When it’s Time to Kill a Project – Part 2

Selecting the right projects, and allocating appropriate resources to those projects, is critical to NPD success. Project portfolio management is the process of periodically prioritizing your projects to maximize your new product development investments. A good portfolio management system serves to put everyone on the same page as to why we have selected this set of projects, and (just as important) why we rejected others.

Even with the best portfolio management system in place, once in awhile you will pick the wrong project, or a good project will get off track. How do you know when it is time to pull the plug?

In part 1, we created a hypothetical project portfolio to examine this question. In the first project portfolio review (we called it Q1), Project Alpha was approved because it looked like a winner. However, in the Q2 review we discovered project Alpha was off track from the original plan. Marketing reported that five-year gross profit is expected to be half what we thought when the project was approved in Q1. Engineering expects development costs will total $1.2M (original estimate of $800K).

In the next table we see what our project portfolio looks like at the Q2 review. We see that project Alpha has fallen to fourth place when the list is sorted by five year gross profit divided by development cost (5GP / DC). Maybe we should dump project Alpha in favor of Beta.

There is a problem with the above table because it includes project Alpha’s sunk costs – the money already spent on the project. That money is gone and isn’t coming back. We have to make today’s decision based on the options available to us today, not what happened in the past. (See what others have to say about using sunk costs vs. remaining costs in my question on the subject posted to the LinkedIn Questions and Answers page.)

Let’s redo the table assuming that we are halfway through the Alpha project – i.e. we have already spent $600K of the current $1.2M total cost estimate. That means our five year gross profit divided by development cost metric becomes 4.2 (not 2.1). This of course is still a setback from the original value (6.3), but this keeps project Alpha closer to the top of the list than if you used total development costs in the calculation.

Remember, project Alpha’s 5GP / DC ratio would be 12.5 if it was on budget and 50% complete. By using remaining costs instead of total costs a good project should look progressively better the closer it gets to completion. That only makes sense doesn’t it?

Ignoring sunk costs, Alpha’s gross profit to development cost ratio is still relatively good and its strategic score still tops the chart. So, unless you have a corporate mandate such as all products must have a 5 year gross profit of at least $4M, it is not clear that you should cancel Alpha just on financial metrics alone.

Now, it’s time to examine why we dropped our 5 year gross profit estimate by from $5M to $2.5M. Is it because we just learned we are designing a product that is missing key features that our customers are looking for? Is it because a new competitive threat has emerged? Did we simply overestimate the available market to begin with? And most importantly, can we make a midcourse correction to get some of that gross profit back?

I’ll look at those questions, and share a real life example, in Part 3.