What’s the Big Idea?

A new breed of product portfolio management software promises to help companies pick a winner.
Yasmin GhahremaniAugust 14, 2006

Like most drug makers, Inspire Pharmaceuticals lives and dies by its ability to deliver valuable new medicines. Figuring out whether to advance or kill an idea, however, has gotten harder. Not only has the company’s product portfolio grown, so too has the range of factors that come into play when deciding which products to back. Case in point: management struggled for two years trying to decide whether to license a new respiratory medicine. Says Ward Peterson, Inspire’s vice president of discovery: “It was hard to make comparisons on an apples-to-apples basis with so many variables at play.”

To help plumb the problem, Inspire last year purchased a software program called Portfolio Navigator. The application, created by SmartOrg, quantifies uncertainties such as market size, development time, and growth potential. It then creates a value map, comparing projects. Within two months of using the tool, Inspire management came to an answer on the drug. “We were able to stack it up against other existing and potential opportunities,” says Peterson. “We realized it would be one of the most valuable opportunities in our portfolio.”

Such clarity is rare, which may explain why the market for product portfolio management (PPM) software is growing at an 11 percent annual clip. All in all, AMR Research reckons sales in the sector are edging up on $850 million. Earlier versions of the programs — usually IT-project evaluators — tended to focus on operational issues. The new breed of product pipeline evaluators target strategic thinking. “The software provides a framework to make decisions in an objective rather than subjective way,” says Jim Brown, vice president of global product innovation and engineering research at Aberdeen Group. “It also provides continuous checks and evaluations of a project throughout its life cycle.”

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Deduces Are Wild

Businesses go through cycles as well. For the past five years, managers have been maniacally cutting costs in a frantic bid to boost earnings. With little excess left to trim, executives are now looking for ways to bulk up top line figures. That’s a much taller task. And despite all the recent talk about “corporate innovation,” profitability remains paramount.

Typically, managers try to gauge the commercial viability of a possible offering by feeding information about potential revenues, risks, costs, and strategic fit into a spreadsheet. The data crunching helps produce a net present value figure. Adhering to a phase-gate approach, managers then reevaluate the figure at each stage of development. The project is axed or advanced, depending on what they find.

One thing they’re certain to find: creating all those spreadsheets is a royal pain. Moreover, if each project manager reports findings in a slightly different format, any attempt to compare the results across an entire portfolio quickly turns into an exercise in futility. “That method won’t scale,” says Michael Burkett, vice president of research at AMR. “Companies can’t do it quickly enough, they can’t be consistent, and they can’t shoot the information to colleagues around the globe.”

By comparison, PPM programs create a central repository of information and a standardized process for gathering and evaluating data. Thus, products can be assessed based on real-time information rather than outdated entries.

Hewlett-Packard’s imaging and printing group can vouch for the approach. In 2004, the technology company commenced a three-year effort to evaluate new business opportunities. HP automated the numbers-crunching with a PPM tool called Decision Advisor. “The software puts a visual interface on the process,” notes Ralph Morales III, finance leader for HP’s imaging and printing group. “You’re able to build models as fast as people can talk.”

A recent product to make it from concept to market: a photo-printing kiosk for retail stores. When analyzing the project, Morales and his team used the PPM program to create two approaches. In one, HP would sell the equipment to the retailer. In the other, it would keep ownership and simply pay “rent” to the retailer. In the end, HP decided to offer both.

Scenarios driven off of the diagrams also helped the team see that ease of use would be more important than the actual price of the service. Hence, stage-gate milestones were developed around customer and retailer preference surveys. As a result of the input, HP decided to design the kiosks for both unattended and attended environments. Reaching that decision during the initial stages of the project was a real money-saver.

Fail to Bail

Killing a project should also be done as soon as possible, says Robin Karol, CEO of the Product Development and Management Association (PDMA), an industry group: “Given the pace of information flows,” she explains, “companies need to bail fast.”

According to the PDMA, the Product Performance Institute, and Cap Gemini, only 2.5 percent of ideas get to the development stage at best-practice companies. At average companies, the ratio is more like 12 percent. The result? Best-practice companies spend a lot less time and money on failures. In fact, only 20 percent of their development resources go to products that bomb. By comparison, less enlightened businesses pour close to half of their development capital into losers.

Of course, this sort of computer-aided insight doesn’t come cheap. A corporation with $1 billion in revenues will likely pay a PPM specialist a few hundred thousand dollars for a product portfolio application, implementation, and training. “It’s not just about the technology,” insists Craig Divino, president and CEO of vendor IDe. “Fifty percent of our implementation time is spent helping an organization use information more effectively.”

No doubt some of that time goes to convincing project managers they’ll benefit from the approach. It can be a tough sell, particularly for engineers who fear their projects will be axed. Still, the promise of shorter cycle times and more successful product launches is hard for senior executives to resist. Says Burkett: “I hear CEOs say upwards of 15 percent of their revenues go to R&D yet they have no idea what they’re getting for it.”

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