Balancing Risk of Innovation Project Portfolios
Copyright by Stephan Klaschka 2010-2025
Risk of Disruption
Innovation projects are risky explorations. Disruptive innovation projects are 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. As my goal is to get the basic idea across, more particular definitions don't seem to 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 organization's resources (How to grow innovation elephants in large organizations).
In contrast, the innovation project portfolio I am referring to aims at the disruptive end of the spectrum: the ‘small elephant projects’ with higher risk but also with the potential for extraordinarily high returns if and when 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 about the portfolio easily becoming an unpredictable money pit. You are likely to get shut down after playing around for a while without demonstrating clear success in terms of return on investment (ROI). 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 long-term.
Risk Categories
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 reaping some quick wins for the less patient stakeholders while the longer-term projects need time to mature.
A common way to approach categorizing projects 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 much high-level sponsorship vetting and are easy to predict and plan resources for.
They are the favored playing field of mature, large organizations.
These projects can often be 'large elephant' projects seen as 'necessary' that the organization rather 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 may be new territory for your company. Sometimes, 'imitating' a successful model in a different industry does the trick (see also: Imitators beat Innovators!).
Adjacencies add to the existing business(es), which requires a higher level sponsorship (usually at the Vice President level) to move forward, allocate resources, and accept the risk of failure.Transformative projects are experimental and risky. They create new markets and customers with bold, disruptive ‘breakthrough’ products and new business models. While the risk of failure is high, the returns could be huge when you succeed.
Highest level (C-level) sponsorship and support is crucial for this category to not only persist and get resources during the development phase but also for the mature organization to adopt and support it sustainably, as they disrupt the status quo.
Finding the balance and learn
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 them "failures" and 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.”
A 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 a few high-risk/high-return transformative projects.
Experiences
From my experience with the portfolio I managed, I leaned towards accepting more risk. This requires being comfortable with a lower success rate as a consequence but also can yield higher returns on the projects that succeed. To my surprise, we completed 55% of our projects successfully and ended up discontinuing 26%.
Fortunately, the average ROI from our "small elephant" projects was so substantial that portfolio returns paid the bills for many years out! Thus, for my portfolio, the 70-20-10 mix turned out as too conservative!
As for how we selected and funded 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 this strategy as well as a supportive organizational culture in 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.