PMS_Study_2

7/23/2019 PMS_Study_2

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1.1 Performance Management for Research andDevelopment

An R&D environment poses particular challenges.

• First, in an R&D environment, performance is difficult to measure and the outcome of

R&D activities often cannot be quantified in advance. Some benefits may be

monetizable i.e., measured in units of currency such as dollars!, "hile others li#ely arenot.

• Second, the timeliness of the data is a concern because of the often long time span e.g.,

several decades! bet"een starting an R&D effort and realization of those benefits.

• $hird, in R&D there are many un#no"ns, "hich cannot be measured, as "ell as

generally higher ris#s of failure.

R&D aims to gro" capacity i.e., mental abilities! and #no"ledge. From the macroeconomic

point of vie", "hen money is moved into certain areas of research, there is historically a

secondary movement in the percentage of e%perts e.g., hD candidates! in those areas. Despite

the longstanding interest in increasing accountability of R&D programs, there are relatively fe"models that program managers can follo" to evaluate the effectiveness of R&D.

2 Practices of R&D Organizations'($R) investigated performance management practices of R&D organizations. Section *.+

portrays commercial industry practices, and Section *. describes government practices. )leven

case study e%amples are provided, including five from commercial industry and si% from

government. Additional information is available in Appendi% A.

-hat follo"s are several e%amples from commercial industry /ucent $echnologies, 0ero%,

1e"lettac#ard, and (2' detailing ne" "ays to measure and analyze performance in

companies or business units "hose sole focus is R&D.3.1.1 Lucent Technologies

/ucent $echnologies developed a decision support model called the 3alue 4reation 'odel

34'! in an attempt to better measure the operations of its Advanced $echnologies A$! 5roup6s

R&D 7perations. At the time it "as rolled out in +889, /ucent had applied the model to a

portfolio of over :;; researchdriven innovation pro<ects that required up to five years to

transition from invention to commercialization. $he pro<ects "ere investment intensive, spanned

numerous mar#et settings and "ere composed of a "ide array of differing, and often emerging,

technologies.+

$he ma<or component of the 34' is the ortfolio 3alue 'etric 3'! "hich is defined as the

ratio of the =3 of e%pected future cash flo"s resulting from the commercialization activitiesattributed to the =3 of the R&D e%pense. (n addition to the 3', a ris# calculation can also

be generated for individual pro<ects or portfolios. $he parameters for a triangular distribution

+

A triangular distribution is typically used as a sub<ective

description of a population, often in cases "hen only limited data

is available. (t is a continuous probability distribution "ith a

+

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are created from three pessimistic, realistic and optimistic! cash flo" estimates for each pro<ect.

$he resulting calculation of ris# is then displayed as a histogram pro<ected by the 34'.*

Although the 3' could be categorized as a financial metric the 34' analysis includes si%

other qualitative, nonfinancial, attributes from the follo"ing four categories>

• Strategic (nitiatives

- e.g., an internal strategic initiative that dealt "ith broadband

technology

• 'ar#et 4ategories

- e.g., the mar#et category of the investment itself, the life cycle

stage of the mar#et

• (ntellectual roperty

- e.g., category of intellectual property, the life cycle stage

• 2usiness ?nits

- e.g., business units from /ucent6s internal organizational

structure that are supported by the particular R&D pro<ect

$hese additional qualitative metrics serve to create a more "ellrounded measurement of the

investment or portfolio performance. Analysis of the qualitative data, due diligence on multiple

estimate scenarios i.e. pessimistic, realistic and optimistic!, and lin#ages of pro<ects to other #ey

initiatives and business units "ithin the company all serve to provide /ucent management "ith

much more data to base future decisions. (t also allo"s the managers "ithin /ucent6s A$ 5roup

to better defend their past "or# and to ma#e a stronger argument for "hy funding should

continue in the future.

3.1.2 Xerox

/i#e many large and mature technologybased firms, 0ero% employs a budgeting process for R&D. (ts internal process uses a #ey planning metric for the coming year, "hich it calls @R&D

intensity.@ $his metric is defined as the planned R&D investment divided by the anticipatedrevenue. $he R&D intensity metric is periodically compared to competing firms, and it is #eptrelatively constant year over year.

Similar to other large technology firms, 0ero% organizes its R&D budget into t"o main parts>

product development and research laboratories. Appro%imately ;B of the total R&D budget is

allocated to product development and managed by the business divisions. $he remaining ;B is

distributed to its research laboratories and is controlled at the corporate level.

$he annual process for determining the ne%t

year6s R&D budget coincides "ith the corporate"ide

budget activities and is tightly aligned "ith pro<ected

revenues and profits. $he specific R&D budget iscreated by categorizing those requests that fall under the scope of product development versus

research laboratories, being sure to identify the number of years anticipated for the realization

of the investments. 2ased on the current and anticipated economic environment, updated

lo"er limit minimum!, upper limit ma%imum!, and modal

most li#ely! value.

*

Xerox makes tactical cost adjustmentsand reconsiders any strategic

implications at the beginning of the next

planning cycle.

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financial targets are established for the follo"ing year and costs across the corporation are

ad<usted to meet the ne" values. ?nli#e the model at /ucent "hich ties potential R&D

investments to strategic initiatives at the outset, these cost ad<ustments at 0ero% are tacticalC any

strategic implications are reconsidered at the beginning of the ne%t planning cycle. Any

decision to increase R&D spending is usually tied to ne%t year6s anticipated revenue, "ith

revisions possible depending on shortterm affordability. $his approach implicitly assumes that

the R&D budget follo"ed revenue and profit gro"th, rather than driving it.

3.1.3 Hewlett-Packard

1e"lettac#ard is the focus of a study on

ne" product revenue and the lin# bet"een

product innovation activities and revenue

gro"th. $he study defines the process

by

"hich a company converts internal resources

e.g., labor, materials! into products, the products are consumed by its customer base, the

company earns revenue, and the revenue can then be reinvested into current operations as "ell as

future R&D for innovative and ne" product lines. $he continual investment in future productlines is a #ey activity that serves to establish a constant stream of revenue for the company even

as older product lines are phased out of production.

$hree factors are identified that drive revenue gro"th>

the fraction of revenue invested in product innovation,

ne" product revenue gain, and the behavior of revenue

over time for a particular business. ?sing a graph

called a product vintage chart, a large company6s

revenue contributions of a particular ne"product

year or vintage! fall into a regular pattern over

time, "hich enables a company to determine mathematical relationships for revenue gro"th as

a function of R&D investment and ne" product revenue gro"th. (n this "ay, senior managerscan gain clearer understanding of the interplay bet"een product innovation, R&D investment,

revenue gro"th, and profitability over time.:

3.1.4 IB

'any companies believe there is a strong correlation bet"een future revenue gro"th and internal

investments made in R&D. Some argue that R&D

should increase spending, regardless of the specific

investment. 1o"ever, there is some level of R&D

spending that "ill not yield additional revenue

1artmann, 5eorge, @lanning Eour Firm6s R&D (nvestment,@

Research $echnology 'anagement, 'arch ;;.

: atterson, 'arvin /., @From )%perience> /in#ing roduct

(nnovation to 2usiness 5ro"th,@ Gournal of roduct (nnovation

'anagement, +88.

*

At Hewlett-Packard, the continual inestment in

future product lines is a key actiity that seres to

establish a constant stream of reenue for the

company een as older product lines are phased out

A large company!s reenue contributions

of a particular new-product year "or

intage# fall into a regular pattern oer

time, which enables a company to

determine mathematical relationships for

reenue growth as a function of $%&

inestment and new product reenue

growth.

'ohn Armstrong, former (ice President of

$esearch and )echnology at *+, claims

you can spend too much on $%&.

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return. Gohn Armstrong, former 3ice resident of Research and $echnology at (2', claims @you

can spend too much on R&D.@

(n an attempt to quantify the value of its ebusiness initiatives, (2' established the Ris# and

7pportunity Assessment process to assist in selecting and prioritizing ebusiness initiatives.

-ithin this process, (2' uses the 3alue 4hain 'odeling $ool to analyze and model the value

chain of its enterprise. $his internal (2' approach has been successfully used to improve the

financial and operating performance of several of its business units.

9

$he Ris# and 7pportunity Assessment process includes the follo"ing stages>

+. 4ollection of data about the R&D initiative> (ncludes any

bac#ground information on the pro<ect as "ell as documented

assumptions. $his results in a data collection plan, definitions of

data requirements, and the actual collection of data.

. 'odeling and Analysis> A baseline model is built, defining #ey

financial and operational drivers for the initiative as "ell as

highlighting various scenarios "hich could positively or

negatively impact the success of the pro<ect.

*. Development> A costbenefit analysis is performed, potential

solutions are prioritized, and a final choice is made.

3 R&D MetricsSection provides e%ample R&D metrics used by commercial industry and government

organizations and programs.

3.1 Commercial Indstr! PracticesAs mentioned in Section *.+, a common industry practice is to categorize pro<ects as either product development or research innovation, and funding is allocated at appro%imately ;B and

;B, respectively. 1o"ever, the case e%amples sho" that many companies thin# about R&D budget allocation and spending trends in different "ays. 'etrics commonly used by commercialindustry include>

• =et resent 3alue =3!

• R7(

• $otal 4ost of 7"nership

$47!

• Discounted 4ash Flo"

• 2udget variance delivering on or belo" allocated budget!

•Huality measurements meeting specificationsIrequirements!

•

Ris#

1artmann, 5eorge, @lanning Eour Firm6s R&D (nvestment,@

Research $echnology 'anagement, 'arch ;;.

9 =assar, Ayman, @A System2ased Approach for Defining ($

7perations 3alue roposition,@ 'anagement Science and

)ngineering, 7ctober ;;.

any organiations rely on metrics to

measure $%& performance instead of

relying on the traditional use of

shortterm financial metrics alone.

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• Alignment "ith corporate strategies

• 4ost

• Schedule

• 7rganizational fle%ibility

• (ntellectual roperty factors

• 'ar#et /ifecycle factors

• Fit "ith e%isting product portfolio

• 'ar#et Share

Since R&D pro<ects are unique compared to other corporate spending pro<ects, many firms have

e%panded the list of metrics used to measure R&D performance instead of relying on the

traditional use of shortterm financial metrics alone.

3.1.1 "#ample "fficienc! Measres

For illustrative purposes, e%ample efficiency measures developed by commercial organizations

Alcoa, Do" 4hemical, (2', and rocter & 5amble are sho"n in the table belo".

Ta!le 3. "o##ercial Industr$ %xa#&le %''icienc$ easures

Agency or

7rganization)fficiency 'easure

$lcoa Returnoninvestment calculation>

FE ;;:! (mprove e%isting AR(S by converting its mainframe system into -ebbased systemdesigned by 7AR and (4 representatives in consultation "ith contractor

3ariable cost improvement

'argin impact from organic gro"th

4apital avoidance

4ost avoidance

Annual impact of these four metrics over :year period becomes numeratorC denominator is totalR&D budget

'etric is used most often to evaluate overall value of R&D program and current budget focus

At#ins ;;9!

$lcoa $ime At#ins ;;9!

$lcoa 4ost At#ins ;;9!

$lcoa 4ustomer demand At#ins ;;9!

$lcoa Ris# At#ins ;;9!

$lcoa (mpact on business At#ins ;;9!

$lcoa (mpact on customers At#ins ;;9!

$lcoa /ocation At#ins ;;9!

$lcoa (ntellectual property At#ins ;;9!$lcoa Aggregate R&D e%penditures by laboratory group or by identifiable programs and publish value

capture or Jsuccess rateK for each on annual basis At#ins ;;9!

$lcoa R7( on R&D spendingC success rate of launched products At#ins ;;9!

@)valuating Research )fficiency in the ?.S. )nvironmental

rotection Agency,@ =ational Research 4ouncil, ;;.

:

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Do%

Chemical

ublicationsC participation and leadership in scientific community collaborative research effortsC

trade associationsC (/S(1)S(C e%ternal "or#shopsC ad<unct faculty positions, <ournal or boo#

editors, professional societies! 2us ;;9!

IM R7( on Summer (nternship rogram and 5raduate Fello"ship rogram> "hat percentage return

as regular (2' research employeesL

IM J2ureaucracy 2ustersK (nitiative to reduce bureaucracy in laboratory support,

informationtechnology support, 1R processes, and business processes Menney ;;9!

IM $rac#ing of patentevaluation process Menney ;;9!IM 4ustomersatisfaction surveys for support functions to evaluate effect of service reductions

Menney ;;9!

IM 'easurement of response time and turnaround for e%ternal contracts Menney ;;9!

IM 'easurement of span of responsibility for secretarial support Menney ;;9!

Procter &

'am(le

$ime saved in product development Daston ;;9!

Procter &

'am(le

(ncreased confidence about safety Daston ;;9!

Procter &

'am(le

)%ternal relations benefits although not quantifiable! Daston ;;9!

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