Portfolios of R&D: What is currently known about selecting projects as a group ?

1. Portfolios of R&D: What is currently known about selecting projects as a group? Jonathan D. Linton University of Ottawa, Canada linton@telfer.uottawa.ca. Thanks to SSHRC for their support of this research and panel

2. Problem: Best (Projects vs Portfolio) Definitions of projects Definition of portfolios Evaluating projects Evaluating portfolios Financial Portfolio Theory Opportunities Needs Summary Notes

3. Project Definitions • Effort to achieve a specific objective within a schedule and budget target (Cleland & King, 1983) • Human, material and financial resources organized in a novel way, to undertake a unique scope of work within constraints of cost and time (Turner, 1993) • A complex effort, made up of interrelated tasks with a well-defined objective, schedule, and budget (Archer & Ghasemzadeh, 1999)

4. Project Definitions • A temporary organization for assigning resources to management of change within the organization as an agency for managing uncertainty (Tunner & Muller, 2003) • A temporary organization and process for a certain goal under constrained time, budget, and resources (Shenhar, 2004)

5. Portfolio Definitions • A group of projects carried out under the sponsorship/ management of an organization (Archer & Ghasemzadeh, 1999) • An organization of a group of projects - managed together to coordinate interfaces and prioritize resources thereby reducing uncertainty (Turner & Muller, 2003) • The initial screening, selection and prioritization of projects proposals, the concurrent reprioritization and allocation and reallocation of resources to reflect priority (Blichfeldt & Eskerod, 2008)

6. Metrics for Projects • Financial – NPV, ROI, or Options • Risk and Feasibility • Relevance, Organization Fit, Strategic Importance • Competitive Advantage – Economic and Non-Economic • Market and Technology • Life Cycle • Innovation and Creativity Financial – NPV, ROI, Real Options Risk/Feasibility Market/Technology Relevance/Organization Fit /Strategic

7. Methods for Evaluating Projects • Financial Indicators • Peer Review • BCG Matrix – growth • Balance Score Card • Stage Gate Model • DEA • AHP/ANP • Fuzzy Selection

8. Visual tools for project selection Source: Bell Labs

9. Metrics for Portfolios • Return – NPV, ROI, Options • Resources • Capacity • Risk • Probability of Success • Efficiency • Effectiveness • IP

10. Methods for Evaluating Portfolios • R&D Effectiveness Index • Real Options Analysis • Conditional Stochastic Dominance • MOI Linear Program • Mean-Gini Analysis • DEA • Fuzzy Selection Model • Balance Score Card

11. Issues Specific to Portfolios • Synergy • Interrelation • Independent • Alignment with Objectives • Resource – Interaction • Benefit - Interaction

12. Visually Evaluating Portfolios http://www.vosviewer.com/maps/journal_application_domains

13. Flaws With Current Approaches • Limited checking for duplication • Not checking for over-representation • Not checking for absence of areas • Not considering potential of lock-out • Not considering absorptive capacity • Appropriability often overlooked

14. Application of Financial Theory • Financial Portfolio Theory well developed • Some difficulties, however: • Lack of efficient markets • Difference in underlying

15. Efficient Markets • Buy and Sell at Market Clearing Price • Calculate volatility • Determine relationship between assets • Select Desired Risk/Return Tradeoff on Efficient Frontier

16. Difference in Underlying • Financial Assets – Market Risk • Gaussian Distribution • Research Assets – Market and Technical Risk • Thick Tails

18. What is Needed - easy • Learn by revisiting existing groups of projects and reassessing them as a portfolio • Assess how differences in FPT affect the selection, valuation and performance of portfolios of research

19. Possible Steps Forward • In a coordinated fashion, consider: • Stage of Development • Capability Maintenance • Technological Lock-Out • Appropriability • Interrelation • Portfolio Diversification • Risk – Technical and Market

20. What is Needed - difficult • Understanding of underlying distributions for Basic Science, Applied Science, Technology and Innovation • Methods for Thick Tailed Portfolio Management • National Innovation Policy that considers current national research portfolio to guide future decisions

21. Current Questions • Appropriate Balance Between Different Stages of Scientific Inquiry – Basic, Applied, Technology, Innovation • What should the portfolio balance be – including diversity and risk? • How to select projects to ensure that balance reflects objectives?

22. Summary • Portfolios are currently just groups of projects in most cases • Need to consider projects in terms of portfolio objectives • Financial Portfolio Theory has some desirable traits, but needs to be developed to reflect the nature of STI • Opportunities exist in seeing how current and past decisions would differ with a portfolio perspective

23. Thank you for your attention Our thanks to SSHRC The Social Sciences and Humanities Research Council Than