What are the seven key elements required for successful strategy realization?
Element 4: The Investment Model
There are seven core elements, all of which are essential to achieve portfolio success – and we will discuss each in turn in this series of blog posts. These seven core elements – pictured below as a hub and six surrounding spokes, are not only vital, but more importantly, must all work together to form a cohesive unit.
In our previous posts we explored the central hub, Portfolio Management, The Innovation Process, and the all-important Strategy. In this week’s post we will be exploring the Investment Model.
Strategy realization requires sophisticated yet easy to use financial modelling matched to the innovation process. Costs need to be estimated according to the development stages and milestones of each initiative/project to produce a cost model. Next, the incremental sales, profit and/or net benefit are estimated, and risk adjusted. From that you can then see the business case for each project (NPV, ROI, payback etc.). The right tools will help you to build a robust sales and profitability plan. Typically, upfront costs are linked to milestones in the development plan, and revenue and operating costs are pinned to the launch dates.
The linkage of individual program and initiative plans through to the overall corporate financial plan is crucial. This requires that any changes in scheduling are automatically fed through to the overall financial calendar.
New Product Development begs a lot of money questions. Such as, how much will the total project cost? What is the estimated timing and profitability? How many years will it take to get your investment back?
These are daunting and complex questions to answer depending on the type of new product and risks involved.
Financial modelling can answer those questions, reduce risk and improve profitability. Industry-leading product analytics and reporting tools help you make decisions with confidence. These models build an accurate picture of all costs incurred during the lifecycle of a project.
But how?
The tools pull together different categories of expense, such as development, operating and capital. The timing of expense in the model is linked to the timing of the project. This helps give an accurate reflection of cost build over stages or milestones, and it also ensures realism if a project is delayed or accelerated at a particular gate.
Integrated models should include:
- Custom metrics/categories
- Best-practice solution
- Link to stages/gates
- Dynamic timing model
- Links to P&L
- Rollup to portfolio
- Integration with Excel
- Baselining Capability
Investment models should build dynamic sales projections over time, that aggregate from individual projects up to a portfolio view. These models are linked to the project plan, such that a change in the implementation or launch date will automatically be reflected in the timing of revenue build in the financial model. This integration applies from each project right through to the overall business plan.
The investment model should enable you to see sales projections that reflect the reality of your project schedules, adjusted in real time. If a project gets delayed at a gate, you need to see the impact financially. Equally, you can make realistic assessments of the financial value of accelerating your best projects by giving them priority access to resources.
It should also combine sales and cost models to produce Profit and Loss (P&L) analysis for each project, over a span of multiple years. This analysis is intrinsically linked to project schedules and timing, and any change in timing of the project automatically adjusts the financial models. It should aggregate financial information from individual projects so you can analyse the portfolio at multiple levels. This also includes the ability to do dynamic slice and dice and filtering, so you can see the effect of alternative portfolio combinations, timing and global rollout plans.
The scenario planning tools should also be integrated into this model, so if you model alternative assumptions about future market conditions, for example, then you can see the effect of these uncertainties in the differing rates of return that you will achieve. It is a tool to make strategic decisions, based on reality, and linked in real time to the current status and delivery schedule of your projects – truly top to bottom
Benefits of Integrated financial forecasting include:
- Inform decisions
- Analytics built-in
- Highly visual
- Dynamic drill down
- Real time KPIs
- Forecast, track, report
- Role based views
- Highly configurable
Organization feedback drives organization learning, which drives improved performance. If you can measure it, you can manage it.
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Related articles:
Element 1: Portfolio Management
