A portfolio is a related set of assets that compete for resources and deliver value for an organization. Interactions among the assets increase the complexity of portfolio decision making. For example, we have competition for multiple types of limited resources; we also have contributions towards the same organizational objectives as well as synergy, cannibalization and halo effects among assets. It is the use of limited resources combined with specific assets that we deliver value.

Perhaps you are a multi divisional company and you have a portfolio of business units or physical assets like plants & manufacturing facilities. Decisions about each asset can be made quasi independently. The characterization of portfolios is done in many ways, notably:
a. number of assets
b. value of stake per asset
c. rate of change (annual, quarterly, monthly, daily)
d. interaction (independent, many to many, shared)
e. uniqueness
f. uncertainty (development, deterministic analysis , commercial)
g. organizational complexity (several teams, many interrelated teams)

Portfolio management involves two types of decisions – executive and strategic. For the latter, you need to ask the questions “are we doing the right things?” or “are the things going in the right direction?” while for the former you need to ask questions like “are my projects going smoothly?” or “How do I assign limited resources?” keeping in mind that the relative effort on execution is huge, in my experience 90% of energy goes into execution.

So one school of thought is project management where budgets are more or less taken for granted. Its an incredibly important mindset. The other focus is more financial or strategic asking if we are going in the right direction. Project plans and resources are in play making sure we are optimizing resources. This focus has huge leverage making it equally important. It’s important to start with the overall business challenge. We are under pressure to spend less. I consulted with a high tech packaging firm earlier this year that was ripe with innovations and ideas for the future, firing on all measurable cylinders on the idea generation front. However, this overloaded their pipeline to a dramatic extent. At the time I was brought on board, they have 70 high priority projects with a realistic capacity to do about 15. Few companies have a problem this acute but many face the inability to deliver – too many project and not enough resources.

Before we go any further, I would like the you (the reader) to ask yourself which of the following falls into the most reinstated portfolio management challenge in your organization:
a. cutting costs without cutting the future
b. too many projects, not enough resources
c. delivering relentless growth
d. getting more for less

I’m often (happily) surprised to see less emphasis in (a) and (d) and more on (b) and (c). Also, as a management consultant, amending the challenge is a lot smoother because the onset is positive as opposed to passive aggressive. As a manager you need to discuss the top down aspirations vs. the bottom up realities. Top down refers to where the organization heads want to be and what they see as important measures to reach that destination. The floor level of the organization serves as a reality check and offsets the aspirations with counter questions such as what can you manage within our existing resources or what should be modified or closed off to achieve the goals in the event that resources are limited (so cutting of Dog product lines in favor of Stars or Cash Cows). As a manager, its your job to set priorities in the funds, to allocate resources among the segments, to balance innovation in incremental projects and to meet corporate goals. For a longer term impact, do start with the mindset of creating a positive win-win scenario outcome to boost motivation and eliminate resentment.

A pharmaceutical portfolio makes for a great business case because the pace of the industry is relatively slow. This means you can see the portfolio unfold clearly and get real insight into what makes a good or bad process. In my time as a management consultant, the real challenge in this practice is people, evaluation methods and has very little to do with the specifics of the industry. The common challenges you will face as a manager in this area is the inert politics that dominate the decision making process, the fact that your organization may not be able to address the risk and uncertainty in a disciplined manner and that decisions go back and forth or get made late or ineffectively. It varies from industry, but in pharmaceutical I have often found my clients in general disagreement over the lack of consistent and transparent ways to measure value in R&D projects. If you know better, please contact me!

The difference in expectation in terms of what the CFO wanted – a business case he could bank on and the R&D director who insisted that innovation is so uncertain that it “cannot be quantified”. People are uncomfortable of the unfamiliar and this particular client was answerable to continental offshore managers that assessed and scrutinized their every move. I want to know how many of you face the same level of frustration and which of these concerns or challenges are predominant in your organization, so do weigh in the comment section below. Now I’d like to share my experiences in applying a value based management process towards strategic decision making in the portfolio my team and I worked on. We took a very proactive approach to manage the portfolio.

In the past, portfolio decisions were made with a project justification mindset notably with a business case which was then followed by a portfolio decisions based on subjective factors. Using a scorecard evaluation was fairly common, the managers would identify key criteria to score high, and they would assign criteria of importance on a scale of 1-10 and many other methods. One of the biggest problems with this approach (given that technical and non-technical managers partake in the survey), is a preference for late stage development projects over early research projects. As a technical executive, you have invested more time and energy into the project in its 5th year as opposed to the ones started last year, hence you will attribute more value towards the one where you have more personal and professional time invested in. You do not want to see your hard work (regardless of true ROI) go down the tube. You feel that if that happened (regardless if it is beneficial towards the long term health of the business) it would impact your internal reputation as being involved in a scrapped (failed project) as well as external for similar reasons.

For people who are familiar with decision analysis, a value map is just a more disciplined approach towards portfolio management. It is an analytical way to link the key factors or variables to value of projects. I see it as a valuation methodology, which reflects the complexity and risks of our investments. And it basically contains elements that are technical, commercial and focus on partnering across functions. It looks at project evaluation through all its phases, the probabilities of reaching the next intended phase, costs & duration, milestone payments towards R&D, timing of the technology vs. project investment vs. probability of success (all of which build the case for the project value). We also look into the P&L with a market profile, so:
a. market growth and size
b. international market multiplier
c. make share profile
d. end of product life or replacement

Revenue measures demonstrate the price and the growth of the price over the lifetime of the product, costs would cover the
a. unit cost
b. cost growth rate
c. fixed costs
d. launch costs
e. capital expenditure

All this would contribute towards estimates towards the cash flow of the new product with the intent of having successful contributions towards project value.; at the end of the day, value is the Ultimate Measure. Peer and expert review would be followed with transparency, credibility, comparability and vetted by the technical experts. This approach gives a wide range in the valuation given to the various projects to choose from. You may have a high vote of a project based on its commercial value but it may have a low probability of advancing towards the next stage and vice versa. Once again, now would be a good time to take a break from reading and think about which approach your organization takes in making project decisions:

a. sales pitch to the decision maker
b. subjective weightage and ranking
c. systematic peer review of value and uncertainty

To shoot myself in the foot, I’d like to confess using the (a) methodology in my university and entry level days for justifying which retail projects to undertake or which marketing mediums to invest in. It’s been learned the hard way, but getting a team of various experience and skills on the same page has much more value in creating the best outcome against the sales potential of the project.

With clients, these tools had positive implications for project decision making. You may want to do a sensitivity analysis for your project with an optimistic model that calculates the NPV of commercial contribution and identify the factors relevant to your project that have the greatest impact on expected value. So we looked at peak market share, unit price in the launch year, years to peak the market share, milestones for the launch year, sales launch cost as contributors towards the project worth in mind of managers. This masks that there were many uncertainties and concerns outside of say, IP issues. What we found was that breaking through a product aspect or benefit that could not be exceeded by competitors would have had a greater overall value impact over concerns regarding the low product lifecycle and IP concerns.

The benefits of this approach cannot be denied; the client experienced a VBM process that saved them millions in potential regulatory setbacks, reduced the portfolio process overhead, eliminated unnecessary processes, accelerated decision making, prevented the deaths of high value opportunities, improved value of productivity, accelerated the analysis of various options and most of all, it reduced the panic and frustrations across functional teams in project selection while effectively kept a good opportunity otherwise discarded and provided a track for learning. With that, you the reader deserves another break so do think it over and jot down which of the following would most improve your portfolio process and how the lessons in this paper would be translated towards your industry:

a. better process design
b. measured value
c. mastering uncertainty
d. creating new alternatives
e. all of the above

The culture shift from the previous method towards VBM was tremendous, partly because our involvement was advocated by the former board member and chief science officer and under his insistence to take on a new approach and learn from the method at each step and interval. The winning of all champions in the organization needs to be of equal importance to demonstrate the value this approach creates. What you want is to get support for the right (not political) decisions.