2. Working with innovation portfolios

Innovation is an uncertain investment: there is no guarantee that any single innovation activity will deliver impact, can be implemented in a predictable way, or will avoid unintended or unanticipated consequences. In an uncertain world, overreliance by public sector organisations on a single strategy can result in a precarious situation, as a change in circumstances (e.g., a crisis or disruption) might make a promising or dependable approach suddenly unreliable or unsuitable. Furthermore, large reforms and goals cannot be achieved by single initiatives or programmes. They require concerted innovation across different organisations both within and outside the public sector. An overview of these activities across a portfolio of interventions builds clarity among an ecosystem of actors around the intent of innovation. As this is an emerging topic, this chapter defines innovation portfolio management and its benefits before jumping into the theoretical underpinnings of an innovation portfolio approach. Based on emerging literature, the main functions of innovation portfolio management are covered in cases identified through qualitative research.

As such, this chapter builds on the semi-systematic literature review carried out in summer 2021, in addition to interviews with current innovation portfolio practitioners. The former were identified during the 2020 OPSI “Government after Shock” conference during an OECD facilitated portfolio workshop session. Prior to the workshops participants were given tools to facilitate their own portfolio discussion in their own organisations using the OECD’s Portfolio Exploration Tool (see further in Box 2.14, Chapter 2) (OECD, n.d.[1]). Following the conference, an external researcher conducted semi-structured interviews with the portfolio workshop participants at the “Government after Shock” conference. This was followed up by case study interviews conducted by the OECD during the summer of 2021. Consequently, the chapter is based on the desktop analysis, qualitative case study analysis and explores how public sector leaders and managers can understand the variety of innovation types that happen in reality in conjunction and in competition with each other. The chapter specifically concentrates on how a portfolio approach to innovation can serve as sense making, coordination and decision-making devise.

Portfolio management is a dynamic decision-making process that involves regular reviews of ongoing activities and ensures coherent distribution of resources (investment, time, human resources, etc.) between strategic options (Box 2.1). A portfolio approach to innovation – managing multiple activities, support structures, and investments – is a way to spread risk, with numerous investments to mitigate the chance of loss if one investment fails, as others might succeed. It is also a way to identify and analyse synergies between actions, evaluate results beyond single interventions and avoid lock-in to ineffective or unsuitable innovation strategies.

In the public sector, investing in several innovations and focusing on activities that draw on different types of innovation can increase the chances of achieving a desired or intentional result. Of course, investing in innovations connected to the same issue could increase costs and result in redundancy. But when viewed from a portfolio perspective, these costs appear as investments in strategic options, rather than one-off bets with no guarantee of success. Some innovations are more likely to pay off, while others can be opportunities for learning. What matters is success at the portfolio level, which implies that riskier and learning-friendly innovation environments can also be supported. From a strategic perspective, a well-coordinated portfolio of projects is a better bet than a single, all-or-nothing effort, especially if the operating environment is uncertain and public sector organisations cannot be confident about where (or when) an innovative response is needed. This approach can also avoid a longstanding problem with innovation in the public sector: that projects become too big to fail, with investments continued on the assumption that they will lead to success due to a lack of alternatives.

In response to these pressures and challenges, public sector organisations in OECD countries and beyond are experimenting with portfolio approaches to innovation. Portfolio approaches can maintain distinct simultaneous activities and supports for both current operations (exploitation) and new opportunities (exploration). With differentiation and equilibrium between activities, an organisation can be more flexible, adaptable and responsive to disruptive contexts. Consequently, to set an overall direction for innovation, it is necessary to have a systematic view of efforts and an ability to steer them at a portfolio level. A portfolio approach is therefore a way to moderate the stream of different innovations within a system.

Nevertheless, as many approaches are still at an early stage of development, there is a diversity of perceptions and practices regarding innovation portfolios in public sector organisations.

Portfolio approaches to innovation management arise mostly from reflections by practitioners on emerging needs. For example, Sitra (2020[6]) in Finland adopted innovation portfolio approaches in response to the realisation that previous innovation management approaches were short-sighted, fragmented and ineffective (see Box 2.2). Meanwhile, Climate KIC, an organisation supported in part by the European Institute of Innovation and Technology (EIT) and focused on innovation to mitigate and adapt to climate change, acquired a new understanding of the strategic role of the public sector in directing innovation (see Box 2.6). At the global level, the United Nations Development Programme is pioneering portfolio approaches to coordinate complex international and local, public sector and third sector stakeholder landscapes (UNDP, 2022[7]).

The main benefits of innovation portfolios are:

  • Avoiding fragmentation and ‘projectification’. A project-centric view of innovation can be problematic, and public sector organisations struggle with ‘projectification’ (Box 2.3): the division of policy problems into smaller, manageable, time-bound actions without an overview of their collective impact. In isolation, innovation activities that need to fit into neat project formats influence the types of problems considered suitable for innovation. For instance, pre-determined timeframes can imply that the main target of innovation is not to uncover the most effective or creative solutions, but to make projects work within the given time span.

  • Tackling risk-aversion and learning on the portfolio level. Innovation portfolio management can provide a view over a range of projects, which facilitates resource dissemination and increases the tolerance for risk and investment in organisations. This involves the ability to distribute risk among multiple investments while developing new intelligence and skills to move swiftly in the unknown. Failure, which is a natural part of innovation, becomes more manageable when viewed at a portfolio level.

  • Finding synergies between projects and activities. Portfolios do not perform in isolation. Rather, they form part of an organisational or systemic context. Portfolio approaches to innovation can highlight the breadth of available resources and actors (not only in the public sector but also in the private and third sectors), to reallocate them in accordance with public value. A benefit is the setting of objectives and prioritisation of resources, even when the innovation activities themselves are unclear, such as when using part of the innovation portfolio to stress-test current policies and services, or responding to rapidly changing technological context or user needs.

  • Building value chains between different project areas. The processes associated with portfolio management bring operational clarity and understanding of the entire innovation value chain, allowing practitioners to evaluate the potential to scale up innovation. They can also mobilise partners, sources of knowledge and resources to help innovation activities move between exploration to exploitation.

  • Keeping tabs on layered activities connected to big reforms. Innovation portfolios can be analysed at the team/unit, organisational or ecosystemic level in terms of both innovation activities and desired impacts. The types of the impact pursued by public sector innovation determine the level at which the innovation activity should be analysed. Portfolio approaches provide ways to coordinate, measure and align innovation at multiple levels towards an overall strategy.

  • Planning across ecosystems. Portfolios offer a holistic view of innovation efforts and the systemic capacity for solution-based design to address complex problems. In many cases, challenges span several sectors and require alignment of innovation activities across ecosystems, such as innovation in basic research and local action to achieve the climate transition (Box 2.4). In multi-project environments, performance should be considered in a joint manner rather than divided between projects, programmes and portfolio.

  • Avoiding lock-in and capture by innovation fads and fashions. Due to the complex nature of ‘wicked’ problems, innovations linked to these challenges must be open-ended and interconnected, and avoid rigid, pre-determined models and pathways to solutions.

Given the diverse and shifting environment in which public sector organisations operate, it is unwise to lean heavily on a narrow approach to innovation. Relying on a single strategy or solution will limit an organisation’s capacity to balance managing current operations (exploitation) with engaging new opportunities (exploration). While exploitation enhances knowledge and expertise when searching for efficiency, exploration means experimenting to find the most novel solution for a transformational change (Andriopoulos and Lewis, 2009[8]). Equilibrium between these modes allows a more flexible, adaptable and responsive approach to disruptive contexts (Turner, Aitken and Bozarth, 2018[9]). This aptitude is associated with the notion of “ambidexterity” (Andriopoulos and Lewis, 2009[8]; O’Reilly and Tushman, 2013[10]; Koryak et al., 2018[11]) – a dynamic capability organisations need in the face of complex and uncertain scenarios.

Most private sector innovation portfolio management literature (e.g., Sicotte, Drouin and Delerue (2014[12])) tends to draw upon Teece, Pisano and Shuen’s (1997[13]) “dynamic capabilities” framework: the capacity to reshape existing resources into novel solutions to address a changing operational environment. While there are many examples of how private sector organisations handle ambidexterity and grow dynamic capabilities (Birkinshaw, Zimmermann and Raisch, 2016[14]; Randhawa, Wilden and Gudergan, 2021[15]), the adroit management of exploration and exploitation activities in the context of public sector organisations is at an early stage of development, especially when it comes impact on innovation processes. To set a direction for innovation, an organisation needs a systemic view of innovation efforts (Osborne and Brown, 2013[16]). Central to this reflection is a portfolio approach to moderate the stream of different types of innovation (Popadić, Pučko and Černe, 2016[17]). Yet there are diverse perceptions of this practice, considering the variety of factors and of contexts in which they could be employed.

The private sector uses innovation portfolios to transform vague ideas into novel activities, often by spreading risk at the level of investment in innovation. Nagji and Tuff (2012[3]) describe innovation portfolio management as an overview of multiple projects that facilitates resource dissemination and increases the tolerance for risk and investment in organisations. This involves distributing risk among multiple investments while developing intelligence and skills to move in the unknown (Nagji and Tuff, 2012[3]). In this line, Meifort (2016[4]) highlights four perspectives in relation to portfolios: (1) optimisation – developing a list of projects based on strategies inspired by financial sector stock portfolios, finding the most suitable combination of projects; (2) strategy – turning plans into action by allocating resources in alignment with the organisational target; (3) decision-making – initiating a deliberative process that includes stage-gate controls to engage with the constantly changing environment; (4) organisational – develop multi-level strategic perspectives to coordinate the views of different departmental decision-makers while respecting budget constraints.

In the public sector context, however, a project-centric view of innovation can be problematic. Public sector innovation and policy pilots often struggle with ‘projectification’ (Lundin et al., 2015[18]; Hodgson et al., 2019[19]; Midler, 1995[20]) (Box 2.3). Innovation activities that must fit into neat formats influence the types of problems considered suitable for innovation. Public sector innovation becomes forced into established timeframes. In such cases, the goal becomes not to uncover the most effective or creative solutions, but to make them work in the given time span (Hodgson et al., 2019[19]). Pre-determined timeframes might be too short for measuring long-term impact, decreasing the usefulness of evaluation. Without measures for long term impact, it is difficult to coordinate with other projects in the wider ecosystem and monitor progress against the overall organisational purpose.

Given the diversity of values the public sector pursues and the partnerships it needs to develop, public innovation portfolios must be broader than individual projects or investments. Considering the complex nature of ‘wicked’ problems, innovation must be open-ended, inter-connected and without pre-determined pathways to solutions (Rittel and Webber, 1973[22]). The innovation portfolio management process aims to align all projects in the portfolio to an overall strategy (Box 2.4). Advancing a shared purpose while creating insights to produce impact on a broader scale is a desirable feature of innovation portfolios in the public sector (Seppälä, 2021[23]). This holistic view of the innovation efforts outlines the need to both look at innovation portfolios from an organisational level and analyse the systemic ability to design solutions by mobilising the whole ecosystem to address complex problems. The private sector analyses this through the concept of ‘alliance’ portfolios, which look at complimentary relationships and diversity of sources of knowledge and resources (Cui and O’Connor, 2012[24]). In the public sector, it could be even broader: innovation portfolios can encourage societal transformation by connecting projects for strategic goals and creating an enabling and collaborative environment (Seppälä, 2021[23]). A proactive and cooperative approach is preferable for dealing with complex systems. 

Drawing on the discussion above, innovation portfolios can be analysed at the team/unit level, organisational level or wider ecosystem level in terms of both innovation projects and the strategic impacts they seek. The dimension of impact targeted determines the level at which innovation activity should be analysed. On the other hand, processes associated with innovation portfolio management improve operational clarity and understanding of the whole process (Cooper, Edgett and Kleinschmidt, 2001[25]; Schultz, Søren and Talke, 2013[26]; Teller et al., 2012[27]; Kock and Gemünden, 2016[28]). Innovation portfolio management can thus increase organisational transparency while allocating available resources and actors in accordance with the organisational mission.

The theoretical underpinnings of an innovation portfolio approach presented above reveal a reliance on private sector experience in conceptualising innovation portfolio management, and that this might present limitations. Portfolio management methods were first applied in the financial sector with a view to steering investment decision-making (Martinsuo and Dietrich, 2002[29]). Although public sector organisations increasingly use private sector performance metrics, they are also influenced by political and bureaucratic dynamics (Crawford, Simpson and Koll., 1999[30]; Parker and Bradley, 2000[31]; Turner and Keegan, 1999[32]; Boland and Fowler, 2000[33]). Therefore, these theoretical models have not proven effective in the public sector context, and the public sector’s requirements for project portfolio structures and tools have yet to be identified (Martinsuo and Dietrich, 2002[29]).

Public sector organisations are influenced by internal political factors and external public expectations (Määttä and Ojala, 1999[34]). The internal political pressure is created by voters covering the social-economic context of the decision-making process. External public expectations concern activities such as infrastructure and services like education, healthcare, and market-based services for citizens and businesses. To provide high-quality services to citizens, these two aspects of leadership must align. As a result of the interplay between budget constraints and effectiveness, the public sector resists change in political, economic, and technological areas (Määttä and Ojala, 1999[34]). Yet public sector organisations increasingly operate in rapidly changing and complex environments, needing to adapt swiftly to new contexts. Portfolio approaches in the public sector thus aim to steer investment while coordinating and balancing innovation activities that satisfy both internal and external pressures.

In the private sector, evaluating investment options in portfolios is associated with reducing risk (Nagji and Tuff, 2012[3]). Portfolios in this context usually face resource allocation trade-offs, conflicts between exploitative and explorative activities in organisational routines, bound risks and more uncertain investments (Stettner and Lavie, 2014[35]). The objective is to build a portfolio that ensures the greatest total performance and distributes resources across a diversity of activities. Innovation portfolio management must contend with shifting contexts, opposing strategic goals and the uncertainty of external factors that affect organisational performance (Cooper, Edgett and Kleinschmidt, 2002[36]).

This suits the corporate context where day-to-day processes are optimised and follow a clear line from problem analysis to strategy formulation and execution. The work is typically organised in such a way that funds and efforts follow pre-planned and defined life cycles and milestones (Elenbaas, 2000[37]; Salapatas, 2000[38]). Hence, private sector innovation portfolios often rely on the innovation funnel model, the innovation ambition matrix model, the options portfolio model and the project impact feasibility model (Box 2.5) to make investment decisions. Decision criteria can include uncertainty, risk, feasibility, impact (e.g. variety across different markets, technologies, product categories and project types), and temporality (long-term projects versus short term investments). Usually, the goal is to maximise the monetary value of the overall portfolio, achieve a balance of projects across the criteria and ensure that the portfolio reflects the strategy of the business (Cooper, Edgett and Kleinschmidt, 1999[39]). However, these models tend to bias the portfolio towards investment and financial value logic. In addition, focusing on cost- and project-based models means that large organisations tend to favour exploitation activities over exploration. Consequently, many of these models have been critiqued for biases and blind spots, for both the public and private sectors.

Innovation portfolio management combines a range of techniques for detecting, assessing, and developing new ideas by managing resources across projects (Cooper, Edgett and Kleinschmidt, 1997[5]). This section analyses the following functions of innovation portfolios: creating new knowledge and space for sense-making; mapping innovation portfolios to create a holistic view; creating a diverse supply of innovation; measuring and evaluating the status of the innovation process; and ensuring efficient project co-ordination and portfolio stewardship.

Spreading organisational assets across a spectrum of activities creates intelligence through practice and collaboration. Holden et al. (2018[2]) point out that innovation investments are not only made to receive the biggest return on investment, but often as a strategic move to learn and develop knowledge about emerging goods or processes. Innovation portfolio management thus improves clarity and understanding of innovation activity (Cooper, Edgett and Kleinschmidt, 2001[25]).

First, expanding innovation activity across a set of projects widens the organisational or systemic perspective. Innovation portfolios influence the long-term perspective as it is crucial to determine the viability of future initiatives and resource dissemination. While many innovations happen on an ad-hoc or provisional basis (Kock and Gemünden, 2016[28]), innovation portfolios can make sense of and reflect on their long-term impacts. Portfolios therefore offer perspective on innovation that aims to remodel society rather than simply provide the financial means to execute operations. Portfolios also put the focus on learning from innovation failures, reframing the negative connotation of innovation failure in the public sector.1 The public sector already plays this role in many cases, providing “patient capital” for research and development (Cooper, Edgett and Kleinschmidt, 1997[5]). But the same logic does not yet apply to public sector activities themselves. Achieving that requires a variety of skills. Analytical ability is essential for developing core and adjacent innovations, while transformational innovations usually require discovery and idea definition (Nagji and Tuff, 2012[3]).

Second, innovation portfolios offer an overview and understanding of ongoing activities and create space for sense-making (Box 2.6). Sense-making in this context means the ability to identify needs for innovation, and ownership of problems and initiatives, using this process to develop organisational expertise (Weick, Sutcliffe and Obstfeld, 2005[40]). Through a structured understanding of innovation needs, portfolio owners can pick up on patterns of significance for organisations or ecosystems (ibid.). In other words, sense-making means understanding, arranging and interpreting complex environments to provide a comprehensible view of current endeavours (Weick, Sutcliffe and Obstfeld, 2005[40]). When confronted with complex situations, managers need “to change what ‘facts’ they pay attention to and ‘frame’ new course of action” (Fligstein, 2006, p. 950[41]) within their innovation portfolio.

Sense-making broadens the institutional view of paths and possibilities within and beyond the existing innovation portfolio, to compare potential investments and chose the most viable (Chôra Foundation, 2021[42]). These pathways shape and trace new forms of exploration rather than leading to the discovery of forgotten or ignored information. This practice generates assets and capabilities for the organisation to gain new skills and expand its perspective, resulting in more tolerance for constant shifts and uncertainty. However, by generating new knowledge and ways of learning, sense-making challenges traditional structures and bureaucratic frames (Kvilvang, Bjurström and Almqvist, 2020[43]). The ability to balance business-as-usual against challenging the status quo and searching for novel solutions for potential scenarios is a capacity connected to “innovation’s dilemma” (Christensen, 1997[44]) and can influence portfolio positioning between exploratory versus exploitative actions.

In the innovation facets sense, enhancement-oriented innovation and mission-oriented innovation receive more high-level leadership attention due to their need for high investment levels and political visibility. This could mean that anticipatory and adaptive action, while important to organisations, are discounted in the broader portfolio. Balancing innovation activities and analysing them in a broader context must thus be part of organisational sense-making activities.

Another relevant aspect of portfolios is to create a holistic ‘portfolio mindset’ (Smithson, 2010[45]). Innovation portfolios present innovation assets and activities from different perspectives and enable organisations or systems to swiftly shift resources such as investments, talent and leadership to more promising opportunities in quickly changing contexts (Box 2.7). Innovation portfolios enable management decisions based on knowledge of all initiatives in the portfolio and how each connects and contributes to the overall long-term strategy (Kester et al., 2011[46]). This requires innovation portfolio managers to monitor and map innovation activities so that decisions can be made holistically. A portfolio mindset gives strategic focus both across organisational siloes, programmes and projects, and across the whole organisation or ecosystem by contributing to more all-inclusive thinking and mobilisation of resources towards broader goals. Portfolios allow decision-makers to optimise resources across projects and tailor them in accordance with new contexts or changes in the operating environment. Innovation portfolios reveal options while making sense of current actions, initiating social dialogue and rethinking shared purposes while allocating resources. The public sector has applied this, for example, to the field of education planning for schools and sharing their resources across districts by developing portfolio networks (Campell, 2012[47]) (Box 2.8).

Innovation often involves risk and uncertainty. Creating a diverse supply of innovation activities and expertise in an organisation’s or ecosystem’s portfolio spreads financial risk and develops higher adaptability to changing contexts. Portfolio management is often associated with financial strategies, as the primary concern of investors is to lower portfolio risk (Fabozzi and Markowitz, 2011[49]). In the investment community, theories connected to investment risk and return are an essential component of sound portfolio management as they form a basis for the investment strategy (Elton, Gruber and Busse, 2004[50]). Rather than putting big amounts of money in one place, it is advisable to build a varied portfolio of several investments. This is called diversification – a risk-reduction strategy that allocates investments over a wide variety of financial tools, sectors and other categories in a portfolio (Ansoff, 1957[51]).

In the public sector, short-term financial, reputational and programmatic risks play a role in shaping innovation portfolios. While diversification in investment portfolios can be a standard approach to mitigating risk, in the public sector it requires a change in the outlook of innovation efforts: from perceiving innovation as a distinct activity to considering it part of the whole organisation (Holden et al., 2018[2]). A diverse innovation portfolio allows governments to deal with individual failures by leveraging rewards across the portfolio to compensate losses and continue funding further rounds (Mazzucato, 2011[52]; Rodrik, 2015[53]). Furthermore, financial arguments might not be the only considerations public organisations need to consider in diversifying their innovation portfolios. Strategic aims connected to goals and challenges might justify higher risk tolerance due to their broader value proposition (Laplane and Mazzucato, 2020[54]).

Another benefit of innovation portfolio diversification is the ability to adapt or lead a public sector organisation’s innovation activity in a different direction when faced with a threat to its mission, remit or purpose. For risk preparedness, organisations and systems must diversify supply and allocation of budget, technology, human resources and knowledge across innovation activities (Box 2.9). Some risk reduction is possible through allocation optimisation and redundancy across innovation activities supporting similar outcomes. The purpose of diversification is to reduce the instability of the portfolio by offsetting a poorly performing innovation activity with a better one. This creates ‘portfolio agility’ (Sull, 2009[55]):2 the capacity to switch resources swiftly and efficiently from less to more favourable fields of work. In decision-making, agility contributes to portfolio optimisation by detecting activities unsuitable to new contexts and prioritising more promising opportunities (Kester et al., 2011[46]). This requires is enough buy-in from senior leaders to address power balances within organisations if reallocations and changes are needed (Kuilboer, Ashrafi and Lee, 2016[56]). Hence, a key portfolio activity is to create an sufficient supply of innovation to support both long- and short-term needs, and adequate investment in diverse innovation activities overall.

Taking these arguments into account and drawing on the diversification strategy, the OECD Observatory of Public Sector Innovation (OPSI) developed the four-facet innovations model3 (Chapter 1), which looks at public sector innovation portfolios beyond financial aims (including, missions, adapting to citizens need, ensuring value for money, and preparing for uncertain events and investments outside the private sector). Governments should not strictly focus on innovation portfolio balance. Organisations should develop each of the facets, but depending on their organisational goals the weight of each in the portfolio may differ. They should have multiple ongoing innovation activities aligned with the strategy or purpose of the organisation while investing in other types of innovation to avoid lock-in and stay in touch with citizen needs. A good portfolio has elements of all the innovation facets. Reflecting diversification strategies used by the financial industry, public sector organisations should spread their innovation efforts across the facets while developing organisational abilities in various directions. As governments are expected to act in a challenge-driven and anticipatory way, different evaluation models will help them assess return on investment beyond monetary terms.

It is important to evaluate the success of innovation portfolio implementation, taking into consideration the type of innovation, the expected accomplishments and lessons learnt. The measurement and evaluation of individual innovation projects is distinct from that of innovation portfolio management. The ‘stage-gate process’ is a mechanism to control and evolve innovation efforts from rough ideas through to implementation (Cooper, 1990[57]). Stage-gate processes can evaluate innovation projects and activities at regular intervals to ensure they fit new contexts and align with organisational purpose (Holden et al., 2018[2]). The evaluation process ensures effective resource management and establishes benchmarks to assess project performance. Reflection on the results helps create knowledge and inform future directions of projects.

In contrast, measurement and evaluation of the whole portfolio of projects requires a different approach. Innovation portfolio managers, who might be responsible for analysis, decision-making or both, should measure and evaluate how the portfolio performs in delivering impact against the organisation’s remit, purpose, or mission. While it is notoriously difficult to track, measure and evaluate, innovation portfolio managers should develop mechanisms to address a few key questions: (1) Is the portfolio aligning activities and projects with the overall organisational purpose or mission?; (2) Is the portfolio creating and maintaining distinct and suitable strategies for managing different types of innovation activity?; (3) Are new linkages across innovation activities being made and is learning happening between them (Box 2.10)?; (4) Are innovation activities in the portfolio shifting based on identified gaps, changed operating environments, or new opportunities or threats? Finally, as a meta-evaluation question, innovation portfolio managers should consider whether portfolio analysis is sufficiently connected with decision-making about how resources are allocated to innovation activities.

The increasingly interconnected nature of public policy calls for new concepts to help public servants adapt (Lindquist, 1992[58]; Paquet, 2009[59]). Especially in the context of innovation management, the state has an important role in shaping and steering technological and economic development towards a societal vision. In this context, stewardship means the interrelated attitudes, roles and behaviours that public sector leaders enact and promote to help their organisations adapt to the evolving context in which they operate (Wilson, 2013[60]).

Although the concept of stewardship is not new to the public sector, a scarcity of empirical studies limits understanding and application of this notion by public leaders in their organisational context. Stewardship as proposed by Kass (1988[61]) describes the capability of public servants to gain public trust with effective and ethically sound behaviour while building synergies and collaboration at a team, organisation or ecosystem level. The role of the steward is to balance the long- and short-term perspective of projects, and enhance the visibility and coordination of innovation activities. The purpose of innovation portfolios is to transform plans into strategic actions (Eggers, 2012[62])).

Whereas innovation might arise from different units in an organisation or actors in a system, it is essential to maintain interconnection between activities while balancing the approaches of different decision-makers – considering them pieces of a broad strategy or mission (Cooper, Edgett and Kleinschmidt, 1997[5]). In multi-project environments, different types of performance should be considered jointly rather than distinguishing among projects, programs and portfolios (Müller, Martinsuo and Blomquist, 2008[63]). Portfolios do not perform in isolation. Rather, they are part of a broader organisational context (ibid.). Their role can be assessed from the perspective of balancing conflicting interests based on the strategic actions of the organisation (Müller, Martinsuo and Blomquist, 2008[63]). Thus, portfolio decisions should be in line with the organisational or ecosystem strategy (Turner and Müller, 2005[64]).  

The success of the portfolio stewardship role becomes evident in the interpretation and alignment of strategic actions and balancing of conflicting interests within the organisation. Innovation portfolios are thus a fundamental part of decision-making (Loch and Bode-Greuel, 2001[65]), especially for large, coordinated efforts (Box 2.11). Consequently, a dynamic decision-making process involves regular reviews of ongoing projects in the portfolio, ensuring suitable resource distribution between projects or activities (Mathews, 2010[66]) and contributing to organisational learning and institutional memory of what works in which contexts and why. Other stewardship functions include setting objectives for different parts of the portfolio, owning decisions, facilitating learning across activities and with internal and external actors, identifying systemic patterns and windows of opportunity, and establishing priorities for available resources (Fricke and Shenhar, 2000[67]) These enhance co-ordination based on broader strategic aims.

Various fields, including the public sector, introduce portfolio practices to coordinate and steer organisational efforts to enhance performance (Roussel, Saad and Erickson, 1991[68]; Dye and J.S., 1999[69]; Cooper, Edgett and Kleinschmidt, 2001[25]; Martinsuo and Dietrich, 2002[29]). There is a wide variety of frameworks and tools for managing a portfolio (Cooper, Edgett and Kleinschmidt, 1997[5]; Roussel, Saad and Erickson, 1991[68]). Tools can be placed inside the government or outside, such as outsourcing services in the form of inter-ministry committees, working groups, central and inter-strategy departments, representing different ways to steer public management (Van De Walle and Groeneveld, 2011[70]). Managing in complex contexts, as in the case of public sector, often means that governments must simultaneously lead towards several goals using a variety of tools.

Portfolio practices in the public sector can be supported using tools designed to illustrate the distribution of resources and activities, promote understanding of portfolio activities, and oversee complex innovation systems. However, in practice there is a lack of mature tools for developing innovation portfolios across functions in the public sector. Evaluation, measurement and benchmarking tools are particularly needed. At present, tools tailored to risk management, resource allocation and understanding the underlying ecosystems connected to innovation portfolios are being trialled in the public sector following their use in the private sector.

One of the functions of innovation portfolios is to create a risk tolerant environment in which managers can balance high risk opportunities with more promising projects (Morris, 2010[71]). In this sense, innovation portfolios in the public sector function in the same way as portfolio management for any other kind of investment and require a profound understanding of the innovation activities involved to allocate resources efficiently (Kock and Gemünden, 2016[28]).

One tool is the Risk-Reward Bubble diagram (Cooper, Edgett and Kleinschmidt, 1999[39]) (Box 2.12). Its main criterion is the added value and possible impact an initiative could have for the organisation or ecosystem. The diagram shows decision-makers the trade-offs between a single initiative and its effects on the portfolio (Cooper, Edgett and Kleinschmidt, 1999[39]). Adding a project decreases the resources available for others, which requires careful distribution of assets. The model shows the “dynamic decision-making process” in action: projects should be documented and compared, and resources balanced across a variety of activities (Cooper, Edgett and Kleinschmidt, 1999[39]). The archetypes in the diagram display the probability of success and reward associated with different activities. A balanced portfolio enables the organisation to concentrate on certain sectors or business areas, and manage the related risk (Doorasamy, 2015[72]). Hence, the archetypes are helpful for framing a portfolio.

An example of resource and risk allocation in the public sector, the US government 10x agency funds innovation exploration activities and uses stage-gating funding to learn and assess exploitative potential over time (Box 2.13) and invest resources accordingly. As a result, projects and activities funded at highest levels have a lower risk of failing to implement because early warning signals or insurmountable barriers were resolved during earlier stage-gates.

Assessing the current state of the portfolio offers a clearer view of what processes and methods already exist, identifies gaps, and creates a strategy for launching the portfolio management process in line with the organisational vision. This shared vision will guide decisions taken across the organisation, aligning them with the organisational objective (PMI, 2013[73]). Portfolio management is a continuous process. Unlike individual projects or programmes that have planned start and end dates, portfolios require constant monitoring of activities to help the organisation respond to change and uncertainty (PMI, 2013[73]). This requires tools for understanding the bigger picture of ongoing innovation activities within an organisation or ecosystem, and for generating evidence to make decisions at a portfolio level.

One tool that supports decision making at a portfolio level is the Portfolio Exploration Tool (PET) developed by OPSI (Box 2.14). The PET helps consider and comprehend the different innovation activities in an organisation or ecosystem. It is based on the Public Sector Innovation Facets model, which differentiates between four types of innovation activities (Chapter 1). The PET allows for self-assessment of capacities and innovation types in an organisation or ecosystem. The results provide an overview of innovation patterns and help teams or systems develop a more deliberate innovation strategy in which excessive focus on one type of innovation does not limit the ability to respond to future challenges.

Portfolio management requires complex, multi-level organisational governance because it usually involves several decision-makers and units with different strategic visions and goals (Cooper, Edgett and Kleinschmidt, 1999[39]; Meifort, 2016[4]). Complexity theory, as applied to public management, offers an approach to understanding the factors that enable managers to make more effective decisions (Rhodes and MacKechnie, 2003[76]). Complexity theory and public management share a perspective on monitoring and providing feedback when steering behaviour in organisational systems. This advocates for a holistic perspective from which public service should be developed.

Complex adaptive systems (CAS) consist of independent elements that act as an integrated body and develop new knowledge based on experience while adapting to a changing environment (Holland, 2006[77]). CAS increase their survival ability by adapting to shifting circumstances based on dynamic networks of interactions. Complex systems support understanding and anticipating the most difficult societal problems (e.g., climate change, the COVID pandemic). In a CAS, the system and its stakeholders cannot be separated; the system is more than just an aggregate of actors or elements (Dooley, 1997[78]). The different components of the system must be coordinated and connected, leading to the creation of new knowledge that is otherwise difficult to obtain by simply observing single interactions.

Many public sector organisations operate in environments of ambiguity, involving multiple interconnected stakeholders and systems. Portfolio management thus requires tools to understand and manage complex systems. One example is the Cynefin framework (Box 2.15) used in collective sense-making to facilitate collective decision-making (Kurtz and Snowden, 2003[79]).

Another approach to developing understanding of innovation activities is to analyse the different sub-systems within a complex environment. The Pentagon framework is used in systems thinking and multi-faced complexity management (Akgün, Van Leeuwen and Nijkamp, 2012[80]) to address the idea that public sector management should be developed in a context of partnership and coordination. The Pentagon framework visually captures the interactions in a system that can produce an impact on a wider ecosystem level (Box 2.16).

Finding a balance between different types of innovation activities in organisations is difficult. However, the ambidexterity to balance exploring and exploiting innovation is desirable for long-term organisational success (Raisch et al., 2009[81]): successful organisations find equilibrium between reinforcing current operations and searching for new opportunities. In the public sector context, an organisation faced with significant levels of uncertainty requires a provisional approach to reflect on possible outcomes before heavily engaging a certain idea or project. To achieve success over time, most organisations need to sustain a variety of innovation activities that enable them to consider varied alternatives (O’Reilly and Tushman, 2013[10]).

Duncan (1976[82]) proposes that organisations achieve ambidexterity in a gradual manner and adapt their structures over time to balance conflicting alignments in accordance with the organisational purpose. In contrast, Tushman and O’Reilly (1996[83]) argue that organisations should explore and exploit at the same time in the context of quick change by developing the “ability to simultaneously pursue both incremental and discontinuous innovation and change results from hosting multiple contradictory structures, processes, and cultures within the same firm” (Tushman and O’Reilly, 1996, p. 24[83]). Thus, they suggest that exploration and exploitation should take place in separate units connected by a shared goal (Tushman and O’Reilly, 1996[83]).

At the same time, Stettner and Lavie (2014[35]) suggest that organisations spread their resources in exploring emerging areas of work while focusing on standard practices by designing a portfolio that gives an overview of organisational activities. Raisch et al. (2009[81]) note the need for more in-depth understanding of the connections and tensions between exploitation and exploration. This can be done using portfolio practices to gain insights into future and ongoing activities that the organisation is developing.

Another approach is to balance innovation portfolio gaps inside organisations with partnerships and collaborations with stakeholders strong in areas the internal portfolio lacks (Chesbrough, 2006[84]). This is known as inbound open innovation (Majhi et al., 2020[85]). This requires an organisation’s absorptive capacity to understand what is missing in its innovation portfolios and integrate external knowledge. Human resource practices, internal learning mechanisms, international diversification and corporate governance rules can play a role in the ability to source knowledge externally (Ardito et al., 2020[86]). In many cases, these relationships are a must because impacts are co-created in a public service setting.

According to Rhodes (1996[87]; 2012[88]), governance should be equal to a space where actors communicate and co-operate. Supporting this view, Klijn and Koppenjan (2012[89]) suggests that an emphasis on connection between organisations to enhance co-operation and collaboration to deliver better services is among the most relevant functions of governance (Agranoff and McGuire, 2001[90]; Torfing, 2012[91]; Rhodes, 1997[92]). This is echoed in literature on collaborative innovation inside the public sector over the last decade (e.g., Sørensen and Torfing (2011[93]); Crosby, ‘t Hart and Torfing (2017[94]); Wegrich (2019[95])).

Consequently, portfolio balance can be archived within a broader innovation ecosystem, rather than only inside the organisation. This makes it necessary to make sense of portfolios within a network or ecosystem perspective, rather than assess projects or programs individually.

Innovation portfolio management is assuming an increasingly central role in the public sector. While innovation portfolios – whether managed or not – already exist, their effectiveness in delivering on governments’ long-term goals is currently more ad hoc than deliberate. Much more investment is needed in innovation portfolio approaches, as is uptake in public sector organisations where practical lessons can be learnt. Many political, institutional and social factors can influence innovation portfolio composition in the public sector that might not even merit consideration in the private sector.

Portfolio approaches help address a variety of issues connected to innovation management in the public sector, such as risk aversion, failure, fragmentation, alignment of action across policy cycles, etc. But portfolio approaches in the public sector are only now developing, and there is a need for more research, testing and development of different models to address diverging needs. Tools and methods are essential to help visualise, monitor, evaluate and act regarding innovation portfolios. There are obvious limitations to the innovation portfolio management tools available today given the variety of portfolio approaches and the broad contexts to which they can be applied. The tools and methods are still too abstract and distant from day-to-day challenges in the public sector, with little or no empirical testing and validation. There is also a distinct lack of comparative research to compare portfolio management experiences with other organisations, or tools and methods shared in the same ecosystem. These questions require exploration in theory and practice.

Of course, tools are only useful if the people and roles they support are positioned to steward innovation portfolios – including those that span across and between organisations. The role of an innovation portfolio manager is not only analysis and decision-making, but also collective sense-making, shared learning and agenda-setting. This role is particularly important for innovation that supports grand societal challenges and missions such as green transformation. Spanning local, regional and national and even supranational bodies, innovation portfolio managers encourage uptake of innovation activities not only among public actors, but also among firms, citizens and the third sector. A systemic view of innovation efforts is vital to allow the public sector and its partners to gauge whether their efforts are sufficient to meet the challenges involved in such missions.

Portfolio practices can also help organisations avoid traditional innovation pitfalls, such as incentivising people not to draw attention to risks, addressing failure on a project basis, and favouring exploitation over exploration and short-term gains over long-term investment. An adequate and intentional supply of innovation activity across a portfolio is important for the public sector to avoid the biggest risk of all: the inability to adapt or lead when faced with a threat to its mission, remit, or purpose, thereby missing the opportunity to create public value or address the biggest global challenges of our time.

Performed well, innovation portfolio management is a continuous activity that spans institutions. Innovation portfolios can be examined within and between units and teams, and across entire organisations. The key question is how to build synergies between these practices that translate into learning and decision making supportive of innovation across the whole organisation. Research is needed on differentiated models of innovation stewardship and portfolio management, not only to fit different organisations but also to meet the needs of government called to steer innovation for the public sector or an ecosystem as a whole.

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Notes

← 1. Traditionally, innovation failures in the public sector are penalised more than successes are rewarded (Feller and Feller, 1981[97]), contributing to a culture of risk-aversion and fear of failure often highlighted as barriers to innovation (Bloch and Bugge, 2013[96]).

← 2. Sull (2009[55]) identifies three types of organisational agility: operational, portfolio, and strategic agility.

← 3. See https://oecd-opsi.org/projects/innovation-facets/ for detailed information about the OPSI innovation facets model.

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