By David Matheson, SmartOrg
In evaluating projects within an innovation or new product development portfolio, we frequently look at a two-dimensional view of project value. For the first dimension, we look at the net present value (NPV) of the project based on achieving the median or "expected" in each of the project’s component value drivers. For the second, we look at how the uncertainty ranges of each component interact to determine the overall range of project value.
This gives us a familiar stacked bar plot of project values. In this presentation, the projects are sorted in descending order of their NPVs. The length of the bars, and their horizontal positions relative to the NPV, are determined by the 10th percentile (lowest) and 90th percentile (highest) values in the uncertainty range.
In addition to ranking the projects by their median value, this view lets us analyze each project’s swing-to-median ratio to see whether the project should be managed to try to capture its upside potential or instead should be managed to achieve the median value reliably. With a big swing-to-median ratio, the median value is a consolation prize compared to the upside potential, and it’s worth taking risks to achieve that upside. With a small swing-to-median ratio, there isn’t much upside potential to justify putting the relatively certain median value at risk.
A third dimension of the projects that provides valuable insight into their strategic value in a portfolio is the probability of development success. It’s important to remember that development success is defined not just as successfully demonstrating that the project meets its technical specifications. Rather, development success includes success of the initial commercialization steps, such as getting sales commitments from beta test customers and gaining customer acceptance of the first delivered units.
Plotting the median NPV of each project against its probability of development success yields the Innovation Screen view of the portfolio. In this view, one clearly sees the mix of project types in the portfolio. Difficult and small-value projects (White Elephants) clutter up portfolios, soaking up management attention and offering little in return. By contrast, difficult projects with high value (Oysters) represent big bets on the future: the big potential rewards if they succeed justify the effort that goes into them. The strategic insight is that it makes sense to examine one’s White Elephants and either kill them outright or find ways to seek more value from them, thus turning them into Oysters.
There’s another dimension to innovation and new product development projects that provides useful additional information about strategy and risk. The time to complete development and to reach product maturity in the market offers a valuable basis to compare projects that lie close together on the Innovation Screen.
In a Time vs. Value view, it’s easy to see that some projects have long time horizons yet offer little value if successful. The longer a project lasts, the more overhead and management time it consumes, and the longer it imposes an opportunity cost by diverting resources from other projects.
Whereas a project with a high potential payoff may justify an extended period of technical and commercial development, other projects may simply not be worth the time and effort to pursue meager returns. Just as the Innovation Screen suggests a strategy of killing or converting White Elephants, the Time vs. Value view suggests a strategy of killing or accelerating small, sluggish projects. If a small, sluggish project has a high probability of success, it may be possible to speed up its development to reap the benefit and make space in the portfolio for new projects. If it has a low probability of success, it’s worth asking if ending it now would open up that space for better projects with higher potential value and/or quicker turnaround.
When strategically evaluating an innovation or new product development portfolio, it’s important to look at all of the sources of clutter and opportunity cost. The dimensions of potential value, probability of development success, and time to maturity all shape the opportunity cost of each project.