http://rpc.technorati.com/rpc/ping Corporate Portfolio Management: Looking at cost benefit analyses for design the Whirlpool way

Monday, January 15, 2007

Looking at cost benefit analyses for design the Whirlpool way

Even as a major proponent of Corporate Portfolio Management, I am worried by the current ROI zeitgeist. While measurement of an investment's potential efficacy is important, forcing an ROI on every investment is not advisable as it will ultimately lead to an organization taking less risk because innovative investments are often difficult to provide any credible ROI to. It also leads to a more insidious impact of making investment owners come up with far-flung return estimates which are not justifiable or measurable in their efforts to justify their investments.

Ultimately, what organizations must realize as they put together their cost benefit analyses (CBAs) is that benefits are not strictly financial. There are strategic and risk benefits that can be quantified but which may not fit neatly into an ROI construct. That said, merely saying you need to do an investment because it is "strategic" is not enough and actually a cop out. You should be able to articulate and measure this strategic or risk impact even if it doesn't translate into direct bottom line impact.

The February 2007 issue of FastCompany magazine contains an interesting article which looks at how Whirlpool has begun to measure the impact of good product design. Like brand advertising, loyalty/retention investments, many IT investments, etc, investments in product design can be difficult to ROI-ize. As the article states, Whirlpool and the design world in general "lack objective financial metrics to help them calculate whether increased investment in design will generate increased profits."

Chuck Jones, Whirlpool's design chief, realized the need to quantify the impact of better design when "the company's resource allocation team asked him to estimate the return on investment, but Jones couldn't produce the numbers to make such a forecast. As a result, he was forced to fall back on a rationale that was simultaneously elitist and lame: Trust me. I'm a designer."

Jones didn't give up and instead of trying to force ROIs on design investments, his team "created a standardized company wide process that puts design prototypes in front of customer focus groups and then takes detailed measurements of their preferences about aesthetics, craftmanship, technical performance, ergonomics and usability."

Jones believes that "this metrics based approach is also transforming Whirlpool's culture." The process has actually yielded its first product and the first product is showing profits up 30% over the previous model.

The done by Whirlpool highlights several different key items worth learning:
  1. Benefits are not strictly financial. It is important that you think of benefits holistically and develop a way to measure the impact of investments even if those benefits are not financial.
  2. It is important that the measurement of these metrics & benefits be constructed in a robust and rigorous way so that they can defend against attacks that will invariably come in most organizations from the introduction of a metric or process that is not widely known.
  3. Development of a credible new metrics-based approach or any type of corporate portfolio management effort takes time. In the case of Whirlpool, Jones' team has worked on the development of their methodology for two years before the first product was launched.
  4. Build a repeatable capability and competency. Whirlpool has built their consumer-generated measurements into a database so they can continue to leverage this data on an ongoing basis to make design decisions. Data underlies good decisions and ensuring this data is captured and available is very important.
  5. Make sure the metrics you capture don't always point to a decision to undertake an investment. Your new process will be more credible if certain projects get killed along the way as well.

If your organization has developed innovative ways to demonstrate the value of and scrutinize investments which don't fit neatly into an ROI construct or which don't have measurable financial benefit, I'd love to learn more. Please drop me a note or leave a comment on this post.

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