New product development is a risky business for companies – the failure rate for product launches hovers around 40%. A quick look at Product Hunt demonstrates there is a flourishing market for new products, all of them competing for our time and money. Companies that have previously found success with one product must invest in the next generation or risk it becoming irrelevant. However, minimizing the investment risk associated with those new products is the key to long-term survival.
Gate systems have long been a way to control that risk, and have been implemented successfully in many industries ranging from pharmaceuticals to software to manufacturing.
What is a Gate System?
A gate system, also called stage-gate or phase-gate system, is a series of steps in which a new product needs to meet certain criteria with the aim to attract additional investment to further development. Each step minimizes the risk involved in launching the product to the broader market through extensive customer testing and culling of poor performers, leaving only the strongest candidates.
Why use a Gate System?
Fundamentally, gate systems serve to minimize the risk and cost associated with new product development. All companies have limited resources for investigating new products, so they must focus those limited resources on the most promising ideas. According to research by Stevens and Burley, the industry average funnels 3,000 ideas down to just one commercially-viable product, while industries such as pharma run as high as 8,000 ideas leading to a single approved product. The purpose of the gate system is to apply a strict framework to systematically identify the losers and then divert the resources to the winners.
By setting out clear criteria for the intended business goals for the product in the early stages of product development, companies can more efficiently use their limited resources to test a variety of ideas and select the winning ones.
Good gate criteria mean that early-stage products are not judged by the same criteria as later-stage products, and that early-stage products are allowed the space to develop. One of the major killers of early-stage products is measuring them by financial metrics that are more appropriate for later-stage products. Early-stage products benefit more from metrics systems that are more closely tied to the small groups of customers on which they are testing; for example, Google’s HEART framework.
Conversely, when a gate system is not used and there are no clear criteria for furthering investment in products, decisions to stop or continue depend more on luck and/or the political skill of the team. From a management perspective, this is not ideal as it means promising ideas can be killed and poor ideas can be brought to market. For the business, this handing over of new product development responsibility to Lady Luck is perhaps not the best long-term business strategy.
Considerations When Determining Gate Criteria
There are several elements that influence the success of the gate system, and selecting clear, enforceable criteria is one of the pillars of this success. Gate criteria should reflect the long-term strategy of the company and be internally consistent from one stage to the next. Since gate systems are typically built from the idea stage through to large-scale commercialization, criteria should be relatively stable year on year to allow for concentrated product development efforts.
In addressing the question “How do I determine gate criteria?” I will defer to the common response from product management, which is: “It depends.” Gate criteria vary widely from company to company, but with this in mind, I can give some perspective on the requirements that influenced the criteria we used at Telenor.
I used to be head of product at Telenor, Norway’s state-owned telecommunications company, which also has a big portion of its operations in Asia. Telenor’s gate criteria have to be relevant in Scandinavia, home to some of the world’s most advanced telecoms markets, and also relevant to emerging markets like Bangladesh and Myanmar. The following table gives an idea of the elements we looked for at the various stages for both the business-to-business and business-to-consumer product criteria:
|Stage||Partial list of sample gateway criteria|
|Stars to Bottle Rocket||
|Bottle Rocket to Satellites||
|Satellite to Space Shuttle||
|Space Shuttle to Space Station||
Some of these criteria were localized so that a business unit could continue working on a product that was relevant for its particular area, but did not necessarily have an appeal outside of that market. For example, a large market for Norway could be 500,000 (10% of the population), but for Pakistan would be five million (roughly 2.5% of the population).
Criteria drive the entire gate-system process. It’s important to take the necessary time to consider the implications of the selected criteria and to ensure that they remain aligned with company strategy.
What Happens Within a Step?
Within each step, the team works towards meeting the criteria for the next gate. This typically requires repeated hypotheses testing to gain an understanding of which assumptions are valid. The hypotheses differ depending on how far along the product is in the process – early hypotheses are typically tested on a few dozen people in a face-to-face environment, whereas later technical hypotheses may be tested on thousands of users to determine whether a system is truly scalable. By building up the data from these tests, the teams are then able to prove (or disprove!) the viability of a product in a particular market.
Production work within a step is conducted by a cross-functional team relevant to the stage. For example, in the early stages, it is unlikely you would have a dedicated marketing resource as part of the team since there is nothing to market. However, it may be useful to have “experts” available to the team to provide advice on particular aspects ( for example, legal.) As the team progresses through the gates, additional resources are added. For example, an ad hoc security resource at the beginning of product development becomes a full time security resource once the product scales.
In order to ensure that progress is being made and the team has the resources it needs, there should be regular reviews to assess the team’s progress. These interim reviews can be used to make minor adjustments to team composition, such as increasing contribution from a part-time resource or providing access to an expert not readily available. Interim meetings between the gateway reviews are also the place where products will be killed. Once a product is killed, the team will need to ensure that the information from the product’s life cycle is recorded for so that future teams can access it.
Caveats to Running a Gate System
Gate systems only work when they are supported and adhered to by senior management. If senior management doesn’t adhere to its own criteria or keeps pulling resources away for pet projects, the system will fall apart rapidly. It takes discipline at the highest level to ensure that the products coming through have the support they need for proper development. If the criteria are causing problems, senior management should take the time to sit down and reassess what is a more reasonable approach for resource allocation.
Gate criteria should be clear enough so that someone who is not directly involved with the process can understand why a decision was made to continue or discontinue a product. A management or product team left mystified as to why a product was ended can lead to frustration and lack of morale within the organization. When a product is ended, it’s important that the team officially organizes and records the learnings for future teams. The team should have enough time to organize the files so that they can be easily accessed by the next product team working in the same area.
Because of the way the gate system works in allocating resources, some teams may work on product after product which never see a public launch. These team members should not be penalized for this as they are contributing to the general knowledge base of the company that may well lead to other successes down the line. Senior management needs to keep this in mind and make sure that the teams can rotate onto later-stage products to allow all a chance to work on something externally-facing.
The gate system can be used to manage the downsides of early-stage products and bring new products to market reliably, without risk to the long-term viability of a company. Investing in the requirements for a gate system can serve as a foundation for a product portfolio strategy as you will be able to more easily manage various products in various stages of development. Each team will understand where they are in the overall system when looking at the different gate criteria for the next stage of product development, and senior management can better understand where their resources are going and at what point they can expect a payoff.
Having said that, gate systems may be too much process for a small company with a limited portfolio of products. The intention of gate systems was based on resource allocation in large companies with sizeable product portfolios where scalable systems were needed to drive the work of large groups of people. In general, don’t create additional process if it doesn’t give commensurate benefits.