2015 Innovation Planning: 3 Ways to Make the Most of Your Investments

It's planning season. More money and higher growth expectations mean more chance of making a bad decision; here's how to minimize the risk

Many R&D teams around the world are in the midst of (and a lucky few are wrapping up) their 2015 budgeting and planning process, and it’s a good bet that one question above all else will plague even the most seasoned senior executives: “Did I make the right choices?”

CEB R&D data shows a hefty increase in R&D budgets over the past few years (see chart 1), which has naturally led to R&D execs funding more projects.

Chart 1: Recent change in 2012 and 2013 fiscal years’ R&D budgets  Relative to the most recently completed fiscal year’s budget  Source: CEB analysis

Bigger Bets Can Mean Bigger Regrets

But not only are executives spending more money on projects, they are spending a disproportionate amount of the money on “transformational” projects – that are inherently riskier than “incremental” type projects – (see chart 2).

Chart 2: R&D spending on transformational projects  As a percentage of total R&D spending  Source: CEB analysis

The combined effect of funding more projects and funding riskier projects means that R&D execs have a greater chance of regretting their portfolio decisions.

In fact, only 58% of R&D executives are satisfied with the revenue potential of their R&D portfolios, according to CEB R&D data. This is because most R&D executives think there are too many low-value projects in the portfolio, and even those who are not concerned about low-value projects still worry (despite recent increases) that they are underinvesting in transformation or breakthrough projects.

In response to this uncertainty about the quality of their projects, many R&D teams choose to increase the number of reviews and involve more senior executives in the decision-making process. However, these actions do not help to improve the quality of the R&D portfolio. In fact, doubling the frequency of reviews and increasing the number of senior decision makers can add more than $1 million in annual decision-making costs for the typical company.

3 Ways to Get it Right

Organizations that outperform others in making the right portfolio choices do three things differently. CEB R&D research determined this by singling out high-performing teams that had “low portfolio decision-making regret.” The definition of decision-making regret was assessed via regression analysis using a number of variables that related to an organization’s negative effects of past decisions or anticipating future negative effects of current decisions.

1. Instead of trying to apply broad estimates to large, complex R&D projects, high performers identify sources of enterprise value; then they map technology projects to these sources of value. This not only simplifies the valuation process but forces earlier articulation of a technology’s connection to business needs.
2. They design flexibility into project selection standards to enable company-wide adoption rather than permitting businesses to apply exceptions to standards on an as-needed basis.
3. Leading organizations center their risk management efforts at the portfolio level and continually evaluate and balance risks across multiple projects and businesses top down.

source:excecutiveboard