Innovation is inherently risky. By definition, you’re doing something that you haven’t done before so there are no guarantees it will work. The mindset in many organizations is to “minimize” risk as if it were a disease, but it isn’t that simple. The best companies face risk head-on and manage it both systematically and transparently.
Back-ups as Contingency Plans
One example of managing risk is having “back-up” projects that target the same technology/market as another—typically high-risk, high-value—project. These back-ups are a hedge in case the primary project fails. Back-ups play an important role in R&D portfolio management, yet also pose a unique set of challenges. Which projects should have back-ups? When is the right time to jettison them? While there isn’t a single answer to these questions that fits all situations, there are good and bad ways to approach such decisions.
Positive Thinking or the Ostrich Approach?
This is part of a discussion I had with the Finance group of a client on how to value back-up projects:
Executive: We should assign back-ups a zero value.
Me: If the projects have zero value, we shouldn’t be spending money on them. If they do have value, we should have an idea of what that value is so we can decide which back-ups are worth pursuing.
Executive: If we assign a value to the back-ups we’re admitting that the primary projects might not make it. We should plan for success. While there may be something to the power of positive thinking, successful companies look to the Scouts for guidance instead. Instead of focusing only on success and being surprised by failure, they create contingency plans for what to do if key projects fail.
Another failure mode appears amidst this atmosphere of wishful thinking. We’ve seen “planning for success” lead to denial about the true risks and downside potential of a project. Rather than face the facts, stakeholders continue to support and fund the project, to the detriment of other more promising initiatives in the pipeline. The most prudent (and compassionate!) action available in this situation is project cancellation, and reassignment of available resources on more exciting, promising, and potentially profitable endeavors. By identifying those alternative projects worthy of funding, it becomes easier for the organization to admit when a project isn’t living up to its potential.
Case Study: Gauging the Impact