| | |

What’s it worth? 3 new powerful concepts of innovation value

ByIAadmin
To make good decisions on the fate of an innovation project, you need to be able to measure it’s potential value. But how do you define “value” and how do you deal with the inherent uncertainty innovation brings? Three recent papers by Robert Cooper – the creator of the Stage-Gate® process – give great insights and practical advice to help you get it right.

What this article is about

In this article, I’ll give you an overview of the three new papers that could inspire you to think differently about the value created by your innovation projects. I won’t go into detail, but I do encourage you to check out the original papers, links to which you can find in the further reading section below [1, 2, 3].

Good project decisions need good estimates of project value

This is an important topic because it’s all about portfolio management. Choosing the right projects to start or stop. To make good decisions about any project, you need to understand the potential value they will create compared to other projects in your portfolio.
The better you are at defining and estimating project value, the better you’ll be at making the right decisions. These papers by Robert Cooper and colleagues have moved both of these aspects forward. To understand how they move the debate forward, let’s look at the way companies generally measure project value today.

Many companies currently only use financial measures to define project value

Companies have been assessing project value for years. And for years, most companies have used financial measures as a the main (or only) gauge of project value. Examples include Net Present Value (NPV), sales, profit, profit margin, contribution, contribution margin and Return on Investment (ROI).
To take into account the uncertainty around innovation, these metrics can be risk adjusted in various ways. For example, you can apply a percentage to the full potential value depending on the progress of the project. The percentage starts low for projects that are still an idea and rises as the project progresses and the team gains confidence in delivering.

The pros and cons of only measuring financial value

The advantage of this approach is you can easily compare different projects because everything is translated into common financial terms.
But only using financial metrics has a couple of important drawbacks:
For some projects, the financial value is difficult to determine and any figures can be wildly inaccurate or even non-existent. Such projects can struggle to get approved due to the lack of a robust financial case.
Only considering financial value does not capture other kinds of value delivered by a project. What about the strategic importance? What about the social impact?
On top of that, if you apply risk adjustment factors to financial measures, you need to be able to accurately estimate the probability of success too!

Moving to a richer definition of value

The three papers presented by Robert Cooper & colleagues offer new approaches to defining and estimating project value. In the first one, you’ll find an alternative approach to calculating financial value called the Expected Commercial Value (ECV). In the second, the authors discuss another value concept called the Productivity Index (PI). This paper also introduces the use of a Value-Based Scorecard (VBS) for measuring more aspects of project value. The third paper combines ideas from the first two and dives deeper into how to set up and use a VBS approach to assess project value that includes both financial and non-financial metrics.
Importantly, all three papers don’t just discuss abstract ideas, they have solid, practical advice and tips on how to implement the concepts in your company.
Let’s dig a little deeper into what the key concepts are and how they can help you.

Concept 1: Expected Commercial Value (ECV)

This is an interesting alternative to NPV which evolves as the project progresses. As Cooper writes, “The ECV uses a decision-tree to map out the Go/No Go decisions in an NP [New Product] project, their outcomes, and the economic consequences of each outcome, with probabilities of outcomes occurring built in.”
The project team estimates the ECV at each stage of the project using estimated probabilities for technical and commercial success combined with projected costs and anticipated NPV.
ECV is a concept that Robert Cooper and others have been working on for several years. The weak point in this approach has been the need to accurately estimate the probability of technical and commercial success. The breakthrough is that for the first time, this 2023 paper collates years of research to provide estimates of these factors in two easy-to-use tables.
This starts to make the ECV concept something you can really start to work with.

Concept 2: Productivity Index (PI)

To paraphrase Cooper et. al., the PI measures the gain in value for the additional effort needed to deliver the project. For example the PI can be calculated taking the project NPV and dividing it by the remaining project costs.
It evolves throughout the life of the project and should increase dramatically in the later stages as the work needed to finish the project reduces and the value delivered (hopefully) remains high.
Its power lies in the fact that it can be used in portfolio management to rank projects on a dynamic “return on investment” basis. What’s more, the concept is flexible – you can define your own “value” and “cost” indicators to use in the PI calculation. For example, you could replace NPV by ECV and you can focus your Productivity Index on specific areas of your business. If your projects are constrained by the number of available R&D people, you could define your PI as “ECV per person-day of R&D work needed to complete the project”.

What about non-financial value?

So far in this article, I’ve focussed on financial indicators of value, albeit with some smart modifications to make them more dynamic.
Now let’s discuss non-financial metrics and how using a Value-Based Scorecard (VBS) can help measure more than simply money.
This brings us to the concepts in the third paper.

Measuring non-financial value metrics

Non-financial measures of value include:
how the project advances the company strategy
its impact on sustainability
the customer experience it delivers
the company’s ability to successfully deliver the project.
Almost by definition, these factors will be more qualitative than quantitative and therefore not easy to measure.
So, including non-financial measures of value presents two major challenges:
Project value moves from being one-dimensional (only financial) to multi-dimensional (financial + strategy + sustainability + …).
You need a method of measuring the non-financial metrics
Value-Based Scorecards help you overcome these challenges.

Concept 3: the Value-Based Scorecard (VBS)

The authors of the third paper provide a methodology for building and using a VBS to measure more than just financial value. In their example, they define overall value as based on 3 main factors:
Strategy and mission
Is the project important to the business’ Strategy and its Mission?
Reward
What is the financial reward versus the Risk?
Will we win?
What is the likelihood of commercial success?
They break each factor down into sub-factors which they score from 0 to 10. Some of these sub-factors are financial, but most are not. Then they go into detail about how to build your own VBS, including how to:
use calibrated statements to define the end points and centre point of each sub-factor scale
define weightings for each sub-factor
mathematically combine all weighted scores to give an overall “value” score
…and much more practical advice.
Then, they discuss how to USE your VBS to drive good decision making about project portfolios. They give examples of how to use a quick VBS approach for screening project ideas. They also discuss when NOT to use a VBS approach.
There’s too much information to go into here, but I found the paper both useful and inspirational. It made a lot of sense to me, based on my 30-year experience in innovation. This paper really is a mine of practical information and tips for anyone who wants to build and use their own VBS approach.

How these concepts can help you

If you’re serious about maximising the value of your innovation portfolio and you’re still thinking purely in terms of basic financial value, you should take a look at these articles. Consider taking some of the concepts on board as they will enrich your view of what “value” is and this will, in turn, enhance your decision making. Particularly if you adopt a Value-Based Scorecard approach.
You don’t have to copy the approaches presented in these papers. I believe there’s even more value in using the concepts to build it your own VBS approach, using your own customised metrics.
You don’t have to do it all at once either. Feel free to start small, test and refine to develop something that makes sense for your company.

Summing it up…

The three papers published by Robert Cooper and co-authors can make your project decision making more powerful, insightful and relevant.
The three concepts in the papers – Expected Commercial Value, Productivity Index and Value-Based Scorecards – are clearly explained and complemented by helpful, practical advice on how to use them in the real world.
These concepts significantly move forward innovation portfolio management and these published papers give you a great opportunity to access and use the latest thinking on the topic.
Whether you dive right in an adopt all three or move more slowly, you should dig into these concepts while they are still relatively new. I’m convinced they will become the norm for innovation portfolio decision-making in the near future and you could be ahead of the curve!
Graphic showing the Six Dimensions Framework

Mastering project value is key to delivering your innovation programme

Being clear about the potential value of your innovation projects and being able to take appropriate portfolio decisions on that basis are central to delivering your innovation programme.
This article covers topics that are parts of the Strategic Fit, Processes and Performance dimensions of the Six Dimensions Framework for successful innovation.
Find out more about the Six Dimensions Framework here.

Have a question or comment?

Contact me

Further reading

1. Expected Commercial Value for New-Product Project Valuation When High Uncertainty Exists. IEEE Engineering Management Review, Volume: 51, Issue: 2, June 2023, https://ieeexplore.ieee.org/document/10103160
2. Dynamic Portfolio Management for New Product Development. RESEARCH-TECHNOLOGY MANAGEMENT VOLUME 66, 2023 – ISSUE 3, https://www.tandfonline.com/doi/epdf/10.1080/08956308.2023.2183004?needAccess=true&role=button
Also available on: http://www.bobcooper.ca/images/files/articles/0/Dynamic_Portfolio_Management_for_New_Product_Development_RTM_2023.pdf
3. Value-Based Strategy-Reward-Win Portfolio Management for New Products. IEEE ENGINEERING MANAGEMENT REVIEW, VOL. 51, NO. 1, FIRST QUARTER, MARCH 2023, https://ieeexplore.ieee.org/document/10078254
Also available on: http://www.bobcooper.ca/images/files/articles/0/Value-Based_Strategy-Reward-Win_Portfolio_Management_for_New_Products__Cooper__Sommer_-_EMR_2023.pdf
4. Robert Cooper’s Website (a great resource for product innovation practitioners!): http://www.bobcooper.ca/

Similar Posts