By David Matheson, SmartOrg
Your portfolio of innovation projects is the engine that drives the growth and market leadership you need to survive and thrive. It’s critical that you tune that engine for the greatest power to drive your growth, and not flood it with too many projects.
The idea that pursuing every innovation opportunity is the best way to maximize the power of an innovation portfolio is appealing. If there were no limitations on available resources, every project with a positive net present value (NPV) would indeed be worth pursuing.
But you don’t live in a world of unlimited resources. If you have more worthwhile innovation and new product development projects than you have resources to pursue, how do you decide which ones to keep in your innovation portfolio and which ones to cut?
To answer that key question, you must answer these three questions:
1. What are good projects?
2. What makes some projects better ones?
3. How do you choose good projects to say “no” to in favor of better ones?
What are Good Projects?
Traditionally, evaluating an innovation project often bogs down in fine details and uses fixed estimates of future conditions to assess what the project’s results will be. The calculations and the sea of data make it difficult to see which factors are the most important.
A better approach is to identify the factors that drive each project’s value and chances of success, then focus on just the most important ones. To do this, estimate the uncertainty in each of the project parameters and calculate probability-weighted outcomes. This highlights the factors with the greatest impact on potential project outcomes, that is, the greatest potential upsides and downsides.
What are Better Projects?
Next, assign to each project an estimate of the probability that the development will be successful (all the way through market introduction). Then map this probability of success (on the vertical axis) against the probability-weighted net present value of the project (on the horizontal axis). Your innovation projects will fall into four groups:
1. Bread and Butter: likely to succeed but low value.
2. White Elephant: less likely to succeed and still low value.
3. Pearls: likely to succeed and high value.
4. Oysters: less likely to succeed but high value.
Each type has a different degree of power to generate growth. Most powerful are Pearls: they generate reliable and big returns, but are very hard to find. Oysters could become Pearls, and the challenge is efficiently identifying the successful ones. Bread and Butter projects generate reliable but modest returns. White Elephants represent a lot of effort for small and uncertain returns.
To improve the aggregate power of your innovation portfolio to drive growth, adjust the project mix. You can manage Oysters to identify the potential Pearls quickly and focus efforts on these. You can look at the uncertainty factors in Bread and Butter projects and focus on areas where you can drive upside, adding potential value while reducing the probability of success (thus turning the projects into Oysters). And you can cancel White Elephant projects that drain resources for little returns.
How Do You Choose Good Projects to Say “No” To?
Now you’ve identified a portfolio of good projects. However, you may still have more projects than you can fund, especially if your new plan includes increasing funding to create more Oysters. How do you pick the projects to pursue? Which good projects do you say “no” to so you can say “yes” to better ones?
Here’s how to set these priorities. For each project, divide the probability-weighted NPV by the projected cost to successful completion: this ratio of value to cost is the project’s expected “bang for the buck.” Sort the projects by bang-to-buck to identify the most valuable group of projects that fits into your innovation budget.
This view lets you easily determine the impact of adjusting your innovation budget. You can see the value you will gain by increasing the budget or the value you will lose by cutting it.
Saying “no” to the good projects that don’t make the bang-for-buck cut may feel like “leaving money on the table,” but the goal is to redirect resources from those projects into funding and driving the success of better projects with higher returns.
Answering these questions to increase the power of your portfolio requires cultural changes, along with special-purpose tools for modeling uncertainty in projects and portfolios. SmartOrg has both the required software tools and change management expertise to help companies succeed answer these questions, boost growth, and claim leadership in their markets.