It takes an innovation system to drive innovation performance.
Alongside clear innovation priorities, optimized innovation pathways, and empowered innovation people, innovation portfolio management is a primary component of a complete innovation system.
These elements already exist in almost every successful organization and are connected behind the scenes. Together, they all concur to determine how organizations set strategy and make decisions to allocate resources.
In particular, portfolio management can bridge the gap between strategy development, budgeting and resource optimization, and the governance of individual innovation projects. But you have to embed it within your existing processes first.
Keen to know how? Here’s a summary of what Alasdair Trotter, Partner and Managing Director at Innosight, shared during our recent Innov8rs Learning Lab on Innovation Strategy, Leadership, Governance & Portfolio Management about managing a portfolio of projects and integrating it into your organization’s existing structures in four sequential steps.
Portfolio Management Is A Discipline: Three Fundamental Questions
At Innosight, they define Portfolio Management as a discipline that enables you to look across an organization’s silos and gather the information around what you're doing so you can answer three fundamental questions. These questions are relevant to every portfolio you might have. You can then use the answers to make better decisions about where to focus your investments:
1. Are we doing the right things? As proof that everything in this context is interrelated, you must first tackle your priorities and know what are the right things that you should be doing before you can answer this question.
2. Are we doing too much, too little, or just the right amount of things? You need a balanced portfolio. In case your answer here is “we're not doing enough”, you would add a little bit more to the pipeline. In case you’re doing too much, reduce your investments. For example, there's no need to over-invest in innovation if the level of change in the market doesn't require it.
3. Have we optimized how resources are allocated to the things we’re doing? This third question is about efficiency and resource allocation. Alasdair shares that one of his clients – a global CPG firm with a portfolio of 6000 projects in multiple European regions – has realized that only a few projects are actually able to move the needle in terms of growth. In their case, it might not make any sense to have a lot of people, time, and resources tied up in the complexity of managing long-tail projects. Each project, of course, is individually justifiable as it's contributing a few hundred thousand dollars of additional value to the organization. But in aggregate, when you look at the complexity caused by all those different projects, “Have we optimized how resources are allocated to the things we’re doing?” it’s a question worth asking. Freeing up resources to repurpose and refocus them on bigger opportunities can eventually create even more value.
“These three questions may sound somewhat simplistic. Yet they're very powerful, and so much of what happens in portfolio management goes wrong because one or more of these questions are missed by leaders”.
Four Steps To Build Your Strategic Portfolio Management
In theory, portfolio management is all about knowing the answers to these three questions for any portfolio you choose to manage. It then takes four steps to establish portfolio management inside an organization and show whether or not your portfolio is actually delivering against those same answers.
1. DEFINE the portfolio of interest
It's important to note that although Alasdair has framed this webinar around the innovation portfolio, all the insights in this article apply to any portfolio, whether it's the strategic portfolio of the whole organization or a narrower portfolio within a particular technology group or product area. It's actually not so uncommon to find more than just one portfolio in an organization.
As such, the first thing to do to establish portfolio management inside an organization is define the portfolio of interest. What matters here is to be very clear about the general purpose of your portfolio, which starts with determining what type of business problem you want to solve (e.g., beyond the core revenue growth, expense reduction, etc.).
Once you've defined that, the next step is to establish what inclusion criteria to use to select what goes in and out of the portfolio. In a nutshell, defining the portfolio of interest equals getting better at eliminating lots of small, overlapping projects and instead trying to repurpose those resources towards the few that will actually make the difference. “You'd rather have 10 needle-moving projects rather than 100 projects that don’t deliver results”, adds Alasdair.
2. Clarify the PERFORMANCE goals for the portfolio
Once you've specified the “why” of your portfolio and what's included and what's not, the next step is to define to what end you wish to manage it and align on the goals for that portfolio specifically. We all know that “what gets measured gets managed”, so if you want your portfolio to deliver against certain goals, you have to be very specific about the ideal attributes it should have and against what standard you have to manage it. The performance goals are not for the individual projects but the whole portfolio as a collective set of projects.
3. Construct Portfolio VIEWS to generate insights
At this point, the next step is to develop what Alasdair calls “portfolio views”. These are, simply put, the simplified, synthesized data that help leaders answer the three big portfolio questions: Are we doing the right type of innovation? Are we doing too much, too little, or the right amount of innovation? Have we optimized our resources? For each question, there are different views or simple graphical ways you could generate that visualize the portfolio from a number of different perspectives to reveal actionable insights for leaders.
Some examples of views are: Current Year Investment by Strategic Priority (to answer the question: Are we doing the right type of innovation?), Long-Term Revenue Potential by Business Unit (to answer the question: Are we doing too much or too little or the right amount of innovation?), and Current Year Investment Relative to Revenue Potential (to answer the question: Have we optimized our resources?).
By creating these simple views, leaders can take the focus away from individual projects and evaluate in aggregate whether or not that portfolio will deliver against what it needs to do over time. It's important to invest time in the discipline of not only creating the data but making sure that people across the entire organization know how to capture that data via consistent methodologies. This will help you face the main challenges that would stand in the way of creating the views you need, including:
· Visibility Challenge: often, there is simply a lack of a management information system to create the view. This happens when the data is tied up in Excel spreadsheets, and no one knows how to use it.
· Methodology Challenge: a chart showing different projects and potential market sizes may be just an aggregate representation of what different teams have calculated using wildly different methodologies.
4. Use those insights to make DECISIONS
The final step, perhaps the most obvious one, is to use the data you’ve collected to decide what to start, stop, and continue doing. “I can't tell you how many portfolio meetings I've sat in where people look at the charts, discuss them and, at the end of the day, no decisions are made. As such, everyone is informed – and that's great! – but nothing's going to happen as a result of portfolio management if clear decisions aren't made to actually reallocate resources and shut down projects”, wraps up Alasdair.
Final Thoughts
Conducting a one-time analysis is a great way to get started. Still, the real power of portfolio management comes from embedding the questions we’ve analyzed so far into your existing processes for how decisions get made.
It's very easy and all too common to see an excuse to create another committee, process, venture board, portfolio management group, and all sorts of well-intentioned bureaucracy within an organization that already has an innovation system.
However, this frequently leads to unnecessary bureaucracy within the organization, with various groups disconnected from the operating model rhythm of the organization managing portfolios and allocating resources to innovation.
The best way to take portfolio management as a discipline and embed it in the organization is to look for the existing strategic planning processes and structures already in place to control resource allocation and strategy. Instead of creating new committees, leaders should work with those existing groups to help them adjust how they gather and present data, ask the right questions, and make the decisions they've always wanted to make (but have struggled to make).