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There are reasons to be optimistic. As sophisticated methods gain use, evidence of their value is becoming more prevalent. So far, most of the data on the relationship between the use of analytic methods and business success is coming from the oil & gas and pharmaceutical industries. Such organizations are early adopters because high project costs and risks make bad decisions particularly costly. For example, an article in the journal Oilfield Review reports a study of 20 oil exploration companies that "established a strong positive correlation between the degree of sophistication in the companies' use of decision and risk analysis and the success of their project decisions." The same article also described another oil company study that found that "Companies that integrated workflow and used decision and risk analysis saw their performance improve shortly after the introduction of this methodology" [15]. A study of pharma stock price performance over a seven year period, found that companies that use decision analysis outperformed the Dow Jones Pharma Index by nearly 200% [16]. Of the numerous ways that analytics can improve organizational performance, project portfolio management, in particular, is receiving good press. SmithKline Beecham reported that finding the efficient frontier for a portfolio of 25 R&D projects increased expected return by $2.6 billion [17]. Focusing on value is key—Eastman Chemical reportedly doubled the worth of its R&D project portfolio as a result of making value creation the main metric for evaluating projects [18]. CIO Magazine reports a survey of portfolio management in product development applications that found that companies that achieve project portfolio management excellence experienced 50% faster revenue growth [19]. Studies released by the Aberdeen Group reported that companies that are best in class at product portfolio management realize 25% more revenue from new products[20}and are four times more likely to achieve margin premiums of 75% or higher [21]. A study focused on R&D portfolios found that companies performing in the top 20 percent had previously installed an explicit, established method of project portfolio management across the organization [22]. In 2008, a market research firm estimated that project portfolio management software delivers over 500% ROI [23]. |
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Also, something new is happening. A few highly successful companies are making no secret of the fact that they have adopted superior analysis as a competitive business strategy. Explaining better than expected 2009 third quarter earnings, Cisco's CFO said, "We have continued our emphasis on operational excellence, portfolio management, and customer focus, all of which we believe positions us for future success" [24]. John Wilder, CEO of utility TXU, claims to have cut costs "by more than $1 billion" through a series of initiatives that included bringing "analytic rigor to our portfolio decisions" [25]. American Express reports that the company applies its "Investment Optimization" portfolio process to all discretionary investments, and that the analysis results in "tens of millions of dollars being reallocated annually" [26]. In a video detailing Chevron's use of decision analysis, Chevron Vice Chairman George Kirkland states, "Decision analysis is a part of how Chevron does business for a simple, but powerful, reason: it works" [27]. 
In an HBR article entitled, "Competing on Analytics," Thomas Davenport identifies eBay, Google, Amazon, and Dell, among others, as a new breed of companies that "are oriented to a much higher level of analytics: predictive modeling, optimization techniques—than we've been used to in the business world" [28], They hire employees for their analytic expertise, provide them with the best available information, and arm them with the best quantitative tools. "As a result, they make the best decisions: big and small, every day, over and over and over." Beat the 60% Solution!The introduction to this paper described the concept of the "60% solution," the belief held by many that organizations only obtain about 60% of the value that could be derived from their businesses. As I have explained, I believe that choosing the wrong portfolio of projects is a major reason for lost business value. The 60% solution can be beaten by doing a better job of choosing and managing project portfolios. It may not be easy, but it can definitely be done. The fact that optimizing project decisions is hard to do (but doable) is why organizations that successfully address the problems identified in this paper can create for themselves a significant competitive business advantage. References for Part 6
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Printable version
Why Isn't Everybody Doing
This?