Evaluation Methodology for the R&D Project Portfolio by Using the Risk Adjusted Net Present Value – One Case Study in the Petrochemical Industry.

Abstract

Nowadays dedicated attention is devoted to intangible evaluation aspects, especially in intensive technological sectors, which are characterized by expressive R&D resources allocation and showing high uncertainties in the project development. The R&D projects can present diverse inovativeness degrees, each one with different projects development terms, technological intensities and complexities, and related uncertainties degrees. So, the current research and practices are concentrated in the adjustment of the traditional evaluation methodologies for the decision making process related to the portfolio management in those sectors, mainly in the pharmaceutical, biotechnology and chemical industries. In this way, the literature presents some uncertainties factors, like the project complexity, the life cycle stage of the technology, the existence of internal knowledge and competencies regarding the technology, the risks involved and the project development terms. The study is based in one in-depth literature review in the technology management, financial methodologies and decision making theoretical streams, and evolves for one field case study carried out in one big petrochemical Brazilian company, which allocates expressive amounts of investments in R&D and uses specific methodology for evaluating the portfolio of projects management. So, the study is organized in three sections: in the first, it aims to verify in the literature the existent methodologies for the project portfolio management. In the second, are presented the evaluation methodologies for innovation projects. Finally, in the third section, one empirical case study is performed in the Brazilian petrochemical leader, by using in-depth interviews and secondary data analyses, aiming to verify in the business practice the methodologies are being used for portfolio management and R&D evaluation, and its observed limitations. Conclusions search similarities in the evaluation methodologies applied to the project portfolio management context, trying to establish recommendations for the company under investigation. As main findings, it is concluded that the traditional evaluation methodologies do not fit very well when applied to R&D projects, which show high associated uncertainties, and need to be adjusted for use. This adjustment is made through specific uncertainty aspects - the risk drivers, which will influence the conditional probabilities of technical and market success, leading to one more robust aggregated indicator, the adjusted net present value. Beyond the use of this improved methodology, it seems to be worth value grouping the projects in different innovation categories, as preconized by the Strategic Buckets methodology, in order of comparing projects only pertaining for the same category, enabling so the adherence of the technology strategy to the business strategy.