The Secrets to Managing an Innovation Portfolio

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Categories: Portfolio Management

Managing a portfolio of innovation projects is very different from traditional portfolio management. Innovation projects hold more uncertainty. It is usually difficult, if not impossible, to provide good estimates and a detailed project plan. And while most organizations care about managing the development of marketable new ideas, few really know how to foster them for business results. 

The first step to managing a portfolio is determining the role and ROI of innovation in a business environment. Innovation, in essence, has to bring tangible results and a competitive advantage to the organization by generating new revenue, reducing costs, improving asset management and increasing reputation.

To achieve these goals, innovation portfolios aim for steady innovation flux, or a constant pipeline of new ideas, for a sustainable competitive advantage. That requires balancing short- and long-term benefits and costs of the following:

  • Incremental innovation: Developing new products, processes or services 
  • Basis innovation: Researching low-maturity technology
  • Radical innovation: Supporting efforts to create breakthrough innovation

For example, it would be shortsighted to generate only incremental innovation; in the long-term, there will be no breakthroughs. However, incremental innovation brings short-term revenue, which is important to keep the company going. Basis and radical innovation generate new products, but require significant time and effort. A good portfolio balance mixes incremental, basis and radical innovation projects in a way that best fits the organization.

Another important aspect of managing an innovation portfolio is selecting the right ideas. Selection is particularly crucial to innovation projects because of the commitment to a long-term "technology roadmap" (i.e., if you choose to invest in Blu-ray products, that means you have a Blu-ray portfolio). Investing in the wrong technology can put an organization in financial jeopardy. Complexity is also greater because you're creating something new and without precedent. So the challenge is choosing projects that support the organization's long-term objectives while still considering these aspects. In summary, innovation portfolios need different selection and prioritization criteria. Here are suggested criteria, ranked from most to least important:

  • Strategic alignment
  • Potential to generate innovation 
  • Level of risk
  • Technological maturity
  • Use of resources
  • Degree of complexity
  • Level of interdependence with other projects

The criteria above are mainly qualitative, so you should also use an enterprise-wide scale for grading each project's potential to generate innovation:

  • High: There are many potential ways and areas to apply this innovation
  • Medium: There is a specific use for this innovation; we are somewhat sure about market demand
  • Low: We are not sure how it will work

After selecting your innovation projects by balancing the above criteria, tailor key performance indicators. Here again, KPIs will differ from a more traditional portfolio. Some I have used in the past include:

  • Ratio between long- and short-term projects
  • Ratio between high- and low-risk projects
  • Number of new technologies created
  • Ratio between technologies applied to new products and technologies created
  • Number of patents created
  • Revenue generated by patents
  • Number of projects successfully transferred to market
  • Percentage of projects commercially successful
  • Return on product development expense
  • Number of new customers from new products or services
  • Market share growth from new products and services

Does your organization have research, development and innovation projects? Do you use an innovation portfolio? How are they managed? 

Share your thoughts below along with your Twitter handle, and Voices on Project Management will publish the best response as a blog post.

Posted by Mario Trentim on: August 06, 2013 11:51 AM | Permalink

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Interesting piece - and perspective.

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