Part 1 of 3
While R&D yields the seeds for hundreds of potentially revolutionary projects, it is an unavoidable fact of reality that companies face constraints on their resources, and only a select few ‘seeds’ actually receive the funding and manpower to take them all the way to the market.
The need to plan for resource allocation
Companies face a dilemma in deciding how best to allocate their resources. Allocating funds and manpower to ‘wrong’ ideas, projects or products that eventually fail leads to what is often considered wastage. On the other hand, not allocating resources to the ‘right’ ones can lead to even greater (albeit often ignored) opportunity costs; these become apparent if rival companies develop the products and subsequently earn large, recurring revenue streams from them (1).
Allocating insufficient resources to projects leads to other problems. The first is over-commitment, which is allocating too few resources to a specific project (and hence having overcommitted resources), which risks a compromise between a delay in the time to market and the quality of the finished product, each with their accompanying costs. Then there is over-allocation, which is allocating a resource to too many projects (and hence spreading the resource too thin), which jeopardizes the results of the portfolio and renders all the painstaking calculations on Net Present Value even more uncertain and perhaps downright inaccurate.
It follows that having a planned approach and sound decision bases for allocating limited resources is critical for any company that intends to manage its portfolio effectively. Being able to allocate the right amount of resources to the right ideas, projects and products is, without saying, the dream of the stressed Innovation Manager.
A hard nut to crack
What stands in the way of the manager and his portfolio decisions?
Firstly, a myriad of variables – including short-term cash-flow, time-to-market, long-term revenue streams and risk versus reward – make it complex to decide what to allocate resources on. Choosing the ‘right’ innovations to fund requires a careful consideration of these factors and many more.
Secondly, the inter-dependencies between projects make it difficult for managers to kill off projects, even when projects are obviously not meeting the mark financially or strategically. Choosing not to continue funding for one project could have adverse effects for another or even several others.
Thirdly, and arguably the most importantly, human factors come into play. Decisions get hard when points of contention arise; choosing to allocate resources on one project instead of another could have implications on the morale and engagement of the rejected party, especially if the reasons behind this decision were not communicated subsequently. Then again, from the decision-maker’s point of view, innate biases and emotional factors sometimes cloud decision-making.
The issue of Resource Allocation is one hard nut to crack.
Food for thought
- In your company, how do you approach this issue of resource allocation? How can this be improved?
- Are project interdependencies and human factors addressed in some way or ignored in the approach?
(1) For an in-depth discussion on this issue of ‘innovation economics’, refer to the last 6 slides in the presentation of KTH Professor Mats Magnusson.
/Joachim Cronquist, Senior Partner and Brandon Leong, Analyst