The R&D Options Yield

Two years into my journey in open innovation?

in 2014, my scouting team identified a fantastic technology from a reputed university. One of THE experts in the field developed a sugar molecule that promised to increase yield in cereals by 15-20%. We couldn't give up on this opportunity- it aligned with our strategy and global trends. Together with the technology transfer office and the professor, we developed a work plan with clear milestones. When we signed the options contract, we thought, "OK, we'll get to the first milestone. If it works, we'll continue. If it doesn't, we'll kill the project." The options contract reflected this way of thinking.?

In reality, when we got to this point, the experiment results were inconclusive, and we had to conduct more and more trials. Some of them showed promising results, and some didn't. We found it challenging to decide on our way forward in this gray area of inconclusive results, and it took something like three years to decide on a course of action. When we returned to the university's technology transfer office, the options period had expired. They (angrily) declined when we asked to exercise the option and get the license. It was a distinguished university, and they didn't have patience for our indecisiveness.?

Surprise?

We could have foreseen this in advance. Rarely experimental results of field trials for a technology developed in the lab are conclusive with statistical significance. Still, we plan an R&D project as a series of clear-cut Go/No-Go milestones and commit to its progression accordingly.?

We knew from the start that production costs for this molecule were prohibitive, but we thought, "We have the best chemists. We'll figure it out." As it turned out, we failed. The process was complicated, with low yields and unique conditions. Even if the field trials were successful, selling a formulation based on this molecule would have been impossible. We didn't even plan for this eventuality. We thought, "there's a challenge, and it carries a risk, but we'll get over it."

Planning for Multiple Eventualities

Options thinking suggests an entirely different approach: you put yourself in the expected milestones and imagine what would happen in a few different scenarios: success, failure, inconclusive, etc. When you think about it, there are many more options than proceeding or stopping. You can do at least ten other things. Through Options Thinking, you save time understanding the situation and your alternatives in the milestone. You avoid wasting the three years we did and losing the project.

Apart from the decision-making aspect at each checkpoint, the value of the project changes as you select one route over another, the team accomplishes value-carrying tasks (patent application, proving a key concept, successful scale-up, etc.), and the certainty level increases. After all, the risk is a function of certainty in any investment. If, upon conducting the field trials, yield consistently increased by 20% instead of 15%, it would have affected our sales forecast. The sales projections and the project's value are meaningless without considering the options.?

Psychology

There's a psychological barrier when considering future options that is hard to break. When we're at the beginning of the project, we're looking for assurances that the project will succeed. We may state a low probability of success figure to avoid the blame of poor project management, but we don't want to think about the project failing. It's innate in us.?

Further, it's tough to think about the future in non-black-and-white terms: "Will my boyfriend propose? Will he not propose?" Imagining options requires some resistance to the natural tendency to dismiss them. Think of a significant decision point in the past, and you'll discover that these other options revealed themselves at that point. "What will I do if he proposes? What will I do if he doesn't? I'll break up with him." But there are other options. The situation may be obscure, and the decisions must account for this unclarity.

One objection to Options Thinking is the perception that it takes too much time. It doesn't. List the crucial risks- those that may kill the project, derail it or alter its outcome or your ability to sell the product. Then, think about the options in different scenarios for each of them.?

Another common objection relates to decisions made, signed contracts, and unchangeable courses of action. Because you cannot change the past, the argument goes, there is no point in thinking about future options. However, this is not true. Realistically, if your R&D partner in a strategic project does not meet a milestone, will you kill the project? More likely, you or your managers will think about the options they have at that point and decide from there.?

The world may not end.

Without Options Thinking: "If we don't meet the emission targets, the world will end in 100 years." But that's not true. There are many different scenarios, as the UN points out, and there are ways to cope and act even if things don't work out according to the most optimistic scenario. We need to prepare for these different eventualities.

We keep making these mistakes, but we try to improve and derisk projects by accounting for these options early in the process. Derisking is especially important when the project is strategic, involves a considerable investment, or when a large staff will work on it for a prolonged time.?

Recap

Many things can happen when you reach a project's milestone. While it is impossible to predict which one will transpire, you can easily categorize the various options and think iin ndvanceat the best course of action. While doing it, you can understand how the project's value increases as certainty levels increase in the critical risk aspects of your project.?

Alternatively, you can always put your faith in luck and play it by ear.?

#researchanddevelopment #derisking #corporategovernance #projectmanagement