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An Excel Solver-VBA Application for R&D Project

Selection and Portfolio Optimization

Conference Paper November 2006

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 AN EXCEL SOLVER/VBA APPLICATION FOR R&D PROJECT
SELECTION AND PORTFOLIO OPTIMIZATION
Anne D. Henriksen, James Madison University, MSC 4102, Harrisonburg, VA 22807
henrikad@jmu.edu, (540) 568-8738
Susan W. Palocsay, James Madison University, MSC 0202, Harrisonburg, VA 22807
palocssw@jmu.edu, (540) 568-3061

ABSTRACT

To determine the optimal R&D portfolio, decision makers must consider synergies between
projects such as the capability to share resources, research results, intellectual capital or
investment costs. We present POpt, an Excel Solver/VBA DSS that uses nonlinear and goal
programming to obtain a portfolio with the optimal combination of project merit and value and
maximum portfolio synergy while meeting cost and strategy objectives. We illustrate POpt with
an example composed of twelve projects.

Keywords: R&D portfolio, R&D project selection, R&D decision support, goal programming

INTRODUCTION

The research and development (R&D) resource allocation process comprises two separate but
related activities: identifying the best projects and selecting the optimal portfolio. The best
projects are the ones that have the highest individual levels of technical merit, probability of
success, strategic relevance, and potential financial return. The optimal portfolio, on the other
hand, is the one with the most synergistic combination of projects due to interdependencies that
make the benefits of two or more projects greater than their individual sum. Such
interdependencies or synergies can include the capability to share resources, derive mutual
benefit from research results, utilize common intellectual capital, or combine investment costs.

The optimal R&D project portfolio may not necessarily contain the best projects. There may
be portfolio attributes that make some combinations of projects better than other combinations so
that the optimal portfolio may actually include projects that are not rated best on an individual
basis. A technically brilliant project with a high probability of success and financial return may
not be desirable if it does not holistically contribute to the organizations core competencies and
strategic objectives. Undertaking the process of R&D project selection without acknowledging
the importance of portfolio optimization may result in a group of individually excellent projects
that do not work well together to maximize the organizations competitive position.

A variety of approaches to R&D portfolio optimization have appeared in the literature over the
past 50 years. More recent studies involve the Analytic Network Process, a variant on the
Analytic Hierarchy Process [1]; data envelopment analysis [2]; elaborate decision support
systems [3, 4]; and a number of mathematical programming models [5, 6]. It is therefore an
important question whether successful corporate R&D programs can be correlated with using a
formal, systematic R&D portfolio management process. Cooper, Edgett and Kleinschmidt
addressed this question and reported on the project selection and portfolio management practices
of 205 corporations [7]. The results of their study indicate that those firms with the greatest
emphasis on a formal portfolio decision process achieved better R&D portfolio performance
across all six metrics than those firms that did not. They also reported that senior management
in the Best companies consistently and significantly view portfolio management as much more
important than do managements in the Worst (companies). They concluded that there is link
between whether senior management considers it important to utilize portfolio management and
the results that it achieves. Formal methods of decision support enforce consistent and rigorous
expressions of strategy, provide a common framework for discussion, impart decision-making
objectivity and equity, and reduce risk by creating a balance between applied and basic research.
The caveat on any decision support tool, however, is that the investment required to use it
effectively must be perceived as reasonable compared to the marginal information it can provide.
Loch, et al. came to this conclusion when trying to explain why the BMW organization adopted
only part, but not all, of a mathematical programming approach for R&D project selection [8].

In this paper we introduce POpt, a decision support application that can be used to evaluate and
compare competing portfolios of R&D projects based on the positive interdependencies or
synergies between projects. POpt selects the portfolio with the optimal combination of
individual project merit, individual project value, and maximum synergy while meeting cost and
strategy objectives. POpt is a Microsoft Excel-based spreadsheet with a Visual Basic for
Applications (VBA) user interface. POpt uses Solver, a mathematical programming Excel add-
in, to solve a nonlinear programming (NLP) problem for maximum synergy and a goal
programming (GP) problem for the optimal portfolio. POpt was developed to be able to work
together with PScore, [9] an R&D project selection tool that evaluates and ranks R&D projects
individually; however, POpt can be used independently.

In the remainder of this paper, we present an overview of the POpt software, describe its inputs
and outputs, and briefly explain the underlying mathematical programming. Next, we
demonstrate POpt with an example program composed of twelve projects and provide screen
shots of the Excel worksheets. Then we discuss the results of the example program for different
situations and conclude with how POpt can be used to perform portfolio what-if analysis.

SOFTWARE OVERVIEW

POpt consists of several VBA forms for entering data and four Excel worksheets: one for the
synergy matrix, one for the NLP, one for the GP, and one for summarizing and presenting the
results. A series of VBA buttons are located on each worksheet to help navigate the application
and to perform operations such as solving the NLP or GP, importing or exporting project data,
and printing (buttons are not all shown on worksheet screen shots). Figure 1 illustrates POpt
inputs and outputs. The individual project merit scores and individual project value ratings are
done separately according to [10] or some other method, and that data along with project titles
and fund requests, are either imported from PScore or entered directly.

POpt obtains the optimal portfolio by solving a GP that minimizes the sum of the percent
deviations from merit, value, synergy and cost targets. The targets for merit and value are
obtained independently without regard to the other goals by selecting those proposals that
maximize portfolio merit and value respectively by obtaining the combination of projects with
the highest merit or value that meet the total available funding constraint. The target for synergy
is also obtained without regard to the other goals by solving an NLP problem that maximizes
portfolio synergy and meets the total available funding constraint. The GP meets the total
available funding constraint by minimizing the percent deviation either under or over total
available funding. The default is to assign equal weights to all deviations; however, the user may
assign a greater weight to selected deviations to minimize their magnitude, and then re-solve the
goal program to obtain an alternative portfolio.

After viewing the POpt welcome and general information screens, the user enters new program
information including the program title, the number of proposals in the program, the total
available funding, and whether the portfolio decision constraint is the maximum number of
proposals allowed or the total available funding. The POpt Main Menu and New Program
Information VBA forms are shown in Figures 2 and 3.

Figure 2. POpt Main Menu VBA form Figure 3. POpt New Program VBA form

The user next enters pairwise synergy ratings on a scale of 0-5 into a matrix template, with 0
indicating no synergy. The matrix template is automatically generated when the program data
is entered in the VBA new program information form. Once the pairwise synergy matrix is
complete, the user moves to the NLP worksheet and enters or imports the individual project data.
Then the user solves the NLP by clicking on a VBA button. POpt solves the NLP using the
synergy matrix and binary variables corresponding to yes/no decisions to obtain a preliminary
portfolio of projects that maximizes total synergy and meets the constraint of either maximum
number of proposals or total available funding, depending on which was specified. The initial
solution to the NLP then becomes the GP target value for portfolio synergy.

After solving the synergy NLP, the user moves to the GP worksheet and imports the project title
and cost data to the GP worksheet by clicking on a VBA button. The GP worksheet next finds
the portfolio targets for merit and value based on user input for individual project merit scores
and value ratings. The GP worksheet now has the merit, value and synergy targets and the total
available funding constraints and can solve the GP for the optimal portfolio. The GP contains
constraints that minimize the percent deviations over the merit, value and synergy targets and
both under and over total available funding. Since deviations over merit, value and synergy
targets are desirable (and could only occur if there were a cost overrun), they are ignored in the
GP objective function. The objective function is to minimize the sum of the percent deviations.

EXAMPLE PROGRAM

We performed a portfolio analysis on an example program composed of twelve projects. The

projects were designed to have a range of merit scores combined with a range of value ratings,
project fund requests, and pairwise synergies. The total funding available to allocate was
$250,000, whereas the total funds required for all twelve projects was $702,000. The pairwise
synergy matrix for the example program is shown in Figure 4. Note that the matrix only has data
in the upper right triangle to avoid redundancy and that the diagonal elements are zero since it is
not meaningful to assign a synergy rating to a project with itself.

Figure 4. Synergy matrix for example program

This matrix data was then used in the NLP to solve for the value of the maximum portfolio
synergy. The value of the maximum synergy from the solution to the NLP is 59. This number
has only relative meaning; it is simply the sum of the pairwise synergies between the selected
products. It is, however, the highest feasible value while still meeting the constraint that the total
funding for the selected projects be less than or equal to $250,000. This number becomes the
target synergy in the GP, and so it forms an upper limit on the synergy that the optimal portfolio
can have. The NLP worksheet for the example program is shown in Figure 5.

Next we solved the GP for the case in which the relative weights on all the deviations in the
objective function were made equal. That produced a portfolio with a cost of $276,000, 10.4%
over the $250,000 target. The GP worksheet for the example program with equal weights on the
percent deviations is shown in Figure 6. Note that the projects selected by the NLP are not all
the same as the projects selected by the GP, in particular, Projects 2 and 7.

Figure 5. NLP worksheet for example program

Figure 6. GP worksheet for example program

When the weight on the deviation over total available funding was made twice as high as the
weights on the other deviations, the cost of the portfolio dropped to $256,000, only 2.4% above
target. However, the portfolio merit, value and synergy also dropped slightly from 4.31, 3.32
and 54 to 4.12, 3.23 and 53 respectively because Project 7 replaced a better project, i.e.,
Project 1. It was not until the weight on the deviation over total available funding was made ten
times higher than the other weights that the cost of the optimal portfolio dropped to its target.
The strategic question at this point is whether the better portfolio is worth the additional cost.

CONCLUSION

The twelve proposals; their individual cost, merit and value; the program parameters; and the GP
0/1 results for the case in which the total available funding target is exactly met are shown in the
Summary worksheet in Figure 7. In comparison to the equal-weights case, there are still six
 projects selected, but not the same six, and portfolio merit, value and synergy have declined to
3.81, 3.05 and 50 respectively. This means there are higher percent deviations for all the targets
and a higher value for the objective function. POpt makes it very easy to perform what-if
analysis for a variety of different weight and funding scenarios. This is an important feature for a
decision support tool. Figure 7 also shows some of the VBA buttons previously mentioned,
which aid the user in printing, importing data, and navigating between worksheets.

Figure 7. Summary worksheet for example program with weight of ten on available funding constraint

REFERENCES

[1] L.M. Meade and A. Presley, R&D Project Selection Using the Analytic Network
Process, IEEE Transactions on Engineering Management, 49(1), 2002, pp.59-66.
[2] J.D. Linton, S.T. Walsh and J. Morabito, Analysis, Ranking and Selection of R&D
Projects in a Portfolio, R&D Management, 32(2), 2002, pp. 139-148.
[3] M. Tavana, CROSS: A Multicriteria Group-Decision-Making Model for Evaluating and
Prioritizing Advanced-Technology Projects at NASA, Interfaces, 33(3), 2003, pp. 40-56.
[4] F. Ghasemzadeh and N.P. Archer, Project Portfolio Selection Through Decision Support,
Decision Support Systems, 29(1), 2000, pp. 73-88.
[5] M.A. Bodri, D. Davis and D. Davis, A Comprehensive 0-1 Goal Programming Model for
Project Selection, International Journal of Project Management, 19, 2001, pp. 243-252.
[6] C-F. Chien, A Portfolio-Evaluation Framework for Selecting R&D Projects, R&D
Management, 32(4), 2002, pp. 359-368.
[7] R. Cooper, S. Edgett and E. Kleinschmidt, Portfolio Management for New Product
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[8] C.H. Loch, M.T. Pich, C. Terwiesch and M. Urbschat, Selecting R&D Projects at BMW:
A Case Study of Adopting Mathematical Programming Models, IEEE Transactions on
Engineering Management, 48(1), 2001, pp.70-80.
[9] A.D. Henriksen and S.W. Palocsay, An Excel-Based Decision Support System for Scoring
and Ranking Proposed R&D Projects, currently under review.
[10] A.D. Henriksen and A.J. Traynor, A Practical R&D Project-Selection Scoring Tool,
IEEE Transactions on Engineering Management, 46(2), 1999, pp.158-170.

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