Thursday, May 22, 2008

Crap Shoot

Before we go any further, ponder this inponderable: Is one really big failure better than three or four small failures?

I was pondering this recently while talking to a participant at the Front End of Innovation show. He was quickly reviewing his firm's innovation process. It seems that his team had generated hundreds of ideas using reasonable approaches, evaluated them and selected one to move forward with. I was nodding along, very interested and engaged right up until he said "one". I decided not to react in my normal way, which would have been to fall down laughing or to roll my eyes, but instead let him carry on to tell me the idea had not been successful but his team had faith in the process.

So, back to the inponderable: As a manager or executive in a large firm, are you compensated to create risk or reduce risk? Does it appear wise to risk a lot on one roll of the dice? Would you, like some Las Vegas high roller, push all the chips in the middle for one good roll of the dice or spin of the roulette wheel? If you can see where I'm heading, stick with me for a minute. If I've lost you in the inponderable, then perhaps your gambler mentality has kicked in.

Logical gamblers, also known as venture capitalists, make a spread of moderate bets across a number of ideas or technologies. They KNOW going in that many of them will fail, but some will succeed and one or two will provide tremendous returns. No good VC bets everything on one idea or one technology. However, most firms that we talk to have a bias towards getting to the "one" good idea. There are so many problems with this thinking that a blog post simply can't do it justice, but here are a few concerns with this approach:

  1. Being able to pick the "one" great idea out of a stack of reasonable ideas
  2. Working with only one idea when the possibility for failure of any idea is so high
  3. Raising the stakes so high since everything is stacked on the success of the one idea
  4. Creating a project that's "too big to fail" since we don't have a second option
No, I don't think most shareholders expect their management teams to place risky bets. They want to know that the firm is investing money appropriately according to risk and return. So why would an innovation team, having generated hundreds of ideas, select a single one to move forward with? Why not try out four, or five, or six ideas, knowing full well that one or two of them is bound to fail. It may turn out that your team finds value in two or three of the ideas and decides to commercialize all of them. However, if your one idea turns out to have a hidden flaw, you don't have an alternative available.

Albert Einstein was famously quoted as saying that God did not roll dice. Well, if he doesn't, why should any innovation team?
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posted by Jeffrey Phillips at 10:57 AM


Anonymous Graham Horton said...

How true this is!

We also see this all the time. Clients expect their idea evaluation process to be infallible, if they can just perform enough checks. The result is a hugely overladen evaluation process containing many questions that are expensive to answer, in the hope that it will detect "the one true idea" which can be presented to the board of directors.

Your analogy with venture capitalists is a much better model: better to acquire a portfolio of projects in the expectation that some will fail, but that the winners will pay for them as well for themselves.

If you are using a stage gate process, then you can do even better: the analogy is then to making private investments. Here, also, you buy a portfolio of stocks or mutual funds in order to spread the risk. In this case, however, you can sell the stocks which are not performing well quickly without losing too much money (you don't have to wait until they have totally crashed before selling.)

Best Regards


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