Risk of Disruption
Innovation projects are risky explorations. Disruptive innovation projects even more so, and individual projects can be quite a gamble. So, how can you limit the risk across your portfolio of innovation projects? The goal is to increase the likelihood for the portfolio to succeed overall even if individual projects fail.
(Quick note for project management professionals: I am deliberately not differentiating terms like “portfolio” and “program” here. My goal is to get the basic idea across. More particular definitions don’t add value here.)
In mature organizations, incremental improvement can easily be and often is interpreted as ‘innovation’, which makes sense when optimizing a production environment, for example. Here, at the back-end of operations, big “elephant” projects tend to bind the organizations resources (How to grow innovation elephants in large organizations). The innovation project portfolio I am referring to, in contrast, aims at the disruptive end: the “small elephant projects” with higher risk but the potential of extraordinarily high returns if they succeed.
Why to manage risk
In large organizations you hardly get a “carte blanche” to manage just highly risky projects. With a corporate focus on predictable, short-term results there is too much concern of the portfolio easily becoming an unpredictable money pit. You are likely to get shut down after playing around a while without demonstrating clear success in terms of return-of-investment. Thus, you will need to come up with a strategy on how to compose your project portfolio to keep your stakeholders happy and your experimental playground open.
Managing risk across a project portfolio comes down to finding the right blend of high-risk/high-return projects and lower risk projects that come with less impressive potential for revenue or savings. You also want to include a few projects that produce returns short-term to demonstrate you are making progress and reap some quick wins for impatient stakeholders while the longer-term projects need time to mature.
A common way to approach categorizing projects into into Core, Adjacent and Transformational based on their risk and return profiles:
- Core projects are merely optimizations to improve the existing landscape of systems, processes, assets or products in existing markets and with existing customers. These incremental improvements are the “safe bet” and “next small step” that, typically, comes with low risk, predictable outcomes but also limited returns. They do not need high level sponsorship, are easy to predict and plan resources for, and so they are the favored playing field of mature, large organizations. These can often be ‘large elephant’ projects seen as ‘necessary’ that the organization more easily buys into.
- Adjacent projects come with more uncertainty and risks as they usually extend existing product lines into new markets. Though not an entire novelty it is may be new territory for your company. Sometime, ‘imitating’ a successful model in a different industry does the trick (read also: Imitators beat Innovators!).
Adjacencies add to the existing business(es), which requires a higher level sponsorship (such as Vice President level) to move forward, to allocate resources and to accept the risk to fail.
- Transformative projects are experimental and risky. They create new markets and customers with bold, disruptive “break-through” products and new business model. While the risk to fail is high, the returns could be huge when you succeed. Highest level (C-level) sponsorship and support is crucial for this category not only to persist and get resources during the development phase but also for the mature organization to adopt and support it sustainably.
Finding the balance
When you manage a portfolio of disruptive (read: transformative) innovation projects, you should expect projects not to succeed most of the time. Instead of calling it “failure,” see it as a learning opportunity. As Thomas Edison put it so famously referring to his experiments leading to the invention of the light-bulb: “I have not failed. I’ve just found 10,000 ways that won’t work.”
The common rule for playing a safe portfolio is a 70-20-10 mix, i.e. 70% core, 20% adjacent and 10% transformative projects. This way, many low-risk/low-return core projects keep the lights on while you play with few high-risk/high-return transformative projects.
From my personal experience with the portfolio I manage, I leans towards accepting more risk, so you would expect and be comfortable with a lower success rate as a consequence but also higher returns. To my own surprise, we completed 55% of our projects successfully and ended up discontinuing 26%. Fortunately, also the average ROI from our “small elephant” projects is substantial and pays the bills for many years out. Thus, for my portfolio, the 70-20-10 mix is too conservative.
As for how we select projects and fund projects, read also Angel Investing within the Company – Insights from an Internal Corporate Venture Capitalist and School for Intrapreneurs: Lessons from a FORTUNE Global 500 company.
Before re-balancing your portfolio in favor of a majority of risky transformative projects, however, make sure you have continued high-level sponsorship and alignment with strategy and organizational culture of your organization. – If culture, strategy and sponsorship don’t align to support your innovation portfolio efforts, your risk increases for painful learning without sufficient business success.
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