Project portfolios focused on the best opportunities, accelerate innovation. So how do you build consensus around the term “best”? George Day’s article provides excellent logic to help you drive a consensual view of risk analysis.
“The risk analysis matrix employs a unique scoring system and calibration of risk. It helps estimate the probability of success or failure for each project based on how big a stretch it is for the firm.”
We know that “best” is a function of something. The two main vectors identified by Day include the intended market (x axis) and the product or technology (y axis). Charts below show that the ranges are similar. Both axis range from “Same” to “New” to the company. Since each question to be asked (below) yields five points, the x-axis extends 30 points with six questions and the y-axis extends 35 points with seven questions.
We modified Day’s original questions that somewhat biased toward product development. While product development represents one type of project, we have expanded the rhetoric to embrace various project types. Modify the questions further and adapt them to your own situation.
The Risk Analysis Matrix
A project’s position on the matrix is determined by its score on a range of factors, such as how closely the behavior of intended customers will match existing customers (internal or external). Consider how relevant the company’s brand or reputation may affect the intended market and how applicable its technology capabilities are to develop and provide life-cycle services.
Assessing Risk Analysis Across an Innovation Portfolio
Take Time To MODIFY
To provide a set of questions relevant to every reader requires broad and less meaningful phrasing. Take time to modify the questions above to reflect your personal environment, market conditions, and constraints. You might even expand or contract the number of questions to more fully embrace your project parameters and culture. Remember that the key to building consensus is getting a group of people to focus on the same thing at the same time. Never underestimate the value of sharp and appropriate questions to drive consensus.
Begin to interpret
A portfolio review team—typically consisting of senior managers with strategic oversight and authority over development budgets and allocations—conducts the evaluation, with input from each project’s development team. Team members may rate each project independently and then explain their rationale. Or, time-permitting, conduct a facilitated workshop to build consensus around each factor and score.
Drive consensus by isolating reasons for any differences of opinion and appealing to evidence and your organizational holarchy. The determination of each score requires deep insights. The resulting scores serve as a project’s coordinates on the risk matrix. According to Day:
“When McDonald’s attempted to offer pizza, for example, it assumed that the new offering was closely adjacent to its existing ones, and thus targeted its usual customers. Under that assumption, pizza would be a familiar product for the present market and would appear in the bottom left of the risk matrix. But the project failed, and a postmortem showed that the launch had been fraught with risk: Because no one could figure out how to make and serve a pizza in 30 seconds or less, orders caused long backups, violating the McDonald’s service-delivery model. The postmortem also revealed that the company’s brand didn’t give “permission” to offer pizza. Even though its core fast-food customers were demographically similar to pizza lovers, their expectations about the McDonald’s experience didn’t include pizza.”
Once completed. . .
. . . the risk-matrix typically reveals that:
- Organizations have more projects than they can manage well, and
- A majority of projects cluster in the bottom left quadrant of the matrix, and a minority skew toward the upper right, where impactful innovation occurs.
The imbalance between incremental improvements and breakthrough innovation can be expected. Discounted cash flow analysis and other financial yardsticks for evaluating development projects are usually biased against the delayed payoffs and uncertainty inherent in massively innovative projects. Again from Day:
“What’s more, minor projects tend to drain R&D budgets as companies struggle to keep up with customers’ and salespeople’s demands for a continuous flow of incrementally improved products.”
The risk matrix provides a compelling and structured visual display to stimulate facilitated discussion. Professionally facilitate discussions and dialogue about the mix of projects and fit with strategy and risk tolerance. Next take a deeper dive that we cover in our next article, on Real-Win-Worth (R-W-W). R-W-W develops a closer look each project’s prospects and according to Day represents:
“ . . . a disciplined process that can be employed at multiple stages of product development to expose faulty assumptions, gaps in knowledge, and potential sources of risk, and to ensure that every avenue for improvement has been explored.”
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