed them and reduced their chances for success. Diversion of resources, however paltry, to these “low-value” projects also impacted late-stage projects that the organization perceived to be valuable.
Organizational Structure As Scapegoat
Even though it was intended to improve efficiency, was the structural change destined to fracture the organization? Absolutely not. The failure arose because each silo was not only tasked with managing its own operations (good), but was also given ownership of the strategy governing its portfolio processes (bad). The disparate strategies of the two organizations meant that the late-stage management couldn’t see the value in many of the projects transferred to them. What was missing?
- A clear strategic plan from upper management that bridged the two organizations’ objectives.
- A portfolio selection process that involved the triumvirate of upper management, early-stage leadership, and late-stage leadership.
These features would have enabled the company described above to speak with one voice, and would also have reduced the element of surprise when projects landed in the lap of the late-stage team.
The pharmaceutical firm profiled above isn’t alone in their split-brain ways: Many in R&D believe that it’s a good idea to manage their early- and late-stage portfolios separately. This topic often comes up at portfolio management conferences, and the sentiment is overwhelmingly in favor of splitting them. The concern is that the low-risk late-stage projects that are nearer to generating revenue will dominate the high-risk early-stage projects that are farther away from launch, and thus only late-stage projects will get funding. This is absolutely true if classic prioritization (“bang-for-the-buck”) methods are used for project selection. But should you let your project ranking scheme determine your organizational structure?
A Solution To the Quandary: Strategy-Driven Portfolio Criteria
While not exactly picking up where our first company left off, another client solved this problem (without a reorganization) by changing their determination of a “good” portfolio. Rather than use project prioritization to identify the “best” projects, they considered the optimal characteristics they would like to see in the portfolio as a whole. They narrowed their criteria to the following set:
- They wanted projects that led to to at least three major new platforms in the next five years.
- They set a minimum threshold for how much revenue they expected their current and future products to produce seven years from today.
- They set an upper limit on the total funding they would allocate to new projects over the following three years. (Historically, they had only used one year of funding, but found they funded too many projects that either had low first-year spending or were slated to start later in the year, causing a budget crunch in subsequent years.)
- Subject to the above conditions, they wanted their portfolio to maximize risk-adjusted net present value of cash flow (eNPV).
The executives used a dashboard like this one to trade-off strategic goals
across portfolios. All of the development portfolios were risky,
so the charts displayed likelihood or an 80% confidence interval.
A dashboard used to compare these objectives and constraints across multiple portfolios is shown here. Note that the dashboard makes use of portfolio Monte Carlo simulation to report plausible range of eNPV and the likelihood of attaining goals for each portfolio scenario. The executives understood and liked these representations of the portfolio risk.
Using their goal-based criteria to look at several prospective portfolios, the client found that while late-stage projects delivering high eNPV were still favorable, incorporating their longer-term and innovation-focused objectives retained enough early-stage projects to support growth. The key was to translate their strategic goals (longer-term revenue fostered by the development of new product platforms) into objectives that they could use to judge alternative portfolios. The projects that no longer warranted inclusion tended to be small, low-risk marketing-based projects that represented small tweaks to existing products or geographic expansions. While these projects supported short-term sales and required relatively low investment, they diverted scarce resources away from a key strategic goal of the organization: long-term growth.
The preceding discussion was a high-level summary of how the client applied their set of criteria to identify a desirable portfolio. In reality, the portfolio review was a two-step process involving a pipeline analysis and an optimization. The pipeline analysis helped them understand, from an historical perspective, how many research projects were needed to eventually yield three successful platforms. The portfolio optimization included every project currently in development, projects under consideration, several potential acquisitions, and dozens of early-stage research programs. From the portfolio scenarios that emerged, executives selected a hybrid approach that increased the R&D budget to enable acquisitions while still funding projects in late-stage development.
Multiple Objectives to Bridge the Organizational Divide
A portfolio needs to be crafted based on a consistent set of objectives, lest two (or more) parts of the organization attempt to run in opposite directions at the same time. When we hear portfolio managers suggest separate processes for early- and late-stage projects, it’s never a cogent argument for doing so—”because this is the right way to do it.” More likely it’s a hands-in-the-air insistence that “we cannot do it any other way.” We suggest there is indeed another way to do it, but it requires breaking the reins of traditional project prioritization and taking a holistic, multi-objective approach to portfolio management. Instead of the R&D portfolio dividing the organization, it can be used to form a more perfect union.
