April 4, 2012

Case Study: Product Development in a Downturn

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Some years ago, we experienced a real-world example of how product management with a lack of measurement can result in failure.

Background:

The company involved was a telecommunications service provider with a varied product portfolio, spanning both mature circuit technologies as well as the newer IP packet data. The corporate product management team was headed by a Senior VP of Product Management who organized the department into four sub-groups, each headed by a Director. The sub-groups were determined by both technology and customer, for example a SONET platform would have large scale carrier-to-carrier products in one group while another would offer standard enterprise SONET products. Each group had multiple product managers and product development teams.

There was a product development plan and roadmap, spanning all of the four groups. While each new product development project included a five year business case as part of the initial Go-No Go approval process, once approved it was not updated against actual performance. Similarly, ongoing revenue numbers for existing products were available, however, existing products did not undergo regular P&L analysis at the product level. Typically, the product management team would launch 16-25 products per year.

During the annual budget review process for the upcoming year, the firm was experiencing financial difficulties, and the VP of Product Management was advised that only eight new products would be launched in the next year. As an aside, it would be more likely that a lower discrete budget value was actually set by management, however this is how the VP presented the situation to the team.

The VP called all of the Directors and Senior Managers into a meeting, to discuss making a revised product launch plan, and announced that each Director would be limited to only two new products for the year. The purpose of the meeting was to determine which two products would be launched for each department.

Analysis:

The VP, in this case, missed a great opportunity to ask some important questions about the product portfolio, and indeed whether the organization had the right structure to deliver the best results for the firm. By making product decisions based on the organizational structure, rather than solving for an optimal business solution, they took the very real risk of further exacerbating the firm's financial difficulties.

A product portfolio should include products at all stages of the product development life cycle. An array of mature products should be generating ample cash as they wind down in order to support the short initial (hopefully) negative cash flow of new products, in a never-ending cycle. Without a product line item understanding of profit and loss, it is very difficult to balance the product portfolio in an appropriate manner.

We would have recommended a different approach to the same issue.

  1. Identify the eight optimal candidate products without consideration of organizational group
  2. Review the existing organizational structure to determine if changes need to be made to support launching the optimal eight products

Identifying the optimal eight products involves multiple levels of analysis. Metrics such as scale of the product development investment, size of ongoing operational investment necessary to break even, present value of expected revenue over the lifecycle, present value of expected net profit, time to break-even, strategic positioning within the market segment, and carrying costs of maintaining the product are good examples. Preparation of these types of metrics across all candidate products will provide an objective means to achieve an optimal mix. Incidentally, we recommend that these type of metrics be maintained at all times as it improves any decision process to have such an objective view available.

Once the eight products are identified, the human resources needed to support launching those eight products can be fully determined. If one organizational group were burdened with the bulk of development, resources from other groups could be encouraged to either transfer into the newly enlarged group, or be seconded for the term of the development cycle. The message that should prevail is that cross-training and change is good for the firm, as well as for the resources themselves.

Conclusion:

The VP's decision process was based primarily on the intangible need to maintain employee morale within the four product groups. While morale is certainly important, and even managers can be emotional about losing some of their organization to other internal groups, it is even more detrimental to morale to be part of a failing business.

Similarly, the decision making choice of intangible inputs against those of a more objective source is fraught with risk for both the manager making the decision as well as the firm being represented. In the end, the market decides a product's overall success and is risky enough, without failing to take the necessary time to fully consider the best possible implementation plan for the firm.

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