A portfolio management approach is perfectly suited for choosing among different product opportunities. A product, one or more features, or any other change needs to be treated the same – we need to understand the investment required for it. We must then look at the return expected from that investment. This is a non-trivial task requiring market research and questioning of customers, sales, engagement management. This is incredibly valuable quantifiable information that can be used in determining an ROI. Each source of information serves to fill in gaps left by another, or to validate or invalidate another. We need to look at the cost of not making a particular investment, as well. This information must inform a business plan for the product, product line, or solution.

It is important for the guiding business plan to exist. But the fact is, any amount of upfront investigation will be flawed and could be outdated during development. Therefore, it is even more important for the plan to be simple enough that development and sales efforts can be measured against it monthly. Assumptions in the original plan will be validated, invalidated, or adjusted. If the ROI turns negative, the product development and sales effort should be put on hold, temporarily or indefinitely.

Financial analysis is critical only because dollar amounts allow the comparison of the cost and return of a variety of efforts over time. It also creates quantifiable goals for revenue (sales) and costs (development and maintenance). Clearly, there are factors other than revenue and cost that will affect initiation or continuation of a development effort. These factors fall into two categories

• Factors like competitive advantage, first-mover advantage, and technology evolution. Neither revenue nor cost can be directly associated with these. However, they can be indirectly associated with them. The associations can be validated as well. For example, competitive advantage can be associated with a number of sales. Technology evolution may be required for the revenue projections to be long term.
• Certainty. A product on the verge of release with a 10% projected ROI should not be abandoned in favor of a brand new product with even a 40% ROI. On the verge of release, the certainty of the 10% ROI is much greater than the certainty of the 40% ROI product. Simply, a bird in the hand is worth two in the bush.

If we find ourselves in the strange situation where numerous opportunities are equally appealing from an ROI perspective, and development is prepared for multiple opportunities, then we should explore as many as possible simultaneously in an exploratory fashion, to validate or invalidate critical assumptions. This prototyping is the R in R&D. When some projects have “failed quickly,” the engineers working on them should be diverted to the remainder. To some extent, this means we don’t need to choose among different product opportunities, just follow through with disciplined up-front investigation followed by rapid failure in prototypes. Funded and custom development opportunities are great as long as all costs are recovered, including maintenance and archival costs. Custom development opportunities generally allow us to solve deep problems for our customers in consultative environments. Funded opportunities should be viewed as offsetting costs, thereby improving ROI. However, funded development guarantees neither positive ROI nor superior ROI—opportunity costs of pursuing funded efforts must be considered. Furthermore, accepting a funded opportunity generally locks us into an investment up front—they are difficult to back out of or put on hold. Therefore, they are inherently riskier than “speculative” efforts.