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Financial Metrics to Drive Strategic Portfolio Performance

While all companies forecast the financial impact of their new product development investments, not all realize that the specific metrics that are used to rank and select projects heavily influence the performance of portfolios, possibly towards an unintended outcome.

This webinar explores typical project and portfolio valuation metrics with respect to what these metrics specifically indicate, and the decision-making behaviors they drive.

Given that the most successful portfolios are guided by a focused innovation strategy, which metrics should your organization be using to measure and maximize investment performance?

During this session you will learn:

How to choose the right financial metrics to drive your innovation strategy
Understand the unintended consequences of picking the wrong financial metrics
How financial metrics drive different decision-making behavior.


View the webinar in its entirety at: http://budurl.com/ld4g

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Financial Metrics to Drive Strategic Portfolio Performance

  1. 1. Financial Metrics to Drive Strategic Portfolio Performance Innovation Management Consultant Sopheon Mike Tulaney
  2. 2. Modern Practice • Most companies forecast the financial impact of their innovation investments • Metrics used to prioritize investments influence portfolio performance • Possibly to an unintended outcome We Will Explore • Classic project and portfolio prioritization metrics • What these metrics specifically indicate • Decision-making behaviors they drive Given that the most successful portfolios are guided by a focused innovation strategy, which metrics should your organization be using to prioritize and measure investment performance? Are you asking the right questions? 2
  3. 3. 3 Steps 1. Translate corporate strategy into innovation portfolios and objectives 2. Identify appropriate financial metrics to FORECAST, PRIORITIZE and MEASURE 3. Augment financial forecasts with strategic qualifiers Identifying the right metrics to drive performance Big Assumption Investments prioritized by an appropriate metric will DELIVER on that metric! 3
  4. 4. 1. Translate corporate strategy into innovation portfolios and objectives Enterprise Innovation Strategy: Balanced Primary Objective: +1B Revenue from New Products over 3 years Business Unit: Industrial Innovation Strategy: Fast Follower Financial Objective: +500M Revenue Portfolio A Innovation Strategy: Fast Follower Prioritization Metric: Stabilized Rev - Project A1 - Project A2 - Project A3 - Project A4 - Project A5 - Project A6 - Project A7 - Project A8 - Project A9 Business Unit: Home Goods Innovation Strategy: Balanced Financial Objective: Keep GM > 50% Portfolio B Innovation Strategy: Niche Defender Prioritization Metric: Gross Margin - Project B1 - Project B2 - Project B3 - Project B4 - Project B5 Portfolio D Innovation Strategy: Core Research and Development Prioritization Metric: Target Application (NON-FINANCIAL) - Project D1 - Project D2 - Project D3 Business Unit: Electronics Innovation Strategy: First to Market Financial Objective: ROI > 10 Portfolio C Innovation Strategy: First to Market Prioritization Metric: NPV - Project C1 - Project C2 - Project C3 - Project C4 - Project C5 4
  5. 5. Specific portfolio definition allows for: • Balancing of risk across the enterprise • Reinforcement of strategic direction Financial objectives for each portfolio should be: • Defined in similar terms as individual investment opportunities (projects) • Forecastable and measureable Identifying a portfolio-specific Prioritization Metric DOES NOT limit the ability to roll up common metrics across the enterprise 1. Translate corporate strategy into innovation portfolios and objectives 5
  6. 6. To what degree does your company translate innovation strategy to guide investment prioritization? 1. No strategy/objectives + No prioritization metrics 2. Enterprise strategy/objectives + No prioritization metrics 3. Portfolio strategy/objectives + Ad hoc prioritization metrics 4. Portfolio strategy/objectives + Standard prioritization metrics 5. Portfolio strategy/objectives + Specific prioritization metrics Poll Question 6
  7. 7. 2. Identify appropriate financial metrics to forecast, prioritize and measure Select classic financial metrics • Net Present Value (NPV) • Return on Investment (ROI) • Stabilized Annual Revenue • Gross Margin • How it’s calculated • What it indicates • Behaviors that prioritizing by this metric may drive • Potential unintended consequences Other classic financial metrics • Internal Rate of Return (IRR) • Payback Period • First-Year Revenue • Incrementality • Market Share 7
  8. 8. 8 CALCULATION • Rt = net cash flow for a period (typically a year) • i = discount rate • t = period INDICATION • The economic benefit to an investor over the life of an investment • Positive NPV suggests a profit (an investment should be made, financially speaking) • Negative NPV suggests a loss (an investment should not be made) • Useful for comparing Dissimilar-sized investments (size of the prize is obvious) BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE • Priority may be given to larger investments (assuming larger payback) • Priority may be given to investments which payback earlier (effect of discount rate) • Priority may be given to investments with longer lifespans (assuming positive cash flows post dev and unless a standard timeframe is applied) POTENTIAL UNINTENDED CONSEQUENCES • Negative NPV investments may be ignored, without consideration to strategic fit • Projected cash flows are increasingly error prone, which is not obvious when comparing single numbers, leading to potentially poor information to base a decision on Net Present Value (NPV)
  9. 9. 9 CALCULATION ROI = Gain (Loss) from Investment – Cost of Investment Cost of Investment INDICATION • The efficiency of an investment as compared to that of other competing investments • Higher ROI suggests a better investment than a lower ROI • Negative ROI suggests a loss • Useful for comparing similar-sized investments (size of the prize is not obvious) BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE •Priority may be given to investments with low costs •Priority may be given to investments which have a longer time in the market POTENTIAL UNINTENDED CONSEQUENCES • Comparisons between investments may be misleading without standardized timeframe • Efficient investments don’t necessarily suggest strategic investments • Overall economic value to the company is not maximized if the entire budget is not used Return on Investment (ROI)
  10. 10. 10 CALCULATION Revenue = Product Sales – Returns - Discounts INDICATION • Annual contribution of cash from an earlier investment • Stabilized revenue assumes low fluctuation and market viability BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE •Priority may be given to large investments with large sales potential •Priority may be given to seemingly stable investments over disruptive investments POTENTIAL CONSEQUENCES •Assumption of market viability in future years may not be warranted •No consideration of the investment cost to achieve revenue •Investments may be made in multiple products which may compete for the same expected revenue (e.g. not considered for cannibalization/ incrementality) Stabilized Annual Revenue Time Annual Revenue Stable Market Period Stabilized Annual Revenue
  11. 11. 11 CALCULATION Gross Margin = Revenue – Cost of Goods Sold *100 Revenue INDICATION • Efficiency of converting raw materials into cash • Does not consider upfront investment cost, only operating costs • Close approximation to “profitability” BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE •Priority may be given to incremental line extensions with well-defined value chains and known market conditions POTENTIAL CONSEQUENCES •Investment in disruptive or nascent products may be reduced because of low efficiency value chain (cost of inputs, introductory pricing) Gross Margin
  12. 12. First to Market - Net Present Value - Return on Investment - First Year Revenue - Payback Period Appropriate prioritization metrics by strategy Fast Follower - Net Present Value - Return on Investment - Stabilized Annual Revenue - Market Share Niche Defender - Stabilized Annual Revenue - Market Share - Gross Margin - Incrementality Reactive (No Strategy) - Gross Margin - Return on Investment 12
  13. 13. Do you believe your company uses the most appropriate metrics to drive the right prioritization behavior? 1. We don’t use metrics to prioritize investments 2. We use standard metrics without intent to drive prioritization behavior 3. We use standard metrics intended to drive a standard behavior 4. We use specific metrics but they don’t drive intended prioritization behavior 5. We use specific metrics which drive intended prioritization behavior Poll Question 13
  14. 14. 3. Augment financial forecasts with strategic qualifiers • Financial forecasts are estimates, not truth • Many unknowns in technology and market development • Prior market performance does not suggest future market performance Why then did we spend 30 minutes talking about financial metrics? • Easily understood and communicated • Easily compared and ranked • Easily aggregated and reported • Provide foundation for deeper “investigation” 1 Cooper, Robert G., Scott Edgett, and Elko Kleinschmidt, Portfolio Management for New Products “Financial models, in spite of their apparent rigor and theoretical soundness, fare the worst of all as portfolio tools.”1 14
  15. 15. 3. Augment financial forecasts with strategic qualifiers Classic strategic qualifiers • Categorical Buckets (Business Unit, Market, Application, Region, Brand) • Execution Risk • Market Risk • Planning Horizon • Launch Window • Technical Readiness Level Unlike financial metrics, strategic qualifiers are typically: • Not historically-based forecasts or wild guesses • Stable over the lifecycle of a project (obvious exceptions: TRL and Risk) • Representative of input from more of the value chain • Standardized across an enterprise for simple aggregation and reporting 15
  16. 16. 3. Augment financial forecasts with strategic qualifiers No-Go Go Go No-Go Go Go Go Go No-Go Risk-Adjusted - Stabilized Annual Revenue Brand-A Brand-B Brand-C target Gap This portfolio of investment opportunities is first broken into 3 Categorical Buckets (Brand), each with their own targets, after which investments are prioritized with respect to Risk-Adjusted, Stabilized Annual Revenue, thus aligning investment with strategic targets Funds/Targets potentially diverted from other portfolios to close this revenue gap 16
  17. 17. Conclusion • Innovation strategy can be translated and driven through the use of appropriate financial metrics • Specific metrics can be used to drive specific behaviors and resulting performance • Strategic qualifiers should be applied to foundational financial metrics to best capture the real value of investment opportunities 17
  18. 18. Questions?
  19. 19. Thank you © Copyright Sopheon plc. All rights reserved worldwide. michael.tulaney@sopheon.com Michael Tulaney
  • CRoss81

    Nov. 11, 2019
  • RalphMueller5

    Jan. 17, 2019
  • DrSharimanAlwani

    Aug. 20, 2018
  • DRMOHAMMEDNASEER

    Jan. 17, 2018
  • antozervudacki

    Mar. 6, 2017

While all companies forecast the financial impact of their new product development investments, not all realize that the specific metrics that are used to rank and select projects heavily influence the performance of portfolios, possibly towards an unintended outcome. This webinar explores typical project and portfolio valuation metrics with respect to what these metrics specifically indicate, and the decision-making behaviors they drive. Given that the most successful portfolios are guided by a focused innovation strategy, which metrics should your organization be using to measure and maximize investment performance? During this session you will learn: How to choose the right financial metrics to drive your innovation strategy Understand the unintended consequences of picking the wrong financial metrics How financial metrics drive different decision-making behavior. View the webinar in its entirety at: http://budurl.com/ld4g

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