2010 : 02 : Building Buzz : Inspiring Innovation in Your OrganizationAccelerating Innovation in R&D with Agile Portfolio Managementby Shan Rajegopal & Peter Wilson

Portfolio management for innovation has surfaced as one of the most important senior management functions for research and development (R&D) organizations. Faced with rapidly changing technologies, shorter product lifecycles, and heightened global competition, more than ever, how an R&D business spends its technology, money, and resources is paramount to its future prosperity - even its survival. Indeed, we believe that portfolio management is the manifestation of the R&D business strategy. It dictates where and how a company will invest for the future. Portfolio management treats R&D investments much like a fund manager in the stock market treats financial investments. It deals with issues such as maximizing the value of the portfolio (hence, the return on R&D spending), compiling an appropriately balanced portfolio, and developing a portfolio investment strategy that's aligned with the company's overall business strategy.

This article explains how the adoption of agile portfolio execution can facilitate the acceleration of innovation in R&D.

Portfolio Management in R&D

There are two ways for an organization to succeed at new products: doing projects right and doing the right projects. Most new product prescriptions focus on the first route - for example, putting in place effective project planning and execution, using cross-functional teams, and building in the voice of the customer.

Portfolio management focuses on the second route - doing the right projects. A vital question for product innovation management is: How should a company most effectively invest its R&D and new product resources? That's what the primary significance of portfolio management is: resource allocation to achieve new product objectives.

Portfolio management is a dynamic decision process, whereby a business' list of active new product (and development) projects is constantly updated and revised. In this process, new projects are evaluated, selected and prioritized; existing projects may be accelerated, killed, or deprioritized; and resources can be allocated and re-allocated to active projects. The portfolio decision process is characterized by uncertain and changing information, dynamic opportunities, multiple goals and strategic considerations, interdependence among projects, and multiple decision-makers and locations. It encompasses or overlaps a number of decision-making processes within the business, including periodic reviews of the total portfolio of all projects (looking at all projects holistically and against each other), making go/kill decisions on individual projects on an on-going basis, and developing a new product strategy for the business, complete with strategic resource allocation decisions.

New product portfolio management sounds like a fairly mechanistic exercise of decision-making and resource allocation. But there are many unique facets of the problem that make it perhaps the most challenging decision-making faced by the R&D organization.

Lack of Data

New product portfolio management deals with future events and opportunities. Much of the information required to make project selection decisions is at best uncertain and at worst very unreliable.

How do companies deal with that uncertainty? One smart approach is to set up classifications for different types of projects or products, from those seeking incremental improvements (where you have more historic data to work from) to those that are blue sky (where you have far less data since you're attacking new markets or trying completely new approaches). One client, for example, goes through a decision tree process to position each initiative into one of four different classifications. Each classification has its own level of risk. Blue sky initiatives have a much higher chance of risk; those with a history are much more predictable and therefore encompass less risk. Then the company performs risk management by allocating a given percentage of its budget to each classification. Those groupings with greater risk receive less of the budget than those with more predictable outcomes.

Constant Competition for Resources

Projects in the R&D portfolio are at different stages of completion, yet all projects compete for resources, so that comparisons must be made between projects with different amounts and "goodness" of information.

When a particular individual or team develops a project plan, it will include an estimation of how long it'll take to be completed. But some teams are much better than others in doing the estimating and you begin to see variation in the competency of the individuals for getting projects done. That variation in process and project maturity will have a huge impact on the way project plans are estimated and, as a result, on their successful completion. That comparison becomes critical for the management team, to make sure they have the right visibility into the risk of the endeavour - what is called the authenticity of risk.

Resources are Limited

Resources to be allocated across projects are limited. A decision to fund one project may mean that resources must be taken away from another; and resource transfers between projects aren't totally seamless. A company must never underestimate the challenge of having the right skills available for given projects because that becomes a major constraint on what you're able to deliver. Additionally, when a project is killed or takes precedence, which requires a shifting of resources, you need to understand the impact of that change on the other projects in the organization. That lack of scenario planning is a common malady for companies that aspire to strengthen their R&D operations.

Ever-changing Priorities

The R&D decision environment is very dynamic - and it varies based on the particular industry. Telecom, for example, can expect a product lifecycle of about three months. As new information becomes available, the status and prospects for projects in the portfolio must change. If a clinical trial goes well, a project may be expedited. If a competitor surfaces, a company may decide to shift its resources to accelerate product development.

A Portfolio Execution Strategy for R&D

In principle the execution of a portfolio can be deployed in two ways, using the waterfall or agile methodology.

The "waterfall" methodology is a linear and sequential approach to solution design and systems development. Each waterfall stage is assigned to a separate team to ensure greater project and deadline control, which is important for on-time project delivery. A linear approach means a stage by stage approach for product building. When a glitch results, you go right back to the beginning and start developing a new solution. This method stands for predictability - excellent for those incremental R&D efforts.

But R&D, as we've pointed out, also is highly dynamic. That's where the agile approach can be applied in portfolio management. Agile emphasizes values and principles rather than processes. It keeps overhead - meetings, documentation, contract negotiation - as low as is possible. Work progresses in cycles - a week or a month - and project priorities are re-evaluated at the end of each cycle.

Agile methodology stands for adaptability. And, that's why agile methods call for small teams to address constantly changing requirements. Using an agile methodology means cutting down the big picture into puzzle-sized pieces then fitting them together when the time is right.

We believe that the R&D organization cries out for the application of agile to its project prioritization for a number of reasons.

Once a stage is completed in the waterfall method, there's no going back, since the priorities set and implemented under the waterfall method are hard to change due to time and user restrictions. The problem can only be fixed by going back and designing an entirely new system, a costly and inefficient method. Agile methods adapt to change. At the end of each stage, the logical cycle - designed to cope with and adapt to new ideas from the outset - allows changes to be made easily. This approach not only reduces overheads, it also helps in the achieving improvements within each iterative cycle.

Another advantage to agile: There's a deliverable at the end of each tested stage or delivery cycle, such as process documentation or tool performance optimization. This ensures any problems or issues are caught and eliminated in the cycle, and the deliverable is double tested and approved by key stakeholders. This isn't possible for the waterfall method, since the deliverable is tested only at the end, which means any problems or issues found results in the entire methodology needing to be re-evaluated. There's only one main release planned for the waterfall method and any problems or delays mean highly dissatisfied users. Agile methods allow for specification changes to address stakeholder requirements.

Both methods allow for departmentalization. In the waterfall method, that can be done for each phase. With agile, each delivery cycle can be delegated to separate groups if resources are available. This allows for several parts of the project to be done at the same time: capacity management by one group, for example, resource pipeline analysis by another, roadmap reporting by a third, portfolio analysis by a fourth, and the benefits case by a fifth.

Define Your Strategic Drivers

Ultimately, executing portfolio management in the R&D space demands an understanding of the strategic drivers for a company - value maximization, balance, strategic direction, defining a "right" number of projects, or some combination. The strategic drivers will in turn influence the choice of portfolio methods.

What becomes clear is the potential for conflict between these high level drivers. For example, the portfolio that yields the greatest net present value or internal rate of return may not be balanced; it may contain a majority of short-term, low-risk projects or be overly focused on one market. Similarly a portfolio that's primarily strategic in nature may sacrifice other goals such as expected short-term profitability.

Through multiple engagements we have found that nailing these strategic drivers isn't easy. It requires understanding what's critical to the company. But taking on this challenge will ultimately result in a stronger R&D organization that knows what direction it should go to find that next innovation. Much like that stock market portfolio manager we referenced earlier, the senior executive will win in the long run who can optimize his or her R&D investments by defining the right new product strategy for the firm, selecting the winning projects for new product development, and achieving the ideal balance of projects. Agile portfolio management can help drive decision-making and outcomes.

Dr. Shan Rajegopal is the head of the portfolio management solutions in the EMEA for Pcubed. He's also the author of Project Portfolio Management: Leading the Corporate Vision and Sun Tzu and the Project Battleground: Creating Project Strategy from the Art of War. He has more than 20 years in project, program, and portfolio management practice, helping clients in both public and private sectors. Contact Shan at shan.rajegopal@pcubed.com.

Peter Wilson is head of Pcubed's CIO practice based in London, focusing on the key issues facing CIOs and the IT community across market sectors. With over 25 years' experience leading IT-enabled business change, Peter has driven major transformation programs for global organizations such as the Mars Group, Philips Electronics, and Inchcape. Prior to joining Pcubed, Peter was the CIO and head of supply chain programs at Inchcape, a position he held for 12 years, where he developed industry-leading supply chain processes. Contact Peter at peter.wilson@pcubed.com.