Research and development is an essential process for any organization. And yet R&D can be so susceptible to outside pressure: Stakeholders who push for an accelerated time to market, budget constraints that hamper access to resources vital to R&D, teams diverted to projects deemed more immediately urgent.
Of course, all of these complications are a question of an organization’s ability to effectively prioritize its projects. This is where project portfolio management come in.
PPM can fortify important R&D activity against extraneous pressures. At the same time, it can provide the organization with a better method for selecting the right R&D projects and empower the organization to execute those projects reliably.
Using PPM to Identify and Prioritize the Right R&D Projects
Accurately prioritizing any R&D project first requires an understanding of that project’s value to an organization. This is the first step for any such project, R&D or otherwise, and yet it is never easy to confidently and honestly attach a dollar amount to the outcome of a project.
“Unfortunately, due to the difficulty of forecasting project consequences, the multiple considerations relevant to determining the value of those consequences, and the limits of human intuitive reasoning, it is easy for good projects to be overlooked and poor projects to be chosen, especially when risk is involved,” PPM consultant Lee Merkhofer writes.
Your organization must establish a metric by which you can measure the value of that R&D project. Merkhofer offers some common metrics, several of which could be good candidates for forecasting the project’s value:
- Financial (e.g. net profit, economic value added)
- Market and marketing value (e.g. market share, brand equity)
- Operations value (e.g. order fulfillment cycle time, project schedule variance)
Alternatively, there is Washington University professor Anne Marie Knott’s comprehensive metric, research quotient (RQ), that she proposed in Harvard Business Review. RQ is a measure of R&D productivity, which means your organization would need to have done R&D projects in the past to calculate this metric. It hypothesizes that an organization’s revenue is a function of the relationships among capital, labor and R&D. Thus, in Knott’s equation, adjusting any of those three variables should have a measurable effect on revenue.
“To calculate your RQ, you need several years’ data on revenues and annual expenditures on PP&E (property, plant, and equipment), labor, and R&D,” she writes. “Those data are converted into logs, a standard transformation needed to run the regression analysis that produces RQ.”
That regression analysis gives you productivity levels for those three inputs: PP&E, labor and R&D. This gives your organization a tool for identifying instances in which you’ve under- or over-prioritized R&D.
For example, when doing this analysis for the full set of publicly traded companies in the US, Knott writes, she found that on average an increase of 1 percent R&D spending would yield a 0.11-percent increase in revenue.
How the Best Organizations Select Their R&D Projects
The key point here is not to say that any one metric is more useful than any other. Just as a strategic thinker needs access to several mental models to solve a problem, an organization needs access to several analytical models to support a project prioritization decision.
In fact, Forrester analyst Roy Wildeman and his team have found that the top-performing product development teams rely on a mix of analytical models to identify which projects to execute, and they have clear protocols that tell them when to continue and when to halt a project.
With this kind of structured analysis, many organizations should be able to make a clear case for their own R&D projects. If that project fits into a larger, balanced portfolio of projects that don’t cannibalize resources from one another, it’s easier to push back against any stakeholders that might want to divert resources away from ongoing R&D.
Executing (and Protecting) the Project
When the R&D project is in line with the objective of the larger project portfolio, then execution and decision-making at the top levels of management become easier. After all, as project manager Giana Rosetti points out, steering an organization to adhere to its project capacity is a responsibility that falls on both executives and the project management office.
That means first understanding and protecting that project capacity. A useful first step comes courtesy of PM Alliance, which recommends creating a network diagram to visualize all of the tasks necessary along the project chain.
“With a network diagram in hand, any potential change to the project schedule can be evaluated, the downstream effects anticipated, and a mitigating contingency plan put into action,” PM Alliance writes. “The right people can be notified if the timeline needs to shift and the labor curve may also be tweaked to maximize the efficiency of the available workforce.”
As every PM knows, timelines do tend to shift, no matter the size of the project. An additional layer of protection against these kinds of changes is to be clear about the project’s scope. This means having the scope defined clearly, written down and signed off on.
Take the time to get this definition right. If there is any wiggle room between what the project will and will not do, someone will see that as an opening. “What happens then is stakeholders see that scope, interpret the words liberally, and assume they mean more than they do,” Elizabeth Harrin says. “The phrase you’ll hear is: ‘While you’re doing that, could you just…?’”
Clear definitions and executive sign-offs are the best protections against this kind of scope creep, she says. “That way, when someone asks: ‘could you just…?’ You can answer: ‘I really wish I could. But I can’t. See here… It’s on the list of things my boss, sponsor, client says are excluded from the project. Sorry.’”
Making Your R&D Project Resilient
Perhaps making your project resilient sounds pedantic, but this is the kind of diligence that distinguishes organizations with top-performing R&D processes. Further, those organizations’ R&D project managers have processes in place to anticipate any such pressures. When hurdles such as incremental changes become apparent, they get flagged and dealt with quickly.
Case in point: Ohio State University researchers Aravind Chandrasekaran, et al. spent some time looking into the change resilience of a couple of pseudonymous Fortune 500 tech companies. One company implemented a risk-tracking framework for its R&D that required a weekly check-in. That same company maintained a strategic planning horizon of one year out and checked in monthly to see what part of that vision needed to be updated. The other company, by comparison, failed to track risks with any sort of comprehensive framework, and it also settled for annual updates to its strategic horizon.
Guess which one did a better job of getting its products to market on time and within budget?
“[S]uccess or failure is inextricably linked to how risk, strategy and communication are managed in times of crisis,” the researchers say. “It’s not dashboards or scorecards alone, however, that equip companies to change course when the time comes. They must be part of a broader R&D culture that encourages feedback, inspires experimentation and develops agility and lean practices. Without it, scope creep can kill and can be extremely costly to handle in today’s economic climate.”