How are you measuring performance in new product development?
08 September 2015
New product development is an increasingly complex activity, posing multiple challenges for companies trying to build competitive advantage. Jörg Putzer and Darragh MacNeill report.
From our experience, there appears to be a disconnect between what organisations are hoping for and what they are getting from their investments in innovation. In many cases, a sense of ‘eternal optimism’ seems to prevail regarding new product development (NPD).
According to a report published in 2013 by the Product Development and Management Association, only 61 percent of launched products succeeded in the market. So how can a company improve this measure?
Performance of NPD is often both under-measured and under-managed. Having correct and clear metrics is a real challenge, and those aiming to manage the performance of NPD typically apply conventional key performance indicators (KPIs) such as time to market, percentage of sales from new projects or return on investment.
While important, these KPIs measure success only after a new product or service has been launched and come too late in the process to influence performance. In other words, they just reflect the outcome of performance. We believe that successful performance management of NPD needs to involve three key aspects:
?Organisation: an holistic value chain approach to align the performance of all the interdependent functions involved in the integrated NPD process.
?Process: a streamlined process managed by a balanced combination of KPIs that evaluate not just final project outcomes but also input and supporting factors that influence the success of NPD.
?Data: capability to use Business Intelligence (BI) as an important enabler to support the management of NPD and drive correct behaviours across the value chain.
The development of new products is a highly cross-functional activity characterised by an interdependence across an organisation’s value chain. In reality the required collaboration rarely happens as effectively as it should. As a result, new product development projects fail to achieve their target objectives. This is often due to contradictory objectives, ineffective collaboration and unclear roles and responsibilities among sales & marketing, finance, purchasing, quality, engineering or manufacturing.
What is needed is a robust performance framework with an appropriate set of KPIs that will make these interdependences transparent and contribute to the effective management of each function’s performance. Only by assigning clear, shared, cross- functional accountabilities, measured by KPIs, will an organisation manage to break down silo behaviour and foster collaborative decision making. Clear accountabilities also help to establish performance-oriented behaviours across an organisation and the nature of these accountabilities changes throughout the lifecycle of a project.
Despite the uncertainty in NPD projects, success can, to a large extent, be predicted and performance proactively managed throughout a project’s life. Continuously assessing the performance status of a project, combined with timely implementation of the right mitigating actions, can greatly influence the success of a project. Therefore, NPD needs to be managed in a structured way by applying systematic performance management, focused on both the effectiveness and efficiency of development activities.
Effectiveness is related to the outcome of projects, such as customer satisfaction or financial success. Efficiency is linked to the multiplicity of inputs that influence those outputs on a day-to-day basis. In order to deliver NPD both effectively and efficiently, we recommend managing new product development projects along four dimensions: lagging, leading, controlling and enabling indicators.
Lagging indicators measure the effectiveness of NPD by evaluating success or failure once a product has been launched (customer satisfaction, for example), whereas leading indicators measure the efficiency of NPD. They are predictive indicators, used to plan and manage critical inputs to activities in the innovation process. Leading indicators provide early warnings and allow mitigation against any developing weaknesses before problems perpetuate throughout a project’s life.
Controlling and enabling indicators focus on the performance of the different processes that drive the success or failure of projects. Controlling indicators are operational indicators used to monitor the performance of a process. For example, the number of requirements change requests can be used as a controlling KPI to measure the performance of the requirements management process. A high number of late changes can be an indication that the requirements definition process is not robust enough.
Enabling indicators are about driving cross-functional cooperation and are used to monitor enablers to the process. They are often linked to the people or technology aspects in NPD. For example, only if project team members are adequately trained to use the requirements management software available, will they be able to ensure requirements traceability. It is important to remember that a single KPI will never tell you the full truth; you must use a combination of different KPIs to get the full picture.
In today’s data-rich environment, deploying an integrated performance management framework in an NPD context needs to be supported by the ability to access and manage a large amount of information across the value chain in a streamlined and timely fashion. To this end, Business Intelligence (BI) can be seen as an important enabler.
BI can be used to foster deeper understanding, connecting the KPIs together, providing the ability to undertake root-cause analysis ‘on the fly’ and form the library of record for development projects, including past successes and failures, from which future development teams can learn. Business Intelligence encompasses data analytics to take the guesswork out of innovation, while at the same time enabling collaboration across new product development teams.
One specific challenge in NPD is that the process is sometimes difficult to visualise; therefore, people are often unable to gain a quick understanding of the overall status. A possible solution is to set up a ‘project room’, where the short-interval control and critical issues are on display. Project stakeholders can then meet there on a regular basis to analyse criticality, make decisions and define action plans. This will drive collaborative behaviours around key performance issues.
For NPD to be a success in any business there must be a well-defined and robust process at its heart. Built around this process there needs to be a system to manage performance. KPIs are an important part of this system.
These indicators highlight performance issues, but they rarely tell you what the root cause of the problem is. However, used in conjunction with accurate data, KPIs are valuable inputs for decision making and problem resolution. Furthermore, they need to be complemented with appropriate behaviours across the value chain, to ensure that the correct actions and decisions are taken. These behaviours should be results-orientated and encourage effective collaboration, transparency and broad-based problem solving to ultimately influence the outcome of NPD.
Integrated performance management based on KPIs aligned across the value chain, supported by a robust BI framework and performance-driven behaviours will enhance a company’s performance management culture and drive competitive advantage through successful NPD.
Dr Jörg Putzer and Darragh MacNeill are with Hitachi Consulting