The Spider Team Reference Library Final Draft for Edinburgh, reprinted with authors’ permission Copyright © 2004 By Edward J. Fern, MS, PMP And Vladimir Liberzon, PMP
SUCCESSFUL INNOVATION MANAGEMENT SYSTEM OR SERENDIPITY? Edward J. Fern, MS, PMP, Time-to-Profit Inc. Vladimir Liberzon, PMP, Spider Management Technologies Introduction To be successful in innovation management, any company shall establish the corporate culture that motivates project teams to maximize potential business benefits of the project success and minimize potential negative impacts of the project failure. Managing innovation is inherently risky. Many uncertainties about future events arise from both internal and external sources. Active Risk Management (ARM) recognizes that these uncertainties can be either threats or opportunities, ARM endeavors to position the enterprise so that it enjoys most of the benefits of opportunity while avoiding most of the pain associated with threats. This new culture has several differences compared with the traditional approach:
Traditional Time to market Every project must succeed Failed projects = failed project managers corporate learning Risk avoidance
Innovative Time to profit Most projects should fail Failed projects = valuable
Active
Risk
Management
Time To Market vs. Time To Profit The fad called “time to market” has long ago been thoroughly discredited as a means of managing risk. Too many companies have won too many time to market races only to discover that somebody else did the job better, though perhaps more slowly, and is enjoying market dominance. An example is Sony’s Betamax video recorder. Sony was first to market with a technologically superior product. In its haste to get a product out the door, however, Sony overlooked several “other things.” JVC Corporation, proceeding more deliberately, was late to market with a technically inferior product, VHS. JVC, however, identified the “other things” and became the sole purveyor of video recording technology to the mass market for a quarter of a century. It was no accident. JVC accepted difficult challenges, including competition with a competitor already in the market, in order to deliver a set of values it believed would be
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more appealing to customers. Taking extra time and money to incorporate sources of value in innovative projects has two major benefits: 1. It provides additional reasons for customers to prefer your product over those of competitors. 2. It ensures that competitors will have greater difficulty in exploiting your omissions. In traditional product development, success is measured in terms of time and cost to market.
TIME TO MARKET In this model, the project manager can trade cost and time in order to achieve the predetermined results. If changes to those results are dictated by changes in the environment, they may either be ignored or the project may be rethought. The future is not deterministic. Stacy1 repeatedly points out, “The relationship between cause and effect gets lost in the details of what actually happens.” On our dynamic planet, reality changes from moment to moment. Markets change. Goals change. The measure of success changes. In this dynamic world, a more adequate measure of project success is time to profit. This measure incorporates both the investment period and the recovery period.
TIME TO PROFIT This model opens several new doors to the project manager. Adding additional sources of value to the scope of the project may extend the time/cost to market or implementation of internal, cost saving projects. It may, however, shorten the time to profit/savings. In the time to market approach project managers manage project cost, in time to profit approach project cash flow is the management object. Research done by the Product Development and Management Association in North America indicates that only one development effort in eight is successful in achieving its return on investment objectives. This means that project management should be considered as successful not only if the project reaches its target but also if the unsuccessful project is terminated as soon as its potential failure becomes probable. The time to market project management approach looks ahead only to the product delivery date. Project managers are not expected to be concerned with product profits. In the time to profit project management model, the project management team is motivated to achieve business goals. Project scope includes future sales and the project management team will monitor the likelihood that project
1
Stacy, Ralph D., Managing the Unknowable: Strategic Boundaries between Order and Chaos in Organizations, 1992, Jossey-Bass Publishers, San Francisco, California
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business results will be achieved. The traditional project management approach suggests treating each project life cycle phase as an independent project. Project outcomes are considered only at the time phases are initiated. In the time to profit approach project managers consider the probability of reaching project business goals continuously, because all project management decisions must be based on future profit criteria. Figure 1 illustrates the two decision models. In illustration A, project completion is achieved quickly and at low cost. Product profitability, however, is late. In illustration B, costs are higher and product delivery is later. Nevertheless, investment in the project is recovered more quickly. Profits needed to sustain the organization and fund future projects are produced at an earlier date.
A B
Figure 1.
Faced with such a prospect, few executives would deny the extra time and money to implement the second strategy. Unfortunately, the prospect is in the future and, therefore, uncertain. Instead, the urge to get quickly to the point of decision, the market launch, often proves more attractive. If we are to incorporate additional value in our innovations, where might we look for these supplements? Published in 1999,2 the Ten-P Paradigm™ provides a comprehensive enumeration of the sources of value that have been used to enhance the customer appeal of innovative products. The ten sources are summarized in words that start with P: Positioning - how to identify and distinguish the new product from those of competitors Planning - how to organize the product development activity into development stages Partnering - how to identify and enlist the support of strategic partners who can make the new offering attractive to the market 2
Fern, Edward J., Time-to-Profit Project Management: A Primer for Project Managers in New Product Development, 1999, Time-to-Profit, Mission Viejo, California
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Producing - how to identify and secure capabilities that will be required to successfully penetrate the market Processing - how to identify and develop ancillary processes required to achieve success in the market Packaging - how to determine the extent and nature of bundling that is appropriate for the market Pricing - how to determine a pricing structure that will maximize revenues and profits Promoting - how to identify and implement an appropriate means of making the market aware of the new offerings Placing - how to identify, enlist, and train appropriate marketing channels Pleasing - how to identify and support customer service requirements of the targeted segment and delight the customers Because each of these elements contribute much to the marketability of new products, to the efficiency of the product development activity, and to the profits earned by new products, they are the Ten-P Paradigm™ sources of value. Many of these elements have customarily been the sole responsibility of the marketing product manager. The time to profit race requires a new approach. Product managers and project managers must now collaborate. Both must bring their best efforts, attention, and disciplined approach, to every available source of value. Traditionally, the project manager has played a role in the producing element and that role has often been confined to the product development segment of that element. The recent popularity of Design for Manufacturing (DFM) techniques has extended the project manager’s scope into the production segment by integrating design and production. Delivering a quality product on time and within budget is no longer enough. Delivering a design that can be efficiently manufactured isn’t enough. Because the finished product must generate revenues in excess of its development and manufacturing costs, the project manager must be concerned with all of the elements that contribute to marketing success. Winning the time to profit race means perfecting all of the activities that are the new product. The role of the project manager in ensuring integration and coordination can shave crucial days, weeks, and months from the total elapsed time required to bring a new offering to the market. Conclusions The time to profit approach to project management means that 1) Project managers are responsible for future business results not just for the product delivery, 2) Project scope includes everything necessary for achieving business success (Ten-P), 3) The project success criterion is achieving the business goal (profit at the certain point in time) and all decisions are taken to improve the probability of meeting this project target, even if it is necessary to spend more money to accelerate achieving project goals if the probable profit exceeds additional spending, 4) Project management is considered successful if project execution is terminated as soon as the probability of the project business success becomes too low, 5) Corporate learning is considered to be the project success that is more valuable that achieving formal project goals, 6) Project team motivation, and incentives, consider success in not only achieving planned results, but also in proper and timely project termination when it is appropriate.
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Active Risk Management Innovations mean a lot of uncertainties and risks. Companies that are involved in innovation management choose to accept a high level of risk. They are successful not because they get lucky, but because they actively manage the risks they take. Threats, opportunities, and uncertainty are assessed and thoroughly planned. Our research showed that projects that were planned based on the most probable estimates of the project parameters had low probability of being on time and within budget. In our experiments with real projects the probabilities of achieving project performance goals based on most probable estimates never exceeded 38% and usually were even lower. So it is natural that most projects are late and over budget because they were poorly planned. Active Risk Management (ARM) deals with future uncertainties that may be either opportunities or threats. To use ARM effectively, project managers ask a series of questions, first focused on opportunities and then focused on threats. The ARM questions are:
For Opportunities
What events might occur that would speed our time to profit? Can we do anything to increase the likelihood of their occurrence? What would we do if they did occur? Will anything alert us that they are about to occur? What must we do before they occur if we are to take advantage of them?
For Threats
What events might occur that would delay our time to profit? Can we do anything to decrease the likelihood of them occurring? What would we do if they did occur? Will anything warn us that they are about to occur? What must we do before they occur if we are to avoid the damage?
It is usual for most future events to be treated as both opportunities and threats. For example, in a new product development project, it is always possible for a competitor to get a product to market before us, particularly if we are using the time to profit strategy. While this event brings the threat that our competitor will gather many of the potential customers before we have a competing product ready to sell, it also offers substantial opportunity. We can now study what our competitor has done in detail, identify its strengths and weaknesses, and modify our own project plan to ensure we have strengths to match our competitor while also ensuring that we are strong where our competitor is weak. ARM helps to establish right business goals and risk management strategy. It should be practiced through the project life using powerful tools and techniques that measure project performance and show
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if the results that were planned have good chances to be successfully achieved, if it is time to consider project performance termination because its success is unlikely, if corrective actions are necessary because our chances for future project success have negative trends.
Success Driven Project Management Risks and uncertainties should be simulated with the purpose of obtaining probability curves for schedule, cost, profit and other project parameters. It may be done using Monte Carlo simulation or three scenarios approach. Monte Carlo simulation is feasible only for small projects because it produces reliable estimates only if the number of trials is very large – too large if the number of project activities exceeds several hundreds. We will describe the three scenarios approach and methodology of Success Driven Project Management (SDPM) that is widely used in Russia and Ukraine. This methodology is supported by the Russian project management software called Spider Project. Project Planning The project planner obtains three estimates (optimistic, most probable and pessimistic) for all initial project data. These data are used to calculate optimistic, most probable and pessimistic project parameters (schedule, budget, profit). The most reliable and pessimistic project versions may contain additional activities and costs and employ other resources and different calendars than the optimistic schedule due to the risk events that were identified and included in the corresponding project scenarios. In these versions, resources may have different cost and productivity, activities may have different work volumes and duration, financing and supply schedules may be different, etc. All project data including the Work Breakdown Structure can be different. All project constraints should be taken into consideration when the three project versions are scheduled. These schedules show project boundaries (optimistic and pessimistic duration, budget, profit estimates) and are used for the reconstruction of the project probability curves for time, cost, profit, material requirements and other project parameters that are important for the project success. These curves are created taking into account the total number of project activities and the number of activities on the resource critical path. Our research for small projects (with hundreds of project activities) where the results of this approximation were compared with the results of Monte Carlo simulation showed that the difference in the estimates of the results probabilities did not exceed 5%. The next step is to establish rational project goals and conditions under which the project will be terminated. These goals include project profit (or loss) at specified points in time. These goals should be achievable with a reasonable probability of success (7080% are the usual figures). Along with the project goals the minimum acceptable values should be established for the same parameters. If the probability of meeting these values becomes less than some specified level (50% as an example) then the project manager should request project termination. In this way, the organization avoids pouring additional resources into projects that have poor chances of success.
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We recommend using the optimistic project version for setting task objectives for project implementers. The calculated contingency reserves should be retained by the project management team and allocated in response to events that occur or fail to occur as the project plan is executed.
Project Control During project execution, the project management team that practices Active Risk Management controls project risks, regularly reconsiders all three project scenarios, and recalculates current probabilities to meet project goals. Both the real progress of the project, and the new information developed within and external to project activities, must be considered. Failure to exceed worst case expectations is an indication that the plan is flawed, either as a result of poor estimating, or failure to recognize or correctly estimate the impact of risk events. An example of success probability trends for a sample project profit after 200 work days is shown in Figure 2. You may notice that though achievement of target profit is not yet obvious, the project team may be optimistic about achievement of the minimal profit that was defined for this project. It is natural that, in successful projects, the probability of meeting targets will move toward 100% gradually and achieve it before the point at which the project is finished.
Figure 2. Success Probability Trends for Sample Project
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Success probability trends are the best performance management indicators that take into account project performance results, network logic and risk estimations. They may change due to: Performance results Scope changes Cost changes Risk changes Resource changes Even if everything is fine with project performance but new threat events are identified and included in the pessimistic project scenario, then success probability trends may show that corrective action is necessary. Similarly, new opportunity events may arise that should be incorporated in both the project plan and the probability analysis. Negative success probability trends show that project contingency reserves are spent faster than expected and corrective actions are necessary, positive trends show that the project management team has increased the chances of meeting project targets. Project managers are encouraged to resolve uncertainties as quickly as possible because this can increase success probabilities in spite of activity finish delays and cost overruns. Postponing problem resolution leads to negative trends in success probabilities. This attribute of success probability trends is especially useful in new product development project management. Conclusions Active risk management and success driven project management technique add the following rules to the list in time to profit project management 7) Establish risk thresholds indicating that the project should be terminated, 8) Continuously monitor and re-estimate project risks, calculate project success and failure probability trends, 9) Take corrective actions if success probability trends are negative, consider project termination if the probability of project failure became high.
Summary The combination of time to profit project management, active risk management and success driven project management, provides the following benefits:
Avoids continued investment in projects that will ultimately fail to provide a return of investment. Incorporates sources of value that will increase the profitability of the product of projects. Supports realistic decision making for project initiation and continuation. Increases profits/savings to sustain the organization and fund future projects.
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