Efficient Frontiers and Productivity Rankings in Project Prioritization
Will the real efficient frontier please stand up?
Each year, we attend many conferences focused on the themes of new product development, innovation, and portfolio management. One of my biggest pet peeves at these conferences arises when speakers discussing project prioritization present a scatter chart with individual projects cumulatively plotted in descending order of bang-for-the-buck (e.g., NPV per dollar of development cost), and refer to it as an ‘efficient frontier’.
(Hint: The faux frontier is the upper graph in the picture)
The graph in question is actually what we prefer to call a productivity ranking. Such a chart features cumulative val
ue (e.g., NPV or eNPV) on the y-axis, and cumulative cost (e.g., cost to launch or cost to the next gate) on the x-axis. The projects are then cumulatively plotted on these axes in descending order of productivity (i.e., value over cost). The projects advance upwards from the origin at a steady pace and then levels out (or trends downwards) as each successively less productive project adds less value and more cost to the overall portfolio.
A true efficient frontier (illustrated by the lower of the two graphs above) is an entirely different beast. Efficient frontiers are built by running multiple optimizations against the set of projects, while varying available resources (development budgets, headcount, or a combination) for each optimization run. The highest value portfolio suggested by the optimizations at each level of resourcing defines the efficient frontier. The result is a curve that may look quite similar to a productivity ranking, but differs in some critical ways.
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