What You Need to Know
About New Product Development

by Dave Biggs

 Whether a company provides services, software or hardware, new opportunities and threats emerge every day. With the pace of change in customer needs, product technology and business processes showing no signs of slowing down, the new Internal Audit question is "Which of our business practices efficiently copes with this dynamic business environment?"

These forces of change provide an opportunity to strengthen the relationship between Internal Audit and the Board of Directors. Institutional investors, lenders, individual shareholders and the business press are all demanding enhanced corporate governance practices and Directors are being held accountable for a proactive overview of all important business practices.

Product development is considered especially important because it is the main activity used to implement strategy. Boards of Directors and Internal Audit have worked together on financial management practices for years and the Director's responsibility for strategic overview has been recognized for some time. New product development is fertile ground for Internal Audit to help the Board. But Directors and Internal Auditors without an extensive background need a good frame of reference to judge the effectiveness of product development methods and practices.

Financial management practices have had the GAAP guidelines for decades. Created out of the need for uniformity in financial reporting, generally accepted accounting principles have very effectively facilitated accounting communications and financial audit practices.

Are new product development practice guidelines needed? GAPDP (Generally Accepted Product Development Principles) sounds nice, but the last thing we need is a new acronym. What is needed is an audit plan template and guidelines that help explore the effectiveness of new product development processes. Whether a company provides banking services, insurance, software or manufactured goods to customers, new product success is dependent on the fundamentals of:

Understanding the marketplace: Defining new products; managing development projects
Introduction of new products: Learning from experience and improving the process

Companies perform some of these processes better than others. Armed with the right questions and an understanding of how to validate the answers, people with good auditing skills are able to evaluate the state of these development processes and provide value by determining where improvements can be made. A feel for the process can be obtained by examining a sample of the inquiry process.

Understanding the Marketplace

Understanding the marketplace is difficult. The half-life of marketplace knowledge is so short that no person or company ever fully understands it. But a good understanding of the marketplace is necessary for consistent product development success. In fact, one of the best measurements of marketplace understanding is the new product success rate. All companies should keep a systematic measure of the new product success rate. The sad commentary is that most companies don't have such a measurement or even a clear definition of success.

Here are a few lines of inquiry that probe a company's effectiveness at understanding the marketplace:

— Do all the people with information about the marketplace understand the learning process?

— Does the marketplace information flow to all the people involved in new product planning?

Defining New Products

The objective of the definition process is to plan how to satisfy customer's expectations. The planning process must include more than just the definition of the product. The business processes used to deliver services or products, a major influence on customer satisfaction, have to be planned at the same time the product is planned.

The strong tendency is to start the design of the product before the definition is completed or processes like order entry and product service have been considered. But, severe penalties are assessed when definition changes are made during design and the terrible re's begin (redesign, rework, retest). The terrible re's almost always compromise the quality of the final product and cause overruns in schedule and budget.

The most effective risk management is accomplished as part of the definition activities. When a product or the business processes are defined with too many bells and whistles, the project is destined to run over schedule and budget. Defined with too few features and functions or adequate support processes and the customer won't want the final product.

Here are some questions to assess the condition of your definition methods and processes:

— Is a product definition completed before the design of the product begins?
— Are the business processes (order entry, manufacturing, product service) defined at the same time as the product?
— Is a formal risk assessment performed and used as part of the planning process?

Managing Development Projects

Project planning, different than product planning, is determining how the project should be broken into small subtasks and which tasks should be accomplished first to maximize control and minimize risk. One of the planning principles is to complete the most difficult tasks first, because the solution to problems, large or small, limits the possibilities in other areas. Solve too many of the easy challenges early in the project and there may not be enough latitude to solve difficult issues later.

The dominant symptom of poor project planning and management is all too familiar. Reports on the project say that there are a few little problems, but time is going to be made up and the product will be completed nearly on time. Then within weeks of the scheduled product launch, overruns begin to be announced. Eventually the project ends up taking 50 to 100 percent more time than scheduled.

The best measure of project management is the percent of projects that are completed on time. Unfortunately, most companies don't systematically keep this type of measurement. From the project management perspective, here are a few lines of inquiry that bring out the condition of the project management processes:

Do people know the causes of past project delays and have steps been taken to prevent similar problems for occurring again?
Is a formal risk analysis performed during the project planning? Is it used to determine what should be done first?
Are projects broken down into subtasks and is there a sense of urgency to finish the subtasks on time?

Introducing New Products

The best way to discredit sales people is to have the customers teach them about new products. Too often, the new products are shipped before sales training is completed, the product service people are ready, or the sales literature is available. Under these circumstances, loss of momentum and embarrassment are sure to follow. The best course of action is to have the support materials and training completed before the product is released. Here are some questions that examine the product introduction process:

Are launch plans made while the product is being defined?
Is sales literature completed and ready when the product design is complete?
Are sales people trained and briefed before the product goes to market?

Learning from Experience

Before rushing into the next project, the problems with the last project should be converted into lessons learned. These lessons should be used to prevent the same problems from occurring again. To prevent known problems, processes or product development methods may have to be modified and training sessions may have to be conducted to share new knowledge.

"How many people have seen the same problems happen time and time again?" is the question. Consistently, over 80 percent of product development seminar attendees indicate that the same problems happen over and over again. Often, companies don't even have a measurement that indicates whether progress in being made in their approach to new product development.

Here are some ways to delve into the effectiveness of learning product development lessons:

Do communication channels exist to resolve issues and share lessons learned during product introduction?
Do post-project reviews exist?
Does everyone understand how new products are developed?

At this point in time, product development principles do not have the GAAP's years of refinement. But product development is not black magic, either. Existing principles and guidelines will continue to be refined, but they currently provide great value by stimulating improvement in a company's product development endeavors.