The German industry neglects strategic controlling

The German industry neglects strategic controlling

A current survey by the consulting agency BearingPoint, the Technical University of Berlin and the umbrella organization PDMA reveals deficits of top management in the controlling of research and development.

80 per cent of the interviewed companies show potential for improvement in their planning of development activities. Only a few have a best practice approach. 70 per cent neglect aspects of governance for structured corporate management and even 77 per cent are not able to fulfill the high management demands of an effective R&D controlling with their existing processes and systems. Top management and division managers are not adequately provided with important information to achieve transparency on statuses and risks. Subsequently, they are not able to ideally lead staff that is involved in innovation processes. The interviewed companies can be categorized according to their strengths and weaknesses into “champions”, “non-formals”, “under achievers” and “beginners” (see figure 1).

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Fig 1: R&D Portfolio Excellence Quadrant: CHAMPIONS: Excellent infrastructure and motivation. Best performers. NON-FORMALS: High individual motivation, existing governance structures but hardly any implemented processes or suitable IT solutions. UNDERACHIEVERS: Exemplary processes/systems but lack of management commitment. BEGINNERS: No established portfolio process so far, initiatives only recently started or a particularly negative attitude.

In the survey, we interviewed managers for innovation and product development from German companies from industry, transportation, automotive and high-tech sectors and asked them in which ways R&D controlling is actually effective through the implementation of company-wide governance structures, management buy-ins and implemented IT-based processes. We analyzed six dimensions of holistic, strategic controlling that can be summarized in two main categories of influencing factors: on the one hand, governance, strategy integration and corporate culture, and on the other hand, operative aspects such as process quality, system maturity and the integration of resource management.

Management attention is crucial

More than 80 per cent of the participants regard the controlling of development portfolios as a task for senior management, the development department and the sales department. Only 20 per cent of those surveyed, “the ‚champions”, think that resource management or the IT department should support this process. In addition, these also have a company-wide portfolio management to control all development activities within the company. 40 per cent of “the beginners” do not seem to have a consolidated view of all projects within the company (see figure 2). The best companies prioritize their projects not only in monetary terms through calculations of ROI, EVA or contribution margins but also include aspects of strategy conformity,a fitting range of products and market attractiveness into their decision-making processes.

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Figure 2: Implementation of strategies in product portfolio: Distinct strategic approach, Company-wide practice, Integrated operative units,, Firm project termination criteria

In summary, the decision-making culture of more “mature” companies has a significantly stronger focus on facts and processes and is designed for long-term planning. Companies that perform worse decide intuitively and situationally, and have more flexible project adoption processes. Only 10 per cent of these companies have clearly defined project termination criteria to stop unprofitable projects and those that are not relevant for transaction values anymore. Additionally, there is more emphasis on staff satisfaction, active participation, the existence of salary-effective incentive systems and educational support in leading companies.

The establishment of consistent governance structures

A centrally established project management office (PMO) for the implementation and quality control of company-wide project and portfolio management standards is only found in 30 per cent of the companies. Particularly the “under achievers” and “beginners” accept an individual organization of processes in their departments with often highly varying levels of quality and rigor. Only the “champions” have a clear understanding of the term “governance”. Operative tasks of R&D controlling, such as selection processes, portfolio controlling or central data consolidation are all organized by their PMO or a comparable role in the company that enforces formative aspects of governance, such as the establishment of consistent standards and company policies (see figure 3). The “champions” also establish themselves significantly as more “mature” in terms of corporate communications or the service principle. In two thirds of the companies, project managers regard the PMO’s and their creation of transparency as supportive rather than “disruptive”. Only a third of the “beginners” agree with this view.

Systematically selecting and prioritizing projects

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Figure 3: Establishment of governance structures: Operative process controlling: Process organization and controlling, data consolidation; Policies and standardization: Policy development, data standardization; Support and communication: Service unit for managers, strategic communication

In companies in the quadrants “non-formals” and “beginners”, there is a considerable need for improvement regarding efficient IT-based processes and methodical project analyses analysis for portfolio decisions. Only “champions” decide analytically via scenario technology, scorecards or dependency observations. The rest of the companies decide by vote, intuitively or according to urgency; regardless of a comparison of profitability, strategic fit, portfolio risks or market demands. Due to a lack of data, it is often impossible to conduct these analyses: 35 per cent of all companies state that they often have no or limited access to current project data. However, IT solutions can also be improved in those companies categorized as “champions”. Dedicated and effectively used portfolio systems are only mentioned by 17 per cent of the companies, more than two thirds criticize a low level of process integration and automation. Noticeable is also the lack of capacity planning when decisions about future product roadmaps are made: resource situations and therewith the viability of a product are currently not regarded as parts of strategic R&D controlling. In addition, every participating company in the survey identifies capacity constraints as a weak point in product development.

Best in Class companies increase their profitability

Studies (cf. Cooper, 2007) prove that effective R&D portfolio management can significantly increase corporate success compared to other competitors. The chance to achieve larger margins regarding new products is also four times bigger in best-in-class companies (cf. Aberdeen Group, 2007). The survey shows that consistent governance and efficient IT-based processes present deficits when implementing a strategy in the portfolio.Furthermore, top management must be involved in controlling processes and actively co-devize these. From experience, the consistent implementation of these central issues of strategic R&D controlling can increase profitability of investments in product development and ensure a long-term competitiveness.

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