By Tristan Kromer

 

Stop me if you’ve heard this before: The business landscape is changing faster than ever, and to remain competitive, organizations need to innovate.

Unfortunately, despite repeating the “things are changing fast” phrase thousands of times, most large organizations still have a stiff stage-gate innovation process that lacks the flexibility that they expect innovation to give them. Most processes are bafflingly strict and stifle the innovation they seek to foster.

In particular, the standard stage-gate model of innovation suffers from several common issues:

  • Every project that is approved, launches
  • Projects that don’t show growth continue to receive funding
  • Good ideas that don’t fit into existing business units are abandoned
  • Small strategic errors in projects compound over time
  • Individual investments are not considered in the context of the overall portfolio

 

Traditional innovation processes often prove to be rigid and suffer from several common issues.

 

These problems are entirely avoidable! They are the result of a fairly typical idea called the stage gate process. This is a widespread model that dictates how ideas should move from conception to launch.

Historically, this model has served as the backbone of many organizations’ innovation processes. However, as we stand in an era where rapid iteration and market feedback are crucial, we need to reassess and refine these traditional frameworks. There are four must-haves needed to modernize a stage-gate innovation process:

  • Metered Funding
  • Data-driven Decisions
  • Bounce Gates
  • Off Ramp

But first…

 

What Is a Stage Gate Process?

The stage gate process is also known as “Phase Gate Process” or “Stage Gate System.”

At its core, this model is a project management technique where an initiative must pass through ‘gates’ before moving to the next ‘stage’ in development.

A stage-gate process typically looks something like this:

 

A stage gate process is a network of processes consisting of ideation, proof of concept, manufacturing, distribution and sales.

 

Ideas always move left to right, never right to left.

It’s generally in the shape of a funnel but it gets very narrow very quickly. The idea is that although a lot of ideas are considered at first, most of the ideas that get into proof of concept don’t actually wind up being distributed.

There can be three steps, four, five, or ten. But it’s always the same basic process.

At each stage, there is a gate with specific criteria. There are a set of gatekeepers, often very senior executives, that define whether the project can proceed or not.

Every Approved Project Launches

In a typical stage gate process, the expectation is that once a project passes through all the stages and gates, it’s deemed ready for launch. This assumption doesn’t always take into account the dynamic nature of the market, competitive landscape, and customer preferences which may shift during the product development cycle.

This is partly because these gates are usually governed by a small board of stakeholders who must approve the project to proceed. However, these types of innovation governance boards generally don’t say no. Why would they? Most of the ideas come from the same executives responsible for distributing the funding.

They occasionally say “not yet” if a project has not fulfilled some regulatory requirement such as food safety, security controls, or budgeting process.

The governance boards are usually responsible for simply adhering to the process, not actually making good decisions to stop a project that doesn’t look financially viable. So the governance board is responsible for the process, not the outcome.

Continual Funding Without Growth

For similar reasons, the traditional stage gate process provides projects with funding even if they show no signs of growth or progress. Eric Ries calls this the entitlement funding approach, where each stage’s budget is predetermined and often divorced from actual project performance.

In most stage gate processes, there is no actual feedback from customers, so projects are entitled to funding, regardless of no demonstrable progress and customer traction.

Abandonment of Unfit Ideas

Sometimes, good ideas that don’t fit neatly into existing business units are discarded entirely. Sadly, this type of tunnel vision is quite common when the governance board is composed of business unit leaders. And why not?

If a project doesn’t fit with anyone’s strategic interests or quarterly objectives – why fund it?

Unfortunately, truly disruptive ideas don’t usually fit within existing business units – and may even threaten an existing business. So they are not just undesirable, they are threatening.

The stage gate process is inherently biased towards incremental improvements within current business lines.

Small, Strategic Errors Compound Over Time

The stage gate model’s linear nature does not allow for errors. It only moves forward.

If a project requires course correction because the target customer segment was incorrect – there isn’t any process to go backwards in the process or repeat a stage to pivot. If a mistake or faulty assumption slips past one gate, it’s likely to affect subsequent stages and could result in wasted resources or even project failure.

Psychological barriers such as the Sunk Cost Fallacy and simply not wanting to lose face by admitting a project is failing make it very hard to take two steps back and start over. The process pushes the project forward to launch and the errors can compound to the point where they are uncorrectable.

Lack of Portfolio Context

Finally, decisions within the stage gate model are often made in isolation without considering the broader portfolio. This siloed approach can lead to misaligned investments and missed opportunities for synergies among projects.

In the many, many cases we’ve seen working with dozens of  organizations, the innovation team is not even given a large enough budget to construct a true portfolio approach. Instead, they may only have a budget for 2-4 projects.

Unfortunately, ideas and innovation are a numbers game. You need a LOT of ideas to find the good ones and you need to have the funding to pivot an idea and try many different variations to unlock exponential growth.

Those are just five of the common issues. So what does a modern innovation process look like?

Four Elements of a Great Innovation Process

A modern innovation process can draw from the lessons of agile, lean-startup, design thinking and even statistics to create something that is flexible, dynamic, and data-driven. So let’s go over four must-have elements for any modern innovation process.

1. Metered Funding

Metered funding (sometimes called startup funding, innovation funding, or something else) is an alternative to the traditional, entitlement-based funding model. Instead of allocating funds based on the perceived potential of an idea at the very beginning of the process – funds are allocated as the project proceeds.

These are small, conditional rounds of funding that are the norm for venture capital investment. A startup might receive a seed round of funding and hope for a series A followed by a series B and so forth. At each stage of a venture capital process, the startup must demonstrate evidence of progress – usually in the form of pre-determined metrics such as user traction or revenue from actual customers.

At the early stages, the demands for evidence are minimal. A few paying customers, some signed Non-Disclosure Agreements (NDA) with potential partners, or perhaps just a Letter of Intent (LOI) with a big distribution channel. The requirements get more stringent in proportion to the amount of money needed by the statement. Want $100,000? A few customers might do it. $10 million? You’d better have serious business model traction.

Larger corporations implement the same mentality as venture capitalists, but are able to make their funding rounds significantly smaller and more timely. Where VCs typically invest sufficient money to last a startup at least a year – corporate startups will usually only receive 3-6 months of funding before needing to go back before the innovation board.

If your company isn’t using metered funding, then it’s basically just playing the lottery. Each project is fully funded without any real evidence that the idea is a good one or not.

This model encourages innovators to use resources wisely, validate assumptions quickly, and demonstrate progress before seeking additional funding. Most importantly, it directly increases ROI from innovation by shutting down failing projects early. That money can be reinvested in projects that show more promise.

2. Data-Driven Decisions

Proper innovation management is data-driven. We can use both qualitative data as well as quantitative data (ideally  backed up by statistical analysis) to make decisions.

In a stage gate process, the governance board simply approves that a project has fulfilled certain (usually binary) criteria such as “has the budget been allocated?” or “has the product passed quality control standards?” Technically, that is data driven because those are verifiable facts. But innovation is not a binary process of victory or failure. Innovation is about making calculated bets on something that is inherently uncertain.

The innovation management team should set clear, objective investment criteria for each stage. But these criteria are not a list of checkboxes to tick off. Instead, human beings need to combine the qualitative and quantitative data to estimate the likelihood of meeting revenue, impact, or strategic goals.

An early stage (ideation + discovery) funding decision might require a 5% chance of a minimum market size of $1 billion within 10 years. A later stage (scale up) decision might require a 60% chance of $10 million in revenue within the next 2 years. Each has a clear target and a quantitative assessment of the probability of success.

That probability should be estimated by using both hard numbers and qualitative assessments. There should be real business experiments using a Minimum Viable Product (MVP) with real customers. There should also be fuzzier data from experience, customer interviews, and human judgment.

Using techniques from Innovation Accounting, we can combine those very different types of data into an assessment of probability visualized with a Histogram or Hurricane graph. This is the ultimate tool that drives decision making.

 

Histogram

 

Hurricane chart in a Monte Carlo scenario

 

This is not to say human judgment doesn’t play a role – there is qualitative data that must be assessed and there may be strategic considerations that are hard (or not worth the effort of) quantifying. But these decisions should be based on tangible evidence of progress and potential that impact the likelihood of success. Personal opinion or politics have no place here.

If a project might negatively impact or displace an existing business unit – that can be quite upsetting – but is not a good reason to kill a project! Assess the data dispassionately and let the data drive the decision making.

This approach ensures that the best ideas thrive, regardless of their origin. Again, it directly increases ROI by making less passionate decisions and having a consistent decision making framework based on a combination of human estimates and statistical analysis.

3. Bounce Gates

In metered funding, failure to meet the criteria of a stage leads to the termination of a project. Although that rarely happens in reality (most ideas are let through), the idea that one mistake kills a project is a depressing one. Innovation thrives on failure!

Real startups pivot. They discover that one or more of their assumptions was incorrect and then they change their strategy or tactics to adapt to the real world data.

In other words, they try something, see if it works, and if it doesn’t, they try something else. That is the basic (oversimplified) innovation process and actively preventing projects from deviating from a previous plan using a stage gate process is a phenomenal way to encourage all innovators in your company to seek employment elsewhere.

A bounce gate is just what it sounds like. If a project doesn’t pass the criteria for the next stage, there are still two options. Kill or Pivot.

Yes, sometimes ideas are just bad and should be stopped for good (or at least paused until market conditions change.) But the innovation board needs the flexibility to keep the project going – just not forward. Each project can pivot by bouncing back to the start of the prior gate. A small amount of funding would allow the project to take the lessons learned from failure, and try to create something better. This approach encourages learning from failures and aligns more closely with the iterative nature of innovation.

Preserving know-how and learning from failure – again, directly increases the ROI from the innovation portfolio.

4. Off Ramp

Sometimes, projects either don’t fit within the existing business unit strategy or pivot away from it. Those projects can fall through the cracks and a great opportunity can be defunded or “orphaned.” This is just a terrible waste of innovation that has all sorts of knock on effects such as great innovators leaving a company that won’t support their vision.

So instead of killing off these potentially disruptive ideas, these projects can be ‘offramped’. That means either letting them become their own new business unit with their own strategy or divesting them from the corporate structure entirely as a spinoff. Those spinoffs are then free to seek funding from other sources such as venture capital like a true startup.

This allows the parent company to preserve some of the value of the innovation without having to invest more resources into a potentially distracting venture.

If the project succeeds, great! The company has shares in something great or the spinoff can be (re)acquired and reintegrated as a new business unit. If it fails, no harm done. This tactic preserves potential ROI in the form of portfolio optionality.

 

Lessons Learned

Innovation management has evolved significantly. It’s no longer a rigid, one-way path but a dynamic, feedback-driven funnel. Projects can now revisit stages for further development, or take an off-ramp if they cease to align with strategic goals. This approach enables organizations to foster a more resilient, adaptable, and successful innovation process. But most of all, it increases both impact and ROI.

 

Using stage gates allows organizations to foster a more resilient, adaptable, and successful innovation process.

 

In the rapidly changing business landscape, there’s no room for static, one-size-fits-all processes. Your innovation process should foster creativity, leverage data, and maintain strategic alignment. By incorporating metered funding, data-driven decisions, bounce gates, and an offramp into your innovation process, you can enhance your new product development process and fuel your organization’s future growth.

  • Metered Funding stops funding to failing projects
  • Data-Driven decisions based on innovation accounting improves ROI
  • Bounce Gates allow pivots, which preserves lessons learned
  • Off Ramps for projects that don’t fit the strategy preserves option value

 

Overwhelming thanks to Andy Cars of Lean Ventures and Kenny Nguyen for giving detailed feedback on this article.

Want some hands-on training with the stage-gate process? Play Plinkromatic, our free innovation management game played in organizations and business schools all over the world. Learn how to calculate expected returns. how pivots impact ROI, and when to invest in small ideas then double down based on data.

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