Managing Research as an Investment Portfolio: Lessons from PARC

2/16/11

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 »

Lawrence Lee is a Director of Business Development at PARC, a Xerox company. Follow @

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  • http://www.linkedin.com/in/catherineho catherineho

    I observe an interesting parallel with how donor portfolios/research are managed in nonprofit fundraising, more specifically at a classical performing arts org with a ticketing component to our business. Our system is a simplified version of PARC’s with emphases placed primarily on:

    1) Numerous nonstatic, always-evolving segments identified by cross-functional team members within our department (Asset Classes)
    2) Internal ranking systems that we establish through prospect research with attention to inclination (Target Allocation)
    3) Dollar forecasting via our development officers, based on donors’ affinities and overall research (Categorization)
    4) Our qualitative assessments through real-life interactions and observations (Evaluation)

    Just as PARC has for early-stage projects, we have a different procedure to deal with new donors, dependent on their existing level of activity with us. There’s less emphasis on hard-number scoring than may occur at PARC, but can be explained through our constant interactions with real people on a daily basis and their active participation with our organization.

  • http://www.parc.com Lawrence Lee

    Thanks Catherine for your comment – interesting parallel! I think nonprofit development is well suited for a portfolio approach. For your segments (asset classes) I am guessing that you create different segments of donors. But do you also consider other types of economic activity, including earned income activities?

    For example you could have a portfolio segment called “entrepreneurial ventures” composed of projects that are not correlated with fundraising. For a performing arts organization, these might include projects that are aimed at creating new products, such as recordings. By creating a budget allocation for this segment based on your financial goals and risk appetite, you can encourage your staff and community to brainstorm new project ideas and then prioritize the most promising ones to fit within your budget.

  • http://timkastelle.org/blog/ Tim Kastelle

    Terrific post Lawrence. Based on my research, I definitely advocate managing innovation as a portfolio too.

    One point that you touch on at the end is very important – you mention that the framework does not include early-stage exploratory projects. I think it’s essential for organisations to have some kind of method in place to ensure that these are happening too. It can be a formal tracking mechanism, or it can be something looser. But one way or another this needs to happen, since this is really the start of the pipeline.

  • http://www.parc.com Lawrence Lee

    Thanks Tim, and I absolutely agree. I think every organization needs an innovation culture and infrastructure that aligns resources, incentives, and tracking for early-stage idea exploration, not only for internal R&D but also with customers and partners in an open innovation model.

    We’re fortunate that innovation is a core part of PARC’s DNA, and because of that we have several mechanisms that support ideation and exploration at the local research-division level as I touched on briefly (some of these include for example peer review, etc.)

    For other organizations, you may need to create support systems to give employees the space to work on exploratory projects (something like Google’s 20% rule) until they get to the point where it makes sense to review them as part of the portfolio.

  • http://www.linkedin.com/in/catherineho catherineho

    Hi Lawrence, thanks for your reply. Yes, in addition to our regular donor segments, we absolutely do have specific designations for a variety of project buckets. They are too numerous and nuanced to name here, but everything related to new productions, stage settings, our technology suite, facilities, younger audience development, education programs, etc. These are our mainstay of how we attract repeat donors, based on their interests they either have revealed to us or we have discovered through research. Otherwise we wouldn’t be able to raise as much money as we do.