How to Identify Uncertainties and Risks in Product Development
Risk assessment for a major new product development initiative is very hard to do well. There are several reasons for this:
- New product development means doing something new. Whether it be new markets, new technologies or new business models, inevitably, the team will be unable to anticipate all the uncertainties and risks that can impact the project.
- Many factors are outside the control of the team, such as actions of competitors and regulators, changes in customer needs and emergence of disruptive technologies.
- Most companies have inadequate tools for identifying, evaluating and managing risks specific to product development.
- Some companies even discourage acknowledging risk, whether through culture, incentive systems or internal processes.
The problems and solutions
1) The confusing language of uncertainty and risk:
Uncertainty in product development arises for many reasons:
- Lack of information
- Lack of experience
- Decisions that have not yet been made
- Outcomes that cannot be known or controlled by the project team
- The presence of an assumption.[i]
These can be described as unknowns, constraints, assumptions, unk-unks, etc. It is difficult to talk about and compare uncertainties without a common language, so we have prepared a set of definitions and examples.
2) Teams are limited by personal experience:
Risks are usually identified in a brainstorming session with little structure to help guide the team. Personal experience drives the identification of uncertainty and risk, without the benefit of an experienced cross-functional team, or objective, reliable data. Bias is introduced when rare events and new trends are completely missed, or when recent events take on too much importance.
We have created a framework that guides teams through risk identification using a structure appropriate for new product development. We also incorporate various techniques from behavioral economics to compensate for various sources of bias:
3) Misleading estimates of probability and loss:
Teams are usually expected to use risk calculation methods common in banking, investment and insurance, such as expected loss and risk-adjusted NPV. Early in the product development process, the team cannot put useful estimates on probability of occurrence and size of loss. Calculations of expected loss are meaningless and often misleading.
We have created an approach for evaluating risks and prioritizing the ones most important to the success or failure of the project.
Make better decisions up front
When a company can confidently discuss the most important uncertainties and risks, it can determine whether to kill a product before making significant investment or commit to a limited investment in driving down uncertainty and risk before making a bigger commitment.[i] Assumptions are particularly prevalent in business cases, where the preparer assumes certain unknowns or conditions are true to assess the feasibility and desirability of a project. These assumptions are often not validated throughout the project and become a source of unrecognized risk.