Dialogue to Drive New Growth
If resources were unlimited, Innovation (R&D and New Product Development) and Finance would never be in conflict: every idea would be fully funded and staffed. In a resource-constrained world, Innovation and Finance often work at cross-purposes. Innovation teams balk at Finance placing restrictions on resources and demanding precise, fixed estimates of project results. Finance sees Innovation teams as a source of unnecessary risk and expense without certainty of return. This tug-of-war distracts both Innovation and Finance from growing the business.
But both groups are naturally allied by their need to make innovation make money. Finance’s growth goals must be on Innovation’s agenda, and Finance must recognize Innovation’s need to explore high-risk, high-reward areas. The two groups need a shared set of terms and tools to let them both focus on driving project upside and prioritizing projects for maximum portfolio value. Then they can agree on which projects to shelve, which to execute as planned, and which to pivot to better opportunities.
To attain high returns, an organization has to take risk: the question is how to manage risk wisely. Managing risk at the project level kills high-risk, high-return projects. Managing risk at the portfolio level recognizes the value of diversification and balances risk and return across the whole portfolio. To get a sufficient number of big winners, the portfolio must include a sufficient number of high-quality risky projects.
The key is to get out of stifling conversations about budget authorizations and committed forecasts, and into smart conversations about wealth creation, options and value. At first, these smart conversations may be unfamiliar and even uncomfortable; most organizations spend the bulk of their time on operational issues and execution but neglect the conversation about building wealth.
How Can We Create Wealth?
The innovation process is about creating wealth through finding new revenue sources for the organization.
Wealth creation starts with unlocking each project’s upside. When it’s done right, evaluation is a continuous process that identifies how to increase the return of each project. The disconnect between Finance and Innovation usually means evaluation is treated as a hurdle rather than an opportunity to drive each project toward ever more valuable results.
The right decision analysis software gives innovators the evaluation capabilities they need to select and prioritize projects better and focus on the factors most critical to success and profitability. By helping Innovation and Finance account for uncertainty in the factors that help or hinder achieving each project’s upside, it keeps their discussions focused on unlocking value rather than on fear.
At the corporate executive level, the issue is making great portfolio choices. Smart conversations about innovation portfolios seek to balance financial return and support of the organization’s strategy with aggregate risk and cost. Here, the right decision analysis software compares projects of different sizes and difficulty on a level playing field. That combats the problem of managers choosing easy incremental projects while avoiding difficult but potentially very valuable innovation projects. With a shift toward more valuable projects, the portfolio has more power to generate profitable growth.
Pursuing projects with the highest upside potential naturally drives conversations about comparative choices. Taken together, unlocking project upside and making great portfolio choices create a virtuous cycle of building great portfolio results.
Smart Conversations, Great Portfolio Results
Achieving great portfolio results has three dimensions:
Resources: assigning resources to projects and setting the parameters (budgets and timelines) for their use.
Process: tools of governance that ensure managers and executives remain informed of project status and have visibility into upcoming achievements and potential problem areas.
Resources and Process are the concrete operational areas that managers are generally most comfortable with. It’s straightforward to create budgets, milestones, dates, and organization charts, even if these may take a lot of effort.
But Economics is the key to ensuring that Resources and Process create real value for the enterprise. The challenge is that top-down requirements for growth and constraints on spending typically don’t match to bottom-up reality. To close the gap, something has to change.
The crux of the issue is learning how to say no to good projects to fund better ones, to manage portfolio risk instead of simply avoiding risky projects. The naïve approach of “gathering the data” and making a decision usually falls short. Objective evaluation is fundamentally hard, because people typically tweak or cherry-pick assumptions and use subjective evaluations to support their case.
To make and accept decisions using objective evaluations, the standards for the process must be high. Will those whose projects were cancelled come to the same conclusion themselves – or at least acknowledge that the decision was made fairly and objectively? Smart portfolio conversations combine analytical comparison processes with conflict resolution processes that help portfolio managers and project owners reach consensus about which projects will best drive the organization’s future.
Shared Terms, Shared Tools, Shared Goals
Helping Innovation and Finance appreciate and understand each other’s roles and goals enables organizations to move beyond mistrust and miscommunication and to start having smart portfolio conversations. These conversations, in turn, let Innovation and Finance both apply their respective skills and expertise to the pursuit of growth and the creation of greater wealth.
SmartOrg’s Portfolio Navigator web-based software provides the necessary tools to make smart portfolio conversations possible. The models, displays and reporting in Portfolio Navigator (built on SmartOrg’s Rangal platform) let Finance and Innovation share a vision of how to drive upside value from projects and achieve better results from the overall portfolio.