Managing New Product Development in the Downturn using Agile PLM
By abhijit.kakhandiki on May 21, 2009
I recently read an article written by Katherine Radeka in PDMA Visions magazine. The article speaks about managing New Product Development in a downturn. In times of recession such as the current one, R&D budgets are difficult to justify since the payback is often months or years away and companies are in survival mode with short-term earnings necessary to keep an enterprise afloat. Product development could play a key role in improving immediate sales and operating cash, while gearing up for the post-crisis future.
Katherine outlines the following three dimensions of Product Development in difficult times, each of which has key aspects detailed below:
1. Contribute to Cash:
a. Production Efficiencies
b. Redesign for Cost Reduction
c. Eliminate Design Complexity
2. Enhance Customer Value:
a. Current Product Improvements
b. "Good Enough" low cost products
c. Product line extensions
3. Prepare for the Recovery
a. Knowledge Creation
b. Platform Development
c. Breakthrough Products
I thought I would use this framework to provide some suggestions on using Agile PLM to guide you through NPD in the current recessionary environment. The key idea here is being able to use Agile Product Portfolio Management (PPM) effectively to execute your business strategy via project prioritization, translating into appropriate keep / hold / kill type of decisions. The suggestions revolve around setting up the right KPIs to help you select projects (products) that are relevant to the 3 categories of objectives listed above.
I am assuming that you have sub-classed your Gates into different subclasses. In general this is a best practice since this allows you to evaluate each Phase using KPIs best suited for it. These evaluations would help you make keep-kill decisions for your projects in any phase. e.g. the KPIs for evaluating a concept phase would be Return on Investment, Expected Commercial Value, Net Present Value, Initial Budget Required, Technology Risk etc. (KPIs that measure financial potential and associated risk) Similarly the KPIs for evaluating a development phase might be Budgeted v/s Actual Costs, Cost to Completion, Schedule v/s Actual Variance, Time To Market Urgency (KPIs that measure project schedule, cost and urgency) while KPIs for evaluating a launch phase might be Product Quality, Customer Feedback, Channel Readiness (KPIs that measure operations risk).
The KPIs at each gate help evaluate project performance at various stages. On top of this, you could have project-level KPIs that could change with economic cycles. During a downturn, such as the current one, sample project-level KPIs could be:
○ Immediate revenue potential (3-month, 6-month, 1-year etc.) - Does this project help bolster your short-term financial situation to carry you through the downturn?
○ Immediate cost (3-month, 1-year etc.) - This is the flip-side. Is this project financially viable over the short term? If the cost is currently low you can survive to make a comeback later.
○ Cost-Benefit Ratio - A slightly different KPI here is that of cost-benefit ratio i.e. is this project a low-hanging fruit type project that can provide immediate benefit to customers (thus increasing sales and improving your financial situation). This can be measured by dividing NPV or ECV by total project cost. You can tweak this KPI by dividing NPV or ECV by project cost over the next 6 months or one year.
○ Time Urgency (6-month, 1-year etc.) - Can this project be put on hold for six months to a year without losing Time-To-Market advantage? This will typically be applicable to projects in earlier stages.
○ Core v/s Context - Is this project (product) core for maintaining long-term market leadership / market share? It may be necessary to keep working on core projects so as to not lose sight of the future.
○ Employee Retention Potential - Is this project important for retention of employees with key knowledge and experience? This one is hard to evaluate objectively, but aligns well with the core v/s context KPI above. There is a employee morale perspective to this one as well.
○ Cost to Completion - This is a key metric in recessionary times and favors projects close to completion. Combined with core v/s context type KPIs, this can be a very powerful indicator for project selection, provided that concept phase KPIs for these projects are solid.
You can determine which projects to move forward with by combining project-level KPIs with gate-specific KPIs. Take stock of your overall portfolio and get the big picture on how many projects are in the earlier stages v/s later stages.
For projects in the Concept Phase, focus on the revenue potential, but pay special attention to the immediate revenue potential and immediate cost. Those projects with less time-urgency are candidates for hold, whereas non-core projects could be candidates for hold or kill decisions.
For projects in Development Phase, you need to take a hard look at schedule and cost overruns. For projects with high schedule and cost overruns, it may be time to re-evaluate the business case for the project. It may make sense to focus on immediate revenue potential, immediate cost and cost to completion KPIs to make keep / kill decisions. Projects with low time urgency, or non-core projects could be candidates for hold / kill decisions. You may need to keep projects with a high employee retention potential to keep employee morale high and retain key employees so you are prepared for the next boom in the economic cycle.
For projects in Verification and Launch Phases - A key concept here is that of sunk cost. Just because a project is in it's later stages does not mean it is not a candidate for hold / kill decisions. If the cost to completion is very high and the project is non-core, it could potentially be killed. Here it is critical to look at the KPIs for the Concept phase of these projects to make sure that they project has a strong value proposition and business case. In fact, during recessionary times, these KPIs from the Concept phase should be re-evaluated based on elapsed project time. Were there any key technology changes? Did any competitor beat you to the marketplace with a similar product? If your channels are not ready, or customer feedback suggested product feature enhancement, you may want to put such projects on hold.
Making the right keep / hold / kill decisions for your projects (and hence product portfolio) is important in any economic situation. It is downright critical in recessionary times since one bad decision could put your company's survival in jeopardy. You need to choose appropriate KPIs during a downturn, such as those suggested above. By combining project level KPIs with gate-specific KPIs, you can develop a comprehensive framework to align your product portfolio to get through the current downturn. I wish you good luck in this endeavor.
As always, your comments and feedback are much appreciated. Keep them coming!