Many project management models are based on Robert Coopers original Stage-Gate model [1][2]. My experience is that it is often misunderstood. Two common such misunderstandings are:

  • That the stages in the Stage-Gate model imply a waterfall development process in which development activities are mapped onto the stages and performed in a strict sequence.
  • That a Gate is some sort of project impediment or, marginally better, any old milestone.

I will below suggest alternative perspectives. But first some background.

Risk and reward

The goal of most project management actions should be to maximize the value of the project. Net present value (NPV) is one way to measure the (expected) value of an investment such as a project [3].

The NPV of a project is the additional profit from the project as compared to other projects or other investments with the same risk level. A project with zero NPV is comparable with the “average” project or other investment with the same risk. Projects with NPVs greater than or equal to zero are thus worth pursuing. NPV can be seen as the ultimate result of the business case for the project. NPV is calculated as follows:

NPV

Here Ct is the expected cash flow for the project at time t and Dt is a discount factor at time t. D0 equals 1 and Dt is always less than Dt+1. A negative cash flow is a cost, a positive cash flow is an income.

The empirical reason for discounting future cash flows is twofold: (1) one unit of money now is worth more than one unit of money tomorrow (money today can be invested to get more money tomorrow) and (2) certain (risk-free) money is more worth than uncertain (risky) money. The discount factor accounts for both these facts. A large D, due to high risk, will result in a lower NPV and therefore a less attractive project.

The NPV formula is really your best guess at any given point in time and subject to decisions and unforeseen events. It will therefore inevitably change as new facts unfold. It also assumes that you hold a whole portfolio of investments (such as projects) so that all risk that can be diversified away is eliminated. In a company setting you most likely don’t have that option. There is the department budget that you need to adhere to or run the risk of losing your bonus. And try to explain to your boss that you wish to start another 29 projects to diversify your risks. So you better deal with that project specific risk too! Despite its limitations, we can still learn a couple of things from the NPV formula:

  • Cash sooner is better than cash later so a short project execution time is most often a good thing. I addition to the discount factor effect, customer preferences are likely to change during a long project execution time which may make your product obsolete even before it is released.
  • Other things being equal, a risky project is worse than a risk-free project. Most managers prefer a €10 000 income with 100% certainty to a €10 000 000 income with 0.1% certainty. (And the Mediterranean debt being what it is they will soon enough prefer $10 000 to €10 000.)

In [1] Cooper also explains:

  • The higher the amount at stake, the lower the tolerable risk. We thus need to lower the project risk level at the same pace as, or faster than we increase the amount at stake (investment). We don’t want to find out that the cold fusion drive that we bet our project on didn’t really work after having designed the rest of the space ship and built the first prototype. Instead we should buy an option by spending some money early on for securing that the cold fusion drive will work as intended.
EPF
Any old milestone. Or is it?

We thus need to control both the projected cash flow (the NPV calculation) and the risks throughout the project, as part of the project management activities, and try to get rid of the major risks as early as possible to make those later (and probably larger) investments as risk-free as possible.

The gates of the Stage-Gate model are good points in time to reassess the cash flow and the risk level, i.e. the business case. Ideally this should be done continuously but for practical reasons we have to settle for a few gates at strategic points in time.

Back to the misunderstandings at the beginning of this post:

Stage-Gate is no waterfall

It is easy to map the phases of a Stage-Gate model onto the phases of e.g. a waterfall system development process. The first Stage-Gate phase would be mapped onto the requirements analysis phase, the next onto a design phase and so on. From this sort of mapping it is then easy to arrive at a simplistic interpretation of the gates too. A condition to pass the first gate would mean that “all the requirements are frozen” etc.

Now, since we want to get rid of risk as early as possible, focusing on collecting every single requirement in the beginning of the project may not be the entirely right thing to do. Most of the early risk does have with requirements to do but not all of it. We may already know most of the requirements even though they aren’t written down yet and there is instead a major uncertainty about the feasibility of a certain technical solution (think cold fusion drive), about a new supplier partnership or some other issue not related to the requirements. Then these risks must also be mitigated early on, perhaps before writing down all the requirements and freezing them.

An approach in which all requirements must be frozen at a certain gate is thus often not optimal from a risk reduction point of view.

A Gate is not any old milestone

A Gate is an occasion when the NPV calculation and the risk estimates should be reiterated. Project cost estimates may have changed, the market demand (~ income) estimates may have changed, and the risk estimates may have changed. We may in particular not have reached the risk level we were targeting at the particular point in time. If not, then some further risk reduction activities are needed before committing more money, especially if the next phase is an expensive one.

A Gate only used as a regular milestone without reassessment of the business case including the risk level is a waste of time for the project steering committee and the other participants of the Gate meeting. Regular milestones can and should be tracked by the project manager.

* * *

The Stage-Gate model is a great tool for managing projects if used right. Used in the wrong way it adds bureaucracy without giving the expected benefits.

Links

[1] Robert Cooper. Winning at New Products. pp 123. Basic Books. 2001.

[2] Product Development Institute

[3] Richard A. Brealey and Stewart C. Myers. Principles of Corporate Finance.McGraw-Hill. 1988.