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Much has been written about how finance organizations can become strategic partners with the businesses they support. While purported experts point to a variety of frameworks, scorecards and key performance indicators, etc. as the keys to bridging the gap between finance and business, these trite 'solutions' have done little to make finance the strategic business partner it seeks to be. Worse yet, pursuing these ideas has put finance organizations on a treadmill where they expend energy and resources (e.

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

g., money and time) ultimately to get nowhere while the issue persists. So if you are still looking for a silver bullet or quick fix to this seemingly incurable problem, stop reading now.

Given the time, money and effort spent, you may be a bit demoralized and even speculating that the finance-business chasm cannot be crossed. Paradoxically, the link between finance and the business has been under finance's proverbial nose for some time - resource allocation. A serious concerted effort to optimize an or

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

ganization's resource allocation ultimately enables finance to develop the bridge between finance and strategy. This discipline known as corporate portfolio management works to actively manage the company's resource allocation as a portfolio of discretionary investments. All companies allocate their resources - very few optimize their resource allocation. Finance is uniquely positioned to enable this because they sit at the nexus of information and data required to undertake a corporate portfolio managem

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

ent effort. (Note: Corporate portfolio management is often referred to by different terms so as a point of reference, terms such as IT portfolio management, enterprise portfolio management, product portfolio management, project portfolio management, resource allocation and investment optimization are similar. In fact, these all are slices or subsets of corporate portfolio management.)

From Resource Allocation to Strategy

First, it is worth understanding the tie between resource allocat

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

on and strategy - they are the same. Where you allocate your resources is your strategy. PowerPoint presentations, speeches by senior leadership, strategy bullets nicely framed on a wall, etc. are all interesting and potentially useful, but they are not your organization's strategy. For instance, if your stated corporate strategy is to have the most engaged and loyal customers (this sounds good, right?), but you allocate all your investment dollars to acquiring new customers, your strategy is actually ar

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

ound customer acquisition. This is a very simple example but clearly demonstrates the dichotomy that can and often exists between a stated and real strategy.

A great article entitled "How Managers' Everyday Decisions Create - or Destroy - Your Company's Strategy" that recently appeared in the Harvard Business Review (February 2007) nicely articulated the connection between resource allocation and strategy and also pointed to the need for a corporate portfolio management discipline. "How business really

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

gets done has little connection to the strategy developed at corporate headquarters. Rather, strategy is crafted, step by step, as managers at all levels of a company - be it a small firm or a large multinational - commit resources to policies, programs, people and facilities. Because this is true, senior management might consider focusing less attention on thinking through the company's formal strategy and more attention on the processes by which the company allocates resources."

The upshot of this is

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

that if finance can enable the process to enable better resource allocation (which is strategy), they will have succeeded in becoming a de facto strategic partner to the business.

The Two Levers of Corporate Portfolio Management

So now the question turns to how to build a corporate portfolio management discipline and ensure its success. A successful corporate portfolio management effort is predicated on two dimensions.

1. Modern Portfolio Theory (aka the process) - This is what people

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

generally think of when they think of corporate portfolio management. It is comprised of:

* Investment valuation - This includes defining what an investment is. It is worthwhile to take an expansive definition of what comprises an investment because this is not just capital expenditures (capex), but also should include operating expenses (opex). In general, 25-40% of an organization's expenses are discretionary and hence are investments. Investment valuation also requires consistency of valuation method

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

ology which necessitates using driver-based models to create projections and also looking at past NPVs and ROIs to consider strategy and other qualitative aspects that drive investment 'value'.

* Portfolio allocation - This requires determining investment areas/themes and the associated allocations. Basically, what are my strategic priorities for investment and how much will go to each area? For example, 25% in customer acquisition, 20% in IT, 55% in customer retention. The allocation should also consid

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

er the risk profile of investments, e.g., 60% in low risk, 30% in medium risk and 10% in high risk.

* Portfolio optimization - This requires selecting the best investments to support the portfolio allocation and periodically rebalancing the portfolio to ensure consistency with desired portfolio allocations. The aim is to maximize strategic and financial return per unit of risk.

* Performance measurement - A key element of successful corporate portfolio management is capturing actual investment results

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

to enable promise vs. performance. Doing this ultimately lets an organization improve ongoing investment valuation based on actual results and allows it to rebalance the portfolio based on performance achieved.

Most people with a finance background will recognize the above tenets of portfolio theory. The problem with most of the discussion of corporate portfolio management is that it assumes that people behave according to a theoretical/rational construct. While various experts like to offer platitudes

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

aying things like, "Just manage your company's investments like you manage your own investments," they fail to realize that many individuals may not even manage their own personal portfolios as they should. They may know what they should do but emotions, intuition, and other external influences take them off this rational path. What often leads us astray in our personal portfolio is what leads us astray in an organizational setting - behavior. The challenge in an organization is magnified by the fact tha

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

t it is hundreds or thousands of people whose behavior that needs to be considered. And so this is the second fundamental lever of corporate portfolio management - organizational behavior.

2. Organizational Behavior - In order to optimize one's corporate portfolio, the behavioral elements must be understood with:

o A data-driven mindset - Organizations often make decibel- or intuition-led decisions and corporate portfolio management, like 6-Sigma, requires data and analytical decision making.

o Silos

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

removed - Corporate portfolio management success requires people thinking about what is best for the organization and not just what is best for "my world" - silos and organizational dynasties need to be broken down.

o Incentive alignment - People should be motivated by similar short- and long-term incentives.

o Accountability & transparency - There should be a willingness to share information and effectively create a marketplace for investments.

Moving organizational behavior is the larger challenge a

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

nd this takes time to change. At American Express, we have actively worked on changing organizational behavior and have made significant inroads over time, but it has not happened overnight. We have conducted cross unit investment reviews, sponsored an internal corporate portfolio management conference and even created a resource allocation simulation to visibly demonstrate the benefit of corporate portfolio management.

Bringing Corporate Portfolio Management to Your Organization If you think corporate

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

ortfolio management can be implemented in one month or one quarter, it is not for you. Corporate portfolio management is not a sprint and requires the will and heart of a marathoner. You will see benefits along the way, but it takes time to realize the full potential of a well developed corporate portfolio. But once defined and running, an actively managed corporate portfolio management discipline will pay immeasurable dividends. For American Express, we can point to stock price out-performance over our

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

benchmark indices as well as our competition since adopting corporate portfolio management. Our resource allocation effectiveness also helps to drive our PE multiple (price to earnings multiple), which is significantly larger than our competitive peers.

Very tactically, the corporate portfolio management discipline has helped us understand what businesses we should exit and where we might want to invest more. It has enabled us to reallocate money across business segments for the first time which can be

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

very challenging in large organizations. Most importantly, corporate portfolio management has become part of the DNA of the organization with finance and the business talking about their investments on an ongoing basis. Finance leads the corporate portfolio management effort but with significant and very direct input and interaction with the business. The chasm between finance and the business has been bridged by utilizing corporate portfolio management, and the benefits to the organization in terms of f

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

inancial and strategic performance as well as employee engagement have been significant.

If you are serious about making finance a strategic partner with the business, and if you finally want to make some forward progress after being on the treadmill for so long, corporate portfolio management offers you a solution to this intractable problem. It requires effort and patience, but, as evidenced by American Express, it can close the finance and business gulf and ultimately generate outstanding performance

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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