Picking The Winners

Companies now are applying information technology to the management side of innovation.

One of the biggest challenges of forward-looking enterprises is deciding where to apply their R&D resources. Most companies have far more ideas and market opportunities than they can possibly afford to see through to commercialization. So how do they decide which ideas merit precious funds? Following the example of Wall Street, Boeing Phantom Works, the Kent, Wash., research arm of Boeing Co., is now applying financial option calculations to assist in research-investment decisions. Real-options portfolio evaluations, facilitated by risk-analysis software, allow Boeing to keep more research irons in the fire. "Applying real-options theory is a breakthrough technique in [quantifying] the probable market value of R&D projects that not only have a great deal of risk and uncertainty in the future but have investment option points as well," says Michael Johnson, director, modeling and simulation, at Boeing Phantom Works. The use of software to assess risk in project portfolio management represents another leveraging of information technology in R&D. A number of other IT applications are now beginning not only to support but also to add value to the management process of innovation. In fact, 3M Co., Du Pont & Co., and Dow Chemical Co., to name a few, have groups dedicated to the IT support of R&D. Other companies have business-process groups deploying information technology to aid the innovation process. In addition to portfolio management, information technology is finding a home in new-product-commercialization processes, intellectual property management and exchange, competitive intelligence, evaluation of new business opportunities, and determining customer needs. "It is clear that because of the uncertainty of R&D, the IT support challenges have not been mastered in the same way as design, or supply chain, or accounting," says Marco Iansiti, professor, technology and operations management, Harvard Business School (HBS), Cambridge, Mass. "Still, IT is doing a better job of addressing the R&D processes that are less uncertain (document management, for instance), and is making progress supporting processes that are uncertain." Today, when product life cycles are short and competition to bring innovative products to market is fierce, savvy application of information technology to the business of R&D could mean the difference between success or failure. Portfolio Proficiency According to Iansiti, 90% of the professionals who attend HBS programs on leading product development identify resource management as the principal problem in portfolio optimization. "The core of the IT portfolio management solution is the ability to hook up strategic directions to real time and projected resource constraints of the organization," he says. "The theoretical portfolio is almost never completed. Good resource management will actually help get the portfolio done, and in a large engineering organization, this can only be achieved with some assistance from IT." Information technology can play key roles in three stages of portfolio management: at the strategic stage when the mix of projects is determined and prioritized to optimize return, minimize cost, and minimize risk; when individual projects are being moved from idea generation to commercialization and beyond; and as management determines optimal deployment of resources and manpower across an entire portfolio of projects. At the strategic stage, risk analysis software helps the portfolio manager better understand the potential risk/reward of R&D investments. Most create spreadsheet models of time, cost, future value, marketplace factors, strategic fit, and internal competencies to assess and rank investments. Complementing and working inside spreadsheet applications, risk analysis software allows the user to put probability distribution models in the spreadsheet cells, rather than single numbers or minimums/maximums alone. The software does thousands of "what ifs," reflecting the many combinations of probabilities, and yields a distribution of possible outcomes and their likelihood. "People don't want to know if they will make $100 million or not on a new R&D investment; they want to know what is the probability that they will make $100 million," says Sam McLafferty, president of Palisade Corp., Newfield, N.Y., maker of @Risk software. "Upper management needs a more thorough analysis with the ability to factor risk into their decisions." Boeing Phantom Works applies these concepts using real-options pricing models with Crystal Ball decision analysis software from Decisioneering Inc., Denver. "It allows us to compare one project with another in terms of risk, payoff, and other options and contingencies," says Scott Mathews, modeling analyst. The result is an analysis for senior managers that allows them to look at the interplay of risk and uncertainty versus probability in managing a portfolio of R&D opportunities." Also employing risk-assessment software in product development is Endo Pharmaceuticals Inc., Chadds Ford, Pa., which uses the tools to balance risk/reward among generic drugs, line extensions, and new chemical entities. And IBM Corp. applies decision-analysis tools worldwide to evaluate the attractiveness of new market opportunities. Setting The Stage Projects that meet strategic requirements of a company need to be coaxed from idea to the marketplace. Vital to that process is the deployment of individuals and resources. In a large organization the challenge is to gain visibility; hundreds of projects may be sharing limited resources and equipment. Management needs a real-time view of what the organization is capable of doing at any point in time. The field of project management offers a number of software tools to address this challenge, from individual project scheduling applications to stage-gate facilitation, Web site/project portal combinations, and enterprise-wide solutions. Texas Instruments Inc., like many companies, moves products through a stage-gate system where projects are evaluated at critical junctures. Products must pass through "gates" of critical review to gain the next round of funding. To help automate the process, boost visibility, and facilitate management of multiple projects across the organization, the company has turned to IDweb, an enterprise-wide resource allocation management system from Integrated Development Enterprise Inc., Concord, Mass. The software helps organize milestones, project assignments, and overall scheduling of manpower and equipment resources. For management reporting, projects can be sliced and diced by metrics of value for resource allocation decisions, such as risk or project value. Additionally, "what if" scenarios can be run to see how redeployment of resources may affect project outcomes. At Sun Microsystems Inc., IT-facilitated project management reduces the training burden when product developers change assignments. Individual projects have their own Web sites that include templates for each of seven development phases a product moves through. These include documents for requesting approval for funding and for measuring quality and performance. Mesa Vista, a product development Web portal from Mesa Systems Guild Inc., Warwick, R.I., provides multiproject access for this system that supports teams organized from software, hardware, and chip groups at Sun's workgroup-server manufacturing facility in Burlington, Mass. Sun keeps a project scoreboard, updated regularly, to communicate data such as progress against goals, budget, and quality metrics, says Chris Chiodo, program manager. Searchable in a central database, the scoreboard allows product-development teams to "see many programs at once and identify trends . . . . If we are having trouble in one of the phases we can pinpoint shortcomings in the business model itself. Knowing that the underlying data that revealed the trend is consistent . . . makes this a very powerful tool." Another capability of the Sun Microsystems system is workflow analysis. If a project violates some preset condition for schedule, cost, or quality goals, for instance, management is automatically notified by e-mail that reapproval is needed within a certain time frame. Employees working on related projects will be e-mailed of the delays. Mining For Information One of the challenges facing those in research and new-business development is how to mine pertinent information from documents pertaining to past work, patents, industry/market analyses, and news of current events. Information technology can ease the burden with text-mining tools that link documents by citation or that process the English language mathematically. Huge databases of information can be presented graphically to facilitate research and analysis. Going beyond search engines that collect information regardless of context, the new tools "tell you what's important in what you are looking for," says Jim Romine, director, corporate R&D planning, Du Pont & Co., Wilmington, Del., whose research groups use a textural data mining tool from Semio Corp., San Mateo, Calif. Given a search topic, "it comprehends what the question really is and provides a conceptual search in context." Text-mining tools help users better understand cause and effect in a technology or industry, with outputs that include three-dimensional information maps, hierarchical taxonomies, spider diagrams, and abstracts. Information maps capture huge amounts of data and show it in "mountains" where peak height relates to the intensity of work in a technology. Intellectual property can be associated with particular companies by color. Ridges connecting mountains indicate bridging technologies, and valleys can represent potential new opportunities. When Monsanto Corp., St. Louis, spun off its chemical business (now Solutia Inc.) to concentrate on life sciences, patents were divided between the two companies. Some of those held at Monsanto are now seen as excellent technologies, but no longer strategic to the company's new business objectives. To find companies that might be interested in buying or licensing some of this intellectual property, Monsanto is using Aureka data mining tools designed for intellectual-property asset management. The software from Aurigin Systems Inc., Mountain View, Calif., operates on patent databases, and can help track down organizations active in related technology and generate a list of potential customers for the intellectual property. At Monsanto, the Aureka software is applied to competitive analysis, as well as to the search for complementary technologies that could be licensed. It has applications in cost containment where it can help a company weed out patents that have lost commercial impact or organize the portfolio to show what technologies support a particular business. "The business may change direction, and the patent portfolio must keep up with that," says Susan Cullen, who works in Monsanto's corporate intellectual asset management. "The tool helps us conform the portfolio to the business need." Other intellectual property applications for Aureka include litigation support and finding and evaluating merger/partnering candidates. A combination of technical and business analysis, accomplished with an information mining tool called SPIRE from Pacific Northwest National Laboratory, Richland, Wash., gave Dow Chemical Co. insight into a new opportunity. "We were looking at an entirely new business model for the company based on a set of technologies we had developed," says Randy Collard, director, computing, modeling, and information science for Midland, Mich.-based Dow. "We used SPIRE to analyze hundreds of pieces of data from dozens of sources to explore the market, other technologies that might be necessary complements to ours, the value chain, and the players and their positions. Out of that we crafted a business opportunity we are now pursuing." The SPIRE tool "required us to understand what our technical position might be, with whom we might chose to partner, and where we thought it was most effective for us to enter the value chain. It gave us considerable insight into the intellectual property that we could achieve, which is critical to long-term profitability."

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