How should an Innovation Portfolio be?
Deciding an innovation portfolio is one of the big challenges for chief innovation office. It involves deciding about which innovation ideas have to be incubated, considering the investment required and risk involved in every idea.
Every potential idea may look like a gold mine which may change the fate of the company. However, it may not be always true because there is a risk of failure in every idea. Thus, before investing into an idea, it is required to assess an idea to manage the investment risk. Adoption of portfolio approach for incubating ideas is a better way to manage the investment risk.
Innovation portfolio should typically look like a combination of multiple ideas of low, medium and high risk. We can use the analogy of A-B-C rule where, A stands for bucket of projects of high risk, B stands for bucket of projects of medium risk and C stands bucket of projects of low risk.
Organizations should have their initial innovation portfolio based on A-B-C- or H-M-L Rule. Thus, initial innovation portfolio should look like:
- A or H Bucket of Projects: This is a bucket of high risk innovation projects. These projects are usually radical/transformational and mostly new to industry. These projects are focused on developing new generation products or services, and usually use emerging or very new technologies. Being high risky projects, the numbers of projects are limited to few so that sufficient attention can be provided to control the risk and maximize return. Return on investment on this bucket of projects can give up to 60%, while which resources allocation can be up to 10% of total resources/efforts used in innovation.
- B or M Bucket of Projects: This is a bucket of medium risk projects. These innovation projects are mostly new to organization and focuses on development of products or services those are new to the organization but known to industry. These projects usually leverage existing technologies. Considerable return can be expected from this bucket which may rise up to 25% and resources allocation can be up to 20% of total resources/efforts used in innovation.
- C or L Bucket of Projects: This is a bucket of low risk projects. Resources allocation can be 70% of total resources/efforts used in innovation. These projects are usually incremental changes in existing products or services of the organization. Thus, risk is very low; hence, return on investment is also not much and may be up to 15%. Many times benefits may be non-financial or in-tangible. The use of technologies is restricted to mature and well accepted technologies.
How to allocate the project into L, M or H bucket is a critical task. Organization can have their own model for allocation of the project into their respective buckets. While developing the model, following parameters and questions can be used:
- Novelty: What is novelty of an idea?
- Market: What is market size of an idea?
- Customer: What is the benefit to a customer?
- Growth: How is it supporting the growth of the organization?
- Allocation of resources: What are the resources required?
- Investment: How much is the investment required?
- Return on investment: How much is expected return on investment? Is it tangible or intangible?
- Competition pressure: Is there any pressure because the competitor has adopted it?
Risk: How much risk is involved?
- Technologies Used: What kind of technologies are required to develop an idea and, are those mature?
Aggregated reply to the above questions on certain measurement scale will help to allocate project to any one of the buckets H,M, or L.
During initial phase of innovation, typically innovation portfolio may have maximum number of projects of incremental changes or low risk. These types of projects will never generate expected growth from the innovation portfolio, thus portfolio has to be transformed over a period from low risk to medium risk.
As organization matures on innovation, it should systematically analyze innovation portfolios and manage risk to increase the proportion of innovation projects having more risk and more rewards. Thus, H-M-L portfolio should not look like 10-20-70 or low risk portfolio. The new portfolio should have more projects from medium risk and from high risk. Thus, new innovation portfolio should be 15-35-50 or 15-45-40 on H-M-L risk.
Periodically or every year organization should evaluate their innovation portfolio to see the ratio of H-M-L. It should neither be in low risk zone nor be in very high risk zone. Having low risk or very high risk in innovation portfolio may always lead to failure of innovation program.
- Day, G. S., (2007). Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio. Harvard Business Review, December, pp. 110-120.
- Nagji B., & Tuff G., (2012).Managing Your Innovation Portfolio. Harvard Business Review, May, pp. 68-74.