#LeanStartup’s Hidden Gem – Built-in Risk Management for Creation

If you are not currently managing, advising or working in a startup, you might not be inclined to read Eric Ries’ The Lean Startup. While this is understandable, it would be very unfortunate because #LeanStartup model includes a “hidden gem” useful to nearly anyone. It seamlessly applies the most power techniques for Risk Management (without getting caught up in complicated terms and overhead) to the most risky of endeavor: the act of creating something new.

Why Risk Management Matters is So Important in Creation

A Risk is a possible situation that could materially affect (i.e., derail) your plans. Risk Management is a set of techniques to reduce the likelihood and/or effect of risks on whatever you are doing.

While any operation or activity has implicit risk, the act of creating something entirely new—be it a company, platform, product or process—is fraught with some of the biggest risks imaginable:

  • What if your underlying assumption regarding the need for what you are creating does not match reality?
  • What if your select approach to fulfil this need does not fit the market?
  • What if customers cannot readily recognize the value of what you are creating?
  • What if your assumptions of customers’ priorities differ from what they really are?
  • Are your customers do not use your creation in the way you expected?

Get all of these right and you will have created “The Next Big Thing.” Get any one wrong and you will likely have a big failure on your hands: lost or delayed revenue; failed launch; wasted time, work and money; etc. Managing these risks from the start—without undue overhead and complexity—is vital to success. The #LeanStartup easily lets you do this.

Tactic 1: MVP Testing to Avoid the Biggest Risks to Creation

As outlined above, act of creation faces bigger, more fundamental risks than any other endeavor. A core principal of risk management is to “manage the biggest risks first—when they are easiest and least costly to address.” The #LeanStartup does this using the Minimum Viable Product (MVP).

MVPs test high-risk assumptions (regarding market, platform, product position, product scope, etc.) from the start, using rapid, low cost development efforts. This avoids the biggest risk of all: wasting time and money creating something customers do not need, want or use as expected.

However, what is refreshing about the Ries’ approach is how he challenges current conventional wisdom regarding how to do this:

I was a devotee of the latest in software development methods (known collectively as agile development), which promised to help drive waste our of product development. However, despite that, I committed the biggest waste of all: building a product that our customers refused to use. (The Lean Startup, pp. 46-47).

Instead of focusing on eliminating “product development waste” (i.e., figuring out how to build faster), the #LeanStartup model focuses on eliminating “customer learning waste” (i.e., figuring out how to understand your customers faster) using the principal of Validated Learning. Validating Learning first uses MVPs (and later Innovation Accounting, see below) to let you focus your time and energy on creating the things most useful to customer (and vital to your success).

Tactic 2: Innovation Accounting to Continuously Avoid New Risks

Risks are not static. They do not all start at the beginning but can emerge at any time. If you do not continuously keep your eye out for new risks to manage, you are likely to face unpleasant surprises as you progress with creating your new product, platform or process. The #LeanStartup model addresses though use of a new form of metrics called Innovation Accounting.

Innovation Accounting is based on the use of actionable, accessible, and auditable metrics to detect and avoid risks by measuring what customers are doing with your product. It throws out “Vanity Metrics”—both measurable ones such as website hits and anecdotal ones such as “person X said our product was great”—in favor of metrics that focus on how customers proceed through their entire life cycle:

  • Of those who looked at our product, which actually bought it?
  • Of those who bought it, which used it (and how much or how often)?
  • Of those who used it, what features did they use most and least?
  • Of those who bought and used it, how many continued to do so? How many recommended it to their friends and colleagues?

Through use of Innovation Accounting (frequently in tandem with A/B Testing, Cohort Analysis and other pilot strategies), you can detect aspects of your product, platform or process that are resulting in undesired outcomes (e.g., abandoned sales, customer turn-over) earlier, addressing them before they become large problems. Furthermore, by tying metric results into your product development lifecycle (another unique change to Agile and Lean methodologies), you can avoid the risks of build whole sets of product features and capabilities that are not useful to your customers (and hence, a waste of time, effort and money to you).

Tactic 3: Pivoting to Mitigate Realized Risks

No matter how skillful you are, some risks will simply “just happen.” Even if your execution is flawless, external events (e.g., new market trend, new competitor, new invention) will change your competitive landscape. When this happen, you may need to change what you are doing if you want to continue to grow your new creation.

The #LeanStartup model introduces the concept of the Pivoting to adapt to change. Pivorting formalizes a fact-based process for change (using Validated Learning from MVP Testing and Accountability Metrics) adding calmness and control when reacting to new information and external events. Ries highlights ten categories of pivots to help you more effectively adapt to a broad range of scenarios, such as:

  • Your product is compelling but its delivery model is not
  • Your product is compelling but its sales model or channel is not providing the results you need
  • Your product is compelling but your valuation for pricing does not match your customers’
  • Your strategy is compelling but underlying market and technology changes require a different approach

Inclusion of Pivoting in your overall business model provides a tool to mitigate the effects of late occurring (or late discovered) risks that could not be avoided earlier in the creation lifecycle.

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Creating anything new is an exciting—but risky—endeavor. Eric Ries’ #LeanStartup model provides three tactics that not only help you guide your venture to success, but also seamlessly harness the most powerful risk management techniques from the start of your idea through realization of your goals.

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