What do gambling and product development have in common? Almost everything! Like a skilled gambler, learn when to fold a project in order to invest your resources in another, more profitable opportunity.
Think back to the last few project portfolio planning meetings or coffee pot discussions about the projects currently under way in your organization. Have you said, or heard someone say, “We’ve invested so much in this project already, we have to finish it regardless.” Believe it or not, such decisions can be a tremendous source of waste for a business.
Every product development, service development, or other profit/channel producing effort is a gamble. We bet our money, time, and resources that the concept can be developed into a profitable offering. There are no guarantees. Our skills, past successes, processes, and other capabilities give us confidence and our experiences help us judge how much we should commit to an idea. Ultimately, however, we are gambling.
Every skilled gambler knows that continuing to bet on a hand that no longer looks like a winner is a sure path to failure. Even when a gambler opens with a strong investment in what initially looked like a winner, sometimes the next card or an opponent’s response will foil plans. A skilled gambler will fold a poor hand even if he has bet too much already. He knows that betting more will only lose more.
The same holds true in product development and other profit ventures. It may be that because the game is much more complex it is more difficult to see that the scenario has changed, but often we do know that our current plan is no longer as sure as it once was. Still, because we have invested so much, we decide to see it through.
Why do we do it? There are many reasons, some more rational than others. Emotionally, it is difficult to give up an idea into which we have sunk our passions. Rationally, we hate to walk away from an investment and it often seems wiser to follow through and try to recuperate as much as we can, even if it might not be as great as we once thought.
The rationale we often don’t consider is this. Instead of investing our remaining time, energy, resources, or money trying to get a little out of a mediocre project, we could instead invest those valuable assets in something more promising. The difficult part is we must admit that our opening gambit is not worth pursuing and change directions.
To generate the courage to make the ruthless decision to fold our hand and draw another, it helps to look at the numbers. Use the following example as a reasonable model for how you might calculate the decision in your own organization.
Let’s say that our example business has an idea to develop a new product that we estimate to be worth $5,000,000 a year annually. We estimate it will require about $12,000,000 in man-hours, materials, equipment, and testing/experimenting, and one year, in order to bring the concept to production, so the business would be making profit in just over two years. Sound reasonable.
Now let’s say that something changes. It might be that our engineering team discovers that the technology to accomplish the concept is more expensive or difficult than we anticipated. It might be that testing reveals a weakness that must be overcome with additional investment and development. It might be that customer response to the prototype trials is not as exciting as we expected.
When we discover that our new product is not going to be as profitable as we expected, we have invested 6 months and $6,000,000. Let’s say that our new projection is that it will take 4-years, not 2 to recuperate development expenses (either because development will take longer and cost more, or because revenues will be less, or both).
Our first inclination is often to look at the $6,000,000 and 6 months invested and decide that such is too much investment to simply write off and wave goodbye. We will accept that our profits from the project will be much less that we anticipated, but we will decide to follow through and finish.
Supposing that our new product should be supplanted by something new in 6 years, we can look at the numbers this way. Instead of $5,000,000 annually, we’ll expect $4,000,000 and a development cost of $16,000,000 instead of $12,000,000. That means that in years 5 and 6 we will profit at total of $8,000,000. That’s not much profit for our time and money, but at least we get the $6,000,000 back and we make use of the initial 6 months invested.
Now let’s look at the other decision, that of dropping the project and starting something else. Suppose another product in the idea stage can be scoped out and estimated.
Suppose the alternative project will require $10,000,000 in development costs for an annual profit of $5,000,000. Notice how I made the math improbably easy for the example? For the same additional investment of $10,000,000 to develop the new idea we can generate $5,000,000 per year instead of $4,000,000.
That simple math alone should justify shifting projects and abandoning the old one. There are many other factors that should be considered:
- What other projects are ready to begin?
- What resources are required for new ideas or projects?
- What are the project risks?
- What will be the market maintenance projects for specific markets?
- What are the product life spans?
- What technology is available?
There are some things that also influence our decisions, but shouldn’t. I say they shouldn’t influence our decision to abandon a mediocre project. I don’t mean that they shouldn’t be considered as challenges or problems to be addressed:
- How does ego play into it?
- What happens to account managers or program managers when the project is terminated?
- How do we address the lost investment on the balance sheet or taxes?
- What about employee morale?
- Will we be punished for taking a risk and admitting that it didn’t pay off?
In the example I gave an unrealistically convenient alternative project to pick up. Instead, let’s look at an alternative significantly different. Let’s say that the alternative project is worth $8,000,000 per year and would cost $14,000,000 and 18 months to develop. It’s not obvious that the larger, longer project is a better investment, but let’s looks at it.
Ignore what has already been invested. It can’t be taken back. We said that to finish the project would take an additional $10,000,000 to finish the project and it would pay off the investment and return a profit of $8,000,000 within 6 years.
If we drop it and start the larger, longer project, we spend $14,000,000 in 18-months before making revenue. At the annual rate we estimated, in six years we will have recuperated our investment and returned a profit of $22,000,000.
Now we can finish the one we started and then do the larger project afterward, but, assuming that we still finish it on schedule, the 6-month delay to the larger project could cost $4,000,000 in delayed, I say lost, profits. That’s as much as the first project will make annually once it is done paying for itself 4 years later. If it takes an additional 6-months to solve some problems and get the first project launched, that delay costs $8,000,000. That’s the entire value of the first project’s profits.
When we do some simple math it becomes clear that the best thing to do is to go forward with a different, more profitable project. That said, let’s address two final thoughts that often muddy the decision-making process.
First, what should we do about the already invested money and time? If we finish the first project, we typically allocate it to the project, and justly so. If we switch projects, should we allocate the investment to the new one? No! Stop worrying about the spent money. It is spent regardless of how we move forward. Make decisions on future risks and assets. Don’t let past deeds influence the decision.
Second, what if we guessed wrong about the other projects too? Granted, this whole thought process breaks down if we are consistently poor judges of the values and investments required of our projects. If such is the case, we must build a better formula and skill set for estimating our projects. Wild bets are no way to win at poker or business.
It is important to be forward-focused and ruthless when making business decisions to abandon one project in order to shift remaining resources and assets to one that is more promising. However, the human element that often muddies the decision process still need to be addressed.
We still need to keep our account or program managers engaged and productive. We must acknowledge the work invested by our development teams and strive to maintain morale even though the project to which they have invested so much time and passion will be abandoned. When doing this, I suggest that it is best to be plain and to share the business analysis with the teams. No one wants to be part of a poor business path; we all want to be part of a successful one.
Take a good look at your own organization’s behavior around development projects and the decisions to proceed or abandon projects, or to select projects for the portfolio. Exercise your influence to encourage objective decision-making based on go-forward risks and to avoid emotional decisions based on already lost costs or emotional investment in less-than-promising plans. You could save your business a great deal of money.
Stay wise, friends.
If you like what you just read, find more of Alan’s thoughts at www.bizwizwithin.com.
