David Matheson - SmartOrg, Inc.

Case Studies from Hewlett-Packard - Don Creswell

I am extremely pleased to announce that our September 27 SmartOrg Webinar will feature case studies from Hewlett-Packard.that illustrate how HP uses their unique New Business Creation (NBC) process to identify new market opportunities, develop innovative products to meet them, and achieve highly profitable growth targets.The webinar will feature Dr. Michael Menke, former Chief Portfolio Advocate and Business Strategist, Strategic Planning and Modeling at Hewlett Packard.

OVERVIEW: It is intrinsically hard to grow a $100 billion organization faster than gross domestic product. In fact, many studies have shown that nearly all large companies hit growth ceilings or points where growth stalls. So, how to keep growing or even accelerate growth? HP met this challenge through strategies that emphasized innovative product development. In this Webinar, Mike Menke will take you on the journey of two products from concept to launch, using HP's NBC process.

I hope to see you there!

Date: Thursday Sept. 27, 2007
Time: 9:00 a.m. PT.
To register: https://www.gotomeeting.com/register/385429309?Portal=www.gotowebinar.com

Inspiration at Inspire - Don Creswell

Probably no industry deals with uncertainties as challenging as those faced by the pharmaceutical industry. Very long development cycles. Huge amounts of money on the table for long periods of time.  FDA approvals. And more. Decision making in this environment, is to say the least, immensely challenging.

This is why "value-based management" i(VBM) is rapidly gaining support in pharma and biotechnology. VBM provides management with the information and tools needed to confidently select the most promising projects to support. By focusing on "True North": the economic value that projects can return and the critical uncertainties that must be managed to management and their teams gain insights that lead to faster, better decision-making. And, to higher portfolio returns.

Ward Peterson, Vice President, Discovery of Inspire Pharmaceuticals will report on the successful deployment of VBM processes and supporting software at his company, at two upcoming events sponsored by SmartOrg: a Webinar on 25 April "Enhancing Portfolio Value" and the Global Project and Portfolio Managment for Pharma conference in Philadelphia 21-22 May. Details about each of these events are on the SmartOrg web site: www.smartorg.com

At the events, Ward will describe how a VBM system helps Inspire select projects that can be expected to contribute the highest portfolio value. The system, according to Peterson, "Provides a consistent, repeatable selection process that effectively factors in the impact of risk and uncertainty on portfolio value."

Big Mistakes in Evaluation - David Matheson

Robin Karol, CEO of the PDMA once told me “By far the biggest mistake in decision making is treating an evaluation as an analysis rather than a conversation.” This view is a bit astonishing, as many analysts spend a lot of time learning about the mathematical modeling in evaluation. It is a trap I have fallen into.

My conversation with Robin brought a flashback to early in my career.  I saw myself in a boardroom finishing the presentation of what I thought was a brilliant analysis to the executives. The bottom line: closing the power plant early would save the company tons of money.  There were a few questions, easily answered from my analysis. Then one executive piped up, “I don’t know, my gut says otherwise.”

Shocked, I marshaled my wits and prepared to use the analysis to convince the skeptic. But I did not have the chance. The president politely dismissed my colleagues and I, “Thank you for your hard work. We will take it under advisement.”

As we left the boardroom, my colleague offered me these consoling words, “Don’t worry David, you did a good job. Lots of decisions get made on gut.”

These were empty words, consolation for wasted analysis.  I had made Robin’s number one mistake.

This mistake shows up in other ways as well. People treat evaluations as boxes to be checked on some process form so they can get on with the real work. People use evaluations to persuade investors by making outrageous assumptions and saying “the analysis says go!” with a straight face. People use evaluations to make points in arguments, or to negotiate a budget. In all of these cases, the evaluation is merely an analysis—a tool or a deliverable in a mathematical format.

So what?

From an analyst’s point of view, this is frustrating because it invalidates lots of hard work.  From a business point of view, this is inefficient because the hard work is essentially wasted effort for all the participants. But fundamentally, the damage is more than frustration or waste: it represents a failure to learn. In complex or unfamiliar situations, it is impossible to make good judgments uniformed by good evaluations. This failure to learn leads to poor decisions and poor performance in many organizations.

In this case, according to my analysis, failure to close the power plant could lead to catastrophic loss for the company.  Their major city the utility served was discussing dropping the company because costs were too high. Yet it seemed that the executives were not getting the message.

While these dysfunctions may seem like part of what it means to be in an organization, a root cause analysis shows it does not have to be this way.

To treat an evaluation as a conversation, you need to start with questions people actually have and craft a model to answer them, in a spirit of inquiry.  You need to provide variables that reflect people’s concerns and allow them to express themselves.  You need to use analytical results and models as a forum for learning about what matters and the best course of action.

In ongoing conversations, Robin and I shaped a list of the biggest mistakes in evaluation.  They all flow this basic insight that you must treat an evaluation as a conversation, not an analysis.  Here they are in brief:

1. PEOPLE – treating a project evaluation as an analysis rather than as a conversation. Not having the right people (or process) to have the conversation. Failure to connect the analysis to the decision making process.

2. TOOLS – Use of convenient tools that lack the power to provide real insight or drive a lasting business decision. 

3. VALUE – Failing to bring an evaluation to the bottom line prevents real discussions of business issues and tradeoffs.  Narrow view of value as NPV. Undocumented assumptions lead people to believe that a particular value metric is more comprehensive than warranted.

4. UNCERTAINTY – Critical issues covered up using assumptions rather than explicitly quantified as uncertainty.  Failure to evaluate, vet and learn about uncertainty. No understanding of the business’ ability to manage risk and uncertainty.

Fortunately for my earlier self, the power plant decision was not made in that boardroom on that day. Somehow we were able to correct for the mistakes that Robin and I later identified.

We followed up with the skeptical executive and tried to understand his gut.  After some inquiry, we realized that he had an implicit assumption:  that decommissioning costs would be lower in the future.  Other executives where concerned these costs would be high.  They were all making assumptions, and failing to see this issue as an uncertainty.

We repurposed the analysis to show that both were in some sense right in their gut: if decommissioning costs were low, then it really was better to keep the plant open; if they were high it was better to close it now.  What was at issue was the probability of high or low decommissioning costs. Both sides confessed to having little expertise in this area. By connecting the uncertainty to value, we were able to bring both sides together.

Of all the concerns, politics, debates and confusion surrounding the plant decision, the best course of action boiled down to one key thing: decommissioning costs. This alone was a huge advance in the conversation because the executive team stopped debating issues that did not matter. The tools we were using had the power to focus the discussion productively.

A quick study was commissioned and the evidence for rising decommission costs was strong. The skeptical executive himself assigned a small chance that costs would remain low, and was persuaded to close the plant.  He, and the whole executive team, had learned and now had a more informed “gut”.  The conversation had been guided effectively by the evaluation.

A couple of months later, they sent me a newspaper clipping. It featured a picture of the skeptical executive in front of the power plant. He was announcing its closure. I should really show it to Robin one day.

Limitations of Scorecards

The letter to the editor of CFO magazine, reproduced below, makes some good points about the misuse of scorecards.

Scoring Scorecards 

Have you ever noticed that the biggest advocates of the balanced business scorecard are IT companies ("Links Still Missing," Topline, January)? Data companies and accountants love all that data collection, storage, and parsing, and ignore two key facts:

1. Too many measurements often lead to conflicts, and there is no mechanism other than managerial judgment to resolve the conflicts in scorecards.
2. There are no successful scorecards that tie into value programs, because the time horizons for scorecards tend to be daily, weekly, or monthly, and value is the present value of future cash flows, hence a structural conflict in the application.

Besides these primary flaws, scorecards are almost always static, and markets and circumstances change faster than scorecards do. In fact, all of that useless data is itself an impediment to value-creating behavior, because it tends to make people try to game the system.

This is not to say measurement isn't important; it's vital, but scorecards are only a small part of the answer in operations and worse than useless in decisions about strategy.

Richard Bassett
Via E-mail

http://www.cfo.com/article.cfm/8760553?f=search.

Decision Advisor v7.1 - Terry Chinn

In our years supplying software to the value management community, we often find users in, roughly, two different camps.  In one camp, there are those who want to create a business case to evaluate a business opportunity for upper management.  In the other camp are the artisans, the analysts, the purists who want to know more about the intricacies of the key drivers to maximize the value of an opportunity.

Our recent release of Decision Advisor v7.1 has some key new features that each type of user may find interesting.  For this first 'nuts and bolts' level of analysis, you use components of the value map to describe the characteristics unique to the business opportunity.  From there, the software creates an Excel spreadsheet that displays the cash flows, revenue, cost, etc. and ultimately the NPV of the opportunity. The software will then perform a sensitivity analysis producing a tornado chart to show you the variables that most affect value. Finally, you can create "S-curves" showing the risk and potential return of your opportunity.

To some, this is the right amount of analysis. Some refinement of numbers and they are good to go.

For the other camp, we have added some features with a simple graphical user interface to answer questions like "What's it worth to spend more money on marketing?" or "If we could improve X, would we do anything different?" To answer these questions we have enhanced the software to gain insight into these questions. From the value map, you create an Influence diagram that is a fully specified probabilistic model.  From there you can use Value of Perfect Information and Control, Sensitivity to a Probability, and the Decision Tree to determine how you can maximize the value of your opportunity.  These analyses will give you insight into how value changes as a variable changes within its range of uncertainty.

At SmartOrg, one of our challenges is to provide valuable, easy to use software tools to enable business professional to evaluate complex business prospects and provide transparency into the "black box" nature of many business models. Decision Advisor v7.1 is the big step in this direction.

A Rose by Any Other Name - Don Creswell

With apologies to Bill Shakespeare (a rose by another other name) and to Gertrude Stein (a rose is a rose is a rose), I address the dual and  confusing terms Product Management and Portfolio Management (PPM). There must be a better way to differentiate management of day-to-day activities involved in PPM as opposed to higher level management activities devoted to forecasting and managing economic value produced by new and revised products, R&D projects and other business opportunities. It is obvious that successful companies must accomplish both but it is most difficult to reorient the thinking of people who are rewarded for producing results measured in terms of days, weeks and months, units of output, etc., towards thinking about the economic value that can (should) be derived from investments in research, development and other activities. I submit that we might change terminology to more clearly reflect this dual management roles. Let PPM stand for getting products/projects "out the door" on time, within budget;, meeting quality standards, and so on. What some term "operational" activities. Then, add one little letter - a "V" - to PPM, producing PPVM or Product Portfolio Value Management; making decisions based on optimizing economic return.

PPVM answers questions like, "what things SHOULD we be working on to give us the highest possible economic return for our investment of human and capital resources." Then, manage operations based on traditional metrics (accounting measures, cost, etc.) and in parallel manage economic value based on NPV that reflects the impact of risk and uncertainty. Track both measures in parallel as time unfolds, making sure that the "value meter" continues to rise. PPVM should be on the radar of all managers, not just those "upstairs."  All important stakeholders - managers and doers - should understand where the value comes from in each of their projects (products), the key value drivers, and where to place their efforts to make value creation as deep a mind set as meeting daily/weekly/monthly milestones.