Selecting and managing the portfolio of innovation projects is a difficult but vital part of managing innovation. Failure to make good and timely decisions is bad for efficiency in the short term, and for profit, or even survival, in the long term
No one set of tools suits all situations; the choice depends on the information available, the type and complexity of the projects involved, and how close they are to commercialization. For early-stage projects, those well to the right in the innovation funnel, information will be sparse and financial approaches are usually unhelpful; multi-criterion scoring is the best approach. The key to a good scoring tool is careful definition and alignment of the scales. Opportunity and feasibility aspects should be assessed separately. Financial methods of varying degrees of sophistication take centre stage when projects become better defined.
Particular care is necessary in treating risk. Risk in the sense of uncertainty should not be regarded as a negative aspect of a project, merely an indication of the need for investigation. It is a mistake to use single estimates of value such as the mean; the range of possible outcomes must always be considered.
The portfolio of projects selected must not only represent the best possible use of resources, but must also be balanced in terms of risk, timing and strategic impact. Various tools such as bubble diagrams are available to help this but the choices are ultimately intuitive and the result is always a compromise.
Selection decisions for innovation projects always involve intuitive judgements. But managers should be aware of the pitfalls of intuition and design the decision-making processes to avoid bias by strong personalities or anchoring effects.
Interview with Christian Rasmussen
Choose project valuation tools that are appropriate for the types of project: using subjective measures such as scoring when uncertainty is high, but emphasizing financial measures more as commercialization approaches.
Keep valuation tools simple and transparent so that the decision process remains open to review, and leaves scope for management judgement.
Treat numerical measures of risk with caution; they are always approximate. Avoid making single-point estimates. Try and understand the range of possibilities open to each project.
Understand the possible errors and biases of individual decision-making. Give close attention to ensuring that the evaluation process is objective and that unsuccessful innovators are rewarded for their efforts.