smithkline beecham

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IDEAS AT WORK By tackling the soft issues - such as information quality, credibility, and trust - SB improved its ability to address the hard ones: how much and where to invest HOW SMITHKLINE BEECHAM MAKES BETTER RESOURCE-ALLOCATION DECISIONS BY PAUL SHARPE AND TOM KEELIN I N 1993, SMITHKLINE BEECHAM was spending more than half a billion dollars per year on R&.D, the lifehlood of any pharmaceuticals company. Ever since the 1989 merger that created the company, however, SB believed that it had been spend- ing too much time arguing about how to value its R&JD projects-and not enough time figuring out how to make them more valuable. With more projects successfully reaching late-stage development, where the resource requirements are Paul Sbarpe is vice president and director of project management in neuroscience at SmithKline Beecham in Harlow, England. Tom Keelin is worldwide managing director of the Strategic Decisions Group, an international manage- ment-consulting firm based in Menlo Park. California. greatest, the demands for funding were growing. SB's executives felt an acute need to rationalize their port- folio of development projects. The patent on its hlockbuster drug Taga- met was about to expire, and the company was preparing for the im- pending squeeze: it had to meet cur- rent earnings targets and at the same time support the R&X) that would create the company's future revenue streams. The result was a "con- strained-budget mentality" and a widely shared belief that SB's prob- lem was one of prioritizing develop- ment projects. Major resource-allocation deci- sions are never easy. For a company like SB, the problem is this: How do you make good decisions in a high- risk, technically complex business when the information you need to make those decisions comes largely from the project champions who are competing against one another for resources? A critical company process can hecome politicized when strong-willed, charismatic project leaders beat out their less competitive colleagues for re- sources. That in turn leads to the cynical view that your project is as good as the performance you can put on at funding time. What was the solution? Some within the company thought that SB needed a directive, top-down ap- proach. But our experience told us that no single executive could possi- bly know enough about the dozens of highly complex projects being de- veloped on three continents to call the shots effectively. In the past, SB had tried a variety of approaches. One involved long, intensive ses- sions of interrogating project cham- pions and, in the end, setting priori- ties hy a show of hands. Later that HARVARD BUSINESS REVIEW March-April 1998

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Page 1: Smithkline Beecham

IDEAS AT WORK

By tackling the soft issues -such as information quality, credibility,

and trust - SB improved its ability to addressthe hard ones: how much and where to invest

HOW SMITHKLINEBEECHAM MAKES BETTERRESOURCE-ALLOCATION

DECISIONSBY PAUL SHARPE AND

TOM KEELIN

I N 1993, SMITHKLINE BEECHAMwas spending more than half a

billion dollars per year on R&.D, thelifehlood of any pharmaceuticalscompany. Ever since the 1989 mergerthat created the company, however,SB believed that it had been spend-ing too much time arguing abouthow to value its R&JD projects-andnot enough time figuring out how tomake them more valuable.

With more projects successfullyreaching late-stage development,where the resource requirements are

Paul Sbarpe is vice president anddirector of project managementin neuroscience at SmithKlineBeecham in Harlow, England. TomKeelin is worldwide managingdirector of the Strategic DecisionsGroup, an international manage-ment-consulting firm based inMenlo Park. California.

greatest, the demands for fundingwere growing. SB's executives felt anacute need to rationalize their port-folio of development projects. Thepatent on its hlockbuster drug Taga-met was about to expire, and thecompany was preparing for the im-pending squeeze: it had to meet cur-rent earnings targets and at the sametime support the R&X) that wouldcreate the company's future revenuestreams. The result was a "con-strained-budget mentality" and awidely shared belief that SB's prob-lem was one of prioritizing develop-ment projects.

Major resource-allocation deci-sions are never easy. For a companylike SB, the problem is this: How doyou make good decisions in a high-risk, technically complex businesswhen the information you need tomake those decisions comes largelyfrom the project champions who are

competing against one another forresources? A critical companyprocess can hecome politicizedwhen strong-willed, charismaticproject leaders beat out their lesscompetitive colleagues for re-sources. That in turn leads to thecynical view that your project is asgood as the performance you can puton at funding time.

What was the solution? Somewithin the company thought that SBneeded a directive, top-down ap-proach. But our experience told usthat no single executive could possi-bly know enough about the dozensof highly complex projects being de-veloped on three continents to callthe shots effectively. In the past, SBhad tried a variety of approaches.One involved long, intensive ses-sions of interrogating project cham-pions and, in the end, setting priori-ties hy a show of hands. Later that

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IDEAS AT WORK MAKING BETTER RESOURCE-ALLOCATION DECISIONS

process evolved into a more sophis-ticated scoring system based on aproject's multiple attributes, such ascommercial potential, technicalrisk, and investment requirements.Although the approach looked goodon the surface, many people in-volved in it felt in the end that thecompany was following a kind ofpseudoscience that lent an air of so-

SB needed a solution thatwas technically sound andorganizationally credible.

phist icat ion to fundamentallyflawed data assessments and logic.

The company had also been disap-pointed by a number of more quanti-tative approaches. It used a variety ofvaluation techniques, including pro-jections of peak-year sales and five-year net present values. But evenwhen all the project teams agreed touse the same approach - allowing SBto arrive at a numerical prioritiza-tion of projects - those of us involvedin the process were still uncomfort-able. There was no transparency tothe valuation process, no way ofknowing whether the quality ofthinking behind the valuations wasat all consistent. "Figures don't lie,"said one cynical participant, "butliars can figure." At the end of theday, we couldn't escape the percep-tion that decisions were driven hythe advocacy skills of project cham-pions - or made behind closed doorsin a way tbat left many stakehold-ers in the process unpersuaded thatthe right road had been taken.

As we set out in 1993 to design abetter decision-making process, weknew we needed a good technical so-lution-that is, a valuation method-ology that reflected the complexityand risk of our investments. At thesame time, we needed a solutionthat would be credible to the organi-zation. If we solved the technicalproblem alone, we might find theright direction, but we would failto get anyone to follow. That is typi-cally what happens as a result ofgood backroom analysis, howeverwell intentioned and well executed

it is. But solving the organizationalproblem alone is just as bad. Opendiscussion may lead to agreement,enabling a company to move for-ward. But without a technicallysound compass, will it be moving inthe right direction?

The easy part of our task wasagreeing on the ultimate goal. In ourcase, it was to increase shareholder

value. The hard part wasdevising a process thatwould be credible to allof the interested parties,including top manage-ment, dozens of projectteams, the heads of SB'sfour major therapy areas,

and executives from key functionssuch as strategic marketing, finance,and business development - allspread across Europe, the UnitedStates, and Japan. In particular, thetraditional advocates in the process -the project teams and their therapyarea heads-would have to believethat any new process accuratelycharacterized their projects, includ-ing their technical and commercialrisks. Those who were more dis-tant-leaders of other project teamsand therapy areas, regional and func-tional executives, and top manage-ment-would require transparencyand consistency. How else couldthey make any meaningful contribu-tion to the teams' thinking, or com-pare projects to one another, or un-derstand how projects might affectone another?

Most organizations think of deci-sion making as an event, not aprocess. They attach great impor-tance to key decision meetings. Butin most cases, and SB is no excep-tion, the real prohlems occur heforethose meetings ever take place. Andso the process that SB designed-athree-phase dialogue between theproject teams and the company's de-cision makers - focused on the in-puts to the resource-allocation deci-sion and the role of the organizationin preparing those inputs.

Phase I:Generating AlternativesOne of the major weaknesses ofmost resource-allocation processesis that project advocates tend to take

an all-or-nothing approach to budgetrequests. At SB, that meant thatproject leaders would develop a sin-gle plan of action and present it asthe only viable approach. Projectteams rarely took the time to con-sider meaningful alternatives-espe-cially if they suspected that doing somight mean a cutback in funding.

And so we insisted that each teamdevelop at least four alternatives:the current plan (the team wouldfollow the existing plan of activity),a "buy-up" option (the team wouldbe given more to spend on the proj-ect), a "buy-down" option {the teamwould he given less to spend on theproject), and a minimal plan (theteam would abandon the projectwhile preserving as much of thevalue earned to date as possible).Working with a facilitator, a teamwould begin by describing a project'sobjective, which usually was to de-velop a particular chemical entitytargeted at one or more diseases.Then it would brainstorm aboutwhat it would do under each of thefour funding alternatives.

Consider a compound under de-velopment in SB's cancer area. Thecurrent plan was to develop the drugin two formulations, intravenousand oral, for the treatment of two tu-mor types, A and B, by investing $10million beyond what had alreadybeen invested. (The numbers in thisexample are not actual figures.)When the team working on the proj-ect was asked to develop alterna-tives to the current plan, theybalked. Their project had alwaysbeen regarded as a star and had re-ceived a lot of attention from man-agement. They helieved they alreadyhad the best plan for the compound'sdevelopment. They agreed, however,to look at the other alternatives dur-ing a brainstorming session.

Several new ideas emerged. Underthe buy-down alternative, the com-pany would drop one of the productforms (oral) in one of the markets(tumor type B), saving $2 million.Under the buy-up alternative, thecompany would increase its invest-ment by $5 million in order to treat athird tumor type (C) with the intra-venous form. When the value ofthose alternatives was later quanti-

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IDEAS AT WORK MAKING BETTER RESOURCE-ALLOCATION DECISIONS

A FRAMEWORK FOR EFFECTIVE COMMUNICATION

This three-phase process allows SB to find more valuein its portfolio of development projects.

starting point

Projectteams

fied, a new insight emerged. Al-though the buy-up option increasedcosts considerably, it also increasedvalue by about 30%. Suddenly it oc-curred to one team member that byselecting only the most valuablecombinations of products and mar-kets, they might botb increase valuesignificantly and reduce costs incomparison with the current plan.That insight led the team to a newand even more valuable alternativethan any they had previously consid-ered: target all three markets whilecutting back to just one productform in each market. (See the exhih-it "Developing Project Alterna-tives.") This solution was so power-ful that it quickly won project teamsupport and management endorse-ment as an improvement over thecurrent plan. Although such resultsare not an inevitable result of insist-ing on alternatives, they are unlikelyto occur without it.

Considering alternatives for proj-ects had other benefits. First, ideas

that came out of brainstorming ses-sions on one project could some-times be applied to others. Second,projects that would have heen elimi-nated under the previous all-or-nothing approach had a chance tosurvive if one of the new develop-ment plans showed an improved re-turn on investment. Third, afterwalking through preliminary back-of-the-envelope financial projec-tions, the teams had a better pictureof which of the elements of their de-velopment plans-time to market,for example, or the claims made onthe drug's label - had the greatest im-pact on the drug's expected value.The team could then focus its devel-opment work accordingly.

Near the end of this phase, theproject alternatives were presentedto a peer review board for guidancebefore any significant evaluation ofthe alternatives had been performed.Members of the review board, whowere managers from key functionsand major product groups within

the pharmaceuticals organization,tested the fundamental assump-tions of each alternative by askingprobing questions: In the buy-downalternative, which trial should weeliminate? Should a once-a-dayformulation be part of our buy-upalternative? Couldn't we do betterby including Japan earlier in the cur-rent plan? The discussion sessionimproved the overall quality of theproject alternatives and helped buildconsensus about their feasibility andcompleteness.

The project teams then revisedtheir alternatives where appropriateand submitted them again for re-view, this time to the group of seniormanagers who would, at a later pointin the process, make the final invest-ment decisions on all the projects.The group included the chairman ofthe pharmaceuticals business; thechairmen of the U.S., European, andinternational drug divisions; andother senior managers from majorcorporate functions.

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IDEAS AT WORK MJtXING BETTER RESOURCE-ALLOCATION DECISIONS

DEVELOPING PROJECT ALTERNATIVESWhen a project team in SB's cancer area hegan to consider alternatives for a compound

in development, it found that it could create more value for less money.

600

530

-i 500

400-t-

3 8 0 ^

What if we drop theoral form for A and Bin order to pursue C?

Current plan

tumorAB

intravenous

••

oral

••

What is the currentdevelopment plan for thiscompound?

Develop it for two tumor typesin both intravenous and oralformulations.

For an additional Investment of$ i 0 million, the expected valueofthe product is $400 million.

S 8 10 15

expected additional investment ($ millions)

2 Buy-down plan

tumor intravenous oralA • /B /

What if the project's costshad to be reduced?

We v/ould drop the oralprogram for tumor type B.

Compared with the current plan,this plan saves $2 million in costsand gives up $20 million in value.

3 Buy-up plan 4 New buy-down plan

tumorABC

intravenous///

oral

What if more money wereavailable?

We would expand the programto include a third tumor type.

Compared with the current plan.this plan adds $130 million inexpected value for an extra $5million in investment.

oral

The current plan results in a The buy*down plan40:1 return on Investment. , rfjIiitfjMurn on Inv

tumor intravenousA /B •C /

What if we drop the oralform for A and B in order topursue C?

This provides higher expectedshareholder vaiue for lessinvestment than the current plan.

Compared with the current plan,this plan adds $ 100 million Inexpected value and saves $2million in costs.

t results in the hightrn on investment-6

In SB's process, alternatives arecreated and presented to the seniormanagement group for discussionbefore any significant evaluation ofproject alternatives is performed. Inmany organizations, investment al-ternatives are presented togetherwith an evaluation,- in others, the al-ternatives are evaluated as soon asthey are put forth, before they arefully fleshed out. Instant evaluations

often focus on what's wrong with anidea or the data supporting it; theyoffer insufficient attention to what'sright ahout an idea or how can it beimproved.

Although it takes discipline tokeep from debating which of theproject alternatives are best, it iscritical to avoid doing so at this earlystage in the process. Premature eval-uation kills creativity and the poten-

tial to improve decision makingalong with it.

At SB, we wanted to be sure thatwe had developed a full range of pro-ject alternatives before starting tojudge their value. To accomplishthat end, the role of the projectteams would be to develop the ini-tial alternatives, and the role ofmanagement would be to improvethe quality of the alternatives by

50 HARVARD BUSINESS REVIEW March-April 1998

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IDEAS AT WORK MAKING BETTER RESOURCE-ALLOCATION DECISIONS

challenging their feasibility, expand-ing or extending them, or suggestingadditional possibilities.

Phase II:Valuing AlternativesOnce we had engineered the processthat took us through phase I, weneeded a consistent methodologyto value each one of the project alter-natives. We chose to use decisionanalysis hecause of its transparencyand its ahility to capture the techni-cal uncertainties and commercialrisks of drug development. For eachalternative, we constructed a deci-sion tree, using the most knowledge-able experts to help structure thetree and assess the major uncertain-ties facing each project. (See the in-sert "Hovk SB Overhauled Its Invest-ment Process.")

We developed six requirements forachieving credihility and huy-in tothe valuation of each alternative:• First, the same information setmust he provided for every project.We developed templates that are con-sistent in scope hut flexible enoughto represent the differences amongthe projeets and their alternatives.• Second, the information musteome from reliahle sources. Expertsfrom inside and outside the com-pany must he selected hefore anyoneknows what their specific inputswill he regarding the major uncer-tainties the development team faces.• Third, the sources of informationmust he clearly documented. Thedate and place of each interviewwith an expert must be recordedalong with the key assumptions thatwere made and any important in-

sights that came up in the conversa-tion. Thus management can dig asdeep as it likes into the assessment's"pedigree" to test its quality.• Fourth, the assessments must un-dergo peer review hy experiencedmanagers aeross functions and ther-apeutie areas. Those managers canthen make comparisons across allprojects and gauge, for example, ifthe project teams are being consis-tent in assessing sim ilar uncertain-ties. They can determine, for in-stance, if the teams are using similarassumptions when assessing theprobability of passing key develop-ment milestones.

• Fifth, the valuations must he com-pared with those done by externalindustry observers and market ana-lysts to estahlish that the numbersare realistic.

P It w

HOW SB OVERHAULED ITS INVESTMENT PROCESS

I

was no smail task for SB to introduce a new re-source-allocation process into a pharmaceutical devel-opment area that included 20 major projects, dozens ofmanagers, and more than half a billion dollars of in-vestment. How was a large, complex organization go-ing to overhaul its investment process? The answerwas: gradually.

Before the new process was introduced to the entire20-project portfolio, it went through two pilot tests-first, on a single development project for migrainesand, second, on a subseetion of the portfolio that in-cluded 10 projects. The company's head of develop-ment, Paul Nicholson, helieved that the people whowould be using the new process, such as his staff in thedevelopment area and leaders of SB's functional areas,should have signifieant involvement in the process'sdesign and gradual implementation.

It was important to address the anxiety people felt atthe prospect of such a major ehange. Would the newproeess, project team members wondered, mean a cut-back in their funding? Would it mean termination oftheir projects? In an industry like pharmaceuticals,where a project leader may work on as few as five orsix projeets in an entire career, such anxieties couldnot he taken lightly.

To manage the issue, Nicholson made a commit-ment to the teams that during the initial pilot no in-vestment decisions would be made. The only objee-tive would be to develop the new approach and gaugeits viahility.

During the pilot test, we worked to build a valua-tion methodology that would win the confidence of itsfuture users. The core of the methodology that pre-vailed was decision analysis. That approach ineludesproblem framing, the creation of alternatives, the useof decision trees to represent risk, options analysis,sensitivity analysis (to represent different viewpointsand focus attention on vaiue drivers), and key outputmeasures of risk-adjusted return. Although such toolsare in widespread use, they cannot be applied in cookie-cutter fashion, SB spent considerable effort tailoringthe tools to its speeific applications.

Tbe pilot phase served to develop consensus ahout _all dimensions of the new process, from its general;philosophy to the specific templates and formats thatwere designed. The project teams and therapy areaswere satisfied that the new process could accuratelyrepresent their projects, even in complex areas such asthe risk associated with product development andcommercialization. Regional and functional manage-ment as well as decision makers could see that trans-parency and consistency were built into the process.The pilot was followed by a full-scale rollout of thenew process in 199 5.

The acid test of whether a valuation methodologyhas won credihility is this: it is credible if it no longerattracts attention to itself. When that happens-as itdid at SB hy late 1995 - the attention of the organiza-tion shifts from How should we measure value? toHow can we create more value?

HI

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IDEAS AT WORK MAKING BETTER RBSOURCE-ALLOCATION DECISIONS

• Sixth, the impact of eaeh variahleon the project's expected value mustbe identified. Doing so gives man-agement and the project teams aclear understanding of the key valuedrivers so that they can focus deci-sion making and implementation inways that add the most value.

We agreed early on that the projectteams would use ranges rather thansingle-point forecasts to descrihe fu-ture possibilities. Using ranges en-hances credibility by avoiding falseprecision. In previous developmentcycles, nothing derailed us fasterthan having a strategie marketingexpert stand in front of a room full ofscientists while trying to defend astatement like, "The worldwidemarket for Alzheimer's diseasetreatments in 2010 will be $21.2 hil-lion." The use of ranges-with thor-ough explanations of the high andlow ends-has become standardpractice at SB for forecasting all un-certainties, from product profile tomarket share to prices achieved.

We increased transparency andconsistency in yet another way byhaving a specially designated groupof analysts process the valuationinformation and draw preliminaryinsights. Having this work done by aneutral group was a relief to manyproject team memhers, who wererarely satisfied with the previous ap-proaehes to valuation, as well as tothe top management group, who

As a CFO of SB once put it,"Inconsistent valuationsare worse than none "

were tired of trying to make sense ofwidely disparate types of analysis.As the company's CFO for pharma-ceuticals put it, "Inconsistent valua-tions are worse than none."

Once the alternatives had heenvalued, a second peer-review meet-ing was held to make sure that allthe partieipants had a ehance toquestion and understand the results.This step was designed to ensurethat no surprises would emergewhen the decisions were heingmade. And again, the peer review

was followed hy a senior manage-ment review that provided an oppor-tunity to challenge, modify, andagree on the underlying assumptionsdriving the valuations. During themeeting, however, the senior man-agers were explicitly asked not to be-gin discussing which alternatives toinvest in; instead, they were askedonly to confirm that they under-stood and believed thevaluations. And if theydidn't, why not? Whatseemed out of line?

In this give-and-take,senior managers andproject team memberswere able to learn fromone another. For example, senior ex-ecutives wanted to be sure that allthe cross-project effects had beentaken into account. Was marketingsuccess in one projeet dependent onestablishing a franchise with an ear-lier product? Would a new productcannihalize an existing product, andif so, would the result be a higher ora lower total value? Was the techni-cal approach in two projects thesame, so that success in one wouldmean success in the other? Did SBhave the staff in its technical depart-ments - or the ahility to contractout - in order to accelerate threeprojects simultaneously? Such con-versations improved the quality ofthe valuations and led to additionallearning ahout technical and com-

mercial synergy.

Onee everyone had re-viewed the valuation ofthe project alternativesand agreed that the in-puts and logic were vahd,the stage was set for suc-cessful decision making

in the next phase. Suppose an agree-ment had been reached that a certaindrug had only a 10% probability ofobtaining approval in oral form. Sup-pose it turned out after a roll-up ofall the project alternatives that the10% probability killed the projeethecause its expeeted value was toolow. Under SB's new approach, noone could come back and arbitrarilychallenge the probability assess-ment. Instead, someone would needan argument that would overturnthe project's pedigree-the hasis of

the 10% assessment in the firstplace. Given the thorough nature ofthe process, the creation of such anargument would be extremely diffi-cult unless significant new informa-tion had come to light.

For example, in one case a seniormanager remarked that a projectteam had given an estimate of aproduct's likely registration with the

To the relief of many projectteam members, a neutralgroup studied the valuations.

FDA that was too high. The responsefrom the project team was, "Whatprobability would be more appro-priate, if this one is too high?" Thefacilitator probed the manager'sthinking; "Do you think it's too highrelative to other projeets? Or that it'stoo high hased on other considera-tions?" he asked. Following anotherexchange of views with the expertwho had offered the original proba-bility assessment, the judgmentstood. In the end, the likelihood ofFDA registration turned out to be akey driver of value. The managerwho had challenged the estimatewas satisfied that the company wasusing the hest information availableand did not question the ultimatefunding decision.

That exchange illustrates an im-portant dimension of SB's decision-making process. If challenges suehas "too high" or "too low" are ac-cepted without requiring the skep-tics to put forth alternative esti-mates or clear rationales, then snapjudgments by senior managers cancarry the same weight as carefullyresearched plans. When that hap-pens, project team members becomecynical. They come to expect thatmanagement will badger them intoproviding estimates that yield theanswers they want.

Phase III:Creating a Portfolioand Allocating ResourcesThe goal of this phase was to createthe highest-value portfolio based onall the project alternatives that had

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I D E A S AT W O R K MAKING BBTTER RESOURCE-ALLOCATION DECISIONS

CREATING A HIGH-VALUE PORTFOLIO

Phase IFor each project, developcreative, feasible investmentalternatives.

Project 3:

Hypertension Treatment

minimal

Highest-Value PortfolioConstruct the highest-valueportfolio based on theretum-on-investment ranking.

Phase nFor each alternative, determineexpected value.

If $8.5 mUiion is invested...

Probability Probabilityof technical of high orsuccess low sales

hieh

Net presentvalue

$1,000 millionpath I

$500 miliionpath 2

$-20 millionpath 3

...then the expected value is $340 millionand the return on inveitmenth 40:1.

Phase IIIRank projects hy highest returnon investment and constructthe highest-value portfolio.

Return onKank investment Project Alternative

o 60:1 #10 current

(ij 50:1 #4 buy-down

( 3 ) 45:1 #7 buy-down

^ ^ 40:1 #3 buy-up

35:1 #7 current

Note:To calculate expected value, multiply the netpresent value for each path by its probability.Then add all the paths.

path I 50% X 40% X $1,000 =$200

path 2 50% X 60% X $500 =$150

path3 50%x$-20 = $ - 1 0

expected value = $340 million

J 1 incremental valuefrom project #3

(buy-up)= $340 million

y

z

45:1

incrementalinvestment$8.5 million

35:1

cumulative investment

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MAKING BETTER RESOURCE-ALLOCATION DECISIONS IDEAS AT WORK

been developed. This was no easytask: with 20 major projects - each ofwhich had four well-conceived alter-natives - the number of possible con-figurations was enormous. We ap-pointed a neutral analytic team,rather than the project advocates, tocarry out a systematic approach toidentifying the highest-value portfo-lio based on return on investment.

The portfolio could then be exam-ined along a number of strategic di-mensions, including stability underdifferent scenarios, balance acrosstherapeutic areas and stages in thedevelopment pipeline, and feasibil-ity of success given SB's technicaland commercial resources. Becausethe senior managers had alreadyagreed-and vigorously debated-theunderlying projeet descriptions(phase I) and valuations (phase 11) foreach alternative, they now focusedtheir complete attention on the port-folio decisions.

It turned out that the portfoliowith the highest expected return oninvestment represented a significantdeparture from the status quo. Onlyfour projects would receive their ex-pected funding, ten would get in-creased funding, and six would becut back. Tbe senior managementgroup was able to discuss the newportfolio without wasting time and

energy questioning the numbers andassumptions.

The first 14 project decisions,which involved increasing or main-taining funding levels, were madewithout controversy. However^when it came time to discuss thefirst project whose funding would becut, the manager of the relevanttherapeutic area challenged the deci-sion. The meeting's chairman lis-tened to his case for maintaining thecurrent funding and then askedwhether that case was reflected inthe project valuations. The manageragreed that it was, but repeated tbeargument that SB would lose valueby terminating the project. Thechairman agreed that value would belost but pointed out that the fundsoriginally scheduled for the projeetwould create more value when ap-plied elsewhere. That ended a poten-tially explosive discussion.

The new process not only reducedthe controversy in the resource-allo-cation process, it also led the com-pany to change its investment strat-egy. Although top management hadset out to cut back on the company'sdevelopment budget, they now sawtheir investment decision in a newlight; they believed the new portfo-lio to be 30% more valuable than the

old one-without any additional in-vestment. Furthermore, tbe marginalreturn on additional investment hadtripled from 5:1 to 15:1. To exploitthis opportunity, the company ulti-mately decided to increase develop-ment spending by more than 50%.

The three-phase process-gener-ating alternatives, valuing them,and creating a portfolio - has led toshared understanding among deci-sion makers and development staffabout the best investment optionsfor the company. The process theeompany adopted is based on our ex-perience that no single value metric,facilitation technique, peer reviewmeeting, or external validation ap-proach on its own can solve the com-plex resource-allocation problemfaced by many companies like SB. Inthe end, we learned that by tacklingthe soft issues around resource allo-cation, such as information quality,credibility, and trust, we bad also ad-dressed the bard ones: How muchshould we invest and where shouldwe invest it?

The autbois would like to thank RobinArnold, managing director of SDG'sLondon office, for his contributions tothis article.

Reprint 98110To order reprints, see the last page of this issue.

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