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From a January 2008 article,

Heads-Up Design:

Connecting Design Decisions Directly to the Bottom Line

by Wayne Mackey, Principal - Product Development Consulting, Inc.

Executive Summary

A heads-up display, originally used in military aircraft and increasingly common in automobiles, puts a transparent view of important data directly in a user's line of sight. Heads-up displays in automobiles show a driver essential information such as speed and fuel levels on the windshield without interfering with the view. Drivers can absorb critical facts without taking their eyes off the road.

In much the same way, Heads-Up Design puts important bottom-line information transparently in front of designers so they can navigate the design process without distraction. Until now, information about the impact of everyday design decisions on profitability either has been lacking altogether or has required designers to stop design work to hunt for it, the equivalent of taking their eyes off the road.

Heads-Up Design is a new approach to synthesizing information that encapsulates price and cost considerations within the design process itself and complements and extends front-end product definition processes such as voice-of-the-customer. Product designers gain early information about the impact of everyday design decisions on profitability that ties directly back to customer needs. Because the approach is simple and requires no additional software or training, it's transparent to the design process, allowing designers to focus on design and leaders to see ahead clearly.

Foresightful Innovation to Improve Gross Margin

Maximizing gross margin or profitability (the difference between the cost of building a product and the price customers pay for the features delivered by the product) is a goal of most for-profit businesses. When competition or a changing business environment threaten to erode margins, companies often respond by cutting costs or raising prices. However, these seemingly sensible short-term approaches cannot form the basis of long-term future growth. Sooner or later, a competitor will undercut the price or costs will be trimmed to the bone.

Many companies recognize that the answer to improving gross margin is continued innovation. By providing ever-increasing value to customers, you keep margins high through prices that fairly represent the value customers receive. Companies have implemented voice-of-the-customer efforts or rigorous product definition to determine exactly what customers value. But many have been frustrated by the next step: how to tie customer value to the bottom line. How can you know ahead of time whether a particular innovation will positively affect profitability? Will it sell? What do you do in the meantime? Even with a relatively short product cycle, you could wait months or even years before you have the market feedback needed to analyze the impact of your decisions.

To understand whether a new product innovation will contribute to improving gross margins, you need to link everyday product design decisions directly to gross margin.

Heads-Up Design uses a new design vocabulary of price and cost to relate price to features and functionality and cost to implementation (hardware, manufacturing, marketing). The system then creates a customer value curve that puts bottom-line decision-making power into the hands of product designers to take the guesswork out of improving gross margin. The customer value curve translates financial impact directly into terms that product designers can understand and act upon. This foresight enables everyone to see exactly how various design decisions will contribute to -- or detract from -- the bottom line.

Making the Connection to Product Design

While you may shy away from putting influence over the bottom line into the hands of design staff, the fact is that designers already make bottom-line decisions -- usually unconsciously and without understanding the impact of those decisions. Designers make technical tradeoffs every day and managers constantly allocate and reallocate time, staff, and dollars to various projects.

What if your company could make these decisions based on how much a project will contribute to profitability? Using Heads-Up Design, tradeoffs become explicit. You can evaluate design decisions based on whether the resulting product will contribute to the company achieving its targeted gross margin. Like the driver whose windshield display shows speed creeping into unsafe territory, designers and managers can respond to early information (without taking their eyes off the design process) to adjust course before committing to the wrong direction.

Establishing the Target Margin and Looking Differently at Features

The first step in applying such a system is to understand your strategic business needs in relation to the product/service portfolio you are building and set a target for the gross margin you want to achieve. You then do the front-end work necessary to determine what customers need and value, including voice-of-the-customer research and a customer-driven product definition process. The output of those activities -- a product concept, definition, and feature set -- becomes the basis for your Heads-Up Design work.

You begin to view product features differently than you may be accustomed to doing. Instead of representing products in terms of features and related benefits, Heads-Up Design looks at each feature and sub-feature of a product as embodying a discrete piece of value to the customer. Let's look at the application of Heads-Up Design in a hypothetical company that is creating a data collection and management system for use by medical staff to log in-room patient interactions. Your customer research (in the form of in-person interviews with nurses, doctors, hospital administrators, and patients) has revealed the top needs that might be filled by such a system. You have brainstormed and translated these needs into a set of features that include:

• a simple but flexible interface,

• security,

• speed, and

• built-in error-checking

Each of these features can be further broken down into sub-features. Looking at the product this way enables you to examine value at a very granular level. The interface, for example, includes the sub-features of:

• uncluttered data entry screens (which enables accurate data entry),

• point-and-click data entry (which minimizes the typing required), and

• configurable user profiles (which enable different users to customize and save their preferences)

Each sub-feature gets its own customer value curve, which directly translates what the customer will pay for different levels of designed-in performance. It embodies the idea that there is an optimum engineering specification target for each sub-feature after which returns will not be proportional to the amount of effort invested. Targets are important because overdesign is as much of a challenge on the road to achieving desired gross margin as is underdesign. Often, companies spend a lot of money designing things that the customer won't pay more to purchase.

To drive cost -- the other side of the gross margin equation -- down to the sub-feature level as you have done with price, you use the same breakdown of features you came up with initially and then look at the materials and processes required to create and deliver each feature. What portion of the sub-feature point-and-click data entry is implemented in each hardware and software module? That percentage, in the aggregate, determines the cost targets for every hardware and software element of the product.

The revelation of Heads-Up Design happens when you put together the two sides of the equation: the new way of examining price (what the customer is willing to pay) and the cost (what it takes to build it). By employing a design process that accounts for both, you achieve a direct view of your gross margin on each sub-feature of the product. As your design and testing proceeds toward production, each potential change in sub-feature specification value translates directly into a change in the product's gross margin, and you can make trade-offs accordingly. You have, essentially, embedded bottom-line effects right into the design process.

Advanced Degree Not Required

Designers want to design, not spend time learning things that don't enhance their ability to create. Project managers want maximize the return on their voice-of-the customer investment throughout the design and development cycle. The beauty of Heads-Up Design is that it relies on simple tools that tie everyday design decisions back to the customers' needs. The only software required is a spreadsheet. No training is needed, just a short series of facilitated workshops.

Will design for gross margin eliminate competitors? No -- but it can give your company a big advantage by embedding financial success in every part of your product design.

From the book, The PDMA ToolBook 3 for New Product Development

Metrics That Matter to New Product Development – Measuring Actions, Getting Results

by Wayne Mackey, Principal - Product Development Consulting, Inc.

Almost every company attempts to measure its new product development (NPD) efforts in some way, yet industry research shows that very few are satisfied they are measuring the right things. Further, product development practitioners often find metrics burdensome, disconnected from their “real” work, or an infringement on what they view as an inherently creative craft. This chapter is written for both product development practitioners and leaders to help them form a common language around measuring the difference between successful and unsuccessful product development. We begin by offering definitions of some metrics terms to provide a common language of discussion, then go on to define six keys to metrics success along with the associated mis-steps development organizations often make. We introduce the concept of a metrics tree and explain how using it as a tool for implementing metrics offers an array of valuable benefits. We conclude with a brief case study. Putting this all together allows you to set metrics that really matter to product development...

Publication date: October 2007 by John Wiley & Sons

The book is available to order online from Amazon.com

From the book, Value Innovation Portfolio Management - Achieving Double-Digit Growth Through Customer Value

by Sheila Mello, Wayne Mackey, Ron Lasser & Richard Tait

INTRODUCTION

MANAGING THE PRODUCT PORTFOLIO FOR

CUSTOMER VALUE: TRANSFORMING BUSINESS

DRIVERS FOR NEW PRODUCT DEVELOPMENT

 

Every executive who has sat through presentations by eager product managers touting hockey-stick growth curves for proposed products knows that financial projections alone may not provide a meaningful assessment of a product's potential market success. Yet, given no viable alternatives, most will either shoot from the hip or resign themselves to simply going by the numbers, using metrics such as projected market share and growth, net present value, and cost/benefit analysis -- even when such economic measures involve an uncomfortable amount of guesswork.

 

There is a better and simpler way. The key to choosing products that contribute to sustainable profitability lies in changing the business focus of portfolio management from financial metrics to customer value. Paradoxically, by putting aside financial data and giving more weight to customer value data when making product portfolio decisions, companies can in fact improve financial performance by identifying products with the potential to delight customers. Customer value, defined as the customer's perception of how well a solution meets their needs, is the only proven course to drive profit: The greater the value of the solution to the customer, the more likely the customer will buy it - and pay a premium price for it. And, unlike many financial projections (and contrary to the beliefs of many executives), customer value is based on something real, which you can accurately measure to yield trustworthy results.

 

REDEFINING YOUR PORTFOLIO ALONG THE VALUE

DIMENSION

Just as an individual's dogged pursuit of happiness for its own sake may in fact engender misery, a myopic quest for profit may not actually yield long-term profitability. So how can companies transform their approach to portfolio management from being profit-obsessed to customer value-driven?

 

The first step is to examine how the company defines portfolio management and how well -- or poorly -- its product portfolio meshes with its business strategy. In our work with scores of companies, we have encountered many that divorce portfolio management from business strategy. They consider only how much of the R&D budget they will allocate to each project to maximize the calculated value of the total portfolio. While R&D resources do have dollar values and efficient resource allocation is a valid concern, in our experience this view leads to over-reliance on financial metrics and a narrow focus on individual products and their revenues and costs. By contrast, those companies approach portfolio management holistically, considering how their allocation of resources maps to strategy -- and include in those decisions all functions in the company, from sales and distribution to support and manufacturing -- make sounder product portfolio decisions and create products that better match customer needs.

 

We have observed another serious problem. Portfolio management, product realization, and business strategy can become disconnected from each other when decisions about which products to build are divorced from the company's vision and mission. Several factors contribute to this disengagement:

* There's process: Product development often is managed using the phase/gate review process, a methodology concerned with schedule and resource management. Phase/gate reviews can be isolated from the portfolio and unsuited to the dynamic nature of products and markets.

* There's turf: Companies believe: Product development is an R&D thing. R&D is not part of business strategy, which is a business thing. Product management is for lower levels of management. Departmental functions (often referred to as silos) in the organization take ownership of -- or set up barriers to -- successful product development efforts.

* There's personality: Business managers think, We're on the business side and product development is too technical. R&D looks at marketing and thinks, What do they know? Marketing is an art, not a science.

 

The overarching problem is that, for many companies, portfolio management is not aligned with new product development. Further, while many companies create cross-functional teams at the operational level, senior level teams often don't operate cross-functionally.

 

When deciding which projects to fund in the portfolio, executives must consider not only cost, but also the customer value delivered by the project in relationship to the company's strategic goals. The intersection of high customer value, high strategic value (aligned with the strategy of the business unit or enterprise), and optimal investment intensity (the level and profile of resources invested in a new product or venture) is the sweet spot for new portfolio projects...

 

Published: September 2006 by J. Ross Publications.

The book is available to order online from Amazon.com:

 http://www.amazon.com/gp/product/1932159576/ref=pd_rvi_gw_1/104-8508494-5478318?ie=UTF8
 

PDC's Discoveries Newsletter 6/04....

"You Can't Stop the Waves, But You Can Learn to Surf"

... Optimizing Complexity in Product Design

by Wayne Mackey, Principal - Product Development Consulting, Inc.

 

"Complexity is, therefore, in part, the study of pervasive innovation in the universe."
-- Mark W. McElroy,  appearing in Journal of Knowledge Management, Volume 4, Number 3, 2000.

 

Complexity in nature is fascinating, and the application of complexity theory to business is on its way to becoming an established discipline. However, most of us could benefit from making things simpler, not more complex. The same goes for product development professionals, who face pressures -- from the general tendency toward incorporating new technology into products to market demands for more and more features -- to create increasingly complex products. This might be acceptable if complex products always worked better and sold better than their simpler counterparts, but they don't.

As if that weren't enough, the product development process itself is becoming more complex, the result of three trends related to handoffs of one sort or another. Concurrent development and the changing nature of teams mean more internal handoffs. Co-development (more than one company or division creating a product) means more external handoffs. Greater reliance on outside suppliers for complete or near-complete products means handoffs at the supply-chain level. And what does a handoff represent if not a rich opportunity to drop the ball, cross the wires, or royally botch things up?

So what's wrong with a little complexity?
Complex products can increase the possibility of failure and drive down product quality. Complexity in product definition, design, and development decreases efficiency and makes them harder to manage.

We're not suggesting you return to the days of completely internal product development to eliminate external handoffs. Nor should you randomly chuck features in an attempt to slim down your offerings, since radical reductionism carries its own risks. The solution lies in determining the right amount of complexity for your industry and product -- and changing your business to meet that target.

Best-in-class companies seek to understand what drives complexity so they can mitigate its negative effects. Evaluating product development processes in light of their complexity can open up whole new realms for process improvements. In each area discussed in this article, we assess what can go wrong, then offer solutions based on our experiences with leading companies. These companies balance complexity to their advantage, applying assessment and benchmarking to identify industry best practices. Your company can do it too -- read on to find out how.
 

Key Questions:
Is your company's product development process too complex? Are you using the best processes to generate requirements? What are the critical few product specifications necessary to meet stated and unstated customer needs? How do you organize your product development teams most efficiently? How much testing do you need to do before going to market?

Customer requirements
Assessment:
All product development begins -- or should begin -- with a consideration of customer requirements, ideally gathered through a customer-centric process. The first area to examine for complexity, therefore, is requirements generation. Is your company adept at identifying the critical few product specifications to meet stated and unstated customer needs? Does the complexity inherent in your product address problems that your customer really cares about -- and will pay to solve -- or is the complexity irrelevant to customer needs? Will your manufacturing organization be able to handle this level of complexity? What is the complexity level of product specifications for other companies in your industry?

Solution: Look at how you turn customer requirements into specifications. Is it alchemy, or do you use a process that gives adequate consideration to both stated and unstated customer needs, and assigns value to specifications based on the degree to which they address true customer concerns?

Take a look at your product specification documents. If they dive too quickly into detail, or if they proscribe approaches to problem solving at the design level, they are adding complexity to your design process. PDC has found that, for industry-leading companies creating moderately complex products, a two-tiered requirements definition works best. The top-level document is short -- no more than 10 pages -- and outlines basic functionality. At the second level, the document is more detailed. Generated with input from those involved in gathering customer input, this document, about 30 pages in length, should provide designers a clear picture of what the product should do, not how to do it.

Customer insight: "We have implemented a new way of documenting and prioritizing market requirements and are giving all of our design engineers a closer look at the customer environment through training and field visits." -- Paul Adam, Manager, Product Development Productivity, Medrad, Inc.

Functional vs. project management
Assessment:
Debates rage. Which is best, a management structure organized along functional lines with clear delineations between engineers and marketers and each reporting to a functional manager, or a collaboration of team members who focus their particular expertise on a specific project? Or is there a way to straddle the fence and get the best of both worlds?

Solution: The road to "the best of both worlds" is littered with corporate bodies. Each structure has pros and cons and each may work best for your company at a particular point in time. To determine what makes most sense for your organization, examine your "symptoms." Are missed deadlines and cost overruns the biggest problem? Have you noticed infighting among different disciplines? These indicate the need for a stronger project orientation. Make the project king. If, on the other hand, cost and schedules are okay, but you notice skill deficits -- engineers with design challenges they can't solve or who are not incorporating the latest technology -- then you may need to move back to functional orientation, giving technology staff a "home room" where they can hone skills or get technical training. The engineering process, rather than individual projects, needs to dominate.

Cross-functional teams
Assessment:
In the "old days," engineers designed products based on specs they received from marketing, then tossed the design over the wall to manufacturing. Today, cross-functional teams are in -- but how cross-functional is cross-functional enough? Are the numbers in line for your industry? Too many functions over-involved too early can slow the design process. Involve too few disciplines early on, and you may find yourself redesigning the product after unearthing problems down the line. Either way, the wrong functional ratio costs in lost time and dollars.

Solution: Use staff ratios to measure how cross-functional your teams are, then compare with others in your industry and modify your ratios to bring them in line with industry standards. A product development team might have a manufacturing ratio of 7:1 (seven designers to every person from manufacturing) at the mid-point of their development. At the same point in development, a supply chain ratio of 12:1 ensures that designers will incorporate crucial information about suppliers and supply chain issues. Best-in-class companies maintain optimum ratios throughout the product development cycle. Companies succeed at reducing complexity at the back end of the design process when they understand the need for staff ratio analysis and understand that they need to populate teams with members from various disciplines (create cross-functional teams). While it may be more challenging initially to manage a cross-functional team, the resulting designs turn out to be more manufacturable, simplifying the overall process.

Generalists vs. specialists
Assessment:
Companies where products are designed exclusively by specialists -- people who do one thing very, very, well -- have more hand-offs and, consequently, more complex and longer development cycles. Of course, some tasks are so technically demanding that you need a specialist to do one particular thing. The specialist/generalist question goes hand-in-hand with the question of the optimum number of concurrent design projects for each team member.

Solution: Designate the "critical few" true specialists as subject-matter experts -- knowledge resources for many teams -- and use them as references rather than project team members. In most cases, using a lot of generalist designers increases efficiency and reduces complexity by minimizing the number of hand-offs. Use relatively few pure specialists. Keep everyone else working on no more than two projects. According to PDC's research on large projects, two is the optimum number of projects per team member. A single project can fail to provide the level of stimulation necessary to fully engage someone, while juggling three or more projects inhibits productivity as work quality drops and confusion among projects lengthens work time.

Defining roles
Assessment:
"Too many cooks spoil the soup" may be a reasonable caution for the kitchen, where one or two people can concoct culinary masterpieces. Complex new products, however, can require large teams to create. What's needed is not fewer cooks but a clearer definition of roles and responsibilities and a master chef to coordinate the activities of everyone else. That master-chef role -- management and coordination of the entire project -- should fall to both the program management and systems engineering (SE) disciplines. Most companies understand program management, but many struggle with systems engineering. SE is responsible for making sure all the components of a system, regardless of who produced them, work together to meet product and customer requirements.

Software companies understand this concept because software is developed this way: systems engineers make sure the software is integrated and works well with all the necessary operating systems. Unfortunately, at many companies, the SE function falls to people without formal SE training or experience such as QA or design engineers. These folks, as skilled as they may be in their areas, are not trained to take a holistic approach that considers the dynamics of all aspects of the system.

Solution: Evaluate the maturity of your SE process (you can use a tool such as PDC's SE maturity model). Who has had formal SE training? Who, in the absence of formal training, has experience? Using a maturity model and skills assessment, make sure team members possess the right skills. For example, check to see if the SE staff knows how to use the tools at their disposal. Do they make a formal effort to modularize design? Are specs well-written so they're understandable both inside and outside the company? Then, make sure you implement the SE process with all development projects. Because systems engineers are involved up front as part of the group that architects the system as well as later on, they can help avoid potential problems that may cause costly delays close to launch time.

Key Questions:
Are your teams cross-functional enough? Are they organized efficiently? Do you have specialists working on the right parts of the project? Are your engineers overwhelmed with too many projects? Is your systems engineering organization mature?

Decision making processes
Assessment:
One of the most critical development areas to assess for complexity often appears the least quantifiable and the least amenable to evaluation: decision making. How an organization makes decisions can often have as profound impact on the effectiveness of product development processes as what decisions are made.

What decisions do you make without a costly and complex trail of documentation? Which decisions must be made explicitly and documented? Who has authority for what types of decisions -- and do they know it?

Today, the consensus method of decision-making is the most common. On the plus side, consensus decisions usually have buy-in from everyone, and often are easier to implement. On the negative side, consensus is the slowest decision-making method, and a single naysayer can stall a whole project.

Solution: First, draw lines of decision-making responsibility clearly and make sure everyone understands them. Identify the boundary between formal and informal decision-making. At companies executing best practices, designers understand their bounds of control. Knowing where the line is also means designers know whom to appeal to if they don't agree with a decision. It turns out that, within reason, where you draw the line is not nearly as important as simply drawing the line. Without a line, people don't know what they have control over and what they don't. They end up making decisions they shouldn't make, or not making decisions that ought to be theirs.

Next, determine how quickly your organization is making development decisions. Are they good decisions? Companies that are fast on their feet and apply best practices favor leader-centered, consultative decision making -- the fastest route to good decisions -- over consensus decision-making. The leader's job is to gather input, make sure everyone with something to say on the decision has been heard, and then make a decision. If team members don't like the decision -- too bad. But most people accept the results of this process as long as they understand it up front. The test of a good decision for the whole team moves from "Do I agree?" to "Was my viewpoint heard and understood before the decision was made?"

Customer insight: "Reorganization of product development to a project centric structure has changed the way we make decisions. We are able to make decisions much more quickly without degrading the quality of those decisions." -- Paul Adam, Manager, Product Development Productivity, Medrad, Inc.

Key Questions:
Do you -- and design team members -- clearly understand which decisions they can make on their own and which require input and approval? Is your decision-making process structured for optimal efficiency? Are you sacrificing speed up front for complete buy-in on decisions, or are you rushing the process up front and creating resistance later?

Testing and documentation
Assessment:
All testing is non-value-added. Period. Customers don't care how much you test. They just want to know that the product works. If you can deliver a quality product that works without testing -- do it. TV sets are an example. Through refinements in design and manufacturing, electronics companies create TV sets that work straight out of the box; individual sets are not tested. In reducing product design complexity, the goal is to do the minimum amount of testing to assure delivery of a high-quality product. So, what is the minimum amount of testing you need to conduct?

Solution: First, determine what absolutely requires testing, and what can be taken care of through process control and simulation (see sidebar, below). Simulation is a common method of testing and can satisfy testing needs even at companies in heavily regulated industries such as medical devices, where strict regulatory requirements govern processes and outcomes. Simulation may be enough to convince the regulatory body that the company understands and can manage the risks associated with the product. For example, when Boeing introduced the 777 in 1994, it sold and flew the first plane built -- a first in an industry that is known for extensive testing. Boeing relied on sophisticated simulations to tell designers what they needed to know about how the plane would function, which reduced the complexity of the design process for the Boeing 777.

To reduce testing to the minimum required to assure delivery of a high-quality product, it helps to know about best practices for your industry, such as CAD/CAM simulation. You may also want to consider factors such as the design capabilities of the factory that will manufacture the product. (Design-for-manufacturability often ties in with a company's efforts to implement design for Six Sigma. If your design relies on processes that are hard to execute, you'll never achieve Six Sigma quality.)

Customer Insight: "We identified test effort above and beyond what the benchmark companies were doing. We have developed 30 standard templates for requirements verification testing that are already reducing our test effort considerably." -- Paul Adam, Manager, Product Development Productivity, Medrad, Inc.

Documentation and the trail of complexity
Assessment:
There is no question that documentation requirements can add to the complexity of the design process. Many formal processes require documentation, and documentation requires your design team to spend time reviewing, approving, storing, revising, and managing documentation. If there's one thing your engineers hate more than meetings, it's documentation.

Solution: Define what requires formal documentation and what can be released informally, allowing for quick changes at a low level. Having the right balance of formal and informal documentation keeps the development process efficient by allowing low-level changes to happen quickly while only decisions with far-reaching impacts are formally reviewed.

Key Questions:
How much do you use computer simulation as opposed to building models and testing? How many different aspects do you test? Who does the testing -- the design team, or a separate test team? How do you document testing? Do you have the right mix of formal and informal processes? How many times do you retest? Are you overtesting?


Conclusion
Don't underestimate the pervasiveness of complexity as a problem in product design and development. Look for root causes of the symptoms that plague you most, whether it's cost and budget overruns or out-of-control requirements. Assess current practices. Benchmark against industry leaders and competitors. Never stop asking questions -- and searching for answers -- and you'll be well along the road to product excellence.

From PDC's Discoveries Newsletter 3/04....

Making Innovation Count
A Framework for Measuring the Creative Contribution to Product Development

by Wayne Mackey, Principal - Product Development Consulting, Inc.


"Innovation is the specific instrument of entrepreneurship. the act that endows resources with a new capacity to create wealth."
--
Peter Drucker, Innovation and Entrepreneurship, quoted in Harvard Business Review May/June 1986
 

A quick search on Google for "history of innovation" yields nearly 7,000 results, many of which come from corporations using the phrase to describe their own activities. Given this, you'd think that most companies understand the process of innovation and can use it effectively to provide their businesses "with a new capacity to create wealth," as Peter Drucker says.

You'd be wrong. Many companies view innovation as a necessary evil arising spontaneously from an ill-understood confluence of circumstances, and allow it to run along its own track with little management oversight. Even acknowledged leaders in innovation, such as 3M and IBM, struggle with how to best harness innovation in the context of a profit-making enterprise.

As with any business process, the first step in exploiting innovation to serve your company's goals is to measure it -- an inherently difficult undertaking. Innovation is a creative process, which, by its very nature, involves doing things that have never been done before. Yet, if you don't measure it, you can't manage it, and if you can't manage it, you can't control it, and if you can't control it, it can sneak up and sabotage your business before you even know there's a problem.

The message of this article is that you can measure and optimize innovation. Read on to find out how.


Innovation in context -- where does it fit?
In general, the innovation process precedes the more structured product development process. Innovation, as we define it, might begin with an employee's "aha!" moment in the shower before coming to work. The employee might be inspired with an idea for a totally new technology, a completely new way of providing a service, or even a new way of selling, as in the case of Dell Computer, which pioneered the idea of customers specifying build-to-order systems online.

The inspiration then enters two distinct phases. The first, which we refer to as ideation, is the process of filtering the idea. The company examines the shower inspiration to see if it makes sense and to determine whether it's a viable strategic and market fit that the company wants to back with an investment. During the second phase -- incubation, in our parlance -- the company begins to spend money to determine whether the idea is feasible. Both phases occur prior to the idea's incorporation into a specific product. After incubation, the idea moves into whatever process the company uses for product development, and the innovation phase ends.
 

What's wrong with current ways of measuring innovation?
The problem is not that companies don't measure innovation today. Every company does, in one way or another. Most innovation metrics, however, are immature. Either they are takeoffs on regular product development metrics or are based on a single company's past experience. Since neither approach uses objective facts about what succeeds and what doesn't, you might as well close your eyes and throw a dart at the wall to determine how to encourage innovation that leads to successful products.

A robust innovation maturity model needs to address both the ideation and incubation phases, as well as a critical third piece: the management system that enables innovation to be successful. Without the right controls, funding, and processes to bring an idea from the employee's shower to the customer, a company may fail even if the rest of the innovation system is strong.

As with any metric, it's important to understand that the act of measuring doesn't actually solve problems. It does, however, provide information so leaders can make more informed decisions, giving everyone not only an accurate view of where they stand, but what they have to do to improve.

Who needs an innovation framework?
Companies whose bottom lines are driven by innovation are good targets for applying an innovation framework such as the one developed by IBM and PDC (more on this to follow). For example, in the heyday of deregulation, power companies were looking for innovative ways to differentiate themselves and increase profitability. Now that deregulation has receded as a business force in the power industry, power companies have returned to core businesses, and probably would not be good candidates for applying an innovation framework. In contrast, many of the technology and service companies that weathered the economic downturn by cutting R&D budgets now have far fewer products in the pipeline than is healthy. They need to pump up the volume, but how? Using an innovation framework would allow them to get more products into the pipeline not simply by throwing money at the problem but by spending that money in ways that make sense and minimize risk.

IBM decided to tackle the problem of measuring innovation directly. Through work with its Emerging Business Opportunities (EBO), IBM realized it couldn't treat the development of completely new products and technologies the same way it treated ongoing product development. The EBO initiative introduced a different set of rules. For example, it's impossible to do a clear business case or an accurate market projection before the breadth and depth of any technology's potential use is known. So best practices in the EBO phase supplement traditional business analysis and market projections with efforts like technology diffusion studies. One of the goals of IBM's EBO phase is to grow revenue by finding the potential breadth and depth of a new technology's application. That information, combined with the current market size of the potential applications, gives insights into the relative value a new EBO.

Still, even an innovation leader like IBM, which realized the right way for EBOs to go, had no objective way to measure the many processes involved. That's when the IBM corporate EBO process architects contacted PDC. With 14 years of client work and a database of innovation best practices, we were able to provide the hard data to help IBM sort out what works and what doesn't. What are the key elements of innovation? What differentiates success from failure?

Although many people believe that real breakthroughs come from the lone entrepreneur working in a garage, PDC's research shows that larger companies have a greater need to control the innovation process. In IBM's case, for example, the company had no trouble generating ideas. The challenge was getting the right ideas into the system and then rapidly turning them into profitable products -- finding the elusive control we mentioned earlier.

One of the ways companies are successful in innovation, of course, is to purchase smaller companies, and the model addresses this as well.
 

The nuts and bolts of the model
PDC developed the innovation maturity model in conjunction with IBM during 2003, using both proprietary and public research. The model is divided into five parts and covers 30 aspects of innovation. Why 30? We wanted enough to provide meaningful information, but not so many points as to make the model cumbersome. According to Dave Coughlin, Executive Consultant for IBM's integrated product development team, "We had lots of discussion about what were the key elements that the model needed to cover. Originally, we started with 80, then cut it to 60. We still felt that was too many."

People simply won't use any model that requires special training or setup, so we kept the model simple. "We spent time taking surveys from other organizations," says Tom Luin, Business Transformation Architect and another key team member. "They took an hour or two to complete. We knew most executives wouldn't put in that much time. Ours takes about 15 or 20 minutes, and that has proven very useful. Almost everyone agrees to take that amount of time to answer 30 questions with multiple choice answers."

The model is supported with an Excel spreadsheet including dropdown answers. It begins with an introductory section that summarizes the company or business unit being studied and asks about its relative success in innovation. This information is used to sort the data and statistically correlate individual elements to success. Each of the next three sections asks ten questions, to which there are five possible answers. These sections cover management system, ideation, and incubation. The final section is an automatically generated report showing, in chart form, where a company stands in relationship to the rest of the company and to other companies.

The five potential answers to each question in the management system, ideation, and incubation sections describe five specific items that characterize a level of maturity. It's important to note that all the answers are based on real and demonstrated practices at companies. This means that although you might look at the highest level and say, we could do better than that, you'd be attempting something that no company has achieved in the real world. Likewise, the lowest level may not be as bad as it could get, but it represents the worst that any company is doing in the real world. The key to establishing a relevant baseline is using objectivity in answering the question.

As with any other benchmarking scenario, no single company will achieve the highest level in every area. That would be an unrealistic goal, like taking the gold in every Olympic event. The genius of benchmarking is that it points out where your weaknesses lie, so you can take steps to address them. Using the reporting section at the end of the tool to map your company against the database for all other companies can be particularly revealing.

Using the tool
There are a couple of steps to using the tool. First, someone with a fairly high-level view of an organization or project fills out the questionnaire, which usually takes 15 to 20 minutes. Then the company goes through a process called calibration. This involves a small group of people, usually between four and 15 -- reviewing the answers to achieve consensus. Calibration is a significant element of the process, because it ensures that everyone who answers the questions understands them in the same way and ensures that everyone comparing himself or herself to the database is looking at a single version of the truth.

Interesting -- and potentially distorting -- things can happen if a company skips the calibration process. In PDC's work with clients, we have discovered that approximately 20 percent of the answers change in some way as a result of the calibration process (which sheds a less-than-flattering light on traditional benchmarking questionnaires without calibration built in). Tom Luin of IBM agrees. "Using individual answers, we can come up with something that's fairly close to accurate. The collaboration step allows everyone to come to a consensus about what the answers are for their business unit. You eliminate the extreme viewpoints. It's a team-building exercise as well. Everybody gets to say what's important to him or her. It's a very useful organizational construct." We also have found that simply knowing others will review their answers causes people to answer questions more thoughtfully, although of course there is no way to measure the effect of this.

Let's look specifically at one area of the ideation section, portfolio management, to see how the process works. The following five answers to the question about how you handle innovation portfolio management, as with any other section, are based on real company experience and range from poor to excellent. Here's the basic idea, with answers ranging from worst to best:

 

 1. Funding is ad hoc or "creative." There is no central portfolio management.
 2. One or two people do portfolio management. It is centralized, but proposals must be justified and rejustified as funding often moves from one project to another based on short-term goals.
 3. Portfolio management follows a process, usually annual, but data about potential projects is either incomplete or not credible.
 4. Portfolio management is process- and data-driven, but adjustments are made based on short-term events.
 5. Portfolio management is process- and data-driven and regularly adjusted, with clear tie-ins to business and technology strategy.

 

In general, most companies will probably find themselves starting at level 3. They have some sort of a process in place, but individual projects offer wild projections about potential success, showing off the proverbial hockey stick in management presentations. This makes executives highly skeptical of the data, which makes it hard for them to justify decisions. The benchmarking exercise has revealed that the company needs better data to advance to the next level.

It's usually best to target improvements one level at a time. However, the process can also reveal that you might want to jump ahead faster than that -- if, say, your company were at a level 2 and others in your industry were at level 4. Again, measurement doesn't solve the problem for you, but it tells you the size of the problem and how much to worry about it, allowing you to put resources where they can do you the most good in your marketplace.

The process also can be used within a company. Interestingly, one company we worked with allowed different internal research organizations to compete for dollars. If a particular group were mature in an area, it would get more money. This made for a healthy internal competition. Once you can measure how well a research organization does research, then you can give people incentives to improve.

A work in progress
At IBM, Luin and Coughlin's group intends to use the framework internally to evaluate implementation of an innovation management system, and externally to compare IBM's activities with other companies.
"We've done some of both already," Luin says. They have taken it to six or seven companies externally, and they have asked a number of internal EBO groups to use the framework. "They found it interesting, but we haven't determined how to turn interest into action." Part of that is a question of priorities, and part is related to the challenges of trying to change management culture. "The idea of talking about and managing EBOs is a culture-shift from IBM's traditional management style and executive experience."

While IBM already has gained from using this model, there is more work to be done. According to Luin, the philosophical feedback received from executives in EBO areas was very positive. "Almost all of them said, 'This is good stuff, it should work; it's a different way of thinking about innovation but it shows promise. We need to pilot it and demonstrate its usefulness.' We are still very much in the middle of that process."

One thing that would advance the process is a bigger database of participating companies, which would help refine the results and ensure they are statistically significant. We at PDC would like to correlate individual answers with levels of success to determine which areas are most critical. That said, this is still one of the only research- and data-driven methods for managing innovation and a good place for any company to begin. "We planted the seed and it's starting to grow," Luin says. Coughlin adds, "We're incubating the idea."

What's in it for you?
To figure out whether your company could benefit from innovation measurement, you first need to determine the strategic importance of innovation to your company. Is innovation a central competitive factor in your industry, or is the market driven by other factors? If innovation is significant, are you satisfied with the efficiency of your R&D efforts, or are you wasting R&D dollars chasing the wrong innovations? Finally, take a hard look at your current innovation process and how well it measures the critical elements. If your process has room for improvement, you may benefit from a formal assessment of your company's innovation maturity. This isn't an easy road, but it can transform your business from one in which innovation is just a marketing buzzword to one in which innovation drives revenue growth.

From Sopheon's InKNOWvations newsletter 7/02....

Metrics Make a Difference in Product Development

by Wayne Mackey, Principal - Product Development Consulting, Inc.

Introduction: Don't use a hammer to saw wood

Almost every company attempts to measure its product development efforts in some way, yet industry research shows that very few are satisfied they are measuring the right things. Further, product development practitioners often find metrics burdensome, disconnected from their "real" work or an infringement on what they view as an inherently creative craft. These issues are most often rooted in a basic misunderstanding of what metrics can and can't do effectively.

Metrics don't fix problems. Ever. Instead, the power of metrics is in accurately highlighting situations and issues that can, if handled properly, make a difference. Allowing a capable product development or leadership team to make early, informed decisions should be the goal of any metrics approach.

Metrics also make poor policemen - numbers alone do not change behavior. All constructive action comes from the people involved, not from the numbers. Benefits are derived from fewer missteps along the product development timeline and an earlier resolution of problems.

Lessons learned from industry's best and brightest

So what's wrong with all those product development metrics that companies are dissatisfied with? First, there are too many of them. The most important lesson from leaders in the field is to aggressively seek the "critical few". Metrics systems are often clogged with measures of meaningless processes or are choked with "good news" items that will never really require the attention of the people involved.

Second, they are disconnected from the goals of the company or the project. These "metrics in search of a goal" offer no insights to consistently move a project or balance sheet forward. Finally, they lack teeth. A metric that is not monitored regularly and acted upon immediately is a waste of time. Period. Successful product development metrics systems have consistent, local governance systems that never ignore any metric or its message. Everyone in the organization knows what is and is not paid attention to and they invariably react accordingly.

Research indicates that leading companies set product development metrics based on the experience of the organization. Ask any product development professional if he or she can discriminate between good and bad product development on his or her project and you will almost always get a "yes". Not only that - they can almost always "smell" product development trouble early. These are the "critical few" indicators that the team needs to measure and act upon during development. Successful product developers have stopped counting drawing changes and adding up hours of training in favor of having the people closest to the work determine the key measures in achieving the end goal. An important side benefit identified in using the experience of the organization to set metrics is that buy-in to their validity and importance - a major force in the longevity and health of product development metrics systems - comes along for free.

A less obvious, but equally powerful metrics capability is their ability to quickly deploy a strategy and drive change through an organization. If the boss measures something new, it becomes important throughout the organization almost immediately. Goal setting and flow-down below the executive level is important to project cycle time. It is difficult to be successful without a direction to head in and a tangible goal. Executive teams tend to do this well, but the necessary translation to meaningful goals at a working level is often missing. This is the responsibility of middle management, which is generally embraced at successful companies. A structured approach to goal flow-down and formal communication paths through the organization are often cited as contributors to metrics success.

Three simple steps to metrics success - it doesn't have to difficult to be right

Companies that have achieved demonstrable success in product development metrics have certain process steps in common. They are often called different things or are broken down into various sub-categories, but three essential elements are easily identifiable.

bulletGoal setting precedes metrics selection.
Every metric has a clear tie-in to a goal. Everyone bound by a metric knows why and how it supports a larger goal of the organization or project. A "metrics tree" detailing the flow-down of goals from the top of the company is one method of communication. Broad involvement in a formal flow-down at each level of the organization is a common thread at successful companies.
bulletMetrics are set with a "causal action" relationship to the goal.
Instead of measuring the goal, successful companies measure the things that cause the goal to happen. A useful analogy is a common diet. If your goal is to lose 15 pounds, measuring your weight is easy, but doesn't really help you achieve anything but informed fluctuation. If you instead measure your daily caloric intake of food and the amount of exercise you do, achieving your goal of weight reduction is under your control. Many companies mistakenly attempt to measure product development by looking at beginning-to-end results, with informed fluctuation the predictable result.
bulletFormal governance is a necessary evil.
Successful governance consists of targets and reviews. A target is an objective measure of where the effort should be throughout the entire implementation period. Progress must be monitored regularly along the way. Without a formal governance system, too much depends on hope and heroes. Frequent, periodic reviews are best conducted at a working or peer level to minimize bureaucracy, but they must be done in a formal manner. On a less frequent basis, a higher-level review of progress toward the ultimate result must also occur to ensure success.

Action implications - Standing up to the plate

It is easy and understandable to throw up your hands and concede defeat in product development metrics, but the success of industry leaders demonstrates that when done well, these metrics are a critical component in achieving consistent new product development results. A good management team can look like a great management team if they are armed with the right information at the right times to manage their development efforts. Successful product launches are a predictable effect of such managed development. Lessons-learned from industry leaders ranging from medical devices to consumer goods to defense electronics demonstrate the power of properly measured product development. It can't be done without an approach that leverages the experience of the organization in a structured manner. It can't begin without someone taking the first step.

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Mackey Group, Inc. © 2002 - 2008
Email:  wayne@mackeyinc.com