For any tech company whose business is based on the ability to innovate in products, managing the development portfolio is key to the business's health.  

There are a few foundational realities to contend with: 

• The return on investment in product development must exceed the firm's cost of capital 
• The development pipeline of projects is a portfolio of investments to be managed. Every project has a risk/reward profile that needs to be understood 
• The company's business model must necessarily be reflected in the choices in the portfolio. A large mature company would be expected to be more stable in their returns than an early-stage tech start-up. This is reflected in a lower cost of capital for the mature firm and a higher one for the early-stage tech start-up. In other words, investors in early-stage start-ups are buying into the risk, expecting more in return. In a mature firm, investors expect more predictability and, hence, will live with lower potential returns 
• Like any investment portfolio, it is dynamic; as knowledge improves or assumptions change, it should be updated 

Managing Development Portfolio 

Given this reality, how should a firm manage its development portfolio? Firstly, they need to understand what sort of return they expect. This is commonly reflected in a “hurdle rate” for ROI, payback, or NPV. They each answer different questions. 

• ROI measures the return on investment over some period, typically 3-5 years 
• Payback measures how long it takes to “payback” the investment. 
• NPV measures “how big” the return is in current dollars 

They are all important. For me, payback addresses risk most effectively. ROI is the leverage on the investment, irrespective of how big it is.  

NPV addresses the size of the expected impact.   

For individual projects, this can be misleading. For example, some projects will include platform-level investments that may be leveraged over many years and products.  

These platforms may also be the basis of the firm’s competitive advantage. Consider the platform Amazon built that underpins its online shopping and AWS or the mRNA platform built by Moderna that will now be used to tackle various diseases.  

For all these reasons, I believe the best way to look at the development portfolio is at the aggregate level.   

So where should a firm start?  

First, take inventory and compile the projects. Ensure they are assessed with a common yardstick. Assess risk and reward at the project and portfolio levels. Ask yourself a few critical questions: 

• Does the mix reflect our strategy? 
• Is the return consistent with our business model? 
• Are there pet ponies in the portfolio? (Projects that are there because a single person favors them) 
• Are there hobbies in the portfolio? (Projects that do not exceed the firm’s cost of capital) 
• Do you believe the assumptions in the model? Have you identified assumptions that need to be validated? 
• Have you built-in checkpoints to challenge assumptions and incorporate learnings regularly? 
• Are there too many projects? 

 The issue of development capacity vs. the number of projects is both real and ubiquitous. I spent my entire career struggling with it, sometimes successfully, sometimes not.  

The truth is that there is a false economy in trying to do too much. Even if you can convince yourself that capacity exists, the fragmentation of effort and attention will undermine efficiency and accountability. No matter what, you are taking risks. My advice is - to take risks about having too few projects.  

Fewer projects require less overhead in resources to manage and communicate status. Laser focuses resources and challenges the organization. 

So, you cleaned up your portfolio. Align it with your strategy. The returns support your business model. Your staff is focused. Then what?  

It is time to execute. The entire team needs to understand the plan, risks, and opportunities. There needs to be a set of KPIs that address status in a regularly updated dashboard.  

Learning needs to be built in both to update assumptions, incorporate new information, and assess any changes in the market. Transparency and clear communication with the team and executive management are paramount to building trust and credibility.  

Make it safe for the team to challenge assumptions or interpretations. Make it acceptable to stop projects if the assumptions change. You are not managing the portfolio if the firm isn’t stopping projects. Realize that you are building culture and capability as you go. It is part of the process. 

Frequently Asked Questions 

1. What is the significance of having a diversified portfolio in product development?

A diversified portfolio mitigates risks by spreading investments across various projects, aligning with the company's strategy while maximizing potential returns.

2. How do you determine the correct number of projects in a development portfolio?

Evaluate the portfolio's capacity against the number of projects, emphasizing focus and efficiency; it's often advisable to lean towards fewer, more impactful projects.

3. How crucial is a continual reassessment of assumptions in managing the portfolio?

Continual reassessment helps adapt to market changes, ensuring projects remain aligned with current realities and enhancing the portfolio's resilience and relevance.

4. How can a company foster a culture of adaptability and risk-taking in managing its development portfolio?

Encourage open communication, where challenging assumptions are encouraged, and stopping projects based on altered assumptions is considered prudent, fostering a culture of learning and adaptability.