Managing Research as an Investment Portfolio: Lessons from PARC
As part of its transformation from an internal research center to a commercial business, PARC has needed to innovate its business practices, as well as its research and technology. How do we balance the seemingly conflicting goals of long-term research vs. short-term profits, of creating breakthrough innovations vs. providing client services, of diversifying research into many markets vs. developing critical mass in just a few?
While PARC has been successful financially, it hasn’t been easy balancing multiple goals in the innovation landscape today—one in which we create business opportunities through technology and services for multiple clients, ranging from global enterprises and government agencies to startups.
One way to handle this balance is by managing research as a portfolio of investments. Together with PARC’s VP of Global Business Development, Tamara St. Claire, I researched, planned, and executed an approach that would work for PARC—and that I believe other technology organizations can adapt to suit their business needs.
The Goals: Holistic View, Sustainable Growth
Unlike portfolio management approaches used in many technology companies, PARC’s Portfolio Management Tool is not based on creating a balanced mix of technologies, products, or markets. Instead, we based our approach on financial portfolio principles such as risk/return and asset allocation. Why? Because it’s difficult to compare relative merits when you have work in so many diverse technical areas.
Furthermore, our portfolio management approach was intended to: 1) provide a holistic view and clear criteria for evaluating PARC’s investments, elevating them above traditional organizational divisions; 2) increase visibility, accountability, and alignment of group and individual decision-making given overall organizational goals; and 3) enable a sustainable, growth-oriented business.
Here’s how we did it.
Step 1: Define the Asset Classes
In financial portfolio asset allocation, you want the right mix of assets to suit your goals. For PARC, our assets are our research staff, and our investments are projects and research programs (a cluster of related projects).
We created four different “asset classes,” or portfolio segments, for categorizing research programs and projects into similar risk/return profiles. We represented this as a 2×2 matrix that distinguishes stages of maturity for technology and market understanding:
Core segment - Programs and projects where we are well known for having deep expertise, and that generate current year revenue with a healthy profit margin.
- RISK PROFILE: Relatively little technical and market risk, some execution risk.
- IMPLICATIONS: Focus program management in this segment on increasing sales, margin, and efficiencies in execution.
Scouting segment - Programs and projects in which we are probing adjacent markets to see if we can adapt our existing technologies.
- RISK PROFILE: High execution risk, some market risk, some technical risk.
- IMPLICATIONS: Conduct market probes faster (“Get to no quickly”)—involving both business development and research investment—to understand whether there are positive opportunities on a risk-adjusted basis.
Next-Gen segment – programs and projects in which we attempt to meet the future breakthrough technology needs of markets based on deep technical understanding and interactions with our clients.
- RISK PROFILE: More technical risk, less market and execution risk.
- IMPLICATIONS: Since it’s often difficult to introduce disruptive technologies to market incumbents, try to introduce next-gen technologies in adjacent markets first to demonstrate their value.
Options segment – programs and projects where we are inventing and developing new technologies to address new, high-potential market opportunities.
- RISK PROFILE: High technical and execution risk.
- IMPLICATIONS: Since risks are high, PARC manages investments in this segment using a phased options approach (much like Real Options), in which we gradually increase investment as we learn new information about the return scenarios and the different types of risks.
Step 2: Propose a Target Allocation Across Portfolio Segments
After you define your asset classes, you have to decide the relative weighting among them based on your financial goals. We didn’t find much public information to benchmark our targets, and most other innovation portfolio management approaches are more … Next Page »