project valuation Archives - Enrich Consulting

5 09, 2018

Is Sunk Cost Thinking Dooming Your Innovation Portfolio?

By Rich Sonnenblick|2018-09-05T16:00:14-08:00September 5th, 2018|Blog|0 Comments

Photo: Manivasagan N, https://www.dtnext.in

I’ve written many times that portfolio management is about change: changing attitudes, changing tactics, and changing how you invest your limited funds and focus your talented teams. We all know change is difficult, leading us away from a known environment and into an unknown future. But the issue at hand is more than a simple case of the devil you know vs. the devil you don’t.

Sunk cost thinking makes change even more challenging. Once we are working on a project our tendency, as humans, is to keep working on it. This remains true even when we are faced with mounting evidence that the project outcome will not live up to our expectations. We all have an innate tendency to look backwards (at what we’ve invested) while we look forwards (and decide how much more to invest), and this leads us to limit our options time and time again. Consider these individual examples (collected in the fantastic book Essentialism by Greg McKeown): (more…)

18 05, 2016

Project Metrics: What’s Behind the Numbers?

By Rich Sonnenblick|2017-05-23T15:41:59-08:00May 18th, 2016|Blog|0 Comments

We’re often asked, “What’s the best metric for portfolio management?” Executives and managers who oversee new product portfolios want one metric that will tell them, and their superiors, how their portfolios and the initiatives within them are doing. They want one indicator they can rely upon, whether in formal portfolio reviews or informal discussions. But there is no one right metric for all companies or all types of portfolios. In some cases, net present value nicely summarizes the financial case for each opportunity. In others, a simpler metric such as market size is useful (and may be all that is available anyway). Still other portfolios are best assessed using attractiveness scores rather than any hard financial criteria at all.

Don’t judge this book by its cover; take a look inside!

There is one common thread across all these situations: As the cover of a book hints at what hides within, a metric provides a glimpse into fundamental outlines—the potential value, cost, and risk—of an initiative. And just as it is hasty to judge a book by its cover, a metric is not a replacement for a deeper description or fuller assessment.

So when the metric tantalizes (or raises concerns), where should you turn for more information? (more…)

14 09, 2015

It’s 2015, why is everyone still using NPV?

By Rich Sonnenblick|2017-05-23T15:42:00-08:00September 14th, 2015|Blog|0 Comments

Watching Back To The Future again recently, I was horrified to realize that, at the end of the movie, the professor and Marty use their time machine to travel from 1985 to…wait for it…2015. They traveled 30 years into the future, and I’ve aged 30 years since last seeing the movie.

Robert Zemeckis’s vision for The Future doesn’t exactly match the real 2015. There are no flying cars or hoverboards. But he did get some things right: we do have wall-sized televisions, tablet computers, and video conferencing. All in all, things have changed a lot since 1985.

But one thing hasn’t changed: firms are still using net present value (NPV) as a metric to evaluate the potential of R&D initiatives. NPV was first mentioned in the literature in 1907, according to historians. It’s survived 108 years because it does have its uses—as an indicator of investment potential and a summary of an initiative’s cash flow impact.

But for R&D evaluation, NPV is sometimes misunderstood and frequently misused. Let’s look at the good, the bad, and the ugly:
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11 08, 2015

The R&D executive read the first slide of the portfolio review; you won’t believe what happened next!

By Rich Sonnenblick|2017-05-23T15:42:00-08:00August 11th, 2015|Blog|0 Comments

It’s every portfolio manager’s nightmare.

The annual portfolio review is about to kick off. Hundreds of hours of preparation have gone into the main presentation’s PowerPoint deck, and hundreds more into each of the backup decks, readied in case management asks about the details of any of the projects under discussion. Information encompassing over a hundred different initiatives has been painstakingly compiled and distilled into slide after slide. The portfolio team is ready to review the current budget and the changes in the portfolio since the last review, and to make recommendations for adjustments to keep R&D activities aligned with strategic goals. Everything is in place. Or so the manager thinks.

Then, the first slide goes up on the wall, summarizing spending since the last review meeting and listing the estimated total value of each division’s initiatives. The manager highlights key milestones each division has met, and heads all around the room nod.

Except one.  The leader of one products division is clearly not happy. His expression sours as he looks at the slide. “You’ve understated the value of our projects by at least $400 million,” he complains.

“But we took these figures directly from your product team summary spreadsheet,” says the portfolio manager.

“Which one?” the exec demands. “We updated that spreadsheet last week based on the market research report from last quarter.”

“Oh that explains it,” the manager says, relieved. “We began building this deck four weeks ago, and we took the latest spreadsheet available at that point.”

The exec is not mollified. “I don’t think this meeting is an effective use of my time, or anyone else’s for that matter, if we don’t have current information.” He begins gathering up his things. “Let’s postpone until you can get all your ducks in a row.” The meeting is over before it has begun.
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5 02, 2013

Avoiding the Many Pitfalls of Project Scoring in Project Prioritization

By Rich Sonnenblick|2017-05-23T15:42:02-08:00February 5th, 2013|Blog|0 Comments

The portfolio review session is coming up, so you craft a list of questions about project value, cost, and risk that can be answered on a scale from 1 to 10. Your R&D project teams score their projects, add up the scores for each project, and voilà, you have a ranked set of projects, ready for your meeting. Yet you can’t shake that nagging feeling: Aren’t scoring models useless? Will the scoring process distract from the real goal of building a more valuable product portfolio?

I am here to testify that this bad reputation isn’t entirely deserved. In fact, there are many cases when a scoring model is an appropriate way to assess each project’s contribution to the portfolio. Scoring models have the potential to spark productive conversations among the project team, and they help differentiate projects across the portfolio.

So what is the source of their bad reputation? One recent engagement began with a client’s dismay that their scoring model failed to differentiate across projects. Their model consisted of 12 questions about value and 8 questions about risk, each scored on a scale from 1-10. The client hoped that a distribution of aggregate project scores would look something like this:

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6 11, 2012

Avoiding R&D Portfolio Management Jeopardy

By Rich Sonnenblick|2017-05-23T15:42:03-08:00November 6th, 2012|Blog|0 Comments

Here is an uncomfortable reality in all but the smallest firms during their R&D portfolio management processes: Between the staff running each R&D initiative and the executives making project and portfolio decisions, there’s usually a division. Maybe it’s the gap between headquarters and lab, upstairs/downstairs, east coast/west coast, London/Singapore, or even a generation gap. At the very least, it’s an information gap, and one that can transform a portfolio review into a detailed project Q&A session.

At one firm we worked with, it played out like this: Each executive arrived at the portfolio review meeting with 3-5 questions about various projects:

“Please explain the market segmentation.”
“Why did the NPV of this project double since the last meeting?”
“How does the introduction of XYZ by our competitor affect our market share for ABC?”

These questions, in turn, led to additional questions and extended discussion. With more than a dozen executives in the room, the questions easily filled all the available time (hours and hours). At the end of the meeting, a few projects had been canceled because the science or the market seemed insubstantial, but most projects passed through the executives’ gauntlet. However, with all the attention paid to individual projects, there was no opportunity to consider the portfolio as a whole.
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9 09, 2012

The “Good Enough” Business Model

By Rich Sonnenblick|2017-05-23T15:42:03-08:00September 9th, 2012|Blog|0 Comments

A product manager and an analyst are discussing the revenue forecast for a product in development. Poring over the financials, the manager asks:
     “Have you considered how SUPR-3 will impact sales of our other SUPR products?”
     The analyst replies confidently: “Yes! Right here you can see we are estimating SUPR-3 to take a 20% cannibalization of the existing SUPR product line.”
     “But a dollar of revenue from our earlier SUPR products is much less valuable, since we have fatter margins on the new product. Has that been factored in?” asks the manager.
     “Oh no, I didn’t think of that,” replies the analyst, taken off guard. “I’m on it.” So away goes the analyst with a job to do: Add another input and another algorithm to The Model.
     Two days later the analyst meets with the manager once again: “You were right about the difference in profit margins–it reduced the impact of cannibalization by 20% and increased the net present value by 4%.”
“I thought so,” says a satisfied manager.” We are getting closer with this business case.”

Another factor to roll up with the model

They were “getting closer,” but the model still wasn’t “good enough.” Variations on this theme play out every few days for the next month, until there are a dozen more business factors explicitly considered in the forecast. Over a quarter or a year, they might add hundreds of factors as they think of questions, but never remove them as they find answers. Taking out a business factor goes against instinct, as if they were removing value, or intelligence, from the model.

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6 08, 2012

Tornado Diagrams 101

By Rich Sonnenblick|2017-05-23T15:42:04-08:00August 6th, 2012|Blog|0 Comments

As we have said before, every forecast you’ll ever build is wrong. The truth may be out there, but due to a lack of perfect information about the future, you won’t be able to reveal it before your project review meeting.

There is a paradox here: The more you insist on the truth, the more likely you are to deny the uncertainties obscuring it. Alas, denying the existence of those uncertainties distances you still further from the truth. So, take a deep breath, and let go of your desire to know the truth. Now you are ready to manage (dare I say embrace?) the uncertainty standing between you and the truth. Managing this uncertainty is the key to good forecasting. By effectively managing uncertainty, you’ll be able to honestly assess the value of your forecast and, in turn, make an honest statement about the value of your project.

A tornado diagram can help you find your project’s pot of gold.

As a forecaster, the key question you need to answer is: “Is my forecast precise enough to make a confident decision?” If it is, hooray! You are ready to make an investment decision. If the answer is no, then you need to gather more information. One of the most useful and easiest-to-understand methods we have to assess our confidence in a forecast is the tornado diagram. Using a tornado diagram, we can assess how much our forecast might change if things go better or worse than anticipated. We can also assess which uncertainties have the greatest impact on our forecast—those are the very inputs we should research further if we want to tighten up forecast precision.

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22 07, 2012

Pigs, Chickens, and Discount Rates: Improving Project Valuations for R&D Portfolio Management

By Rich Sonnenblick|2017-05-23T15:42:04-08:00July 22nd, 2012|Blog|2 Comments

Finance and R&D can get along

You’ve just finished briefing the executive committee on the methods for project valuation that you have worked so hard to establish in your R&D group. The team has finally acknowledged that risk needs to be managed in all its potential forms. You’ve reached consensus on the following set of risks that will be characterized as ranges, using probability distributions in your business models:

Market share
Willingness to pay
Product yield
Product cost
Technology feasibility/R&D cost and schedule

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