Do you have lots of ideas, but not enough resources to act on all of them, and no consistent way to select the best ideas? Projects keep piling up, deadlines keep slipping out, while the develop teams gets more and more frustrated and burned out.
Let’s suppose that you compete in a fast moving, highly competitive market arena where the first company to market with the next generation of product almost always gains the lion’s share of revenues and profits, since the life of a product generation is often a couple years or less. The implication of delaying market launch can be huge as the market clock ticks down and competitors win over customers that could have been yours.
These days, development teams are asked to do more with less because companies are reluctant to staff up in these uncertain economic times. Right, wrong or indifferent, if you are asked to be a lean team (i.e. no new resources in the foreseeable future), then you need to operate as a lean team and recognize that doing “less is more.”
Why do companies try to do more with less? There are many factors involved ranging from the pressure of trying to get the most output they can from their limited development resources and “spreading risk” by doing multiple projects just in case a couple of them are duds. Nothing good in terms of development performance results from this misguided practice.
There may also be a real lack of understanding how much resources are really available in the product development pipeline (capacity), how much resources are required to complete development projects in progress (load), and a general lack of understanding of resource efficiency and the associated negative impacts of over loading the product development pipeline, including project delay and burn-out.
Too many projects in the product development pipeline is a sure tell-tale that a company lacks an effective product development portfolio system. A product development portfolio system provides a solution to selecting the best projects in the first place, and then allocate adequate resources to complete the active projects in the portfolio.
The first function of a portfolio system is to screen out product ideas that simply have marginal commercial value, poor strategic alignment, and/or too far outside the current capabilities of the company. There are many approaches to screening product ideas. The best approaches incorporate several factors including strategic fit, technical and core competency fit, market attractiveness, product and competitive advantages, and financial reward.
Projects that are properly screened should include a risk adjusted estimate of the potential profit contribution expressed as a simple net present value (NPV). Done right, NPV provides an apples to apples comparison of the potential return on investment for each product candidate in the portfolio.
Calculating NPV is really straight forward (mathematically that is). It’s simply all the net profits you expect to make from a new product (corrected for inflation and financial risk) minus upfront cost including product design, tooling and other nonrecurring expenses. Check out Wikipedia or Google search NPV for more information on calculating NPV. Also drop me an email and I will send you a presentation and Excel worksheet on how to calculate NPV.
Okay I know forecasting can be tricky for new products, especially really new products (see blog on forecasting). But to make a good management decisions, we need to have a sense of the potential value a given new product development effort will deliver. Risk adjust NPV provides a “relative” measure that is sufficient to compare apples to apples.
We could simply rank order project priorities according to the NPV, that might be a good starting point, but that may not be the best “bang-for-the-buck” use of resources. Instead, what if we ranked-ordered each opportunity divided by the estimated number of design hours to complete it? We would end up with what’s called a productivity index (PI) also known as “bang-for-buck” index. By knowing the ratio between NPV and design hours remaining, we are able to create a more efficient and profitable use of resources.
Lastly, a portfolio management system should include a way to balance risk and reward. Think of a product portfolio system as being similar to your personal investment portfolio. What we are trying to do is maximize the upside potential while limiting the down side risk. So for example in our investment portfolio we wouldn’t want to bet all our future earnings on a couple of risking IPO investments. And on the other hand, we would like to get a better return than just investing in money market funds.
Striking the right balance between “bread-and-butter” opportunities (this would be product extensions and incremental improvements) and breakthrough innovations (including new-to-market and new-to-company) is a strategic decision. By allocating buckets of development resources between sure bets and higher risk innovation, a company can improve its long-term growth without the risk of “betting the ranch” or succumbing to flat and declining sales due to “me-too” product doldrums.
To summarize, don’t confuse motion with progress. Too many projects in the product development pipeline almost always yields product launch delays and burned out staff. Your development resources are finite and they need to be managed and not over taxed. A product portfolio management system provides a solution to invest limited development resources on the best “bang-for-the-buck” opportunities while balancing risk and reward.
Happy investing,
Kevin