Answering the Critical Questions that Drive Project and Portfolio Value

By Don Creswell, SmartOrg Inc.

Last month I wrote about “Optimizing Portfolio Value in Difficult Economic Times.” I discussed the critical need to focus on creating economic value at two levels: Portfolio Value Optimization (PVO) that concentrates on optimizing economic value via a balanced portfolio; and on Portfolio Tactical Optimization (PTO) that concentrates on “making it happen.”

Few companies start at “ground zero”, building portfolios from scratch. Your portfolio exists, made up of the projects/products you now have in development. If your company is like most, you have a lot of questionable projects, maybe even some “walking dead”, which have been around forever, soaking up resources but promising little. You also may have potential blockbusters.

A portfolio sweep provides a snapshot of your portfolio’s potential value, identifying opportunities for adding value, balancing downside risk and upside potential, and exposing projects that need to be killed or significantly refocused.

A sweep begins by responding to three questions about each project or product:

• Market and Customer Needs: Does anyone care?
• Strategic and Economic Value: Should we do it?
• Technology/Product Solution: Can we do it?

The answers to these questions need to take uncertainty into account; basically, what do we know and, of greater importance, what do we not know? It is “what we do not know” that can get us into the most trouble.

Value-based business models capture the impact of this uncertainty by considering ranges of values for each variable in a business model. In some cases, there may be little uncertainty, e.g., the cost of building a product where you have a lot of experience and data. In other cases there may be a great deal of uncertainty, e.g., the size of the market for a radically new product, where there is no reliable data, only informed opinion.

The figure shows a portion of an input template that captures ranges of uncertainty for market factors that contribute to commercial value (what is it worth if we can do it?). Other input templates capture the factors that affect Technical Success (can we do it?).

The computer uses these inputs to calculate an “expected net present value” (NPV weighted for the impact of uncertainty) and arrays each of the projects on a grid based on two dimensions: probability of technical success and if we can do it, what is it worth?

After the sweep, a portfolio grid might look like the one below. The grid, sometimes called an “innovation chart”, plots each project into one of four quadrants. “Bread and Butter” projects fall into the upper left quadrant and are easy-to-do projects but return fairly low value; “White Elephants” fall into the lower left quadrant. They are hard to do and do not have high value. Typically, these are candidates for killing or significantly reallocating resources.

You would like to have as many projects in the upper right hand quadrant as possible (“Pearls”). Many companies call these blockbusters. We call them “pearls” because only a relatively few risky, potentially high value projects make it to this point; it takes a lot of “oysters” to make a pearl.

In the example, there are too many white elephants, possibly too many bread and butter projects. The firm is not in very good shape when it comes to producing pearls; they have only one oyster.

To optimize portfolio value, you need to balance risk vs. reward in such a way as to reap the most economic value from your overall portfolio investment. Then, throughout development you must track each project and how it moves within the grid, constantly seeking ways to move to higher overall value.

Looking at the portfolio from the Portfolio Tactical Optimization frame, your challenge is to carefully allocate resources—both human and capital—towards those projects that have the highest potential for producing value. Both portfolios need to be in balance, which means parallel tracking at each stage of development, often at stage gate reviews.

For an in-depth discussion of project and portfolio value management, refer to chapters 9 through 11 of “The Smart Organization: Creating Value through Strategic R&D” by SmartOrg founders David and Jim Matheson. The book can be ordered from www.smartorg.com.

The charts above were produced by Portfolio Navigator™ value optimization software. [download product sheet]