By Andrew J. Sherman, Esq. and Chel Stromgren
American businesses invest billions of dollars each year in research and development activities, intending to cultivate new and innovative technologies. The results of these efforts are critical to the future of these companies, representing the products and services that they will sell for decades to come. As a result, trillions in unharvested and underleveraged intangible assets sit inside companies in search of a strategic home or “adoptive parents.”
Despite the sheer value of these investments and the importance of the technology portfolio to their future, many businesses employ shockingly rudimentary processes for managing these assets. Decision making for technology investment is often done in ad hoc, if not completely arbitrary, manner. Managers are often forced to make decisions based on “gut feel”. Even in the best scenarios, decisions are made based on extremely limited information and analysis. Very few companies have a senior level executive who is accountable and responsible for intellectual capital management and harvesting, leading to clueless or uninformed boards of directors who lack critical guidance in driving shareholder value in this area.
So, why do companies in all industries and of all sizes have such difficulties in managing and harvesting their technology portfolio? Why do the investments that are made in research and development often provide such uncertain returns?
There are countless examples of poor practices in technology portfolio management. However, these failures tend to involve one or more typical shortcomings:
§ There is no effective system in place to track technology projects across the company: In many companies, R&D investments takes place in “stovepipes”. Different parts of the company make investments with limited visibility of efforts and achievements occurring in the other parts of the company. Without an effective database of projects, there is no way for managers to monitor, evaluate, and compare efforts across the business.
§ There is no clear process for producing a ‘valuation’ for a technology: In order to make rational investment decisions, it is critical to have some indication of the potential payoff from different technology investments. However, formalized assessments of the future value of projects are rarely ever developed. Even companies with good practices in this area often rely on “review committees” or subject-matter-expert evaluation to assess and rank opportunities. These experts often have inherent biases in their opinions and do not have access to any quantitative analysis of expected payoff.
§ Investment risk is evaluated only intuitively: Technology investment involves a large amount of uncertainty and risk. Projects often under perform, exceeding planned budget and schedule, or fail outright. Despite having a large amount of historical data regarding the outcome of past similar technology development efforts, companies do not make an effort to evaluate the likelihood of failure or to project the adequacy of budgets and schedules. In effect, managers often ignore the risks involved with these projects. This situation is exasperated when managers become emotionally attached to certain projects, ignoring signs of trouble.
§ Technologists themselves are the primary source for project information: Often decision-makers rely on the scientists and engineers who are developing a particular technology to provide data regarding cost, schedule, and performance. Technologists have a vested interest in the future of a project that is not related to the payoff to the company. Overly optimistic projections are par for the course.
Is there a better way? Emphatically, yes! A number of leading-edge groups in government, the private sector, and academia have successfully implemented effective methods to manage technology investments, putting into place robust and repeatable processes, and emphasizing the use of empirical data to evaluate projects.
Corporate America can emulate these efforts and dramatically improve their return on investment. There are steps that a company can take that will better inform investment decision-making, will allow the business to better track the status and value of technologies, and will enable improved long-term planning.
Basic components of an effective Technology Portfolio Management process should include:
1) Knowledge capture and sharing – It is impossible to effectively manage investments if managers do not have visibility into the nature, status, and value proposition for different projects. A standardized system for classifying the description of the project and expressing performance, cost, and schedule data are a key aspect of such a system.
2) Valuation of technologies – A repeatable, consistent process is necessary to determine an expected value for candidate and on-going projects. This should include an evaluation of financial impacts of a successful project and a reflection of the costs and timeline for the project to reach maturity. The valuation should also reflect the risks in developing the technology and the uncertainty in future value, including market dynamics. A consistent system provides decision makers with a rational basis to compare the cost, risks, and payoff of different investment options.
3) Application of historical data – A data driven evaluation process can provide managers with a valuable assessment of the potential risks involved with different investment options.
4) Evaluation of comprehensive investment strategies – Choosing which technologies to invest in is only the first part of a comprehensive investment strategy. Strategies should also contain hard milestones to be met by projects, plans for re-directing funding based upon project performance, and hedging strategies to mitigate development risk. Strategies should be formalized and made clear to managers and technologists.
Making these sorts of changes is not easy. Leaders and line-managers often view R&D activities as their own “pet” projects and are reluctant to cede any sort of control over the process. The board of directors of the company must be committed to treating investments in technology as they do any other type of investment; analyzing and managing alternatives in a comprehensive and complete manner, reflecting proper accountability and value maximization to shareholders.
Our ability to kickstart our economy and stay competitive in a global marketplace depends on it.
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ABOUT THE AUTHORS
Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide. Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty-three (23) years. Mr. Sherman is the author of twenty-one (21) books on the legal and strategic aspects of business growth and capital formation, his most recent work is Harvesting Intangible Assets: Uncover Hidden Revenue In Your Company’s Intellectual Property. Mr. Sherman’s eighteenth (18th) book is “Road Rules Be the Truck. Not the Squirrel”. (http://www.bethetruck.com), an inspirational novel published in the Fall of 2008. Mr. Sherman can be reached at 202-879-3686 or e-mail ajsherman@jonesday.com.
He can be reached at 301-686-8571 or via e-mail c.stromgren@binera.com.