Managing Research as an Investment Portfolio: Lessons from PARC

2/16/11

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take time each year to reflect on how the portfolio management tool impacts decision-making. Did it result in better decisions and better outcomes? Did it deliver insights that weren’t visible before? Are there decisions that were made that would not have been made before? Too often I see companies make decisions that are either too broad or too local. Decision-making without clear context, criteria, and data is not only difficult but also vulnerable to politics and other negative influences.

Learning and Evolving

Here’s the paradox: as a commercial business, we want predictability in meeting financial goals. As an R&D center, we want to nurture and invest in breakthrough innovation—which is by definition unpredictable in how it will shape our (and our clients’) futures.

To balance these competing interests, we created a novel portfolio management approach. But I should note that the above framework does not account for our early-stage, exploratory projects; these projects are only included when they reach a level of investment that warrants inclusion within the portfolio management framework. Where do we manage these projects then? Locally, within research divisions—because that’s where PARC’s cultural norms (for technical vetting among peers, debating impact of ideas, exploring passions and intuitions, etc.) prevail. This ensures we continually and evenly invest in exploratory ideas. We’ll share lessons learned in managing the tradeoffs between possibility and reality as we continue on our journey.

Portfolio management at PARC is new, and it will evolve as our organization and the overall innovation ecosystem does. While we have borrowed, sometimes loosely, from financial portfolio management principles and adapted them to our needs here, I hope you can draw on our approach and experiences to help you understand your R&D investments more holistically.

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.