We have all managed towards success, either for ourselves or for our staff. Completed projects are easy to identify as success. Projects that are cut are failures. An easy binary way of setting up reward systems. But what if you expected to have a high failure rate such as venture capitalists do? Would it make sense to only reward completed projects? Consider the example of a manager who had a portfolio of one hundred projects. Eighty failed. What type of reward should be expected from this result? Before answering, let’s focus on the failings of success. If we have the completion equals success paradigm, then certain behaviors will come into play so that we game towards completion. But we may be hurting ourselves by playing the game with the wrong rules.
First, let’s consider how we select projects to fund. If success equals completion, then we will have a bias towards selecting only projects that we know can be completed. We lower our risk and increase our probability of success. Lowering risk though has a significant impact. We are all familiar with the risk/reward concept. Low risk does not lead to high reward. If we lower our risk in project selection, then we are locked into a world of low returns. They will certainly cross our company’s hurdle rate but are destined to incrementalism. No breakouts can come from the low risk strategy for project selection.
Now let’s consider how this paradigm affects projects that are underway. We have a completion bias here as well. We have all seen some of the contortionist approaches that organizations take to reach success on any given project. A little extra funding, a slight scope change, the dates shift, the “fixer” is assigned – all of these tactics, and more, can push a project to completion, but does the project really deliver against the original promise or is success just a declaration?
So what does completion bias get us? We are likely to have projects that provide a reasonable return but are not transformative and we have the potential to negatively impact those returns as we strive to ensure all projects are a success. In short, we are tied likely to keep pace but never achieve true change.
Now let’s look at the approach in the venture capital world. Yes, they expect a high rate of failure, but in the end, they expect that when their entire set of investments are considered they get a high rate of return. They have a reward bias. They certainly care about success but distribute their funding across many investments each with the potential for high rewards (think multiples of their investment) so that the impact of the successes highly outweighs the cost of the failures.
Back to our manager with eighty failures in the portfolio. If that portfolio had been created in the old paradigm, with completion bias, then she clearly failed. But what if this portfolio was created as a venture capitalist would? Created with reward bias. One hundred projects each with the potential to have outsize returns. Ruthless management of the portfolio so that funding gets cut from the projects that won’t make it. In this approach, she has managed a portfolio that will outperform the market. Its not confined to incrementalism. In short, the twenty successes made the portfolio meet its objectives and the manager and her team should be highly praised.