The big payoff
BY MALCOLM WHEATLEY
PHOTO BY MAHESH BHAT
Raja Ukil, Wipro Technologies, Bangalore, India
Every now and then, a new product or service comes along and shifts the whole competitive landscape. Just think of last year when Apple Corp.'s iPhone made its grand debut. Or go back a bit further, when Toyota launched the Prius. And was there really a time when Google-ing wasn't a part of the everyday vernacular? The companies behind these earth-shatteringly popular projects scored hefty boosts to the bottom line. Customers finally got that elusive something they couldn't believe they ever lived without. And rivals were left standing on the sidelines trying to figure out what happened.
The goal, of course, is to create a project portfolio that delivers genuine innovation, aligns with the company's strategic vision—and contributes a nice addition to the coffers.
It all leads back to that age-old question: How can companies best achieve a balance between cutting-edge innovation and rock-solid ROI?
Straightaway, one thing is clear: There's a lot of room for improvement, according to Innovation 2007: A BCG Senior Management Survey. The study of 2,468 senior executives in 58 countries was conducted October 2006 through March 2007 by The Boston Consulting Group Inc., Boston, Massachusetts, USA.
Just 46 percent of the executives reported being satisfied with their return on innovation expenditures, a drop from 52 percent the year before.
It's a downward trend visible over the entire four years the survey has been running, says James Andrew, Chicago, Illinois, USA-based senior partner and director of the firm's global innovation practice.
“In absolute terms, you're always going to pick up some level of dissatisfaction,” he says. “What's worrying is that over time, the level of dissatisfaction is increasing—and that it embraces over half the people in the survey. That cannot be a good thing.”
LEAN AND MEAN
COMPANY: Novelis Inc., an aluminum manufacturer
TECHNIQUE: Design for Lean Six Sigma, a five-stage process that begins with the clear articulation of the customer requirement and concludes with verification the as-designed new product or process does indeed meet the stated purpose
HOW IT WORKS: Prior to launch, projects must sequentially pass through five gates: define, measure, analyze, design and verify. At each point, the project can be canceled or returned for refinement.
ROI: Within the company's European manufacturing operations, the five-stage gating process is credited with influencing a number of recent decisions on development projects.
One project was killed off shortly after the design stage, says Novelis' Nachterstedt, Germany-based Frank Rill, master black belt, continuous improvement. “It was a disappointment, but it wasn't going to deliver,” he explains. “The whole purpose is to avoid wasting resources on projects that are effectively already dead and won't deliver on their promise.”
As painful as the process can be, it does free up resources that can be redeployed to other projects. That's precisely what happened at Novelis. Resources devoted to the canceled project were shifted over to another initiative to introduce new process technology. That project has since delivered a $2 million annual return by delivering an increase in capacity at the company's Italian manufacturing operations.
That's especially true given the importance executives put on innovation: 66 percent ranked it one of their organization's top three strategic objectives.
Reducing that dissatisfaction calls for pulling off a difficult balancing act: not only building a tighter link between innovation expenditure and ROI, but also increasing that ROI. At the same time, organizations don't want to constrain the ability of the business to deliver the kind of wildly successful innovations that rewrite the competitive paradigm. What if Starbucks had been content with just selling plain old coffee and dismissed the idea for the frappucino as too risky or too expensive to develop?
THE PRICE YOU PAY
Circling high above the planet Mars, the National Aeronautics and Space Administration's Mars Reconnaissance Orbiter is helping to pinpoint landing sites for the Mars Science Laboratory. Critical to that task is Orbiter's multimillion dollar image sensor that has helped contribute to the 26 terabytes of images sent back—equivalent to the contents of about 5,000 CD-ROMs, an amount that exceeds the total from all other current and past Mars missions combined.
That kind of innovation doesn't come cheaply, making a very rigorous innovation management plan all the more important for e2v technologies, the Chelmsford, England-based manufacturer that developed the sensor.
“A process is essential,” says Trevor Cross, Ph.D., e2v technologies' group CTO. “We have a lot of very bright engineers in the business, and when people come along and say, ‘I have an idea for a new product we could work on…,’ it's important to be able to take a balanced view of the fundamentals. How large is the likely market? How fast is it growing? How large will it ultimately become? What average profit margin might be expected? How risky is the technology? Questions like these must be answered before we spend significant penny.”
MOST INNOVATIVE COMPANIES
»Google, Mountain View,
»Toyota Motor, Toyota, Japan
»General Electric, Fairfield,
»Procter & Gamble,
Cincinnati, Ohio, USA
»3M, St. Paul, Minnesota, USA
»Walt Disney Co., Burbank,
»IBM, Armonk, New York, USA
»Sony, Tokyo, Japan
»Honda Motor, Tokyo, Japan
»Nokia, Espoo, Finland
SOURCE: INNOVATION 2007: A BCG SENIOR MANAGEMENT SURVEY, THE BOSTON CONSULTING GROUP INC., BOSTON, MASSACHUSETTS, USA
Along with evaluating market conditions, companies should consider timing.
“Ideally, there needs to be a balance of short-term projects, medium-term projects and long-term projects,” says Shan Rajegopal, Ph.D., PMP, head of the project program portfolio unit at Berkshire Consultancy Ltd., Reading, England. “Otherwise the flow of innovation through the pipeline will be erratic, delivering new products at irregular intervals, with resources consumed at an uneven pace.”
This is where portfolio management can help. Instead of just seeing a disparate clutch of development projects, companies should take a good long look at innovation across the entire portfolio. Doing so makes it possible to take a more strategic approach to new product development. The project management team needs to create a strategic plan and then allot the resources based on that criteria.
Trevor Cross, Ph.D., at e2v technologies, advocates a practice he calls “managing the funnel.”
“We might choose to proceed with quite a lot of ideas, once we've satisfied ourselves as to the market fundamentals—but only commit a relatively low level of resources to them, by way of a feasibility study,” he says. “We recognize that we can seriously invest in only a few major projects at a time—so we have to be careful to pick the likely major successes, and kill off those that aren't going to make the cut.”
“Is there a window of opportunity during which a product launch would maximize shareholder value?” Dr. Rajegopal says. “If so, resource allocation across the portfolio can be reviewed, with projects—and their resource requirements—prioritized accordingly.”
DOES IT MAKE THE CUT?
At IT services company Wipro Technologies, Bangalore, India, an innovation council identifies, incubates and scales-up the company's portfolio of innovation projects—a number of which have originated from employee ideas, says Vikesh Mehta, general manager of Wipro's Innovation Group.
The council is responsible for managing a two-stage gating process, explains Wipro colleague Raja Ukil, general manager at Wipro.
The group starts by evaluating the proposed project from a market perspective, looking at factors such as potential competitors and how unique the anticipated offering would be. Those views are then validated—or not—by discussions with “analysts, customers and other people with relevant opinions,” he says.
“Then, for proposed innovations that successfully pass this stage, we create a formal business plan, evaluating the level of investment required, the likely timescale and the best way of moving forward,” Mr. Ukil says. “Only after the innovation council has approved the business plan do we develop a project plan.”
But restricting the innovation projects placed into development portfolios is only part of the solution. Organizations must regularly review them from the twin standpoints of risk and reward, says Keith Goffin, Ph.D, professor of innovation and new product development at Cranfield School of Management, Cranfield, England.
“Increasingly, best-in-class organizations are focused on ensuring their portfolios contain a proportion of higher-risk, higher-return projects—but deliberately leavening the overall portfolio mix with lower-risk, lower-return projects designed to yield incremental innovations that deliver a rate of growth that's no faster than the growth of the market generally,” he says.
In addition to balancing the risk within the portfolio, companies must also keep a weather eye on what exactly those risks are. They should regularly revisit the original assessments of each project, establishing the extent to which anticipated risks have changed over time.
Percent of time Google engineers spend on projects of their choosing. Google News, Google Suggest, AdSense for Content and Orkut are among the many products the company says grew from offering this perk.
“As projects evolve, the risks they face evolve too. And the sooner you can get a handle on those risks, the quicker you can decide to kill off projects that don't meet risk criteria, the better it frees up resources for future projects,” Dr. Goffin says.
Indeed, one of the secrets of successful innovation is to build precisely this mindset into the very fabric of the company, adds Paul Sloane, founder of consultancy Destination Innovation, Camberley, England. Too many companies, he says, have a relatively small portfolio of innovation projects that they back very heavily, and are consequently disappointed when they fail, or under-deliver on their original promise.
Instead of developing such a high degree of emotional attachment to innovation projects, “businesses need to think like venture capitalists,” he urges. “Fail often, but fail cheaply. Have a lot of ongoing innovation experiments, yet be comfortable about some of them failing.” PM
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FEBRUARY 2008 PM NETWORK