Rewards : Slide 20

Most of the portfolio management scenarios are centered around financial recurrence. A stock market portfolio, for example, and a venture capitalist portfolio is sighted around the dollar value of the return on investment over time of activity of the closed-end portfolio fund. There are other portfolios, however, that have different criteria for success. As an example, the loan portfolio of a small bank is measured by its failure/success rate and the success of the bank internally. One of the more successful portfolio systems is the movie industry. Disney®, for example, makes sure that its movies come out at a continuous rate, have a budget to succeed in a portfolio manner, and of course, make money for the Disney Corporation©.

In the time sequence, however, there are three criteria in the movie industry. These are: the critics, the paying attendants, and the Oscars. When a movie first comes out, the critics may sometimes make or break a movie. Critics are people who in themselves, cannot make movies, but certainly "know what they like". In ascertaining critic value, it is merely one of the criteria, but it does give a very early indication of the likelihood of success or failure of a given movie. The second criteria, which usually occurs several months after release, is the gate ticket sales. This is the total revenue achieved and is an indicator of the total revenue, including video tapes and foreign distribution that may appear in the future. The final measure, which occurs approximately twelve months after release, is the reward structure, typically called the Oscar. These three--critics, revenue, and rewards--are what the movie industry uses to evaluate its movies. Woody Allen gets critical raves and sometimes Oscars, but seldom makes the money that Disney Corporation© does. Robocop, a movie about a decade ago, was panned by the critics, but made lots of money and won Oscars for certain of its technologies. It is not necessary that all three succeed as measurements of success, but if all three are not met, the portfolio value of that particular movie is labeled a failure. Music, books, painting, and other artistic forms of expression are evaluated along similar lines.

We can hypothesize a similar valuation system for the portfolio of R&D projects along the same lines. Certainly, projects can be easily measured by a "walk through," by knowledgeable experts who take an hour on a project and give it one to five star rating. They also "know what they like." In-depth analysis is not the criteria here. It is a first blush of observation that counts. The second criteria of R&D portfolio management and its success or return are the actual dollars we see. These dollars can be with new products, new markets, utilization of the technology in other divisions or existing product, and/or licensing fees. These three R&D evaluations of the individual performance are also scaled by time. The critiques, of course, can be done "instantaneously." The money occurs a year or two after the R&D is complete. It is important to note that measurement by dollar returns alone does not have the benefit of instantaneous evaluations. It requires time to pass to the conclusion of the R&D project; time for its eventual application; and time to measure and judge how much financial impetus was given to the corporation.

There are other classes of awards. These are:

· The percentage of revenue garnered from products that did not exist five years ago
· Professional technology turnover
· Creation of new markets
· Percentage margin of new revenue on products

All of these, however, are mere indicators of the performance and will not be gone into at the early stages of this endeavor.

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