Auditing New Product Development
Increasing Responsibility and Adding Value

by Dave Biggs

New product development, the source of the future value of any business, puts the Board of Directors "between a rock and a hard place." Held responsible for enough involvement to protect shareholder's interests, Directors, on the other hand, must not micro-manage and weaken the management team. Fortunately, Internal Audit is in a unique position to help both the Board of Directors and Management with the product development process.

Financial process audits provide a historical precedent. Working together, Boards of Directors, management teams and auditors have found and corrected many financial process problems before an enterprise's vitality was compromised beyond repair. Done correctly, audits improve, rather than weaken, management's effectiveness while keeping the Directors informed on critical issues.
Poor product development processes arguably cause more damage than improper financial practices. While fraud or improper management of credit terms are detrimental, developing the wrong products, being late to market or having excessively high product costs is terminal. The importance of new products dictates that the Board of Directors, Management and Internal Audit must work together to seek out and correct problems before irreversible harm befalls an enterprise.

Lack of a "GAAP" (Generally Accepted Accounting Principles) tool for product development has been an obstacle. Created out of the need for uniformity in financial reporting, GAAP has very effectively facilitated accounting communications and financial audit practices. GAPDP (Generally Accepted Product Development Principles) sounds nice, but we don't need a new acronym. What is required is an audit plan template and guidelines to facilitate objective evaluation of new product development processes. To be effective, guidelines must cover the key principles while remaining general enough to fit a wide variety of businesses. Whether a company provides banking services, insurance, software or manufactured goods, consistently developing successful new products and services is a function of:

Understanding the Marketplace

* Planning new products
* Managing development projects

Introduction of New Products

* Learning from experience to continuously improve the process

With an understanding of how to validate answers to the right questions, Auditors are able to identify which processes require improvement. As a beneficial by-product, the Directors are kept informed and can remain passive, unless it becomes necessary to take action in the interest of the shareholders. Examining a sample of the inquiry process provides a feel for the audit process.

Understanding the Marketplace

The half-life of marketplace knowledge is so short that no person or company ever fully understands the marketplace. The mainstream of today quickly becomes passe tomorrow. The best indicator of marketplace understanding, the new product success rate, is often not clearly defined or measured.
Questions that probe a company's effectiveness at understanding the marketplace include:

1. Does a clear definition of new product success exist?
2. Is the new product success rate measured?
3. Are methods in place for the company (not just an individual) to continuously learn about the marketplace?
4. Do the people with information about the marketplace understand the learning processes and how to share their marketplace knowledge?
5. Does marketplace information flow to all the people involved in new product planning?

Planning New Products

Selecting the best marketplace need to pursue and planning the best way to fulfill the customer's expectations are the new product planning steps. The processes used to deliver and support the product, a major influence on customer satisfaction and have to be planned at the same time as the product to best fulfill the customer's expectations. Aspirations of short project cycle times tempt people to start the design process before the definition is completed, but definition changes made in the middle of the design process cause the terrible re's (rework, redesign, and retest). The effects are budget and schedule overruns, compromises in product quality and missed product cost targets. The definition process should effectively manage risk by preventing changes during the other stages of product development.

Here are lines of inquiry that assess the condition of the definition methods and processes:

1. How often do definition changes cause redesign, rework or re-testing?
2. Are business processes (order entry, manufacturing, product service) defined at the same time as the product?
3. 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. 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. Project status reports indicate a few little problems, but lost time is going to be made up. 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.
From the project management perspective, here are a few lines of inquiry that bring out the condition of the project management processes:
1. Do people know the causes of past project delays and have steps been taken to prevent similar problems for occurring again?
2. Is a formal risk analysis performed during the project planning? Is it used to determine what should be done first?
3. Are projects broken down into subtasks and is there a sense of urgency to finish each subtask on time? Often, the sense of urgency only increases near the end of the project.

Introducing New Products
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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:

1. Are launch plans made while the product is being defined?
2. Is sales literature completed and ready when sale of the product starts?
3. Are sales people trained and briefed before the product goes to market?

Learning from Experience

Consistently, over 80 percent of product development seminar attendees indicate that the same problems occur over and over again. 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, root causes of product development problems have to be identified and methods have to be modified or training sessions conducted to share the new knowledge.
Here are some ways to delve into the effectiveness of learning product development lessons.

1. Do communication channels exist to resolve issues and share lessons learned during projects?
2. Do post project reviews exist?
3. Does everyone understand how new products are developed?

Product development is not black magic. While the audit guidelines will continue to be refined, they currently provide significant value by stimulating improvement in a company's product development endeavors. The pace of change in marketplace needs, product technology and business processes show no signs of slowing down. Internal Audit is in a unique position to facilitate an answer to the question "What can be improved to make product development practices more effective?" During the process, there is a significant opportunity to help Directors protect the shareholder's interests and make management stronger during the process.