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As market uncertainty continues and economic recession looms, corporate leaders are rethinking their innovation portfolio objectives. Nobody can reliably predict how deep the downturn will go or how long it will last, but, until the market stabilizes, the prudent strategy for many is a shift in strategy from growth to productivity.
What does this mean for portfolio decision-makers? You no longer prioritize projects solely on revenue potential or NPV when deciding how to allocate investment. Productivity metrics that look at “bang for the buck” now take center stage. This means tilting the scales in favor of those projects that utilize fewer resources and, for the time being, throttling back on projects that will take three or more years to produce a return.
“Bang for the Buck”
When strategy shifts, the evaluation criteria for selecting and prioritizing projects shifts as well. Common project valuation methods like revenue, NPV, and risk adjusted NPV (eNPV), designed to maximize the value of the innovation portfolio, tell part of the story. Productivity metrics take the analysis a step further by maximizing portfolio value relative to a fixed budget. For example, metrics like expected commercial value (ECV) factor in success probability and subtract out development costs, thus penalizing resource-intensive, lengthy projects that don’t show an outsized return (Note: Development costs are those delivery and launch costs remaining for the project. Sunk costs already spent are not relevant to the funding decision.).
When in belt-tightening mode, you can take the above approaches even further by dividing your NPV or ECV by the company’s constraining resource. For technology-driven companies, this is typically the remaining R&D spend or, more precisely, R&D labor (expressed as dollars, FTEs, or person-days). For capital intensive businesses that require expensive new production equipment, this is capital spend. Use this productivity ratio to prioritize projects and optimize portfolio value, favoring projects that produce the greatest “bang for the buck”.
The following graphic captures project portfolio NPV versus R&D labor (the constraining resource in this case). Note how this view is used to drive actionable decisions.
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