Townson Pmi Portfolio Mgmt Final Version

David Townson Ph.D., [email protected]

Project Management Institute (PMI) PresentationSouthern New England Chapter: 12 December

2011

Biographical Summary for David Townson 20+ years of project and portfolio management experience. 10+ years of leading global product development teams.

Previous Worldwide Portfolio Director for a Fortune 50 healthcare company: Doubled therapeutic area productivity while managing $1BB in resources annually. Recognized subject matter expert in pharmaceutical and biotechnology portfolio management: Over a dozen conference speaking appearances.

Education includes:Bachelor of ScienceGraduate Certification: Information Technology ApplicationsMaster’s Degree: BusinessDoctorate: Applied ManagementProject Management Professional (PMP) Certification

Prepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

AGENDA1. Environmental Scan: The Setting

2. Problem Statement: Observations

3. Solutions Employed: Granular Approach

4. Examples of Exploring Value Opportunities

5. Summary/ConclusionsPrepared by David Townson http://www.linkedin.com/in/vpproductdevelopment

Environment: Organization Type

Research and Development Setting

Technology Projects with Long Development Time

Highly Regulated Industry

Many Assets in the Portfolio

Individual Asset Budgets Range: $2MM - $50MM/yr

Portfolio Resources of $1BB/year

Strict Budgetary Controls (and limited resources)


Environment: Culture

Lessons From Both Large and Small Companies.

Focus on Metrics as a Proxy for Productivity.

High Shareholder/Investor Awareness.


Timing

Quality

Cost

Technical

Regulatory

Commercial

Environment: Risk Types

&


Environment: Portfolio Management Maturity Level

Organization Possessed an Inventory to Understand the Composition of the Portfolio:

- Projects we have, and knew about it.

- Projects we have, but did not know it.

- Projects we thought we had, but didn’t.


Prioritization Process Inputs Established:

- Quantitative: - Expected Sales, NPV, eNPV, ePV, Cost,

PTRS, etc.

- Qualitative:- Link to Corporate Goals, Management’s

Favorites, Whomever Yells the Loudest, etc.



Prioritization: What to do with Results?

- Inform the Allocation of Resources.

- Inform the Allocation of Talent.

- Inform the Hierarchy of Attention by the Organization.



Project A

Project B

Project C

Project D

Project E

Project F

Project G

Project H

Project O

Project P

Project Q

Project R

Project S

Project T

Project U

Project V

Project I

Project J

Project K

Project L

Project M

Project N

Project W

Project X

Project Y

Project Z

Project AA

Project AB

Prioritization Became a Process that Merely Generated a List of Assets that got Funding - Starting at the Top and Working Towards the Bottom.

Situation: Company had Insufficient Resources to Cover all Asset Needs.

Observation


Project A

Project B

Project C

Project D

Project E

Project F

Project G

Project H

Project O

Project P

Project Q

Project R

Project S

Project T

Project U

Project V

Project I

Project J

Project K

Project L

Project M

Project N

Project W

Project X

Project Y

Project Z

Project AA

Project AB

All of the Portfolio Candidates Were Considered Valuable by the Organization.

However, Resource Allocation Via the Prioritization Process Did Not Consistently Result in Funding of the Key Value Drivers of the Lower Priority Projects. This Caused Many of These Projects to Slowly Starve, Eventually Becoming Less and Less Valued.

Problem Statement


There is nothing wrong with killing projects – but it should be done intentionally, not through neglect or poor portfolio management processes.

Project A

Problem: Prioritization at only a Macro/Project Level Creates a

“Prioritization Food Chain”

Project J

Project K

Project Z


Question

Should EVERY Activity on a Highly Ranked Project

Have Greater Priority than ANY Activity on a Lower

Ranked Project?


Answer

Of course not!Generally, Projects Have: - A defined critical path. - Activities that are “close” to, but not yet on, the critical path. - Some activities that are not close the critical path, and may be unlikely to become so - they have a degree of slack as to when and how they occur

Some projects, especially those with a high organizational priority, often have:

- Discretionary activities (“nice-to-haves”) that do not strictly relate to the project’s established success criteria/agreed-upon scope.


Project A

Project A Plan

Treating All Activities on “Project A” as High Priority Essentially Makes This Plan

Project A

Project A Plan

Like this…

Critical Path ActivityNon-Critical PathNice-to-Have Activity

Color Key


Project A

Project A Plan

So What?

Critical Path ActivityNon-Critical PathNice-to-Have Activity

Color Key


Funding nice-to-have activities as well as non-critical path activities far in advance of when they are needed may:

- Consume resources that could be applied to other assets.

- Reduce the NPV of the asset.

- Cause rework if other activities dictate a change in scope and activities have to be repeated.

Unintended Result


While this Methodology does Ensure that the High Priority Projects get Lots of Resources, it can become a Contributor to Productivity gaps in your Pipeline…

Rather than creating a continuous stream of valued assets, macro-level prioritization may over-invest in some assets and slowly kill others by under-investing (not fueling the critical path) as well as lost investment opportunities.

Project K


Response: Take a More Granular Approach to Asset Prioritization

- Determine “Must-Haves” for Project Scope vs. “Nice-to-Haves”.

Project A

Project B

Project C

Project D

Project E

Project A Plan

1. Assign resources2. Sign external contracts3. Have great kick-off meeting at Disney World4. Initiate testing

It is Important to Reconcile the Proposed Scope of Activities versus What is Required. “Scope Creep” is Common on High Priority Projects – so is “Scope Dieting” on Low Priority Projects.

Project K


Response: Take a More Granular Approach to Asset Prioritization

- Understand the Sensitivity of the Plan’s Value Drivers.

Project A

Project B

Project C

Project D

Project E

- Market Launch Date/Timing- Competition- Product Profile/Characteristics- Technical Risk- Regulatory Risk- Commercial Risk- Intellectual Property Risk

Examples of Value Drivers

Risk Types Will Impact Projects VERY Differently: For Example, One Project May Not be “Sensitive” to Delays…but for another Project it can be Costly.

Examples of Different Ways to Take a More Granular

Look at the Portfolio


Sensitivity of the Value Drivers

- Market Launch Date/Timing- Competition- Product Profile/Characteristics- Technical Risk- Regulatory Risk- Commercial Risk- Intellectual Property Risk- Sales

Delay Acceleration

EXAMPLE: What is the impact to the asset’s value for a 3 month change in time to market?

For this project the Value Driver “Timing” is more sensitive to a delay versus an acceleration.

- $25MM + 2MM

Revenue Difference


Comparing Value Drivers Across Portfolio

Delay Acceleration

Without understanding the sensitivity of this particular Value Driver, the organization might fund the lower priority assets in a manner that does not avoid major losses of value due to delays (i.e. Project D), and it may miss opportunities to increase asset value via acceleration (Projects C & F)

- 10

Projected Value Difference ($MM)For a 3 Month Timing Change

+ 50

High Priority

Med Priority

Low Priority

+ 10

+ 5

+ 75

+ 5

- 10

- 50

- 10

- 10

Project A

Project B

Project C

Project D

Project E

Project F

+ 5

- 5

We can treat opportunities to address risk in a similar manner. Options to “buy-down” risk can be assigned values and compared against other investment opportunities.

Let’s look at an example of how this can be accomplished.

Building in Quantitative Value Approximations for Risk


Case Example:

Assume you are responsible for increasing portfolio value and ensuring the portfolio assets hit key corporate goals.

In this setting “value” is determined by risk-adjusting the present-value of assets. Thus, a project with present value of $200MM and a 75% probability of success (POS) has a “value” in your portfolio of $150MM.

In this example, the 75% POS is attained from the probability of technical success (PTS) of four activities leading up to a major go/no-go decision-point.

Driving Value Through Risk Management


Next ProjectPhase

95% 95% 95% 90% Go?Y

N

Case Example: continued

How can we increase value of the asset AND give a greater chance of meeting that next stage gate as soon as possible?


Assigning Value to Risk Management

Rework

* (.95 x .95 x .95 x.90 = .77) . Assumption: A successful test result is required at each step before proceeding.

This plan has approximately a 75% chance* of getting the asset through the next stage-gate.

Answer: Because we need a successful result at each step prior to moving on we will run a parallel test - in this case we select the final step - in order to increase the POS* and boost asset value.

95% 95% 95%

90%

Go?90% Y

N

This plan gives us about an 85% POS (+10%).



Next ProjectPhase

* Assumes that the product being tested is able to do what we expect it to do. The probability of having at least 1 statistically significant result in step four of this plan will be 99% and the overall probability is (.95 x .95 x .95 x .99 = .85).

ReworkDuplicate Test Added


Mannkind Corporation

and this is how we got teh extra 10% in the last graph...How can we increase the odds?”*Probabilities assuming that the drug is doing what we hope it will do.Probability of at least 1 statistically significant study

If the present value of the asset is $200MM, then the difference in the two plans can be represented to be the difference in risk-adjusted value:

Current Plan: 75% POS x $200M = $150MM Value

Optional Plan: 85% POS x $200M = $170MM Value

….versus the cost of the parallel testing.


OK, but is an 10% improvement in POS worth it?



Therefore, spending an extra $1MM increases the risk adjusted value of the asset by $20MM. Is this better or worse than other investment options?

We can create a semi-quantitative factor in order to have a comparison against other investment opportunities we have in our portfolio.


Assume the extra testing costs $1MM.



We can compare this type of value factor against other investment options in the portfolio to help us get the biggest “bang-for-the-buck” from our resources.


Our example has a “Risk Productivity Value” of 20 (20:1)


30

25

20

15

10

5

0

RP

V

0 3 6 9 12 15 18 21 24Time Horizon (Months)

Portfolio View of Risk Productivity Value (RPV) vs. Time


This is only one method to objectively compare the value for managing risk and adding value within and across assets. If you were focused on increasing straight $$$ rather than a ratio you’d modify the approach because some low cost options might have high RPVs but yield a low total return (for example: Would you rather have a 1000% return on a $10,000 investment or a 100% return on $50MM?)

Portfolio productivity is measured many ways – in this example if getting to the next stage gate was a key corporate goal you could add more certainty (10%) by spending this extra $1MM (75% vs. 85%).

Sometimes (especially when it comes to corporate goals) the more reasons you can come up with to build a higher POS on an asset to target key milestones the more the disciplines of project and portfolio management may be seen to add value as contributors to organizational success.


Adding Certainty to Goals

Case Example: Conclusion


Value is in the Eye of the Beholder

Many Definitions


Beanie Baby

Peanut The Elephant.

$3000

- Future Revenue.

- Future Revenue Adjusted for Time, Risk, etc.

- Intellectual Property Value.

- Customized Semi-Quantitative Values: RPV, etc.

-Qualitative Measures: Serve as proxies for productivity.

Today’s definition of value may be different tomorrow!

Defining the “Value of Portfolio Management”

After Getting Past Basic Prioritization Processes Organizations Can Derive More from Portfolio

Management


Optimizing PortfolioValue

Hitting KeyMilestones More

Reliably

Managing Portfolio BudgetStrictly While Allowing Flexibility

at the Individual Asset Level

Providing a Smarter Method to Investment Allocation

Improving SuccessRates of Assets & Reducing Attrition

Improve Alignment AcrossOrganization’s Stakeholders

Optimizing Resource Allocation

Examples of Exploring Value Opportunities



Understanding Value Changes Versus Just Tracking

Loss Gain100 90 80 70 60 50 40 30 20 10 0 10 20 30 40 50 60 70 80 90 100

Change in Asset Value (ePV%): Dec 10’ – Dec ‘11

Project A

Project B

Project C

Project D

Project E

Project F

Project H

Project I

Project j

Project G


Tracking Versus Understanding Value Changes

Exploring the Drivers of Value Loss for Project DValue Loss (%)

100 90 80 70 60 50 40 30 20 10 0

Project D

Announcement of Competitor’s ProductRejection by Regulators

ForecastOverage

Acceleration of Timing by 6 months

-70

%

-15%

+1

5%

Loss

Gain

By exploring the reasons for the projected loss of value we may be able to respond with solutions to mitigate the situation.


500 450 400 350 300 250 200 150 100 50 0

Negative Adjustments to Present Value Driven by “Regulatory Risk” ($MM)

Project 1

Project 2

Project 3

Project 4

Project 5

Project 6

Project 8

Project 9

Project 10

Project 7

Exploring Value OpportunitiesAreas of Potential Value Gains in a Single Risk Type


Understanding Portfolio Value TrendsExploring Areas of Value Gains

Regulatory Risk

In this example the asset’s value is shown as expected present value (ePV).

By exploring the discounts driving a reduction in value we can have conversations about where to focus effort to mitigate risk/restore value.

ePV$800MM

TotalChange

=

PV$1200MM

Risk Adjustment- $400MM

- $350MM

- $50MMTechnical Risk


Understanding Value DriversExploring Trends to Raise Awareness of Behaviors

In this example the portfolio is showing a consistent decline in value driven by delays to the Value Driver “Timing”. If there is not an obvious reason for this (e.g. plant shutdown), could it indicate an organizational tendency to be overly aggressive in its timing estimates?

200150100 50 0 50100150200

Loss(-$MM)

Gain(+$MM)

Adjustments to Expected Present Value (ePV) Driven by DelaysTime Point Dec 2010 – Dec 2011


Understanding Value Opportunities

Value: ePV ($MM)50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800

Project A

Project B

Project C

Project D

Project E

Mapping the key product characteristics which drive commercial value for the base, optimistic and pessimistic product profiles at future launch.

Optimistic Product Profile

Pessimistic Product Profile

(Base Profile is Where They Both Meet)

Color Key

Summary

In Managing a Product Pipeline it is Ideal to:

1. Provide “Adequate” Support to All Portfolio Assets. Likewise, Assets that are not Valued Should be Eliminated Intentionally.

2. Fuel both Long and Short Term Productivity.

3. Preserve the Peaks of Productivity & Eliminate the Valleys, While Managing Overall Risk.

4. Understand the Drivers of Value for Assets.

5. Have the Ability to Target Investment at a More Detailed Level vs. an All-or-Nothing Approach.

Conclusion

Portfolio Management can make a major contribution to building value in organizations whether they are large or small.

As the discipline matures beyond basic multi-project tracking and prioritization:

- create techniques to extend utility of risk mgmt.

- raise awareness of how value can be created or lost based upon how investment decisions are made - whether intentionally or due to a lack of understanding of key value drivers.

- underscore value of project mgmt as a trusted source of critical data for decision-making.

The End

Thank You!David Townson Ph.D, PMP

[email protected]

I welcome you to connect with me on LinkedIn


Townson Pmi Portfolio Mgmt Final Version

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