R&D portfolio management best practices

Another article with some best practices for the weekend – this time from the Corporate Executive Board on R&D project portfolio management –Pick a Winner and Make it Pay. As the pressure on improving R&D efficiency increases, one approach organizations seem to be following is increased portfolio reviews.

However, reviews do not automatically improve portfolio quality. One of the key reasons for that is that projects need to be measured on equal terms across product lines, technologies, maturity, and divisions. This is hard to do, but essential:

We saw the best portfolio managers focus on two capabilities in particular: 1. Ensuring project valuation and selection criteria are consistent across the enterprise. 2. Identifying and managing risk from the portfolio level down, rather than from the project level up.

The other problem in reviews is lack of uniform categorization scheme (along three axes – product lines, technologies and maturities). I have found that many large organizations have multiple parallel (often redundant) R&D projects. Since the projects are not categorized in a consistent manner, it becomes extremely difficult for R&D managers to make effective decisions.

There are two practices that clients find particularly helpful in making the shift from a ‘project-up’ view to a ‘portfolio-down’ one. The first, that we came across in our current research, is from Deutsche Telekom and helps with the perennial problem of categorizing projects into the ‘kill’ or the ‘fund’ category. The firm’s T-Labs R&D group divides its portfolio into agreed zones to increase clarity of project scope and stimulate productive discussions on border line projects.

A systematic categorization allows organizations to aggregate data across projects and make strategic decisions at the portfolio level. Even when data is available, the portfolio decisions still need significant management intuition. A problem tends to be that this intuition is not uniform across managers and it is often difficult to quantify it. The article suggests voting as an approach:

The second is a client favorite from Ecolab , a cleaning services firm. Its R&D group developed a portfolio prioritization process that engages business leaders in the creation of high-growth R&D portfolios. Using an objective voting mechanism, senior managers rank proposed projects based on their potential ability to address the organization’s strategic objectives.

I believe a more useful approach could be scoring based on a uniform / simple checklist. A score for each project can calculated from the list. In addition to quantifying manager intuition, these checklists allow organizations to learn from success / failure of funded projects.

I have a few examples that I could share. Please send me an email.

Playing Well With Others

MIT Sloan Management Review had an interesting article Playing Well With Others about communication between R&D and marketing:

The Situation: Different priorities and ways of thinking often create gaps in understanding between marketing and research-and-development staff.

The Problem: Such gaps often mean that one side dominates the development of new products, giving short shrift to the other. When marketing dominates, R&D can be under too much pressure to hit on breakthrough ideas. When R&D dominates, new products can lack marketable strengths.

Effective communication is very important in R&D environment. In fact, some amount of questioning and skepticism is absolutely essential to scientific / engineering progress and to innovation. However, when two different departments like marketing and R&D are involved, effective communication becomes more difficult and essential. The article suggests:

The Solution: Companies should help both sides learn to appreciate each other’s strengths, and encourage them to work closely together at the earliest stages of product development.

I believe that R&D managers need to put in place a communication bridge that transcends jargons (both engineering and marketing) to allow a free flow of communication. The bridge could be individual dependent (like in FreeScale) or in terms of an effective process and tool-set that allows everyone to focus on what is of common interest (product specs and customer requirements) while bypassing what is not (details of engineering implementation or product surveys). The article points out the same:

Make sure everybody recognizes the value that each department brings to the process—and how one side complements the other.
If one department or the other is dominating a company’s process for developing new products, bring the two more into balance.
Have the two sides speak a common language.
Get out of your silos—up to a point.
Focus on the consumer.

Data on contribution of “Innovation”

The article Strategic Decision Making and the CFO has some interesting data about contribution of innovation to the bottom line.

As chart 1 shows, this provocation (which isn’t our word by the way – see below) is important. The data comes from the well-known book “Blue Ocean Strategy” and shows that new ideas only account for 14% of new business launches but deliver 61% of the profits.

Chart 1: Revenues and profits from innovative versus incremental new business launches

Definition of what is innovation will change the results significantly The results would be easily explained if one defines innovation as new product line introductions (as opposed to incremental releases to an existing product line). A relevant question to ask is how much of the R&D investment is spent on what is defined as innovation…

Don’t have access to customers? Hire stand-ins!

I guess hints about R&D strategy are everywhere one looks. The article How Moore’s Law drove Intel into the arms of anthropologists talks about how Intel developed and evolved an innovative approach to identifying and understanding customer trends to help drive R&D (for those who do not know SoC, it means System On a Chip):

Now, the SoC business has fragmented into three main parts: 1) OEM customers, who design consumer products and put in orders for SoCs with specific kinds of capabilities, 2) fabless semiconductor shops, which work with a range of OEMs to make SoCs that fit certain market niches, and 3) the foundries, which manufacture the SoCs that are dreamed up by the first two parties.
Because Intel isn’t an OEM customer, a fabless shop, or a foundry, it ends up having to be all three at once if it wants to play the SoC game. That’s one place where the ethnographers come in.
The ethnographers essentially stand in for OEM devicemakers, in that they provide Intel with market-oriented input into the kinds of products that the company should be designing SoCs for. In other words, the user experience researchers can function as substitute “customers,” so that Intel can iterate its products internally in conversation with a kind of “market.”

I have heard of many companies hiring their customers to drive R&D. It is very common in Aerospace world to hire retiring astronauts or generals. However, what Intel has done is one step farther removed. They have hired ethnographers, sociologists and psychologists to go a step beyond their customers. These are people that their customers would hire to help them plan their products.

This might be helpful for Intel in more ways than one. First, it helps Intel become more successful by providing reference designs that its customers can use – there by leveling playing fields and driving down costs. More importantly, it helps diminish the impact of asynchronous development cycles. It normally takes much longer to design, develop and produce a processor than a system that uses that processor. By getting insights into what will drive its customer’s behavior down the road, Intel can effectively do codesign with less complex R&D management. On the flip side, Intel than has to absorb the cost of hiring a skill-set completely outside its normal business and find ways to manage and motivate them…

Selfish Profit Incentives To Win Military Challenge In A Single Day

Here is a quick article from The Guardian on how MIT Uses Selfish Profit Incentives To Win Military Challenge In A Single Day:

The Guardian: The Darpa Network Challenge, which took place on Saturday, offered a cash prize for the first group to successfully locate 10 large red weather balloons hidden at a string of secret locations across the US. Competitors were asked to use the internet and social networking sites to discover the whereabouts of the balloons, in what Darpa – the Pentagon’s Defense Advanced Research Projects Agency – said was an experiment to discover how the internet could help with rapid problem solving.

Effectively MIT used a pyramid scheme to drive behavior and get the desired result. This may not be a bad thing necessarily. In fact, Borderless Innovation talked about a Creative Bazar for innovation and the Indian conglomerate Tatas use karma points in somewhat similar fashion to identify and reward innovation.

May be this could be the answer to right Innovation Incentives?

What is Innovation?

In a HBR blog post, Scott Anthony asks What’s Stopping Innovation? Of more interest is his attempt to define what is innovation:

When I use the word innovation, I think of three interlocking components:

* Insight or inspiration suggesting an opportunity to do something different to create value

* An idea or plan to build an offering based on that insight or inspiration

* The translation of that plan into a successful business (in simple terms, commercialization)

The senior leaders I talk to believe that the bulk of their innovation challenges lie in the first two components. I suspect this is because the third piece looks like execution, and of course, large organizations know all about execution. And yet, my field experience suggests that it’s this third component, not the first two, that actually blocks innovation

As we have noticed several times (Invention vs. Innovation, CEOs want more creativity, BCG Innovation Study and Ideation Tools), lack of clear innovation definition leads to many incorrect conclusions about how and when to drive innovation. Furthermore, a unclear definition also leads to indeterminate metrics for innovation. Without clear metrics, it becomes difficult to measure innovation.

The author is quite right about execution preventing realization of the benefits of innovation. There have been many articles about open innovation and reverse innovation. However, implementation of innovation from outside the R&D organization (even a sister division of the same company) is fraught with not-invented-here problems. R&D managers need to be quite clear in their plans on benefiting from access to outside innovation.

Another problem I have seen repeatedly is lack of funding for converting innovative ideas or plans into delivered products. Many innovative ideas come from research arms of R&D organizations. There is always a tension because of researcher ideas that might impact funding for or sales an existing product line. In many cases, the innovative ideas suffer because of inherent risk and the clout of product managers. What have you seen?

The Secret Reason Your Employees Won’t Innovate

HBR lays out The Secret Reason Your Employees Won’t Innovate:

After surveying hundreds of employees ranging from managers to stock clerks, Feirong Yuan of the University of Kansas and Richard W. Woodman of Texas A&M found that worries about “image risks” (unfavorable social impressions) significantly diminish workers’ innovativeness. People whose roles don’t explicitly call for innovation believe that coworkers will think negatively of them if they try to come up with better ways of doing things. In some cases, they’re even afraid they’ll “provoke anger among others who are comfortable with the status quo,” Yuan says.

We have discussed some of the reasons why R&D team members are reluctant to put forward new ideas: Risk averseness and misaligned incentives. Clearly something R&D managers should be consciously changing:

But leaders can have a big impact on this problem, the researchers report in the Academy of Management Journal. Perceived organizational support for innovation significantly reduces workers’ view of the social riskiness. The key is to create a sense of psychological safety: Provide an environment in which differences are tolerated and people feel free to approach problems in new ways.

Are Companies Protecting the Wrong R&D Investments? – Scott Anthony – Harvard Business Review

An older HBR article talks about Are Companies Protecting the Wrong R&D Investments.

An article in Monday’s Wall Street Journal suggests that many executives understand this dynamic. The Journal found that R&D spending at 28 large U.S. companies dropped a mere 0.7 percent in the dismal fourth quarter of 2008.

Is maintenance of R&D budgets a good thing? We have found a couple of examples (TI and FreeScale) that leveraged the downturn to eliminate low return R&D projects from the pipeline. There is also some evidence that R&D spending does not automatically guarantee profits. This article reinforces that theme – use downturn to evaluate and prune the R&D project pipeline, but do not focus exclusively on near-term projects because that will have a negative long-term impact on competitiveness.

Research by Innosight Board member Clark Gilbert found that when companies perceive a threat, they tend to become very rigid in their response. The very act of “protecting” R&D budgets could lead to high degrees of rigidity, which could lead companies to missing the most important innovation opportunities.

Companies should use today’s tough times as an excuse to critically evaluate their innovation investments. As I argue in Chapter 2 of The Silver Lining (coming next month!), companies need to think about prudently pruning their innovation efforts to focus on ideas with the most potential. Companies should seek to balance focus on near-in opportunities with appropriate investments in exploring new markets that have the potential to be tomorrow’s core business.

While we are on the subject, here is another article suggesting the same thing – Cut Costs, Grow Stronger:

“If you are a corporate leader, you have probably been spending a lot of time lately thinking about costs. In the aftermath of the global economic crisis of 2008–09, the pressure to cut costs — whether driven by cash flow, shareholders, uncertainty, or investment needs — has been extraordinary. Many businesses are struggling to survive. Others, even if they’re doing relatively well, are reducing expenses to make sure they are well prepared for future uncertainties. But there is a positive side to this situation. Dramatic cost cutting gives you a chance to refine or even reformulate your company’s overall strategy. After all, you’re never just cutting costs. You’re making a decision that something is no longer strategically relevant, and that other things are essential to keep. Yes, you may have to lose some product lines and activities, and perhaps some of your employees and customers. You also, however, have the opportunity to help your company grow stronger in the process. We reject the idea that cutting costs in itself makes a business weaker or more limited. To be sure, if you reduce expenses in a panic, or without an eye to strat egy, you could do great harm to your company’s competitiveness. But if you focus on your priorities and on your future potential, cutting costs can be a catalyst for ex actly the change a company needs.

Finally, here is a simple framework that can be a good reminder of what to keep and what to cut:

India’s Next Global Export: Innovation

Here is a quick read on a new framework for innovation from business week: India’s Next Global Export: Innovation:

A Hindi slang word, jugaad (pronounced ‘joo-gaardh’) translates to an improvisational style of innovation that’s driven by scarce resources and attention to a customer’s immediate needs, not their lifestyle wants.

The concept is to get work done by improvising around constraints – the approach does not matter as long as goals are met. However, as we had discussed in assumptions that executives need to challenge, jugaad can have pretty negative implications:

Moreover, because jugaad essentially means inexpensive invention on the fly, it can imply cutting corners, disregarding safety, or providing shoddy service. ‘Jugaad means ‘Somehow, get it done,’ even if it involves corruption,’ cautions M.S. Krishnan, a Ross business school professor. ‘Companies have to be careful. They have to pursue jugaad with regulations and ethics in mind.

This might be a good idea to drive innovation in a culture that is overly burdened with bureaucracy. However, one must really ask the question about why there is bureaucracy in the first place. In fact, work getting done bypassing bureaucracies will reduce the need to remove inefficiencies…

How to Manage Virtual Teams

MIT Sloan Review had an interesting article on How to Manage Virtual Teams. As we have discussed in the past, the need for effectively managing cross-cultural cross-organizational virtual teams will only increase with time.

The article measures virtuality in terms of “dispersion” of teams and finds that even small distances (different floors of the same building) have a significant impact on team cohesion. R&D managers probably need to understand that processes and tools needed for managing virtual teams may actually benefit teams that are traditionally considered collocated.

The article is a very good read. However, here are the key findings:

* The overall effect of dispersion (people working at different sites) is not necessarily detrimental but rather depends on a team’s task-related processes, including those that help coordinate work and ensure that each member is contributing fully.

* Even small levels of dispersion can substantially affect team performance.

* When assembling a virtual team, managers should carefully consider the social skills and self-sufficiency of the potential members.

I guess the main takeaway is very encouraging – virtual teams can be as effective (or probably even more effective) than collocated teams as long as tools exist to provide effective communication. The key challenge is for R&D managers is to avoid communication through large documents: they are filled with discipline-specific jargon and no one has time to either develop thorough documentation or to read someone else’s large document. More importantly, documents fail to capture rationale followed by one team member to reach decisions that impact other team members. Interesting challenge… DPSTBNMT3VHA