The Paradox of Driving Growth While Cutting Costs | ValuePoint May 2017

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Insights from Teva’s Portfolio Journey

By David Matheson, SmartOrg

It seems like an impossible challenge: drive growth while cutting costs.

Yet it seems to be a common one.

Teva webinar attendee rolesAt our recent webinar, Julia Reznick of Teva Pharmaceuticals shared her multi-year journey with strategic portfolio management. She described how she used portfolio management to help Teva deal with some of its most important challenges: preparing for the loss of exclusivity of their most important product, working through a major merger, and determining where and how much to invest in innovation. Her main insight, applicable to all industries, is this: at every stage, focus on solving real business problems.

Our audience contained many veterans from many industries, including healthcare, energy, telecommunications, and environmental conservation. About 70% were either portfolio process owners or experts who have been involved in many companies.

Each participant was asked to indicate their top business challenges, resulting in a three-way tie (see Figure 2). Driving growth and cutting costs were two of the top three. The third top-rated challenge sheds some real insight into this apparent contradiction: focusing on innovative projects and killing incremental projects.

Attendees top business challenges The forces in most organizations under pressure (and let’s face it, what organization isn’t under pressure to produce more with less?) is to cut the slack. The first place management looks is at the hard-to-justify, somewhat speculative, long-term or maybe indirect projects. These projects, with long-term impact, uncertain prospects, or unclear short-term contributions to keeping customers happy, now have a big target painted on them. Innovation pretty much fits this bill, and finance is ready to cut it back.

You’ve got to connect innovation and finance to give these critical growth investment decisions a chance. Teva’s journey highlighted five methods/tools that they found invaluable. In a poll, participants found these tools useful also (see Figure 3), and the top three point the way to resolving the paradox.

Julia was able to shift management thinking to focus on the most valuable projects. This may seem obvious, but many executives are so concerned with their near-term objectives, fighting for resources for their business unit or organization, or otherwise caught up in the day-to-day, that this common sense approach is anything but common. With it comes a focus on measuring economic value in a practical and rigorous way–the first step in connecting innovation and finance. The webinar attendees rated this as the most valuable technique.

Useful portfolio management techniquesRanked second was understanding uncertainty. It is all too easy to get caught in “the promise”–what we can reliably deliver by investing in a proposed project. Yet we all know there is significant uncertainty in outcomes, especially in innovation. Without a detailed understanding of what drives the upside and downside, it is irresponsible for finance to endorse innovation. A Tornado Diagram, for example, gives a different take on a business case by presenting the outcomes of many business cases simultaneously.

One these are under your belt, you can understand the balance between bread and butter projects (high probability of success and low potential impact), versus oyster projects (low probability of success and high potential). The Innovation Screen, used to understand this balance and make choices about risk versus return, is the third of the three most important tools.

My experience is that most companies do way too much incremental innovation. A lot of it can simply be cut. I know many incremental projects support important customers or are otherwise easy to justify or supported by powerful people. But investing solely in incremental innovation is a guaranteed path to mediocrity and slow growth. We all know it takes investment in innovative projects to really grow. Because these investments are hard to justify rigorously and often fall prey to hand waving, most companies need more rigorous evaluation that doesn’t kill the fragile innovative idea.

Techniques like focusing on value, understanding uncertainty with the Tornado Diagram, and using the Innovation Screen to balance the portfolio are instrumental in addressing the paradox of driving growth and cutting costs. They align innovation and finance to resolve conflict about where and how much to invest. They worked for Teva. They can work for you.

See the entire webinar.