Strategic growth decisions
Executives who WANT TO AVOID growing pains should focus on rigorous reporting methods and their ability to choose dispassionately between winners and losers.
BY MARK INGEBRETSEN
PHOTOGRAPHY BY JAMES MCENTEE
Lake Placid, N.Y., USA
TO OPTIMIZE THE PROJECT PIPELINE, executives could learn a thing or two from venture capitalists. The goals of a venture fund are “pretty clear cut,” says Gregg Barcus, founder of the Emerging Growth Group, a Des Moines, Iowa, USA-based high-tech incubator and venture-funding firm. “You want to maximize your profits and increase ROI. You're only successful if you're able to build a sustainable business that at the end of the day can support itself and keep moving forward without any additional investment.”
To optimize a portfolio of projects, senior managers should first develop reporting standards that let them quickly assess the range of projects in play.
Each project should be evaluated in terms of the organization's growth strategy.
New and existing projects also can be assessed based on how well they meet predetermined financial and quality benchmarks and how well their risks and reward potential create a balance within the company's portfolio.
Collaboration through partnering or licensing can help facilitate smart growth.
New projects always must be ready to replace those nearing completion.
And yet, many executives continue to manage growth on an ad hoc basis, isolating projects from one another and using reporting methods that are anything but uniform. Companies need a framework supported by three best practices:
- 1. Take
inventory of the current project mix.
- 2. Establish reporting controls and the criteria to evaluate new projects.
- 3. Achieve a balance within the project pipeline that jibes with the organization's growth goals.
From here, executives can tweak their pipeline with the same clarity as venture capitalists, separating the projects that guarantee profits from those that deplete resources with no visible gain.
The guiding question when looking to expand or further define a niche is simple: “Are we working on the projects that are going to move the company forward?” says Donald Gardner, past chair of PMI's Financial Services Specific Interest Group and a consultant with Gardner Project Integration Group Ltd., Hastings-on-Hudson, New York, USA. Often, simply taking the inventory of the projects in a company's pipeline can free up otherwise-wasted resources.
As easy as that sounds, some companies aren't even aware of the projects they manage. Mr. Gardner works with portfolio planners to institute a process that enables the senior team to view the aggregate portfolio condition readily, looking at status, risk level and response. This analysis is correlated to every project—project managers provide senior management with updates and status reports and senior managers give feedback. In the end, all information and best practices are shared: Project managers know where they stand and senior management can anticipate resource and priority conflicts and take actions more quickly.
At the top of the funnel are products in the discovery stage of development, and as you move farther down the funnel, the opportunities become less and less because of failures. At the bottom you have the few that make it.
In working with the global project office at New York, N.Y., USA-based Citigroup, Mr. Gardner's and the project team's portfolio management process was driven by three objectives:
- 1. Are we on target with regard to schedule, scope and budget?
- 2. Are we able to respond to escalation calls from project managers in a way that will help them but that also communicates that project managers are expected to do their homework before they ask for help?
- 3. Are we in a position to make decisions regarding moving resources and changing priorities?
Rather than use complex software, Mr. Gardner used spreadsheets to illustrate key project information and status; color-coding reflected the project risk condition. A series of uniform management practices—regarding the launch of new projects and how to assess their risks as they proceed—also underlie the spreadsheet, Mr. Gardner says. Working at CitiBank helped him appreciate the value of organizing a portfolio to ensure that the most important projects—the ones that can help a company grow in terms of revenue, market share and operational savings—are the projects that are executed.
Scrutinizing ongoing success is one thing; establishing criteria to evaluate new and ongoing projects requires separate techniques.
One way is to create a target product profile (TPP), which is a detailed list of attributes a product must meet. When a TPP is developed early, project managers regularly can compare what has been achieved against the listed attributes says Patti Hopkinson, an independent project management consultant. She works in pharmaceuticals, an industry where effective project portfolio management determines whether a company will succeed or fail. It can cost $800 million over 10 to 15 years to bring a new drug to market, according to Washington, D.C., USA-based Pharmaceutical Research and Manufacturers of America. In this industry, the TPP process can be used to weed out likely nonperformers at the earliest, least-costly stages.
Essentially, the TPP establishes the product specifications required to perform successfully in the marketplace. “The list is lengthy and includes requirements for product safety, efficacy and stability, to name a few,” Ms. Hopkinson says.
The attributes listed in the TPP can be listed as ranges, with minimum, target and optimal values for each. Often a minimum attribute will be comparable to a product currently on the market, and it is expected that if the product in development cannot perform as least as well as the product that is already on the market, it should likely be terminated.
Monetary or man-hour benchmarks also can be used to track the progress of a project portfolio and present the information in such a way that project managers can grasp instantly, says Paul Naybour, managing consultant, PMProfessional Learning Ltd., High Wycombe, U.K. Mr. Naybour uses the earned value management technique to help government-run British Nuclear Fuels keep track of its myriad worldwide projects.
Earned value is applicable especially in large-scale analysis because it evaluates projects based on some refreshingly simple criteria: the budgeted cost of the project and its earned value based on the degree to which it is completed. The latter benchmark, which can be expressed monetarily or in man-hours, then is compared with the actual cost of reaching an established milestone. When this information is reflected in a chart, it's easy to see each project in the pipeline by stage and how much the project has deviated from the original budget. At this point, poor-performing projects can be discarded or retooled to prevent any further stress on the company's resources.
To implement earned value management successfully, an organization must first “get good project plans in place with good budgets,” Mr. Naybour says. Excellent reporting methods are required to track the project's benchmarks, along with scheduled audits every three to six months; a large organization might need eight months to acquaint all of its project managers with the process, he says.
Balance the Scales
Those measuring techniques can help an organization assess its project pipeline; in order to achieve smart growth, companies must adjust the portfolio to ensure that it makes the best use of the company's resources. This is especially true in business sectors that are compelled to launch a large number of projects to increase the probability that winners emerge continually.
Ideas may be plentiful, but a shortage of resources keeps most of them from becoming reality. Often, the portfolio manager's own time is the most critical resource of all. “In the end you've got to limit your activities if you're going to be successful,” Gregg Barcus says.
Managing a portfolio of companies via the Emerging Growth Group business incubator he founded, Mr. Barcus must perform a constant juggling act. Some of the companies he's nurturing require almost full-time assistance. “Others are stacked up in a landing pattern,” he says, “and we try to keep them moving forward but not to the point where they require constant oversight and activity.” To leverage his and his partners' available time, Mr. Barcus works to achieve synergies among his portfolio suppliers, perhaps also sharing employees and services. The operating principle is, “build it once; deploy it many times,” he says.
Incubators are especially adept at fostering this kind of sharing atmosphere. Locating cadres of energetic, creative and entrepreneurial types within the confines of a single workplace fosters communication that tends to improve everyone's work methods. The real goals of a shared environment such as an incubator is that you put people in a place where they can help each other and learn from each others' mistakes, basically growing from each other's work, Mr. Barcus says.
This means that fewer of those good ideas are wasted.
The pharmaceutical industry serves a good example of this phenomenon. Ms. Hopkinson says drug companies often view their development process via “the funnel effect.”
“At the top of the funnel are products in the discovery stage of development, and as you move farther down the funnel, the opportunities become less and less because of failures. At the bottom you have the few that make it,” she says.
Whatever the industry, failures within a portfolio are inevitable. This is precisely why companies must balance their project mix; in doing so, they increase the chance that the projects that do succeed will be the ones that best grow the company.
Some firms don't have the option of simply shuffling assets within the organization, and that's particularly true of companies in fast-paced industries that need to keep their pipeline full while preparing for the unexpected. This is why partnering plays an important role in the high-stakes pharmaceutical industry, Ms. Hopkinson says.
“A company might have five endocrinology products in the pipeline, and three of them for one reason or another have to be terminated due to inappropriate safety profile or poor performance on clinical trials,” she says. “Smaller companies want to partner with a larger company so they can get development funds and in some cases, sales and marketing support; sometimes they simply need additional resources. So large pharma will purchase or partner with these smaller companies.”
Ms. Hopkinson says the pharmaceutical industry has operated in such a mode for upwards of 15 years. Perhaps other industries eventually will evolve away from being giant research and marketing operations to operating in a similar partnership model where portfolio managers dispense funds and other forms of assistance to smaller, more agile firms.
For some drug makers based in India, such as Sun Pharmaceutical Industries Ltd. and Glenmark Pharmaceuticals Ltd., the partnering strategy provides a way to boost margins and better compete at all levels within the global pharmaceutical industry. Leveraging the low research and labor costs inherent in an offshore pharmaceutical business, these companies now are seeking to enter the higher-margin business of new drug development and marketing throughout the world. To jumpstart that effort, they're acting, in effect, as venture capitalists on a buying binge, seeking to buy drug brands or invest in pharma companies in the United States and elsewhere.
License to Drive
Licensing is yet another smart growth technique. Here, companies exchange existing research or product technologies with one another, allowing both buyers and sellers to tweak their portfolios as they wish.
Partnering and licensing can be powerful growth-enabling tools, providing a company's project portfolio a degree of liquidity comparable to what's found in stock or bond funds. Because assets can be quickly and easily exchanged, Web sites such as www.yet2.com and www.pharmalicensing.com now act as electronic markets for technology buyers and sellers.
As executives adapt to this fast-passed technology-swapping environment, they are liable to use the same portfolio-balancing techniques long used by the mutual fund industry and more recently by venture capitalists. “It's like any asset management group,” Mr. Barcus says. “In your own investment portfolio, you want some companies that are in an early stage and you want balance by economic sector. You can't put all your eggs in one basket. You've got to keep refilling the trough with new companies. You never know where your winners are.” PM
Mark Ingebretsen, a freelancer based in Des Moines, Iowa, USA, writes on business and other topics for the Wall Street Journal Online. His most recent book, Why Companies Fail, was published by Crown Business.
PM NETWORK | DECEMBER 2004 | WWW.PMI.ORG
DECEMBER 2004 | PM NETWORK