Transcript Evaluating Projects and Creating Portfolios: Balancing

Evaluating Projects and Creating
Portfolios: Balancing Costs, Benefits
and Risks
Dr Lawrence Phillips
Visiting Professor of Operational Research
London School of Economics & Political Science
Development portfolio decisions in
your company are made...
A: …by proposing the
B: …by considering
best way forward for
options for each project,
each individual project,
OR
judging trade-offs
then adjusting funding
between projects, then
on some projects to
selecting those options
ensure the total budget
that are collectively best
is not exceeded.
within the total budget.
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Two approaches to project decisions
A: Silo decisions
Promising
Market
Leader
Orphan
B: Portfolio decisions
Potential
Blockbuster
Metoo
?
3
Does it matter? A real case:
 Silo
decisions:
P: Current development
spend is expected to
yield benefits of 415
(relative units).
 Portfolio
decisions:
B: Same spend will yield

benefits of 515.
P to B: 24% more value
Can exceed $2 Bn NPV!
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Portfolio decisions: 7 principles
1. Think strategically: what & why before how & when
2. Identify areas of strategic importance
3. Pursue multiple goals; express as criteria
4. Evaluate investment options, not projects
5. Judge trade-offs between areas and criteria
6. Create portfolios: the best ‘bang-for-the-buck’ option
from each area
7. Explore the best portfolios under different
judgements and assumptions
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1. Think strategically
 Ask
WHAT should be
done and WHY before
engaging in operational
questions of HOW and
BY WHEN.
 Maintain ‘Helicopter
View’ but ensure
realism.
 Example:
• Develop this broad
spectrum anti-cancer
agent for lung cancer
because it shows good
anti-tumour activity in
animals and the unmet
medical need is great.
• NOT, complete Phase II
studies and begin Phase
III (this is the next step
in how the above will be
done).
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2. Identify strategy areas
 Areas
•
•
•
•
are budget categories for allocating resource
therapeutic areas (discovery research)
projects (development)
disease states (marketing)
etc.
 Areas
should be relatively independent: more or less
resource could be allocated to one without
commitment to another
 Worry about interactions later
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3. Pursue multiple objectives
“Contrary to business school doctrine, ‘maximizing
shareholder wealth’ or ‘profit maximization’ has not
been the dominant driving force or primary objective
through the history of the visionary companies.
Visionary companies pursue a cluster of objectives, of
which making money is only one--and not necessarily
the primary one.”
Collins and Porras, Built to Last, 1996
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Express objectives as criteria
 Financial
•
•
•
•

net present value
profit
market share
revenue
Risk
• probability of success
• doability
• confidence
 Non-financial
•
•
•
•
•
•
unmet medical need
time to market
leadership
strategic alignment
innovativeness
future potential
(extension of life)
• franchise enhancement
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4a. Identify investment options
 Disaggregate
the current plan into separate
strategies.
• P1: lung cancer
• P2: breast cancer

Propose new investment strategies.
• +1: colon cancer
• +2: sustained-release formulation

Include a ‘shut down’ or ‘no-go’ option

Work in multi-functional teams; think creatively
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4a. Identify investment options
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Strategic 11
Invest10
ment
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Options
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5
4
3
2
1 exit exit exit exit exit exit exit exit exit exit exit exit exit exit exit
Project A B C D E F G H
I
J K L M N O
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4b. Evaluate options on the criteria
 Assess
options for their
 total cost from the
decision point through
to completion,
 non-financial value
 financial value, and
 risk (probability).
 Area:
Cancer
Med
Cost NPV Need
None
0
0
0
P:Lung 10
260
30
P:Breast 11
300
15
+Colon 15
50
10
+SusRel 9
40
5
Prob
1.0
0.6
0.3
0.2
0.1
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4c. Re-scale evaluations
 Convert
positive
benefits into scores
that sum to 100.
 Convert probabilities to negative
penalty scores
(score=100 log p),
then re-scale so
sum equals -100.
 Area:
Cancer
Med Risk
Cost NPV Need Score
None
0
0
0
0
P:Lung 10
40
50
-9
P:Breast 11
46
25
-21
+Colon 15
8
17
-29
+SusRel 9
6
8
-41
Sum 100
100
-100
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5a. Judge trade-offs between areas
 Assess
the extent to which successful completion of
all the options for one area will contribute value as
compared to all the options in another area.
NPV
£1,500M
Preference
100
NPV
£300M
Preference
100
This swing in
preference is
five times…
0
0
Area A
Pref scale weight=
… this swing
in preference.
0
0
Area B
100
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5b. Assess trade-offs among criteria
 Assign
weights to express the relative importance
of the criteria
Medical
NPV Need
Prob
100
60
40
normalised
0.5
0.3
0.2
 Weights are best assessed by the decision makers
and senior executives who see ‘the big picture’
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6a. Determine priorities
 Calculate
overall riskadjusted preference
(benefit)--weighted sum.
How? See Goodman and Wright,
Decision Analysis for Management
Judgment, Wiley, 1997, Chs. 2 & 12.
the priority of
each strategy option:
risk-adjusted benefit
divided by cost.
‘BANG
for the
BUCK’
RISKADJUSTED
BENEFIT
 Calculate
COST
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Why not prioritise just on benefit?
 59 projects
prioritised in
two ways.
 If budget
= 8000, all
projects can
be pursued.
 If budget
< 8000,
more benefit
is realised by
funding
projects on
the basis of
benefit/cost.
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6b. Construct best portfolios
 Stack
triangles from
each project in order
of declining slopes.
 Any point on the
curve is a portfolio
which includes all
strategies up to that
point, from all areas.
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Portfolio depends on the criteria
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Balanced portfolio
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$ NPV & technical risk
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 Medical Need & tech risk
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
Strategic 11


10
Invest9
ment
$
8
Options


$
$
7 $

$
$  
$
6

$
$
$
5


$
$
$
4

3
$
$
2
1 exit exit exit exit exit exit exit exit exit exit exit exit exit exit exit
J K L M N O
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Project A B C D E F G H
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7. Explore results and reflect
 Examine
Frontier Portfolio at Plan Portfolio cost
Indicates Plan strategy
falling outside Frontier
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7. Explore results and reflect (con’t.)
 Bring
selected options into Frontier, see trade-offs
Strategy brought into Frontier
Strategies traded out to keep
same cost for Frontier Portfolio
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Those 7 steps constitute MCDA-multi-criteria decision analysis
An approach to evaluating strategic options
characterised by multiple objectives.
 Options are evaluated against individual criteria
(criterias) using data and judgements.
 Criteria are weighted to reflect their relative
importance; a key role for judgement.
 Overall evaluations are calculated as weighted
averages.
 The ‘big picture’ can then be explored.

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Purposes of the MCDA process
 To
create shared understanding of the opportunities
in the portfolio
 To develop a sense of common purpose across
different areas or ‘silos’
 To gain commitment to subsequent decisions by
senior decision makers.
The MCDA model is used as a tool for thinking.
The MCDA process requires careful design to engage the right
people in the right way at the right time
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A sample design of social
processes
Brief
Senior Execs
Kick-off
Meeting
T e a m
M e e t I n g s
Merge
Meeting
assess trade-offs
explore portfolios
Evaluate
& Digest,
Recommend
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After the Merge Meeting
 Evaluate
and digest results
• to deal with unexpected results
• to consider new perspectives that were revealed
 Create
a temporary decision system (or use the
existing system if it can do the job) that
•
•
•
•
•
relies on multi-functional forum
draws on appropriate authority relationships
is steered by a core project team
elicits & sustains overall portfolio view
creates space for negotiation among key stakeholders
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Why does MCDA process work?
Allocating resources on a
project-by-project basis
imposes the ‘Commons
Dilemma’:
when total resources are limited,
even if each area is using its share
optimally, the result will not be
collectively optimal
Silo decisions always create
sub-optimal use of the
available resources!
Promising
Market
Leader
Orphan
Potential
Blockbuster
Metoo
?
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Why does MCDA process work?



MCDA manages the
complexity of viewing the
portfolio as a whole.
MCDA shows where to
allocate resources as they
become available.
MCDA indicates how the
whole can be greater than
the sum of its parts.
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The value of the MCDA approach
 Better
communication across ‘silos’
 Shared understanding of strategic goals
 Development of an ‘idea-generating’ culture
 Improved team-working
 Better appreciation of trade-offs in the portfolio
 Commitment to the way forward
 Smarter, defensible decisions
 Creation of more value, financial and non-financial
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