When we engage with a client, our primary objective is to ensure that they are investing in the right projects: Those in closest alignment with their strategic goals. Without proper attention paid to project execution, however, you’ll never unlock the potential of your chosen projects. Last year we blogged about the distinctions between operational and strategic R&D portfolio management and the critical nature of both activities. The two terms have often been contrasted with a phrase like this:
Strategic R&D portfolio management ensures you are working on the right projects, while operational project management ensures the projects are done right.
It is a useful aphorism, but separating the activities into completely discrete tasks is illusory: insights gleaned during project execution always inform your chosen project set, and refinements to your strategy and resulting portfolio will always affect how and when you execute. So in reality the activities are inextricably linked in a healthy organization. All activities ultimately serve the same goal: Delivering novel products that delight the customer.
Putting the Cart Before The Horse?
So which comes first in the life cycle of an organization, strategic or operational portfolio management? It would seem, logically, that a first pass at choosing the right projects should come first. But the reality is often that the initial project-selection decisions a company or division makes are ad hoc, or are a simple extension of the success enjoyed to date. Far more attention is paid to ensure projects underway are on-time and on-budget. This is understandable, in that the effects of poor project management are more acutely felt, short term, than the effects of poor project selection. This results in an emphasis on resource planning, budgets, and schedules, rather than value-driven project selection and refinement.
At some point, however, all growing companies pass a threshold where they also should be practicing rational project-selection as part of portfolio management. The challenge is to notice the threshold and begin systematically thinking about project selection based on strategy and value before you’ve expended substantial resources, and lost precious time, chasing the wrong opportunities.
What are some of the signs that your firm has crossed that threshold? Here are a few we’ve seen in practice:
Employees disagree about the right level of R&D investment, and the right number of projects to pursue, but conversations never proceed beyond ideology. A portfolio management process will help your organization define strategic goals, and translate those goals into spending guidelines. Everyone will have a clearer sense of where spending is adequate, and where it falls short, to meet short- and long-term goals. In one organization we assisted, clarifying medium term cash flow and earnings goals enabled the R&D team to rally around a target for new product launches that was 3x their historical average. Without a strategic framework, the group would have never agreed upon such an ambitious target as necessary.
The number of projects undertaken prohibits any one person from knowing everything about all of them. At some point, key executives reach an impasse: No one can keep the entire portfolio in their head any longer. Smart people who are accustomed to having a total command of the situation unexpectedly find gaps in their understanding. A portfolio process will ensure that the executive view of the portfolio benefits from knowledge and lessons learned by the entire R&D organization. (But only if the process actually adds value through frequent honest, effective, cross-departmental conversations about each opportunity.)
Complexity of each project undertaken prohibits any one person from knowing everything about one of them. Just as an executive reaches a point where they can’t track the portfolio by themselves, projects may reach a point where no one person knows enough to judge its attractiveness. A portfolio process ensures that representatives from marketing, sales, and R&D, among others, weigh in on project value and feasibility. This pays dividends far beyond project selection; each project plan is progressively improved as a direct result of each project team conversation that occurs.
The reason for undertaking a project seems to change from month to month or even week to week. Last month it was ‘huge market’ while this month everyone is saying ‘price premium in niche market’. Portfolio management ensures that the baseline positioning for each project is recorded, from the value proposition to the market forecast. If those details ‘evolve’ over time, everyone should be aware of the reasons. We’ve found that organizations don’t always even know when the rationale for a project is evolving until it is written down where everyone can see it evolve over time. Recording the key risks or challenges for a project at each review meeting, and then revisiting those challenges at subsequent meetings, is another way to ensure that the organization avoids amnesia and tackles the most important project questions head-on.
Funded projects consistently seem to be those with the most persistent (and loudest) supporters. Volume-based portfolio management is a common failure mode in fast-growing organizations. Absent specific criteria for project value, those who exhaust everyone else can get their way. The alternative is to employ a valuation model (which need not be quantitative) to assess each project’s value on a consistent set of factors. At one client, holding fact-based project selection discussions was such a novel concept that there were numerous false starts: Project teams didn’t believe in preparation for these meetings because evidence-driven business models had never been requested before. Eventually project leadership printed up baseball bats with the slogan: “Enrich Enforcer” to underscore their commitment to only funding projects where a substantiated business model was presented.
Projects that are cancelled or denied funding continue on as pet projects of a particular executive, or as skunk works projects executed on the sly. When there is no assessment of project value, no record of project decision making, and no regular reviews or oversight, it is easy for projects to soldier on, even if they lack sufficient sponsorship or were supposed to have been cancelled long ago. Note that I am not categorically against a project just because its benefits cannot yet be well articulated, but when that project flies under the radar, the organization cannot expect to effectively learn from that team’s efforts. R&D is rife with examples where unexpected twists and turns spun straw into gold: The Post-It, the medical x-ray, and super glue are just three of many such examples. The organization should be willing to sponsor some number of ambiguously valuable initiatives if their product strategy aspires to disrupt current markets or industries. This is a good segue to the final warning sign…
The balance of initiatives are minor extensions to existing products, without any project venturing into new or disruptive territory. Ironically, this failure mode occurs even when a swing-for-the-fences long shot got the company to its current level of size and success. Most of us are not risk seeking, and most organizations do not reward or acknowledge the need for risk-taking. An effective portfolio process will assess whether the mix of risky and not-so-risky projects is in alignment with the strategic goals of the firm, and then devote resources to the creation of risky projects with large potential upsides.
I hope this list had a few ‘aha’ moments in it for you, where you saw your own organization represented in these challenges. Of course, the aha is only the first step; following the realization with effective action is the real challenge. I would love to hear from you about how R&D portfolio management did or did not succeed in surmounting the challenges you’ve encountered.