Are you just winging it when it comes to Portfolio Resources? Do you know how much fuel is left in the tank?
So often, we see companies flying blind when it comes to knowing what resources they have for each portfolio project. As an innovation consultant for nearly two decades now, I know, alarmingly, MOST companies don’t integrate Resource Planning with their Project Portfolio planning.
Not knowing how many resources you have for a project is effectively like flying without know how much fuel you have left in the tank. You know you’re going to run out but just not sure when!
There are 3 goals of effective Portfolio Management to consider…
- Value Maximisation
- Achieving Portfolio Balance
- Strategically aligned portfolio
Quantifying and maximizing the VALUE across all 3 goals in the project becomes the main focus, by having an appropriate selection of projects to provide portfolio balance which will deliver SHORT and LONG term VALUES, which is strategically aligned by accommodating the requirement for non-economic factors to influence project selection.
VALUE or RELATIVE WORTH is a productivity measure and calculated as the ratio of $ Inputs to $ Outputs.
Inputs costs can be considered as:
- Market Research
- Technical Development
- Design Development
- Production Trials
- Capital Expenditure
- Resource costs … most importantly… is a significant element of the total input cost and is often the primary constraint.
Determining the OUTPUT value of a project requires a measure of its BENEFIT or RETURN and is typically calculated as New Present Value (NPV) of a defined period of time. Eg: 3, 5 or 10 years
By measuring the ratio of input to output costs, alternate opportunities within the innovation portfolio can be ranked. This ratio is referred to as the Productivity Index and is used to assess the relative merit of possible investments or the “Bang for Buck” on alternate innovation projects. Given scarce resources and the opportunity cost of backing poor projects, the productivity index provides a sound economic rationale for determining the optimal portfolio of innovation projects for any business.
THE CHALLENGE – THE RESOURCE ESTIMATION
The challenge for most companies is that the cost of gathering the input costs is often perceived as out-weighing the benefits.
There are 3 methods for Resource Estimation.
1. Constraint Management
The key objective in this approach is to find the constraint or bottleneck and manage the constrained resource pool rather than all resource pools. The 80:20 rule applies well in resource constraints and it is often the case that there are one or two resource pools which are the genuine constraint. For example, in many companies the constraints are most often in the R+D or technical team and/or in the Marketing teams.
2. Project Classification
The key objective in this approach is to simplify the assessment of projects and their resource requirements using a high-level classification system. This has sometimes been referred to as “Shirt-sizing” projects and typically uses the classifications such as ‘Small’, ‘Medium’, ‘Large’ and ‘Extra Large’ to quickly approximate resource effort per project and therefore the total project capacity.
3. Resource Profiling
The key objective in this approach is to pre-define the resource requirements or resource profile for a project based upon a set of variables. A simple variant may be the process model the project is following.
In addition to the overall development time, the resource demand for any given function or resource pool (R&D, Marketing, Supply Chain etc.) will vary based upon a set of identifiable parameters, tailored to each business. Typical parameters include:: Degree of Technical risk New technology development or Use of existing (proven) technology Degree of Market and Commercial risk New to market New to company New or existing Supply Chain Capital required or not required Testing & stability periods For any project the different functions required to complete project deliverables are drawn from resource pools. The profile then defines the resource intensity over time for each resource pool.
THE GOAL – FINDING THE TRUEST MEASURE FOR PORTFOLIO OPTIMISATION
The goal is to achieve a strategically balanced portfolio of innovation projects using Strategic Buckets or discrete project portfolios. Strategic targets define the proportion of the total development spend which will be allocated to each portfolio or “bucket”.
The Productivity Index, estimated by the resource estimation, ranks the projects within each bucket to deliver the optimal return on the total investment in innovation.
The optimisation of development productivity or return on investment is the truest measure of the relative FINANCIAL VALUE of any project portfolio. Financial measures should be used in conjunction with strategic measures to optimise the total innovation portfolio.
Want to know more about Strategic Buckets or Portfolio Optimisation
Download our Prodex White Papers
Want to discuss your Innovation Portfolio Strategy and identify the holes?
Contact Prodex Systems Senior Innovation Consultant and Managing Director, Gerard Ryan [email protected]
