Innovation continues to be a key business drive as data shows organizational spending on R&D increasing yearly. Still, many products with the greatest opportunities to bring organizational value are placed on hold and traded off for shorter-term products that aren’t always aligned with corporate strategy. Typically, these concessions occur when leaders lack data visibility or the ability to coalesce around an action plan.
A non-strategic R&D portfolio management process bases decisions on gut feelings or pet products, usually being reactive or too focused on what the competition is doing. Often, there is little in-depth data analysis or comparative bucketing of enhancements to current products against opportunities for true innovation. Instead, the process devolves into prioritizing and spending resources on what the organization has historically done to stay competitive, with no objective justification.
On the other hand, a strategic R&D portfolio management process is data-driven, relying on transparency and strict governance to bring into focus what resources will be required across the organization to execute on strategy. In this process, R&D leaders must also work closely with their peers across other functions to see the bigger picture and align around strategic objectives. Decisions are made based on real-time data and comprehensive analysis, clarifying what trade-offs are necessary and making the tough choices that allow them to stay competitive.
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Key Indicators You Are Not Being Strategic
There are tell-tale signs of R&D portfolios that are not based on a well-defined strategy. Typically, uninformed trade-offs dominate, where the habitual tendency is to push near-term, incremental products instead of long-term, transformational products that will likely offer more significant overall ROI. These organizations see clear imbalances in their product mix, with numerous delays, descoping, or underperforming products continuing to receive funding, often without much understanding as to why.
Gartner finds corporate R&D portfolios that are out of balance lead to “a material impact on company growth.” A Gartner survey found that of responding organizations, less than half felt their portfolios contained enough high-value products or that spending matched organizational strategy.
The same report found only 23% of R&D leaders are satisfied with their portfolio management processes, and those with the unhealthiest R&D portfolios expect to miss their five-year revenue growth goals. Gartner outlined six common R&D portfolio management errors that are symptomatic of a lack of strategy, including:
- Equally weighing the value of all products in a portfolio
- Placing too much emphasis on consensus analysis models and lacking confidence in valuation models
- Overreliance on intuition-based decision-making
Only 23% of R&D leaders are satisfied with their portfolio management processes, and those with the unhealthiest R&D portfolios expect to miss their five-year revenue growth goals. – Gartner
But the status quo can (and should) be broken. Developing a strategic R&D portfolio management process can transform an organization into a market leader. The transition will take time, but the effort to adapt business capabilities to deliver new, innovative products continually ultimately pays off.
A non-strategic portfolio management process slows the development cycle and creates resource waste, easily leading to frustrated employees, misallocated resources, and loss of market position.
A strategic R&D portfolio management process helps accelerate innovation and reduce cycle time by ensuring optimal resource allocation and a well-balanced, healthy portfolio.
The Value of a Strategic R&D Portfolio
Industry analysts agree as to why organizations should rethink their approach to R&D from being reactive to proactive.
McKinsey says, “A clearly articulated R&D strategy that supports and informs the corporate strategy is necessary to maximize innovation investment and long-term company value. R&D should help deliver and shape corporate strategy to develop differentiated offerings for the company’s priority markets and reveal strategic options, highlighting promising ways to reposition the business through new platforms and disruptive breakthroughs.”
This goal can only be attainable with a flexible and intuitive toolset that helps illustrate the alignment between strategic objectives and the portfolio mix. Only then can leaders across the business visualize the current landscape and see opportunities and risks based on available capacity and other factors. They can then use that information to decide which portfolio will offer the greatest value confidently. This is what strategic R&D prioritization looks like.
7 Steps to a Strategic R&D Portfolio Management Process
When shifting from a non-strategic process, these steps can help R&D:
- Reduce cycle time and bring better products to market more quickly
- Accelerate innovation to create more profitability
- Help the organization become more adaptive and capable of delivering value
Step 1: Define the Strategy
The first step of the strategic R&D portfolio management process is to define the strategy through the lens of the portfolio. By defining the following, you can better analyze and select products that will achieve success and solidify a strategy that will get you there:
- Objectives: how you plan to achieve your goals.
- Key Results: specific desired outcomes that support the objective.
- Spend: the money to be allocated to accomplish the objective.
- Constraints: any limitations or roadblocks that could delay or prevent achieving the goals.
Define quantitative or qualitative metrics for each factor, allowing each portfolio scenario to be evaluated against them. Working backward, determine what data needs to be collected from existing and potential products to calculate those metrics. Limit the required data to only that which supports these metric calculations; if the data doesn’t support a decision, the time spent gathering it is a wasted effort.
Step 2: Collect the Data
Base every portfolio decision on accurate, complete data to provide consistent valuations across all products and aggregation at the portfolio level. Data collection as part of the R&D portfolio management process may require system integrations, flexible inputs, the ability to document assumptions, and reasonable timeframes for collection and review.
When designing the data collection process, the following questions should be asked about each data element:
- Why is the data necessary?
- Who is responsible for providing the data?
- In what format will the data be captured and reported?
- How frequently should the data be refreshed, and can that process be automated?
The best data collection processes capture assumptions and create an audit trail of changes, providing transparency into data age, data provider, and value changes.
Further value can be derived through visualizations such as waterfall charts that summarize the impact of data changes on project value between two points in time.
While there may still be some gaps in the data, the goal should be to have full transparency with real-time reporting on the portfolio’s overall health, including the ability to drill down into specific product details. The process should be repeatable and as low-effort as possible. Efficiency with simplicity allows the data providers to support data calls quarterly at a minimum and ideally on an ad hoc basis as the data for individual products changes.
Step 3: Review the Functional Data
Stakeholders can sign off confidently on product business cases only when they have complete visibility into the value, cost, risk, and alignment to corporate strategy. Likewise, executives must trust the data if they are to use it as the basis for critical decisions.
To ensure accuracy, the best practice is to review the data across the organization from different functions (e.g., marketing, R&D, and sales) as well as divisions or business areas.
While this step takes time, validating the data before the portfolio review is essential, as discussions that devolve into questions about data quality are a bane to review meetings. In addition, once credibility is lost, the path to winning it back is long and arduous. These extended timelines hamper the organization’s ability to adopt sound portfolio management practices.
Step 4: Strategic Bucketing
Once stakeholders sign off on the data, it can be helpful to place products into strategic buckets to streamline conversations about the links between spending and business strategy.
Gated processes recommend bucketing based on innovation levels, market segments, technologies, or other aspects that are particularly relevant to an organization. These buckets can be used to group products within the portfolio for comparison purposes and to understand which buckets drive portfolio value.
Strategic buckets can also be used to streamline discussions. Portfolio reviews inevitably involve some level of discussion about individual products, and in all but the smallest portfolios, there isn’t enough time to discuss every one of them. If possible, create a set of buckets before the meeting to categorize projects along these lines:
- Committed: Products that must be in the portfolio
Committed products are those approved for funding and resources. Only portfolio scenarios containing all of the committed products will be given consideration. Minimize the number of committed products to only those central to the defined strategy or irrevocably promised to partners.
- Considered: Products that may be funded, killed, or delayed
Considered products include new and current products that are not yet committed but have potential. These products require proper deliberation because they may or may not receive funding. If there are products that straddle the line between Committed and Considered, place them in this bucket until they qualify for the committed bucket.
- Excluded: Products that should be left out of the portfolio
Inevitably, some products are either not ready for further evaluation or are clearly not advantageous to pursue. Excluded products may resurface later but are far down the list of priorities. Review this bucket periodically as strategies, funding, and capabilities change. Any product not included in any portfolio scenario should be placed in this bucket.
Step 5: Develop Alternative Portfolio Scenarios
By analyzing the new R&D portfolio, R&D leaders can develop and propose a set of portfolio scenarios to executives. The portfolio scenarios represent strategic alternatives that include different products and/or product scenarios. The alternatives will vary in objectives achieved and resources required.
How to Create a Portfolio Scenario
Define scenarios by selecting different combinations of products and/or product scenarios. Scenarios inform the key decisions facing the organization by illustrating the trade-offs reflected by each alternative. If the organization has multiple objectives, such as maximizing overall value, hitting a short-term revenue target, or investing in products targeted toward a new market, create one scenario for each that effectively achieves that objective. If the resulting scenarios contain very different sets of products, creating a “hybrid” scenario that blends two or more objectives can also be helpful.
Scenarios can also be created with different resource allocations. For example, if the current portfolio exceeds the proposed budget, developing a less costly scenario can highlight the trade-offs needed to stay within budget restrictions.
Ensure that every portfolio scenario includes all the products in the Considered bucket designated in Step 4, while none contain any Excluded products.
Scenario Optimization: What Is It and When to Use It
Optimization is a means of automating product selection to maximize an objective while adhering to a set of constraints. Optimization is good for quickly finding the “best” set of projects for a given scenario, e.g., maximizing net present value without exceeding next year’s budget. However, optimization is generally not suitable for presenting results directly to leadership.
The best practice is to use optimization as a starting point to directionally understand what products would be selected under a scenario with a ruthless adherence to a particular objective. That scenario can be compared against the current portfolio to suggest potential changes to achieve that objective better.
Sensitivity Analysis: Go a Level Deeper
A sensitivity analysis illustrates how products can move in and out of a portfolio as criteria change. For example, with objective sensitivity analysis, the emphasis may shift between objectives, helping to determine which products to include regardless of what you’re trying to achieve and which products are “on the bubble.”
Another example is constraint sensitivity analysis, which measures what may happen if resources are redistributed. How might performance and delivery improve with additional resources? What could be sacrificed if there were fewer resources?
Step 6: Select a Portfolio Scenario
Once a set of portfolio scenarios has been created, the next step is for decision-makers to meet and select which portfolio to pursue. Products in the selected scenario will be developed, and products excluded from the selected scenario will be delayed or canceled.
The best portfolio review meetings keep the discussion at the portfolio level for as long as possible without delving into individual products. The goal of the R&D portfolio is to help the organization achieve its strategic objectives, and each portfolio scenario created in the previous step are alternatives for executives to weigh.
By highlighting how well (or how poorly) each portfolio scenario helps the organization achieve its strategic objectives, the actual decision for executives to make is which objectives are more important to pursue.
To that end, presentation materials used at the beginning of the meeting should:
- Re-state the organization’s strategic objectives
- Provide an overview of the purpose behind each portfolio scenario
- Compare the portfolio scenarios against the strategic objectives
Inevitably the discussion will turn to individual products, at which point the strategic bucketing performed in Step 4 should be referenced to ensure focus on Considered products.
What Is a Strategic Trade-Off?
R&D Portfolio Management wouldn’t be necessary if sufficient budget existed to fund every product fully. In the absence of that rare situation, organizations are compelled to make trade-offs.
It is human nature to explore all options, but that approach within R&D leads to split priorities, underfunded efforts, and delays that ultimately lower organizational value. The mindset of “Can we find a way to fund everything?” needs to be replaced with “What set of products has the best chance of helping us achieve our objectives?”
At a high level, trade-offs can be divided into two categories:
- Objective trade-offs – How each portfolio scenario achieves the different strategic objectives. Objective trade-offs answer which is most important: NPV, balance, or growth?
- Resource trade-offs – Licensing a technology to someone else would lower our organization’s revenue from a product. Still, the cost savings could be used to invest in other products. Is the trade-off worth it?
The result of the portfolio review should be a portfolio scenario containing the set of products with which there is consensus to move forward. Conversely, there should be a consensus not to move forward with the products not included in the selected scenario.
Step 7: Prioritize an R&D Portfolio
Once executives select a portfolio scenario, the resulting products need to be communicated to R&D teams for operational purposes. Simultaneously communicate the products as a prioritized list. This step allows preference to be given to the higher-priority products when resource bottlenecks occur.
It is typically unnecessary to assign each product a numerical rank. The same bucketing process used in Step 4 can help organize priorities, e.g., Committed products before Considered. For portfolios containing a large number of products, providing more detailed guidance by tiering the products within buckets can be helpful. Such tiering can be achieved using a benefit-to-cost analysis or another measure of strategic value. Ultimately, this process will streamline the translation of the strategic plan into actionable roadmaps.
Increase Effectiveness by Connecting R&D Decision-Making to Your Strategy
In this dynamic and competitive marketplace, organizations cannot afford missteps that frequently occur when there is no structured approach, consistent data, or purposeful platform to support product decision-making. For R&D to play a pivotal role in driving change and maximizing the value of the portfolio, organizations must be able to connect and align R&D strategy to key organizational goals and objectives.
Embracing a strategic R&D portfolio management process typically requires a cultural shift that promotes governance, data visibility, and collaboration among R&D leaders and business leaders. Over time, this approach will result in increasingly reliable data and more robust product and portfolio scenario development. Those rationales will provide decision-makers with greater comfort, allowing strategic objectives rather than product metrics to govern portfolio selection.
To learn more about how this process, integrated with other product portfolio management best practices, can provide R&D and departments organization-wide with a faster path to executing strategic initiatives for greater success, check out the following guide to product portfolio management.The Essential Buyer’s Guide for Product Portfolio Management Solutions
This buyer’s guide offers an in-depth explanation of what to look for in a product portfolio management solution that enables your organization to adhere to a more adaptive product strategy.