The Dirty Little Secret: Why Smart Leadership Teams Pursue Low ROI Projects (and 4 Ways to Fix it)

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We read the headlines every day: large, well-respected companies are investing in waves of programs that have a low return on the investment it takes to get them into your hands.  

The decisions being made in strategy sessions today about products and services will be in the earnings headlines for the next 24 months – what will be written about your company?

I have been working with senior leaders from a variety of small, medium and large firms this year and one item consistently ranks as the key difference between having a robust growth path or fighting it out in a commoditized world.  The fork in this road comes down to one word – risk.

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In shaping and handling choices relative to risk, leadership teams rarely consider the full range of options for their firm.  Many, many leaders unconsciously succumb to the siren song of high probability, low-risk outcomes and lock themselves into a self-selected, lower growth environment.  As we will see, the real question is how expensive it is to gather or generate information that reduces the risk of a particular option.

Do you want to be the leader that is known for double-digit growth during your rotation of service?

So then how do we conquer this tendency to make choices that constrain our growth?  A deceptively simple, but very useful tool comes to us from a 1999 publication called The Alchemy of Growth by Merhdad Baghai, Stephen Coley, and David White. In their book, they state that firms deal with choices in three horizons:

In horizon one, we are dealing in a near-term zone where our capabilities and the competitive environment is well known.   In horizon two, we are dealing with those areas where uncertainty is higher, but the DNA of our firm gives us the capability to reduce risk either by having insight into the market, the production process or both.  The third horizon is the most uncertain, and typically contains a mix of projects and programs that are the province of R&D or applied technology. These have a perceived high return, but involve substantial uncertainty in realization.

Many use the horizons as time-based tools (i.e., horizon one is one to two years, and so forth), but a more nuanced (and useful)  approach is to see them as zones of uncertainty.  By parsing your options into three categories, a very useful schema emerges.  

The Three Zones of Uncertainty

Zone 1 is the zone of market research, production optimization, and data-based decision making.  Precision is essential here because we are working with the in-market products and services of the firm – the “crown jewels.”  The stakes are high, where tenths of a percentage point provide major returns and decision making needs to be fact based, swift and effective. Truthfully, most of the firms I work with are very polished Zone 1 players.

Zone 2 is where new products and services are being readied for market introduction; you might think of it as the launch pad.  In this zone, 90% of the core work is complete – it’s where the phrase, “the last 10% that takes 90% of the time” was born.  The investments here are much larger than Zone 3, because in addition to vetting the core of the offering, we are building the support systems to launch at scale.  The blind spot that develops here is that we are doing something uncertain against a backdrop of something we are good at.  The portion of the project we are good at can lead us to a false sense of security, and goad us into a larger than merited investment while turning off some of our usual risk management radar.   Mistakes here multiply quickly and firms wind up publicly backing away from markets after large and expensive efforts to scale.  For more on Zone 2 issues, see one of my most popular blog posts here.

Zone 3 is where new business models, products and services are born, and the conceptual work is tested and vetted.  It can be useful to picture this zone as the “lab.”  When working with teams in this zone, you run into lots of different levels of maturation and potential ROI.  The issue becomes how to vote some of these forward as investable, while knowing what needs to be refined or dropped.  For more on this, including a useful mapping tool and a good choice model, check here and here.

So, then how do we conquer our innate human need to have certainty, while investing in programs that have the capacity for stunning financial returns?

The key is handling risk at all three horizons.

The way to hold all three zones together is to develop a specifically described level of risk that you manage each zone to.

By setting aside a well considered zone of uncertainty, you invite experimentation and intuition back into your firm, and open the door to double and triple-digit returns on your investments.

In Zone 1 we need to invest shrewdly and not be afraid to look at projects that “disrupt” our current way of doing things.  This is best accomplished by bringing objectivity to the process via well constructed peer teams (see Ed Catmull’s terrific book) or views from external resources.  Once these teams come to a viewpoint, be willing to fund a short list of tiger team efforts to validate their work, with specific financial caps and milestones.

Let’s take Zone 3 next.  Your primary tools for managing risk here are the degree of projected impact, the significance of customer benefits and the budget needed for maturation.  My advice to leadership teams is to only invest in programs with a validated order of magnitude impact to real customer needs via their new product or service.  Anything less than a 10x improvement will provide insufficient returns to merit the investment needed in Zone 2.  

The four key points for zone 3 programs are:

  1. Keep the teams small.
  2. Keep the investments tranched.
  3. Have a high challenge and high support environment.
  4. When there is a path forward – fund it.

Zone 2 is the most problematic of all 3 zones.  An insightful article on this issue was recently published by Geoffrey Moore here.  The reason this zone is so hard, is because we are moving from intuition to quantified experience at scale.  By keeping careful tranches of investment, with carefully selected Beta customers, geographies or limited product lines, you can manage risk here. The coaching here always is that this zone requires the most detailed management review and vigilance, as these programs can burn a large hole in your balance sheet very quickly.  Many firms lose their objectivity here and persist with investments past their usual risk trigger points due to their “success” and “knowledge” in an adjacent market. (see confirmation bias and for more this blog post.)

So there you have it – the key to selecting great programs is to manage risk well.  By applying the right tools in the right zones, you can sleep at night, and have the prospect of great stakeholder outcomes.

My work takes me all over the world to apply the Right Project, Right Team, Right Plan Framework to help firms make strong plans for growth.  If you’d like to discuss doing a one-day diagnostic session with me on your particular project or program, please reach out to me at 847-651-1014 or send me an email.

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