Pitfalls of Project Portfolio Management implementation

Computer World has an interesting IT Project Portfolio Management (PPM) article that is equally applicable to R&D management – just read R&D when they write IT :-). They point out three dangerous myths of portfolio management:

PPM is IT’s lookout

Right tools drive PPM success

The best starting place is PPM Best Practice

In my experience, even the organizations that do PPM on R&D portfolios, often fall into some of these traps (I am not certain what fraction of companies have formalized PPM. May be we will do a poll on this soon). PPM is sometimes delegated to CTO or Engineering. This has a negative impact on R&D team members because there is no clear customer for what they are developing.

Another key problem is too much focus on tools and best practices. I myself fell into this trap at one PPM implementation. I was unaware of how little the organization new about their project portfolio (most were legacy R&D projects that had gone on for many years). It was not wise to even attempt to implement PPM when there was no clear portfolio to begin with!

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Focus on technology instead of customers if you want breakthroughs

A marketing study performed at University of Illinois at Urbana-Champaign shows that a technology focus is necessary to generate breakthroughs and that a customer focus only brings in incremental improvements.

Groundbreaking ideas spring most from companies that stress technology, rather than customer needs or staying ahead of competitors, according to research that will appear in the Journal of Product Innovation Management.

Firms that focus on their competitors or customers generate more new product suggestions than technology-based companies, the study found. But the ideas typically net only subtle advances, such as the slow evolution of wireless reading devices, rather than breakthroughs similar to the shift from compact discs to music downloads.

These results make sense intuitively. The key point in my mind is that an organization needs both – breakthroughs and incremental improvements. In fact, incremental improvements are critical for day-to-day operations of a business. The need then is to achieve both through a balanced approach to R&D management. A careful set of portfolio balancing tools are needed that allow organizations to fund breakthrough ideas and incremental improvements.

R&D spending does not guarantee profits

In an article that corroborates TI’s findings, here is a 2005 article in Management Issues suggesting that higher R&D spending does not necessarily result in better profits. In some ways the material is still relevant, especially if one wants to find savings in R&D budgets.

Companies which invest heavily in research and development may be wasting their money. According to a new study, there is no direct relationship between R&D investment and significant measures of corporate performance such as growth, profitability, and shareholder return.

The article has some useful data about the R&D spending on the top 1,000 global players:

According to consultants Booz Allen Hamilton, who analyzed the world’s top 1,000 corporate research and development spenders, innovation spending is still a growth business. This 2004 Global Innovation 1,000 spent $384 billion on R&D in 2004, representing 6.5 per cent annual growth since 1999.
And the pace is accelerating. Measured from 2002, the annual growth rate jumps to 11.0 per cent.
While the top 1,000 corporate R&D spenders invested $384 billion in 2004, the second 1,000 spent only $26 billion – only an additional 6.8 per cent beyond the top 1,000 spenders.

This article points out the need for coordinated processes R&D planning, project portfolio management and R&D investment management: “How you spend is more important than how much you spend.”
However, getting coordinated processes in place for planning, portfolio management and investment management is rather difficult. Add to it the complexity of aligning investments with changing market needs and project progress/delays, and the real task of guiding R&D and invention becomes rather difficult.

In other words, the study argues, it is the process, not the pocketbook that counts. For example, Apple’s 2004 R&D-to-sales ratio of 5.9 per cent trails the computer industry average of 7.6 per cent, while its $489 million spend is a fraction of its larger competitors.

What do you think? Do you have any stories to share about success or failure around project portfolio management? Or are there any challenges that you face that you would like to discuss?

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R&D spending cuts sharpen vision?

A recent article in the Dallas News mentions that TI has cut its R&D budget by more than 25%. These cuts appear to be permanent.

Texas Instruments Inc., a legendary font of innovation, cut its budget for research and development by almost half a billion dollars in 2009. Those reductions are expected to stay in place this year as well. But the Dallas-based company, producer of landmark technology such as the integrated circuit and the pocket calculator, says the approximately 25 percent drop isn’t a sign of declining innovation. Rather, it’s a mark of a maturing, streamlined product portfolio.

TI believes that the cuts are actually helping it sharpen its vision on more important R&D and eliminate unnecessary efforts.
Instead, the company is focused on embedded processors and analog chips, the devices inside cellphones and other mobile goodies that crunch video and handle other complex tasks.

“We’re looking at markets that were maturing or not developing the way we had anticipated” for cuts, said chief financial officer Kevin March.
One source of savings is that TI stopped doing much research into ways to mass-produce its products, leaving that work to manufacturers in Asia that crank out the chips.
TI has also been extricating itself over the last few years from designing baseband chips that connect mobile phones to cellular networks.

The question here is the impact of sudden large changes in the R&D budgets on the overall health of the R&D project portfolio. An underlying theme is that organizations get complacent in their view of their R&D priorities. Or that unproductive projects are really difficult to kill once they have been funded for a while. A large discontinuity forces the organization to revaluate priorities and see how the R&D pipeline is aligned with the priorities.

A concern may be that a sudden large change may actually get rid of good projects along with the bad. One needs to have a good handle on what is in the project pipeline and what results those projects are targetting. If a good view of the pipeline exists, should there be a need for large changes? What is the need for large R&D direction changes if the organization has effective periodic R&D project portfolio reviews? Should not the weak projects be eliminated because their proejcted results would not meet requirements? If such a view of the pipeline does not exist, would not a large discontinuity be a difficult time to develop such a view?

What do you think? Has your organization successfully made large changes in R&D spending? If your organization has an efficient portfolio management process, do you think large changes such as this would be necessary or effective?

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