Driving Value Based Decision Making in Portfolio Management

1. David Townson Ph.D., PMP [email_address] Project Management Institute (PMI) Presentation Southern New England Chapter: 12 December 2011

2. Biographical Summary for David Townson 20+ years of project and portfolio management experience. 10+ years of leading global product development teams. Previous Worldwide Portfolio Director for a Fortune 50 healthcare company: Doubled therapeutic area productivity while managing $1BB in resources annually. Recognized subject matter expert in pharmaceutical and biotechnology portfolio management: Over a dozen conference speaking appearances. Education includes: Bachelor of Science Graduate Certification: Information Technology Applications Master’s Degree: Business Doctorate: Applied Management Project Management Professional (PMP) Certification Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

3. AGENDA 1. Environmental Scan: The Setting 2. Problem Statement: Observations 3. Solutions Employed: Granular Approach 4. Examples of Exploring Value Opportunities 5. Summary/Conclusions Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

4. Environment: Organization Type Research and Development Setting Technology Projects with Long Development Time Highly Regulated Industry Many Assets in the Portfolio Individual Asset Budgets Range: $2MM - $50MM/yr Portfolio Resources of $1BB/year Strict Budgetary Controls (and limited resources) Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

5. Environment: Culture Lessons From Both Large and Small Companies. Focus on Metrics as a Proxy for Productivity. High Shareholder/Investor Awareness. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

6. Timing Quality Cost Technical Regulatory Commercial Environment: Risk Types & Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

7. Environment: Portfolio Management Maturity Level Organization Possessed an Inventory to Understand the Composition of the Portfolio: - Projects we have, and knew about it. - Projects we have, but did not know it. - Projects we thought we had, but didn’t. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

8. Prioritization Process Inputs Established: - Quantitative: - Expected Sales, NPV, eNPV, ePV, Cost, PTRS, etc. - Qualitative: - Link to Corporate Goals, Management’s Favorites, Whomever Yells the Loudest, etc. Environment: Portfolio Management Maturity Level Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

9. Prioritization: What to do with Results? - Inform the Allocation of Resources . - Inform the Allocation of Talent. - Inform the Hierarchy of Attention by the Organization . Environment: Portfolio Management Maturity Level Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

10. Project A Project B Project C Project D Project E Project F Project G Project H Project O Project P Project Q Project R Project S Project T Project U Project V Project I Project J Project K Project L Project M Project N Project W Project X Project Y Project Z Project AA Project AB Prioritization Became a Process that Merely Generated a List of Assets that got Funding - Starting at the Top and Working Towards the Bottom. Situation: Company had Insufficient Resources to Cover all Asset Needs. Observation Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

11. Project A Project B Project C Project D Project E Project F Project G Project H Project O Project P Project Q Project R Project S Project T Project U Project V Project I Project J Project K Project L Project M Project N Project W Project X Project Y Project Z Project AA Project AB All of the Portfolio Candidates Were Considered Valuable by the Organization. However, Resource Allocation Via the Prioritization Process Did Not Consistently Result in Funding of the Key Value Drivers of the Lower Priority Projects. This Caused Many of These Projects to Slowly Starve, Eventually Becoming Less and Less Valued. Problem Statement Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment There is nothing wrong with killing projects – but it should be done intentionally , not through neglect or poor portfolio management processes.

12. Project A Problem: Prioritization at only a Macro/Project Level Creates a “Prioritization Food Chain” Project J Project K Project Z Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

13. Question Should EVERY Activity on a Highly Ranked Project Have Greater Priority than ANY Activity on a Lower Ranked Project? Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

14. Answer Of course not ! Generally, Projects Have: - A defined critical path. - Activities that are “close” to, but not yet on, the critical path. - Some activities that are not close the critical path, and may be unlikely to become so - they have a degree of slack as to when and how they occur Some projects, especially those with a high organizational priority, often have: - Discretionary activities (“nice-to-haves”) that do not strictly relate to the project’s established success criteria/agreed-upon scope. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

15. Project A Project A Plan Treating All Activities on “Project A” as High Priority Essentially Makes This Plan Project A Project A Plan Like this… Critical Path Activity Non-Critical Path Nice-to-Have Activity Color Key Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

16. Project A Project A Plan So What? Critical Path Activity Non-Critical Path Nice-to-Have Activity Color Key Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Funding nice-to-have activities as well as non-critical path activities far in advance of when they are needed may: - Consume resources that could be applied to other assets. - Reduce the NPV of the asset. - Cause rework if other activities dictate a change in scope and activities have to be repeated.

17. Unintended Result Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment While this Methodology does Ensure that the High Priority Projects get Lots of Resources, it can become a Contributor to Productivity gaps in your Pipeline… Rather than creating a continuous stream of valued assets, macro-level prioritization may over-invest in some assets and slowly kill others by under-investing (not fueling the critical path) as well as lost investment opportunities.

20. Examples of Different Ways to Take a More Granular Look at the Portfolio

22. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Comparing Value Drivers Across Portfolio Delay Acceleration Without understanding the sensitivity of this particular Value Driver, the organization might fund the lower priority assets in a manner that does not avoid major losses of value due to delays (i.e. Project D), and it may miss opportunities to increase asset value via acceleration (Projects C & F) - 10 Projected Value Difference ($MM) For a 3 Month Timing Change + 50 High Priority Med Priority Low Priority + 10 + 5 + 75 + 5 - 10 - 50 - 10 - 10 Project A Project B Project C Project D Project E Project F + 5 - 5

23. We can treat opportunities to address risk in a similar manner. Options to “buy-down” risk can be assigned values and compared against other investment opportunities. Let’s look at an example of how this can be accomplished. Building in Quantitative Value Approximations for Risk Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

24. Case Example: Assume you are responsible for increasing portfolio value and ensuring the portfolio assets hit key corporate goals. In this setting “value” is determined by risk-adjusting the present-value of assets. Thus, a project with present value of $200MM and a 75% probability of success (POS) has a “value” in your portfolio of $150MM. In this example, the 75% POS is attained from the probability of technical success (PTS) of four activities leading up to a major go/no-go decision-point. Driving Value Through Risk Management Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

25. Next Project Phase 95% 95% 95% 90% Go? Y N Case Example: continued How can we increase value of the asset AND give a greater chance of meeting that next stage gate as soon as possible ? Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Assigning Value to Risk Management Rework * (.95 x .95 x .95 x.90 = .77) . Assumption: A successful test result is required at each step before proceeding. This plan has approximately a 75% chance* of getting the asset through the next stage-gate.

26. Answer: Because we need a successful result at each step prior to moving on we will run a parallel test - in this case we select the final step - in order to increase the POS* and boost asset value. 95% 95% 95% 90% Go? 90% Y N This plan gives us about an 85% POS (+10%). Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Assigning Value to Risk Management Next Project Phase * Assumes that the product being tested is able to do what we expect it to do. The probability of having at least 1 statistically significant result in step four of this plan will be 99% and the overall probability is (.95 x .95 x .95 x .99 = .85). Rework Duplicate Test Added Case Example: continued

27. If the present value of the asset is $200MM, then the difference in the two plans can be represented to be the difference in risk-adjusted value: Current Plan: 75% POS x $200M = $150MM Value Optional Plan: 85% POS x $200M = $170MM Value … .versus the cost of the parallel testing. Assigning Value to Risk Management OK, but is an 10% improvement in POS worth it? Case Example: continued Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

28. Therefore, spending an extra $1MM increases the risk adjusted value of the asset by $20MM. Is this better or worse than other investment options? We can create a semi-quantitative factor in order to have a comparison against other investment opportunities we have in our portfolio. Assigning Value to Risk Management Assume the extra testing costs $1MM. Case Example: continued Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

29. We can compare this type of value factor against other investment options in the portfolio to help us get the biggest “bang-for-the-buck” from our resources. Assigning Value to Risk Management Our example has a “Risk Productivity Value” of 20 (20:1) Case Example: continued 30 25 20 15 10 5 0 RPV 0 3 6 9 12 15 18 21 24 Time Horizon (Months) Portfolio View of Risk Productivity Value (RPV) vs. Time Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment This is only one method to objectively compare the value for managing risk and adding value within and across assets. If you were focused on increasing straight $$$ rather than a ratio you’d modify the approach because some low cost options might have high RPVs but yield a low total return (for example: Would you rather have a 1000% return on a $10,000 investment or a 100% return on $50MM?)

30. Portfolio productivity is measured many ways – in this example if getting to the next stage gate was a key corporate goal you could add more certainty (10%) by spending this extra $1MM (75% vs. 85%). Sometimes (especially when it comes to corporate goals) the more reasons you can come up with to build a higher POS on an asset to target key milestones the more the disciplines of project and portfolio management may be seen to add value as contributors to organizational success. Assigning Value to Risk Management Adding Certainty to Goals Case Example: Conclusion Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

32. Defining the “Value of Portfolio Management” After Getting Past Basic Prioritization Processes Organizations Can Derive More from Portfolio Management Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Optimizing Portfolio Value Hitting Key Milestones More Reliably Managing Portfolio Budget Strictly While Allowing Flexibility at the Individual Asset Level Providing a Smarter Method to Investment Allocation Improving Success Rates of Assets & Reducing Attrition Improve Alignment Across Organization’s Stakeholders Optimizing Resource Allocation

33. Examples of Exploring Value Opportunities Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

34. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Understanding Value Changes Versus Just Tracking Loss Gain 100 90 80 70 60 50 40 30 20 10 0 10 20 30 40 50 60 70 80 90 100 Change in Asset Value (ePV%): Dec 10’ – Dec ‘11 Project A Project B Project C Project D Project E Project F Project H Project I Project j Project G

35. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Tracking Versus Understanding Value Changes Exploring the Drivers of Value Loss for Project D Value Loss (%) 100 90 80 70 60 50 40 30 20 10 0 Project D Announcement of Competitor’s Product Rejection by Regulators Forecast Overage Acceleration of Timing by 6 months -70% -15% +15% Loss Gain By exploring the reasons for the projected loss of value we may be able to respond with solutions to mitigate the situation.

36. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment 500 450 400 350 300 250 200 150 100 50 0 Negative Adjustments to Present Value Driven by “Regulatory Risk” ($MM) Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 8 Project 9 Project 10 Project 7 Exploring Value Opportunities Areas of Potential Value Gains in a Single Risk Type

37. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Understanding Portfolio Value Trends Exploring Areas of Value Gains Regulatory Risk In this example the asset’s value is shown as expected present value (ePV). By exploring the discounts driving a reduction in value we can have conversations about where to focus effort to mitigate risk/restore value. ePV $800MM Total Change = PV $1200MM Risk Adjustment - $400MM - $350MM - $50MM Technical Risk

38. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Understanding Value Drivers Exploring Trends to Raise Awareness of Behaviors In this example the portfolio is showing a consistent decline in value driven by delays to the Value Driver “Timing”. If there is not an obvious reason for this (e.g. plant shutdown), could it indicate an organizational tendency to be overly aggressive in its timing estimates? 200 150 100 50 0 50 100 150 200 Loss (-$MM) Gain (+$MM) Adjustments to Expected Present Value (ePV) Driven by Delays Time Point Dec 2010 – Dec 2011

39. Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment Understanding Value Opportunities Value: ePV ($MM) 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 Project A Project B Project C Project D Project E Mapping the key product characteristics which drive commercial value for the base, optimistic and pessimistic product profiles at future launch. Optimistic Product Profile Pessimistic Product Profile (Base Profile is Where They Both Meet) Color Key

40. Summary In Managing a Product Pipeline it is Ideal to: 1. Provide “Adequate” Support to All Portfolio Assets. Likewise, Assets that are not Valued Should be Eliminated Intentionally. 2. Fuel both Long and Short Term Productivity. 3. Preserve the Peaks of Productivity & Eliminate the Valleys, While Managing Overall Risk. 4. Understand the Drivers of Value for Assets. 5. Have the Ability to Target Investment at a More Detailed Level vs. an All-or-Nothing Approach.

41. Conclusion Portfolio Management can make a major contribution to building value in organizations whether they are large or small. As the discipline matures beyond basic multi-project tracking and prioritization: - create techniques to extend utility of risk mgmt. - raise awareness of how value can be created or lost based upon how investment decisions are made - whether intentionally or due to a lack of understanding of key value drivers. - underscore value of project mgmt as a trusted source of critical data for decision-making.

42. The End Thank You! David Townson Ph.D, PMP [email_address] I welcome you to connect with me on LinkedIn Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment