Portfolios of R&D: What is currently known about selecting projects as a group ? Jonathan D. Linton University of Ottawa, Canada 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 r.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

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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 ThanThan Our thanks to SSHRC The Social Sciences and Humanities Research Council