Measuring Performance in New Product Development
Hitachi Consulting analyses the NPD trend, coming to the conclusion that if you can’t measure it, then you can’t manage it
New product development (NPD) is one of the most important strategic and operational levers an organisation can use to sustain growth and profitability. Yet 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.
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?
Those aiming to manage the performance of NPD typically apply conventional key performance indicators (KPIs) such as time to market, percentage 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.
Successful performance management of NPD needs to involve three key aspects:
1. Organisation: A holistic value chain approach to align the performance of all the interdependent functions involved in the NPD process.
2. 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.
3. 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.
Organisation: Managing performance along the value chain
The development of new products is a highly cross-functional activity characterised by interdependence across an organisation’s value chain.
Yet, in reality, the required collaboration rarely happens as effectively as it should. This is often due to contradictory objectives, ineffective collaboration and unclear roles and responsibilities among sales & marketing, finance, purchasing, quality, engineering or manufacturing.
Only by assigning clear, shared, cross-functional accountabilities, measured by KPIs, will an organisation manage to break down silo behavior and foster collaborative decision making. Clear accountabilities also help to establish performance-oriented behaviours across an organisation and, as illustrated in Figure 2, the nature of these accountabilities changes throughout the lifecycle of a project.
For example, purchasing requires input from engineering early in the project lifecycle to lead the strategic supplier evaluation and selection. Engineering can, therefore, be measured against the on-time in-full delivery of technology specifications. If purchasing receives these technical specifications in the correct time window, it is able to undertake a proper review of potential suppliers to make the product.
During the development phase, purchasing requires detailed drawings from engineering to source components, and those components must meet cost targets. Again, new components will only be available on-time and at-cost if both functions perform against their KPIs.
Process: Getting the balance right
Despite the uncertainty in NPD projects, success can, to a large extent, be predicted and performance proactively managed throughout a project’s life. It has been shown that effectiveness is related to the outcome of projects, such as customer satisfaction or financial success.
Although useful in many ways, managing “outcomes” has limited use throughout a project to define mitigating actions to influence success or failure. Efficiency is linked to the multiplicity of inputs that influence those outputs on a day-to-day basis. Efficiency indicators are “leading” or “input-oriented” and help predict the future outcome of NPD.
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 - e.g. customer satisfaction - 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. 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.
The approach taken to achieve those objectives will differ from industry to industry depending on the prevailing competitive situation and an organisation’s NPD objective.
It is also 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.
Data: Closing the loop to drive collaborative behaviours
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.
Business Intelligence (BI) provides the necessary collaboration tools to share information across functions and improves data integrity, consistency and accuracy. Business Intelligence encompasses data analytics to take the guesswork out of innovation, while at the same time enabling collaboration across new product development teams.
NPD is sometimes difficult to visualise; therefore, people are often unable to gain a quick understanding of the overall status. A possible solution for this 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.
For NPD to be a success in any business there must be a well-defined and robust process at its heart. 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.
The performance system will bring rigour to execution. Once in place it will:
· Provide the right people with the information they need, when they need it, to base decisions on facts rather than emotion and “gut feel”
· Ensure clear accountability for follow-through on decisions
· Sustain strong focus, at all operating levels, on fulfilling the business strategy
· Break down silo behaviour and foster collaborative decision-making
· Deliver the needed insight and analytics to manage business performance and build competitive advantage
· Role model the optimal set of behaviours required throughout the organisation to drive a culture of performance
Integrated performance management based on KPIs aligned across the value chain, supported by a robust BI framework and performance-driven behaviors will enhance a company’s performance management culture and drive competitive advantage through successful NPD.
Dr Jörg Putzer is a Manager at Hitachi Consulting. As the EMEA MCRS® Capability Lead in Hitachi, Jörg has helped a large number of clients in different industries to analyse and improve their management systems and achieve sustainable results. Jörg is also a subject matter expert in product development and engineering. Jörg holds a doctorate in Innovation Management focussing on performance management in new product development projects.
Darragh MacNeill is a Director at Hitachi Consulting and leads the Operational Excellence capability in EMEA. Darragh has extensive product development experience from the automotive industry and has been instrumental in major business transformations with leading industrial clients. Darragh is a subject matter expert in Engineering and Lean Transformation.