Managing Research as an Investment Portfolio: Lessons from PARC

2/16/11

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descriptive than prescriptive. But if you don’t give yourself a target (even if based on incomplete information), then it’s difficult to know whether you’re making any progress.

Make sure to re-balance regularly as your financial goals change over time. In our case, as Core programs become more efficient and generate more profits that we can reinvest in other segments, we increase the weights in other segments—enabling us to develop a pipeline of future Core programs.

Step 3: Categorize Programs and Projects into Segments

Categorizing programs and projects into the appropriate segment is the most difficult part of the process because the boundaries can be fuzzy. For example, there’s a gray area when adapting an existing technology for a new market—is it new or existing technology? While it’s important to have clear definitions, you also have to make judgment calls based on the intent behind the return/risk categorizations.

Since the asset classes or segments correspond to varying degrees of technical, market, and execution risk, you want to define “existing” relative to your company. PARC defined:

  • Existing technology as one where we have a prototype suitable for engagement with commercial customers—otherwise, it’s still considered new technology;
  • Existing market as one where we have at least one commercial reference client (which greatly increases the probability of future commercial success)—otherwise, it’s a new market for us, even if the market is already out there.

Step 4: Evaluate Programs and Projects Within Each Segment

The goal of evaluating and ranking programs and projects is to provide insightful data to foster productive management discussion—NOT to do management by spreadsheet.

To promote the intended behavior and avoid unintended consequences from gaming the system, each company will need to think carefully about the specific factors, weights, and definitions used for scoring. You also don’t want to make the process of scoring programs and projects too cumbersome if you don’t have teams of analysts and instead require your line managers to do the scoring.

For us, I created a two-part scoring system with a weighted return score that is then discounted by a risk score. We used ranges of values to normalize all scores between 0 and 3, instead of asking for absolute values. I suggest you do the same, because in any model, a critical mistake is to get a false sense of precision from data calculated from assumptions.

Return factors. After considering many different factors, I ended up with: 1) Projected profit with five-year outlook, 2) Time to revenue, 3) Value of IP, and 4) Business model. Additional factors could be profit margin and alignment with strategy.

Risk factors. To reduce scoring variance, I developed a questionnaire for each type of risk and based on the responses, calculated a score between 0 and 1 for each, corresponding roughly to its probability of success (so a 0.9 technical risk score means 90 percent probability of the project achieving its technical goals):

  • Technical risk focused on our ability to achieve the technical breakthroughs or maturity level that was necessary for commercialization.
  • Market risk focused on size and growth characteristics of the market, PARC’s degree of competitive advantage, and whether we had just one-shot or multiple opportunities.
  • Execution risk focused on our understanding of the market, value chain, and partner landscape, and whether we had gotten market validation yet.

We then multiply the different risk scores to arrive at an overall risk score. In our system, a low score means a high risk. We treat each type of risk as independent, because … 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.