Portfolio Balancing

A balanced portfolio is one that delivers the corporate strategic goals.  Given the decade plus timeline for projects in the R&D portfolio the determination of balance is exceedingly challenging, since science, competition, and regulatory hurdles will change the composition of the portfolio without any sophisticated portfolio planning.  The act of portfolio balancing necessarily follows the portfolio review.  Balancing is an outcome of review.  Senior managers will have gone through all of the projects in the portfolio, have a fresh awareness of the potential value and risks for each of the projects and how close each project is to reaching the next milestone.  There may have been a particular theme to the review, e.g. to compare a therapy area that may be less productive to other therapy areas.  Trends will appear, e.g. a particular target class may be more productive.  Upon discussion senior managers may perceive an imbalance to the portfolio, that more projects are needed in a certain area, or that there are too many of a particular class of projects.  A deficit in a particular stage is a common imbalance.  There may be straight forward desired outcomes to the portfolio balancing exercise, e.g. in-license projects to fill the stage deficit.  But it may be necessary to consider the consequences of different sets of outcomes.  Here portfolio modeling can play an important role forecasting the potential consequences of the different sets of outcomes.  Once the senior managers have settled on a set of desired outcomes, a set of actions must be agreed to fulfill the desired outcomes in the form of an action plan.  One of the senior managers must be in charge of executing the action plan and at a later date must show the senior managers that the actions have been completed and perhaps later, that they have achieved the desired outcomes.  Portfolio managers can provide support here by ensuring that the actions that relate to project termination or initiation have been accomplished and that portfolio balance has been achieved.   Senior managers may elect to delegate action plan execution to a portfolio manager.   All senior managers must agree to support the action plan.  A common action in portfolio balancing is that certain projects may need to be terminated, or be given a strict timeline for meeting certain project objectives or face termination.  Another common action is that a whole set of projects may need to be terminated, which can have knock-on consequences to certain line departments, such as placing jobs at risk.   The action plan must consider the knock-on consequences, since these may be essential to reaching the true desired outcomes.

Once portfolio balance has been achieved there may be some time before the next portfolio review occurs.   Portfolio managers can monitor and report the composition of the portfolio with respect to the desired balance.  A common management temptation is to change the composition of the portfolio before value from the portfolio balancing exercise is realized.  There are usually good reasons for premature portfolio rebalancing, such as a corporate merger or a new financial reality.  But the reasons for terminating a project in one portfolio balancing may vanish in the next, allowing for potential reinitiation of the project.  At the project level the portfolio manipulation will be seen as a regrettable loss of time and may even give competitors some time to catch up.  Such potential consequences must be considered, i.e. that the reasons for termination can be justified at the project level.  A potential indicator that portfolio balancing may be improperly impacting projects is to examine the percentage of project terminations that are labeled “strategy change” or simply “portfolio balancing” compared to other reasons for termination, such as “lack of efficacy”.  If this “strategy change” set of projects is one of the larger sets of terminated projects, then portfolio balancing strategies may need to be evaluated.  Senior managers may also want to dig into that set as a potentially valuable set of assets for reinitiation or out-licensing.

Stage Dependency of Portfolio Balancing.  Portfolio Balancing is critical in late stage Development to provide for the greatest return on investment, which not only includes deciding which projects to fund in Phase 3 but how to stage the various studies if budgets are tight.  Bio/pharmaceutical companies tend to use all available assessment tools for portfolio balancing of the late stage development pipeline.

Portfolio Balancing earlier in the pipeline, e.g.  up to Candidate Selection and up to Proof of Concept involve more qualitative assessments.  In the earlier stages balance refers to both value and risk, as well as therapy areas, and target classes.  A range of qualitative factors may need to be considered in portfolio balancing.  Value-Focused Thinking is a way of taking all factors, no matter how diverse, and structuring an assessment of all factors in a single consistent manner that allows for visual comparison. 1  Across the pipeline certain aspirational goals may influence balance.  For example,GSK intends to have 20% of its pipeline derived from biologics by 2015. 2

  1. Ralph L. Keeney, “Creativity in Decision Making with Value-Focused Thinking” Sloan Management Review 33-41, 1994.
  2. “The Future of Pharma: GSK’s research leaders answer Nature’s questions about where their company — and their industry — is headed”, Nature News online, Oct. 9, 2008.


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