Innovation portfolio management: integrated by nature

FM30prvw01Project or product portfolio management?

For over a decade now,  I prefer to use the word “innovation portfolio management” as the most accurate description of our work. The most common response to this phrase is the question: “Do you mean project or product portfolio management?” My problem is with the word “or” in this question.

Portfolio management is a decision-making process, so it requires a proper comparison of alternative options. These options have impact on projects (what do we work on) as well as on products (which new products do we expect, and how do they affect the existing ones).  So in the decision-making process the trade-offs across projects and products must be considered. A good decision requires the analysis of all its consequences. For example, by delaying a certain project so that the portfolio meets next budget year’s  headcount constraints, the resulting delayed market introduction of new products from the project needs to be considered at that same decision moment.

The trade-offs are not simply to select or deselect projects (in isolation) either.

Portfolio management is not (just) project selection

One of my favourite quotes is that the best portfolio is not always the set of best projects. In fact, in real portfolios,  there is no measure of project “goodness” that can be defined so that the best projects according to this metric automatically make up the best portfolio.

From the portfolio goals of strategic alignment and value maximization, it is tempting to derive such a metric. However, synergistic and cannibalization effects across projects (and products) also spoil the . Research by ETH (as early as 2001 in “Computer-aided R&D portfolio valuation”) and UMB (by Keisler, 2005: “When to Consider Synergies In Project Portfolio Decisions”) show that these synergies matter. Put differently, the added value of a project to the portfolio depends on which other projects are in the portfolio.

Even more problematic is the aspect of portfolio balance. This is a property of portfolios that cannot be considered at the project level at all, so it must be assessed at the integrated level of the portfolio.

A third aspect of innovation portfolio management is the inherent uncertainty in innovative activities. Innovation, by definition, encompasses newness in technology, market, and/or organization. This means the expected results are uncertain, or risky. The proper diversification of individual project and product risk can only be considered at the portfolio level. This is where the word portfolio management originates.

This means it is about business cases…

The implication of the above is that a good portfolio management process looks at costs (as investments in projects) as well as benefits (in terms of product revenues and profits) as well as risks (in terms of uncertainty).  This matches quite well with the definitions of the phrase “business case” (as in Business Directory):

A type of decision-making tool used to determine the effects a particular decision will have on profitability. A business case should show [..] how costs and revenue will change.

Or even with the ingredients of the business case definition in Wikipedia (even though  the full definition seems biased to IT business cases):

[..]Included in a formal business case could be the background of the project, the expected business benefits, the options considered [..], the expected costs of the project, [..] and the expected risks.
Summarized in one sentence: innovation portfolio management is an integrated decision-making process aimed at optimizing the portfolio of innovative activities based on the drivers of the underlying business cases.
What aspects to cover?
 With the first anniversary of this blog (check the anniversary page), this integrative reflection of the blog’s topic seemed appropriate. Let me know which aspects of the process you would like to see elaborated in 2013. Happy holidays! 

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