Innovation Studios: the Engines of Enterprise Experimentation (Jeff Gothelf at Enterprise UX 2015)
Business model innovation by experimentation
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Business Model Innovation by ExperimentationYoav AviramEnergized Work@yobo
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IT Projects60% don’t meet schedule, budget or quality goals - IBM
50% failed to achieve what they set out to achieve - KPMG
17% go so badly that they can threaten the very existence of the company. - Calleam Consulting
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Startups 95% of technology startups fail - Allmand Law
93% of the Angel investments never achieve expected ROI - University of Washington
80% of the VC investments never achieve expected ROI - National VC Association
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WHY?
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Software: Tip of the Iceberg
Too late
Poor quality
Missing functionality
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Agile
An iterative and incremental approach to development, where requirements and solutions evolve through collaboration between self-organizing, cross-functional teams
- Wikipedia
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Who is the customer?How do we acquire new users?How do we convert users to paying customers?How should the product look and behave?How is our product used?What problems does the product attempt to solve?What features provide the greatest value?
...the Product Iceberg
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Lean Startup
A combination of business-hypothesis-driven experimentation, iterative product releases, and "validated learning"
- The Lean Startup, Eric Ries
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...the Business Model IcebergWho are our customers?Who is the competition?How do we reach our customers?What are the revenue streams?What is the investment needed?What is the operational cost?What is our unique selling point?What team members to recruit?What are our business goals?
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Business Model Innovation
- Business Model Generation, Alexander Osterwalder
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Product-Market Fit
There is a poorly met need a reachable market faces
There is a solution people are happy to pay for
There is a way to package and deliver the solution in a cost effective manner
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This is all About Risk
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Uncertainty
The lack of complete certainty, that is, the existence of more than one possibility. The "true" outcome/state/result/value is not known.
- How to Measure Anything, Douglas Hubbard
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Quantifying UncertaintyA set of probabilities assigned to a set of possibilities
“There is a 60% chance this market will double in five years”
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Risk
A state of uncertainty where some of the possibilities involve a loss, catastrophe, or other undesirable outcome.
- How to Measure Anything, Douglas Hubbard
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Quantifying Risk
A set of possibilities each with quantified probabilities and quantified losses
“There is a 40% chance the proposed oil well will be dry, with a loss of $12 million in exploratory drilling costs”
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The Problem with Risk & TechnologyTechnology is used to solve complex problems
Our mind is wired to oversimplify complexity (we are not very good at understanding probabilities)
We are solution oriented
We are optimistic (overconfident) by nature
People (grossly) underestimate risk & uncertainty
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Compound RiskCombination of two or more related risks
Compound probabilities are (very) counter intuitive
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Monty Hall
Contestants on a game show are given the choice of three doors.
Behind one door is a car, behind the others, goats.
After a contestant picks a door, the host, who knows what's behind all the doors, opens an unchosen door, which reveals a goat.
He then asks the contestant, "Do you want to switch doors?"
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Should the contestant switch doors?
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Yes!The odds of winning are 2 out of 3 if you
switch
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Compound Probabilities
This answer is so counter intuitive, most people get it wrong
It’s why they made a game show off of it: the trick works every time
The lesson:
We need to give serious consideration to risk
We must not rely on our intuition when factoring risk & uncertainty
We need a better accounting system
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Risk Management for TechiesAvoid by eliminating the situation or activity that presents it
Transfer through insurance or through other types of contracts
Reduce by hedging your bets or reducing uncertainty
Retain, because some risks are worth assuming
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Risk Reduction
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Investor Mindset
Spread your bets on a portfolio of investments instead of one
Decide on an investment strategy
Split the investment into small incremental bets: abort bad products quickly and ramp up investment in the good ones
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Uncertainty Reduction
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Value of InformationInformation reduces uncertainty
Reduced uncertainty improves decisions
Improved decisions have observable consequences with measurable value
- Information Theory (1948)
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Sources of InformationExisting within the company
Other’s research
Experiments
Live product
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A scientific procedure undertaken to make a discovery, test a hypothesis, or demonstrate a known fact
- Wikipedia
Experiment
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Experimental Discovery
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Prioritising ExperimentsUncertainty around making a decision is high (little existing information)
The value of the opportunity, or the cost of a mistake, is high
Experimentation is least expensive in terms of cost and time
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Designing Good Experiments
Attempt to falsify a hypothesis
Are objective, measurable and repeatable
Are controlled (variables tested in isolation)
Are cost effective
Influence a decision
Experiments aren't free
It's an investment decision
Information may be cheaper elsewhere
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Measurement
A measurement is an observation that results in information (reduction of uncertainty) about a quantity
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Qualitative Measurements
The soft stuff
Descriptive, subjective, messy and hard to quantify
Customer surveys, focus groups, interviews
But … provide insights about Perceived Value
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Good Qualitative QuestionsAvoid leading phrases such as "do you agree that..." Make customers part with money or sign up, rather than asking them whether they wouldUse follow up questions to get to the ‘why?’Qualitative data can easily be influence by cognitive biases
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Quantitative Measurements
Start by decide on the right Metric (what to measure)
Then set lines in the sand: what success and failure look like
Always validate results with qualitative data
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Good MetricInfluences a decision
Comparative
Rates and Ratios are easier to compare and act upon
Measure what’s important to your customers
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Putting it all TogetherInvest wisely, through small incremental bets to reduce risk and discover opportunities
Information reduces uncertainty & risk
Experiments are not the only source of information
Experiments have the biggest impact in a high value, high uncertainty and little data situations
Disprove hypotheses, don’t confirm them
Think in terms of Risk and account for it
The distinction between business and technology is anachronistic
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Reading List
The Lean Startup by Eric Ries
Business Model Generation by Alexander Osterwalder
How To Measure Anything by Douglas W. Hubbard
Lean Analytics by Alistair Croll and Benjamin Yoskovitz
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Accounting for Risk
Frame your business and product as a set of hypotheses
Declare your assumptions and how you can prove them wrong (falsifiable)
Evaluate your results ruthlessly, and be prepared to change course
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Assumption BacklogAssumption Certainty Risk ($) Critical
People like shiny apps 90% $100K (cost of beta) Yes
Market size for shiny apps at least 200 million people
50% $1M (cost of a full product) Yes
I can build a shiny app 95% $50K (cost of development) Yes
People share shiny apps with friends 45% $100K (cost of beta) No
5% of users will upgrade to shiny+ for $5 a month
20% $1M (cost of a full product) Yes
10% of active users will spend $2 a month on shiny accessories
75% $100K (cost of beta) No