6.5.2 Setting the budget

Setting the budget for the product development programme and the individual projects is related to the outcomes desired and the resources of the company.

The central figure in setting the budgets is the product development manager who discusses the project needs with the project leader and then negotiates for the budget with the top management. This is essentially a human relationship although it is clothed in quantitative terms such as predicted financial outcomes, costs and probability of success. In the radical innovation, these predictions can be inaccurate and the budget for the project is secured on, as Tighe said in 1998, the 'selling' of the project to the higher management based on a combination of estimates and confidence.

For incremental product development, the predictions are more accurate and the decisions are more pragmatic. Essentially the product development budgets are competing with the budgets for the 'today' functions; either in the main company budget, or if product development is in a functional department/division, within its working budget.

The project leader and even the product development manager can be looking for a sponsor, who could be someone on the company Board, in top management, in a functional department, or in a new venture corporation. For incremental product development, increasing a product line or re-positioning a product, the marketing manager is probably the most interested person in the outcome of the project. For process development, it will be the production and engineering managers. If the project is a radical innovation, going across the functional areas in the company, then it is at top management or Board level.

In a budget presentation, the project is clearly defined as to:

     aim and outcomes and their relationship to the strategic direction of
        the company or the department;

     effects on profits, revenues; costs and the qualitative targets for the
        project.

In the presentation it is important to relate the outcomes of the project to the business and also to show how the resources sought in the presentation are to be used. The project budget needs to relate to the company strategies, plans and budgets, because the resource allocation is not only dependent on the project needs but also on its relationship to the overall company resources and the competing departmental and project needs.

Important resources needed by the project manager are:

     financial;

     expertise (people with the required knowledge and skills);

     equipment;

     raw materials;

     information.

For a company in a given environment, some or all of these resources may be in short supply, expensive or shared; there are limited resources for the project. In companies with a number of projects and project managers, competition for limited resources may add to resources allocation problems. The consequence of these situations, in terms of reaching the project outcomes on time, has to be assessed and problem areas identified as early as possible. Bottlenecks are predicted and resolved before they become serious. Failure to identify such bottlenecks can result in missed deadlines, which are frequently associated with large cost penalties or lost market advantages.

Budgeting should not be complex. A straightforward approach is to take each activity and look at its resource requirement on a monthly basis and so build up a schedule of costs, personnel, equipment and raw materials. It is important for the project leader to analyse each activity to see if other techniques could be used that would be less costly, more within the present capability of the team, and yet still yield the desired quality and efficiency levels in the project. If the monthly expenditure is presented graphically as cumulative expenditure, critical areas for cash flow during the project can be identified. The capital expenditure is treated separately.

One aspect to consider is the future use of the capital equipment; if the equipment is to be used only for one project, writing off this capital is an important point in determining the validity of the project.

One of the factors in helping the project team to product success is to give it a secure basis for development; this is largely based on the availability of finance. So all levels of management need to spend some time in the early stages predicting the costs for the project and the relationship of these costs to the company's availability of finance. They need to be involved in the decision to finance the project. The product development manager has to combine the resources detailed in the plans of the individual projects. The projects are integrated so that there is optimal use of resources, the specific resources are within the budgets of the different functional departments - R&D, marketing, production, and the finance required is within the overall budget predictions of the finance department. This can present a problem in some companies where departmental budgets are not specifically related to product development and only R&D is identified as product development. As is well known the main expenses are in product commercialisation and launching, and these costs need to be identified at the beginning of the project so that they are within the financial resources of the company or available from venture capital. The top management and the Board of Directors have to view the budget proposals for the product development programme and judge them within the strategies and resources of the company. It is not sufficient just to agree to the funds for one year, but the funds for future years need to have support. There also need to be contingency funds either to allow for rapid product development sparked by a change in the environment or to solve unforeseen problems that may have arisen.

Think Break In two recent product development projects in your company (one incremental and one radical innovation): 1. Identify the times in the PD Process when the needfor resources was     identified and when the resources were allocated. 2. What resource needs were identified - finance, people, equipment, raw     materials, information? How were the resources found? Were there any     other resources needed? 3. Who were the people who developed the budget proposal in these     projects and who made the decision to guarantee the budget? 4. Were there any delays in the projects because of poor prediction of     financial needs? Were there cost overruns? 5. Compare the resource management and financial control in both     projects, and identify the difference between an incremental project and     a radical innovation.