New PPM Metrics
The Bayes' law model is general, but the analysis of your PPM results must
match your method of selecting proposals. I am developing an analysis that compliments
the most popular method of selecting proposals: funding down a ranking. If you
use a variation of this method, as described above, and if my research is
successful, your PPM results can produce the PPM metrics I describe below.
Evaluating Your Proposals and Prioritization
Figures 4 and 5 are metrics that estimate
 and  .
From this example one learns that:
- The excellent prioritization for office inkjet printers is wasted because
proposal processes produce few good ideas for this business line.
- The company can invest heavily in its line of office laser printers. With
good prioritization and proposal processes, aggressive selection will produce
a high value for
 ,
which will produce strong financial results.
- Aggressive selection in the professional printing line will produce poor portfolios.
If professional printing is strategically important, the company must invest to
improve its proposal processes ()
and prioritization
().
|
Strategic Bucket
|
P Proposals
|
|
Office inkjet printers
|
40%
|
|
Office laser printers
|
53%
|
Professional printing
|
38%
|
Figure 4: Table listing % of Good proposals in each strategic bucket
Figure 5: The quality of prioritization and project selection for each strategic
bucket
Cutoff Values, Hurdle Rates and Bucket Sizes
The preceding metrics, and forthcoming Figures 8
and Figure 9, arise from your proposal
evaluations and a twofold classification of completed projects: Good vs. Bad.
With a more thorough evaluation of completed projects the model can provide additional
metrics. Specifically, if you can estimate the value created or lost by each project,
the new model can relate project selection to portfolio ROI and NPV. Figures 6
and 7 illustrate these metrics. (For ease of presentation,
these Figures assume that projects are evaluated on a ten-point scale and that
Bad projects have a NPV < 0.)
Figure 6: How NPV varies with cutoff values
For each strategic bucket, Figure 6 shows how NPV
varies with the cutoff value that you select. If you select a high cutoff value,
will be high,
so NPV > 0. However, you will select few proposals, so NPV will be small. If
you lower the cutoff value and select more projects,
will decrease. Initially, the value from the additional Good projects will exceed
the losses from the additional Bad projects, so NPV will increase. However, if
you continue to lower the cutoff value, will decrease too much. At some point,
the losses from the additional Bad projects will exceed the value created by the
additional good ones. When this situation occurs, NPV will decrease. If you continue
to reduce the cutoff value, NPV will become negative.
The maximum of each curve shows the optimal cutoff value for its strategic
bucket. The points where NVP = 0 show the lowest cutoff values you can set before
each bucket's NPV turns negative. Figure 6 could display
NPV vs. hurdle rate or bucket size (budget), so the new model can help you set
cutoff values, hurdle rates and bucket sizes.
Figure 6 is analogous to the productivity curves found
in PPM dashboards and the "efficient frontier" produced by optimization. However,
Figure 6 differs from those metrics in two ways. First,
Figure 6 considers the impact of prioritization errors,
but the other curves do not. For this reason, productivity curves and "efficient
frontiers" display an optimistic bias. Second, productivity curves and "efficient
frontiers" present expectations that arise from the assessments of your current
proposals. Figure 6 presents expectations that arise
from your past portfolios. It reveals your company's proven performance. Both
types of metrics are useful and should be considered.
Balancing Strategic and Financial Goals
Figure 7 reveals the relationship between each strategic
bucket's cutoff value and ROI. A high cutoff value (cautious selection) raises
ROI. A low cutoff value (aggressive selection) lowers ROI. This relationship occurs
for two reasons. First, in a prioritized list the "bang-for-the-buck" tends to
decrease as one moves down the ranking. Second, because prioritization is imperfect,
decreases as one
selects down a ranking. This relationship implies a trade-off between strategic
and financial goals. In the short-run, aggressive pursuit of strategic goals will
hurt financial performance.
Figure 7: How ROI varies with cutoff values
Figure 7 helps you manage this trade-off. To see how,
suppose you wish to obtain 30% of revenue from new products while producing an
ROI = 15%. You can estimate the number of proposals you must select to produce
the revenues. This estimate identifies the cutoff value that will achieve your
strategic goal. With Figure 7 you then estimate the ROI
for this cutoff value. If the estimated ROI < 15%, your strategic and financial
goals are incompatible and destined to fail. If this situation occurs, Figure 7
will help you select the best trade-off for your company. You can then relax the
trade-off by using methods I present later in this paper.
|
Proposals
and Selection
