CFOs are all too familiar with the experience: someone at the company has a Big Idea for an innovative new product or service, or has identified the next great growth opportunity. Money is earmarked and a project is launched with great fanfare. But two years later, what looked dazzling in a PowerPoint deck now looks ill-conceived if not completely doomed. Yet ego, corporate politics, and a desire to recoup some kind of return on investment almost guarantees that good money will be thrown after bad.
Rita Gunther McGrath, professor of business strategy at Columbia University, says there is a better way. In fact, she co-wrote the book on it (Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity, Harvard Business Press, 2009). Her basic message sounds simple enough: innovative growth can be attained by establishing and systematically testing project assumptions at progressively more challenging checkpoints, learning from the outcomes, and changing direction as appropriate. “If the results live up to your assumptions, you release more funds until you get to the next checkpoint,” McGrath says. “If they don’t, you alter the project or kill it. The important thing is that you’re embedding learning into the planning process.”
When McGrath explained the approach at CFO’s Core Concerns conference in Baltimore this summer, “it resonated with me,” says Gregg Olson, senior vice president and CFO of Trail Blazers Inc., which owns the Portland Trail Blazers NBA basketball team and the team’s related merchandising enterprises. “We had just launched this new product — live, online streaming of our games — and had made certain financial assumptions. Unfortunately, we had no template to test the accuracy or efficacy of these assumptions. Her methodology would have given us more confidence around pricing.”
Olson is far from alone among CFOs seeking a more systematic way to fund growth strategies. Many companies are knee deep in cash and equity capital (see “Time to Get Off Your Cash?” July/August) and would like to put it to work. But in a new, more risk-averse climate, the fear of failure is palpable. McGrath presents an alternative — “fail fast and fail cheap.”
“If you fail fast you can take the risk of failing more,” agrees Brian Kimmel, CFO of the National Association of Convenience Stores. “By establishing assumptions and then checking them along the way to see if they’re right or wrong, you can kill the project before it breaks the bank. You’ve now preserved capital for the next growth initiative.”
That’s not how traditional ventures are funded. “Once a project acquires a life of its own, people are afraid to kill it,” says Kimmel. “They’ve got too much skin in the game.”
Or, these days, too little. “CFOs are balking at proposals that might, in fact, drive growth, because they don’t see enough evidence that the idea will work,” says Kevin Bolen, a partner at Innosight, a consulting firm that leverages McGrath’s ideas in engagements. “But if someone says, ‘Can I have $10,000 to test these assumptions I have about this interesting idea?’ a great project that otherwise might not get funded gets off the ground.” (As one example, see “And One that Worked” at the end of this article.)