A modern approach to Stage-Gate: Innovation and risk management for Scale-ups
Combining Agile and Lean Startup methodologies in a coherent framework to manage innovation at scale, for Tech companies and Scale-ups
So you got yourself involved again in a conversation about Innovation: probably the most abused word in the english dictionary. Your Execs, Board members, Investors talk about it as something sacred, critical for the future of the business. But eventually the quarterly results (and the bottom line) take priority.
Early stage startups see Innovation as the natural way to move forward: you take risk, you disrupt a market/business model/experience, and you get rewarded. Hopefully.
But as soon you get traction and start seeing early signs of growth, and especially, as soon as you get funding, either seed money or a proper Series A investment, that risk-taking attitude that made you successful up until now needs to face the reality of a yearly budget, quarterly priorities, growth projections and shareholders expectations.
Let’s face it, it’s difficult to keep innovating when you have a revenue target to achieve every month: you are forced into a working mechanism that is more typical for a big Corporation than a small company dealing with the unknowns of a new venture. And, in my personal opinion, this is the biggest point of failure for most Scale-ups: planning for infinite growth pretending it can be simply fueled by continuous improvements of the Product: as the theory of the Diffusion of Innovations shows, sooner or later a market will reach saturation and maturity, and the same companies that were able to disrupt that market will have to face the red ocean of competition, unless they are able to innovate again and move over a new S-curve.
I found myself in this situation, more than once: as product leader, having to balance the day to day operations (and contribution to the business) with the strive for mid-long term disruption. And although I don’t have yet the perfect solution for it, I started developing a framework that can help Scale-ups (and Tech companies in general) to make space for innovation, creating a safe and controlled environment where those crazy ideas that can shape the (long term) future of the company can be tested, validated and eventually funded.
The Framework: Agile + Lean + Stage-Gate
The idea behind this framework is very simple: leveraging best practices we have accumulated in recent years of digital product management (Agile & Lean) within a more traditional and standardized process. A “framework of frameworks”, in reality.
The first 2 variables we are trying to manage are Risk and Cost (CFOs reading this piece are feeling the excitement growing at this point): When you have limited resources (aka Costs) you want to maximize your ROI, right? Well, sometime ROI within the quarter is the killer of Innovation. Let’s think more in terms of long-terms return of the limited resources we have to invest into innovation. Again, my friend CFOs would love to consider this in terms of NPV (Net Present Value) of an investment. And here enters the Risk: the uncertainty we have at present time that a specific event would occur in the future.
This is a key element of the framework: trying to reduce uncertainty early on, before we invest heavily: here is the other variable we are trying to “control” with this framework: Time. Which is in my experience the worst fear of Investors and other C-level when they hear about Lean and Agile: no clear timeline — nor “Deadline”.
I prefer the concept of “timeboxing” however over Deadlines: you give enough time, resources and freedom to a team, enough to experiment, iterate and pivot if necessary, and you review where they’ve got versus the initial hypothesis. So let’s introduce the last source of inspiration for framework: the Stage-Gate process (also known as Phase-Gate process) — a project-management, waterfall methodology that has its origins in the late 40s of the past century, used to manage complex engineering projects, and eventually formalized by Robert G. Cooper in 1986.
I’m sure that after reading the words project management and waterfall most of you may want to stop reading, but please bear with me: it’s the combination of the risk management and time-control of Stage-Gate plus the adaptability and flexibility of Agile/Lean that makes the framework so powerful.
Initiatives, Stages, Gates and Review Committee
As in a traditional waterfall Stage-Gate process, our framework is composed by Stages (a specific phase of the initiative) and Gates (the formal review point that decides which initiatives will go to the next Stage); Initiatives start as simple ideas and eventually evolve into a full working new feature or product as they go through each Stage and Gate.
Unlike a traditional waterfall process however, it’s important to note that this “movement” is not linear nor unidirectional, as Initiatives will go back and forth through Stages depending on the result of each Gate review: teams will have the opportunity to learn, pivot and reassess as they learn through each Stage, maintaining the “feedback loop” typical of Agile methodologies.
During Gates, a Committee review the status of each initiative, reassess the confidence level based on the learning accumulated by the teams, and together they decide the next step: move to the next Stage, pivot and go back or even kill the initiative. Composition of the Committee is key: Execs are welcome and needed, but also key team members and experts are required: lead engineers and members of Customer Support team for example can bring to the table different perspectives while assessing the progress of initiatives.
Ultimately, notice also how each stage, while it’s aimed to reduce risk/uncertainty, also imply a growing cost/resources allocation.
Stages
Each stage is trying to answer a very specific question:
Concept (“convince me”)
This is the most important stage of the overall process: in this phase we are trying to make some order between exciting yet somehow confusing ideas for a new product/feature: by “forcing” the proposing teams/individuals to use a standard, extremely simple template, we homogenize the initiatives, make them comparable, and also extremely readable, by eliminating the bull**it and focusing on the content.
I used an extremely lean template based on the 10 slides pitch by Guy Kawasaky [https://guykawasaki.com/the-only-10-slides-you-need-in-your-pitch/], and namely we ask the teams to present a basic idea of the customer problem they are trying to solve, addressable market, the business model, a generic idea for the go-to market and a back-of-the-envelope financial simulation, among other things. The key is that no extreme precision is required at this point, and some of the assumptions here will need to be tested in the next Stage: we want to make sure teams take in consideration their ideas from different angles, for example analyzing what competitors do.
Another approach for the Concept Stage is using a Business Model Canvas (or Lean Canvas, or any other Canvas that fits your needs) to describe the idea: again, the goal should be having teams presenting the key elements of an initiative from a 360 degree perspective, using a standard format while maintaining the cost to the minimum.
This is also the Stage at which most initiatives are killed, sometimes by the teams themselves, once they see that simply the market size and/or problem identified is not big enough.
Teams should be able, during the Concept Stage, to build a confident enough pitch/deck to present at the upcoming Gate review; the question we are trying to answer is: if our hypothesis were true, would we have a viable and scalable business?
Prototype (“show me evidence”)
Once an initiative makes it to the Prototype stage, the real fun starts: teams will have a limited amount of Time and Resources to validate the most critical hypothesis of the Initiative.
At this stage we will focus on validating the problem/solution fit: now it’s time for Lean Startup and all related methodologies to shine: identify the biggest risks and assumption, pivot if necessary, and come back at the next Gate review with “Evidence” that will support the initiative.
Goal of this phase is provide qualitative data that support the critical hypothesis around the Initiative. I found methodologies such as Lean UX [https://jeffgothelf.com/books/#lean-ux] being the more effective: as per any other Stage, teams will have a limited time (timeboxing) to identify and validate key hypothesis, so the fastest and better way to move through the Prototype Stage is by testing and learning as quick as possible, pivot and iterate as necessary. The biggest mistake teams can commit at this point is spend their time and resources trying to build already the perfect prototype or MVP — you may limit your chances to learn and iterate and fail eventually your next Gate review.
MVP (“show me results”)
At this Stage teams have been able to collect enough evidence to support the Initiative — which eventually can be quite different from the initial idea, thanks to the cumulated learnings. It’s time to allocate more resources and time and take on some more Risk; time to build a first Minimum Viable (or Lovable) Product and focusing on proving product/market fit.
Higher buy-in is required in this phase, but thanks to the previous stages, we managed to increase our confidence, reduce risks while contain costs.
In this Stage is key to identify what are the minimum requirements for the MVP to prove success against a small set of KPIs. We have already found answers to our main hypothesis, we have built confidence around the initiative, it’s now time to deliver the leanest version of our Product to a small set of users and measure success: engagement, retention, activation, conversion to a specific action, are all valid — just make sure you pick the right KPI critical to the success of the Initiative and focus on that: you need to have clear success metrics and communicate them transparently — the Gate Review following the MVP stage will focus on those success criteria to determine the viability of the Initiative to the next Stage. Consequently, we are focusing more on quantitative data (user behaviours, funnels, engagement and retention, etc.) to complement the qualitative data collected at the previous step.
Typical mistake at this Stage is trying building already a fully fledged product, with the assumption that all features are needed to prove viability: you can quickly burn the allocated timebox to build the perfect MVP — while the most successful strategy, straight from the Agile playbook, is build incrementally and release as often as possible, guaranteeing yourself the maximum amount of iterations (and learning) during the current Stage.
ROI (“show me the money”)
We are almost there: MVP proved to be successful against the initial success metrics; now it’s time to prove that the MVP can evolve into a fully fledged Product/feature that can be successful at scale.
At this Stage, we are increasing the bets, with higher investment in both people (more engineers, marketeers, CRM specialists etc.) and money, as we are going to test also the viability of different User Acquisition strategies. Iterations on the product focus on improving the product-market fit, potentially moving beyond early adopters, and funnel and retention optimization to maximize ARPU and/or LTV; marketing team focus on improving CAC by testing different acquisition channels and refining the Product Marketing message.
Goal of this Stage is to prove financial viability of the Product at scale. To further control risk, the Product can be initially tested only on a selected (small) market, postponing heavier marketing investment and international expansion to the next and last Stage.
Growth (“make me rich”)
When the Initiative reaches this Stage, we are now at the end: we have proven the problem/solution and product/market fit, validated financial viability, now it’s time to focus on growth: the Product is now part of the company portfolio, resources will be allocated permanently; growth, consolidation and/or international expansion are the topics at hand for the Product team. Normal operations and processes are now built around the product.
As you can expect, getting to this point is a slightly longer journey compared to a traditional waterfall approach or even when going full-in with Lean Startup and Agile — benefits are however better control over cost-resources, risk and time. And greater transparency and objectivity over what’s moving forward or not, what’s funded and what’s discarded.
In the table below you can find a summary of each stage, with typical roles and resources involved (based on my personal experience) and also tools and metrics relevant for each phase.
In the next part of this article, we will explore more in details each Stage (with real-life examples), and also best practices and recommendations about iterations and prioritization within Gates.
