BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT
Product Development Teams Up with Finance
How the new players on product development teams can join the all-star lineup.
Keith Schleiffer and Julie Devore
A revolution is sweeping through medical device product development departments nationwide. The uneasy truce that previously existed between the financial and the creative components of the medical device design effort is fading in favor of a new partnership that has sprung up between the chief financial officer's office and R&D leaders in their quest to produce profitable products as quickly as possible.
In the past, the appearance of a financial representative (FR) at a product development meeting signaled the need for a major course correction—perhaps the project was over budget or the projected product cost was too high. Product developers tended to get defensive, and everyone was glad when the meeting ended. But everyone also knew that whenever the FR was brought in, something had been missed in the project management process, and key decisions made by the developers—months, maybe years ago—might now be changed.
In recent years, the FR has started to play a very different role in product development. Perhaps it was market pressures that awakened the R&D staff to the importance of financial responsibility. Or maybe FRs found that becoming contributing partners to the design team throughout the process of product development is more satisfying than their former role of audit and oversight. At any rate, many industries, including the medical device arena, determined that a better model exists: engineering know-how plus a working knowledge of how the company handles financial matters results in lower risks and a faster, more efficient path to marketplace winners.
Teams Need Diversity
It's a business staple: every company exists to make money. New products are developed to meet goals for corporate growth and profitability. Finance professionals and product designers must work together to make those goals reality.
Successful product development efforts must meet certain financial goals, including unit manufactured cost, capital investment, cost of development, and development schedule. When an FR is part of the team during initial project justification, the FR learns the assumptions being made and can explain the financial ramifications of such assumptions, providing a basis for the development team to make feature and design decisions that affect cost. Very early guidance is essential because the Pareto principle applies: the development team will make 80% of the product-cost commitments in the first 20% of its effort.
By helping the team evaluate the trade-offs between product cost, product price, and product performance—none of which are typically easy to determine—the FR gets to the heart of effective product development, the reason that cross-disciplinary teams are so needed now. In fact, in addition to financial representatives, a progressive team will also include members from marketing, as well as from the technology development, product engineering, purchasing, and manufacturing departments.
The greatest challenge for an FR on a product development team may be how to sell this new style of relationship to the engineers. Because many development teams have been conditioned to behave defensively when the FR appears, the FR needs to support the new model by assuming the role of an expert resource available to advise and collaborate with the R&D team, and eager to educate team members on applicable financial strategies. The FR needs to provide a healthy level of skepticism but maintain a productive relationship by assuming that the product is destined for success.
In the long run, everyone will save time, money, and aggravation by working together cooperatively in a cross-functional environment from the beginning of the product development process. Most importantly, everyone benefits. Engineers will become more aware of the financial strategies and goals of the organization so that they can create products that more closely align with those plans, and financial representatives can ensure costs and schedules don't stray from set targets.
At the Plate
Great teams include many contributors who each specialize in a particular area. When FRs become part of a product development team, fellow players can look to them for leadership in the following areas.
Product Justification. The FR's primary function on the product development team is to help developers make a reality of the assumptions that went into project justification.
The FR can also help the developers understand the company's financial assumptions and sensitivities, and remodel if the developers or the market causes a change in assumptions. The FR can also point out financially sensitive or risky territory. Often, project engineers don't know the assumptions that went into creating their marching orders nor do they have access to the financial-sensitivity analysis that was created while the business risks were being evaluated. To help empower the technical team members on strategic issues, the FR can help engineers understand the financial impact of such factors as market-entry date, risks, product cost, and product performance. Through this exposure, engineers can learn to think more in terms of the company's financial risks and rewards, as well as the financial performance of the product, as they make technical decisions.
Project Priorities and Imperatives. A central element of the product justification process is the time to develop the product and put it on the market. The effect of this time appears in the return on investment and net present value (ROI and NPV) calculations. Techniques are available for astute FRs to use in calculating the economic value of a month's delay in product launch—which could have a value of millions of dollars.1 Computing this economic metric for every project provides a measure of its relative priority and supports the tough decisions for allocation of scarce R&D resources. The FR is in a particularly strong position to collaborate with the team's manufacturing representative and establish a firm understanding of the product's unit manufacturing cost early in the development effort (see Table I).
| Activity Type | Product Definition Phase | Detailed Development Phase | Product Testing and Clinical Trials Phase | Manufacturing Development and Launch Phase |
| Development drivers | Problem to be solved Technologies to apply Feasibility | Documented product requirements Subsystem and component performance System integration | Making fixes Completing test program Finalize documents for regulatory applications | Tooling purchases Component purchasing Assembly procedures |
| Development inputs to finance | Development program schedule and cost | Unit manufacturing cost estimate updates | Testing and trials schedule and cost Tooling cost estimating | Manufacturing equipment strategy |
| Development- financial interactions | ROI drivers Develop financial basis for decisions | Financial impacts of design trade-offs Product cost estimating and monitoring Project cost estimating and monitoring | Capital investment justification Cash flow for testing and trials Cash flow for lead-time items | Final product cost Monitor capital investments Capacity planning |
| Financial inputs to development | Assumptions used to justify project | Impact of assumptions and revisions | Capital planning process | Capital planning process |
| Financial drivers | Communicate project justification based on ROI Development cost and schedule Product cost, price, and margin | Project schedule Project cost Product cost Balancing long-term versus short-term gains | Cash expenses to complete Capital investments for launch Marketing investments for launch | Further investments needed |
Product Cost. The financial arm of the organization—with its links to the purchasing office's knowledge of what components cost in production and to the manufacturing management system—can regularly provide UMC estimates to the development team. Based on the FR's cost estimates, the engineering team can change product specifications and assumptions with greater speed and efficiency, enabling the engineers to produce a better medical product at less cost.
Capital Planning. The FR can interact with everyone involved in the product development process—with technical staff on product cost, with marketing staff on product pricing, and with the product line manager and upper management on capital investment strategy. Financial representatives can contribute greatly by helping to define how much money will need to be invested to meet demand during the product's introduction period and how a higher capacity can be accomplished.
Product Pipeline Management. Product line managers will always identify more customer needs than the development effort can meet. FRs can meet regularly with product line and R&D managers to identify projects that are no longer meeting financial criteria. "Thinning the herd" keeps the company healthy and frees resources for more-promising projects.
What the Leading Organizations DoOrganizations that lead their industries in product development talk through a number of questions for every project. Shalak et al. suggest that financial managers consider a variety of financial aspects, including the product itself, cost estimation, overhead, vendor cost, and project cost, when evaluating product ideas.2 Various industry sources report that including a financial representative on the product development team has helped companies like Rubbermaid, Procter & Gamble, Motorola, and Pillsbury collaborate their way to innovative products.3 Typically, these are the kinds of questions the financial representative can ask, and then answer, for the product development team.
These questions need to be asked early in a product's development cycle and revisited regularly. Some firms generalize the analysis into decision rules: spending $1000 in development is a good investment if it will reduce product cost by $0.40, or if it will buy insurance against a day of delay on the critical path. |
Stepping Up to Bat
When companies began tearing down the wall between product development and manufacturing, it took some time to arrive at the point where the manufacturing experts became collaborative members of product development teams. In the early stages of getting together, many people thought the goal was for the designers on a team to have a better grasp of the details related to manufacturing, and maybe vice versa. But things didn't really click until everyone involved started to summarize their needs and views and then share them with the team. Financial representatives can adopt the same process when they join development teams.
Management gurus write about silo management and the inability of one part of the organization to see or understand what is going on in another, often nearby, part of the company. This can happen in garage design shops or in Fortune 500 corporations. Companies that integrate an FR onto the product development team should keep the following points in mind.
- Financial decisions should happen in real time. Involving the FR in the product development process means that financial considerations can be integrated into every design decision immediately and adjusted as often as needed, rather than attempting to perform damage control on months' old decisions and suffering financial fallout.
- Involving the FR early helps to ensure financial inputs are available for those early decisions that often have big cost consequences later.
- FRs who stay involved over time are better able to keep a "big picture" view of a project's progress—and keep the company's big picture before the developers, too.
- Product development changes happen every day; keeping the FR in the loop avoids shocking the whole development system when financial issues dictate trade-offs and adjustments. It's good to know that someone is always worrying about the investments made.
- Even if the CFO can't provide an FR to regularly participate in development activities, someone needs to provide that sort of input. As an alternative, the product manager, for instance, might be tasked with providing regular financial inputs to the team and interval reports back to the CFO. But this approach might not be as effective unless the product manager understands the company's financial goals and guidelines, and has a high level of access to all of the company's financial resources.
Battelle has gained important insights by relying on the FR as a key resource on the product development team. The economic imperatives associated with moving product to market rapidly are clearer. Value to the market and product-cost-versus-price questions are considered during design trade-off decisions. At Battelle, the FR has helped preserve a big picture approach to decisions, helping technologists focus on the long-term issues rather than on immediate dilemmas. The technologists now have an easier time with capital planning, and the company's overall budgeting process is more effective. However, the most important benefit Battelle's product development team has gained from working more closely with the FR is this: it has clarified the ultimate goal of product development—profitable products.
References
1. P Smith and D Reinertson, Developing Products in Half the Time (New York: Wiley, 1998), chap 2.
2. SC Shalak et al., "Defining a Product Development Methodology with Concurrent Engineering for Small Manufacturing Companies," Journal of Engineering Design 8, no. 4 (1997): 305–328.
3. AL Patti and JP Gilbert, "Collocating New Product Development Teams: Why, When, Where and How?" Business Horizons 40, no. 6 (1997): 59.
Keith Schleiffer, PhD, is a project manager and Julie Devore, is business operations manager for the medical products group at Battelle (Columbus, OH).
Illustration by Christopher Zacharow/SIS
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