While all companies forecast the financial impact of their new product development investments, not all realize that the specific metrics that are used to rank and select projects heavily influence the performance of portfolios, possibly towards an unintended outcome. This webinar explores typical project and portfolio valuation metrics with respect to what these metrics specifically indicate, and the decision-making behaviors they drive. Given that the most successful portfolios are guided by a focused innovation strategy, which metrics should your organization be using to measure and maximize investment performance? During this session you will learn: How to choose the right financial metrics to drive your innovation strategy Understand the unintended consequences of picking the wrong financial metrics How financial metrics drive different decision-making behavior. View the webinar in its entirety at: http://budurl.com/ld4g

1. Financial Metrics to Drive
Strategic Portfolio Performance
Innovation Management Consultant
Sopheon
Mike Tulaney

2. Modern Practice
• Most companies forecast the financial impact of their innovation investments
• Metrics used to prioritize investments influence portfolio performance
• Possibly to an unintended outcome
We Will Explore
• Classic project and portfolio prioritization metrics
• What these metrics specifically indicate
• Decision-making behaviors they drive
Given that the most successful portfolios are guided by a focused innovation
strategy, which metrics should your organization be using to prioritize and
measure investment performance?
Are you asking the right questions?
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3. 3 Steps
1. Translate corporate strategy into innovation portfolios and objectives
2. Identify appropriate financial metrics to FORECAST, PRIORITIZE and MEASURE
3. Augment financial forecasts with strategic qualifiers
Identifying the right metrics to drive performance
Big Assumption
Investments prioritized by an appropriate metric will DELIVER on that metric!
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4. 1. Translate corporate strategy into innovation
portfolios and objectives
Enterprise
Innovation Strategy: Balanced
Primary Objective: +1B Revenue from New Products over 3 years
Business Unit: Industrial
Innovation Strategy: Fast Follower
Financial Objective: +500M Revenue
Portfolio A
Innovation Strategy: Fast
Follower
Prioritization Metric: Stabilized
Rev
- Project A1
- Project A2
- Project A3
- Project A4
- Project A5
- Project A6
- Project A7
- Project A8
- Project A9
Business Unit: Home Goods
Innovation Strategy: Balanced
Financial Objective: Keep GM > 50%
Portfolio B
Innovation Strategy: Niche Defender
Prioritization Metric: Gross Margin
- Project B1
- Project B2
- Project B3
- Project B4
- Project B5
Portfolio D
Innovation Strategy: Core Research and Development
Prioritization Metric: Target Application (NON-FINANCIAL)
- Project D1
- Project D2
- Project D3
Business Unit: Electronics
Innovation Strategy: First to Market
Financial Objective: ROI > 10
Portfolio C
Innovation Strategy: First to Market
Prioritization Metric: NPV
- Project C1
- Project C2
- Project C3
- Project C4
- Project C5
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5. Specific portfolio definition allows for:
• Balancing of risk across the enterprise
• Reinforcement of strategic direction
Financial objectives for each portfolio should be:
• Defined in similar terms as individual investment opportunities (projects)
• Forecastable and measureable
Identifying a portfolio-specific Prioritization Metric DOES NOT limit the ability to
roll up common metrics across the enterprise
1. Translate corporate strategy into innovation
portfolios and objectives
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6. To what degree does your company translate innovation strategy to guide
investment prioritization?
1. No strategy/objectives + No prioritization metrics
2. Enterprise strategy/objectives + No prioritization metrics
3. Portfolio strategy/objectives + Ad hoc prioritization metrics
4. Portfolio strategy/objectives + Standard prioritization metrics
5. Portfolio strategy/objectives + Specific prioritization metrics
Poll Question
6

7. 2. Identify appropriate financial metrics to forecast,
prioritize and measure
Select classic financial metrics
• Net Present Value (NPV)
• Return on Investment (ROI)
• Stabilized Annual Revenue
• Gross Margin
• How it’s calculated
• What it indicates
• Behaviors that prioritizing by this metric may drive
• Potential unintended consequences
Other classic financial metrics
• Internal Rate of Return (IRR)
• Payback Period
• First-Year Revenue
• Incrementality
• Market Share
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8. 8
CALCULATION
• Rt = net cash flow for a period (typically a year)
• i = discount rate
• t = period
INDICATION
• The economic benefit to an investor over the life of an investment
• Positive NPV suggests a profit (an investment should be made, financially speaking)
• Negative NPV suggests a loss (an investment should not be made)
• Useful for comparing Dissimilar-sized investments (size of the prize is obvious)
BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE
• Priority may be given to larger investments (assuming larger payback)
• Priority may be given to investments which payback earlier (effect of discount rate)
• Priority may be given to investments with longer lifespans (assuming positive cash flows post dev
and unless a standard timeframe is applied)
POTENTIAL UNINTENDED CONSEQUENCES
• Negative NPV investments may be ignored, without consideration to strategic fit
• Projected cash flows are increasingly error prone, which is not obvious when comparing single
numbers, leading to potentially poor information to base a decision on
Net Present Value (NPV)

9. 9
CALCULATION
ROI = Gain (Loss) from Investment – Cost of Investment
Cost of Investment
INDICATION
• The efficiency of an investment as compared to that of other competing investments
• Higher ROI suggests a better investment than a lower ROI
• Negative ROI suggests a loss
• Useful for comparing similar-sized investments (size of the prize is not obvious)
BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE
•Priority may be given to investments with low costs
•Priority may be given to investments which have a longer time in the market
POTENTIAL UNINTENDED CONSEQUENCES
• Comparisons between investments may be misleading without standardized timeframe
• Efficient investments don’t necessarily suggest strategic investments
• Overall economic value to the company is not maximized if the entire budget is not used
Return on Investment (ROI)

10. 10
CALCULATION
Revenue = Product Sales – Returns - Discounts
INDICATION
• Annual contribution of cash from an earlier investment
• Stabilized revenue assumes low fluctuation and market viability
BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE
•Priority may be given to large investments with large sales potential
•Priority may be given to seemingly stable investments over disruptive investments
POTENTIAL CONSEQUENCES
•Assumption of market viability in future years may not be warranted
•No consideration of the investment cost to achieve revenue
•Investments may be made in multiple products which may compete for the same expected revenue
(e.g. not considered for cannibalization/ incrementality)
Stabilized Annual Revenue
Time
Annual Revenue
Stable Market Period
Stabilized Annual Revenue

11. 11
CALCULATION
Gross Margin = Revenue – Cost of Goods Sold *100
Revenue
INDICATION
• Efficiency of converting raw materials into cash
• Does not consider upfront investment cost, only operating costs
• Close approximation to “profitability”
BEHAVIORS THAT PRIORITIZING BY THIS METRIC MAY DRIVE
•Priority may be given to incremental line extensions with well-defined value chains and known
market conditions
POTENTIAL CONSEQUENCES
•Investment in disruptive or nascent products may be reduced because of low efficiency value chain
(cost of inputs, introductory pricing)
Gross Margin

12. First to Market
- Net Present Value
- Return on Investment
- First Year Revenue
- Payback Period
Appropriate prioritization metrics by strategy
Fast Follower
- Net Present Value
- Return on Investment
- Stabilized Annual Revenue
- Market Share
Niche Defender
- Stabilized Annual Revenue
- Market Share
- Gross Margin
- Incrementality
Reactive (No Strategy)
- Gross Margin
- Return on Investment
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13. Do you believe your company uses the most appropriate metrics to drive the
right prioritization behavior?
1. We don’t use metrics to prioritize investments
2. We use standard metrics without intent to drive prioritization behavior
3. We use standard metrics intended to drive a standard behavior
4. We use specific metrics but they don’t drive intended prioritization behavior
5. We use specific metrics which drive intended prioritization behavior
Poll Question
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14. 3. Augment financial forecasts with strategic qualifiers
• Financial forecasts are estimates, not truth
• Many unknowns in technology and market development
• Prior market performance does not suggest future market performance
Why then did we spend 30 minutes talking about financial metrics?
• Easily understood and communicated
• Easily compared and ranked
• Easily aggregated and reported
• Provide foundation for deeper “investigation”
1 Cooper, Robert G., Scott Edgett, and Elko Kleinschmidt, Portfolio Management for New Products
“Financial models, in spite of their apparent rigor and
theoretical soundness, fare the worst of all as portfolio tools.”1
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15. 3. Augment financial forecasts with strategic qualifiers
Classic strategic qualifiers
• Categorical Buckets (Business Unit, Market, Application, Region, Brand)
• Execution Risk
• Market Risk
• Planning Horizon
• Launch Window
• Technical Readiness Level
Unlike financial metrics, strategic qualifiers are typically:
• Not historically-based forecasts or wild guesses
• Stable over the lifecycle of a project (obvious exceptions: TRL and Risk)
• Representative of input from more of the value chain
• Standardized across an enterprise for simple aggregation and reporting
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16. 3. Augment financial forecasts with strategic qualifiers
No-Go
Go
Go
No-Go
Go
Go
Go
Go
No-Go
Risk-Adjusted -
Stabilized
Annual Revenue
Brand-A Brand-B Brand-C
target
Gap
This portfolio of investment opportunities is first broken into 3 Categorical Buckets
(Brand), each with their own targets, after which investments are prioritized with
respect to Risk-Adjusted, Stabilized Annual Revenue, thus aligning investment with
strategic targets
Funds/Targets
potentially
diverted from
other portfolios
to close this
revenue gap
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17. Conclusion
• Innovation strategy can be translated and driven through the use of
appropriate financial metrics
• Specific metrics can be used to drive specific behaviors and resulting
performance
• Strategic qualifiers should be applied to foundational financial metrics to best
capture the real value of investment opportunities
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18. Questions?

19. Thank you
© Copyright Sopheon plc. All rights reserved worldwide.
michael.tulaney@sopheon.com
Michael Tulaney