Stage-gating helps companies determine what investments to make and if they are in line with the company’s strategy. Capital investment through a gated model helps ensure proper capital allocation and portfolio alignment with the company’s brand message.
Managers should strictly implement these gates, so they can manage capital spending properly while mitigating risk. Utilizing these predetermined benchmarks as the standard for capital allocation automatically increases the likelihood of successful investments with a sizeable return.
Overview of the stage-gating funding model
You can divide the stage-gate funding model into four separate aspects or gates. Each gate has a preset benchmark for success. As you meet each benchmark, more resources are allocated, and more risk is taken to reach the next gate.
Each specific gate should have its own individual set of metrics and time frame. The model discussed here is a generic model. However, the stages can be renamed for specific projects and given subset phases. The general stage-gate funding model includes market validation, customer validation, limited launch and global launch. About half of all ideas are eliminated at every stage with this model, along with the risk they pose.
The first stage is market validation, which verifies the need for a product through first-hand, public research in a limited time frame. Assigned team members must first prove that there is a problem or a pain point in the marketplace.
They must also conduct interviews and experiments to determine that there is a market for the product that addresses the issue. Proper CAPEX stage-gating includes a thorough economic evaluation and a feasibility check. Only after collecting first-hand evidence can they proceed to the next gate.
The second gate is what tells executives if an idea has the potential to meet revenue and margin requirements while satisfying demand. This customer validation stage verifies that enough demand is present to mitigate risk. If the gross margins are not high enough, then the idea simply can’t proceed. However, revenue projections could allow the idea to cautiously proceed to the limited launch stage.
The third gate is a limited launch in a local area, which is basically a trial run. This is where you project volume and introduce products to sales teams. The limited launch stage tells an organization if a product resonates with clients and falls in line with the company’s brand message. If the results are not favorable, there is still time to scale back.
The global launch is the final gate. This is when the full commitment is made, and the idea or product is completely integrated into the existing business. Clients move from emotional connection to really taking ownership. The company or organization is fully committed and engaged as the product becomes reality.
By utilizing a gradual hand-off that starts with customer validation, the risk is limited and the product has been validated multiple times.
Stage-gating best practices
Although the gates in this approach do have some common components, there are predetermined practice models for successful implementation. For instance, it is imperative that each team member has clearly defined roles and responsibilities from the very beginning. This helps facilitate better collaboration between team members to reach a common goal.
It also allows for more detailed documentation and reporting throughout the process and increase the chances of even the smallest risk being identified early. Each team member is accountable to the others and the supervisor for their assigned roles. Only through collaboration, organization, documentation and reviews can the team determine preliminary findings. As such, they will then determine whether to proceed to the next gate.
Meetings are a time of review and planning. This is when cost estimates and deviations can be predetermined. Contingencies should be put in place to alleviate high-risk situations and costly mistakes. One person should be appointed to organize and lead the review process throughout the project.
This is also the person responsible for ensuring that the findings of each meeting are shared with the business owner and the team agrees on the next steps. Only at this time can the findings be communicated to the delegated authority who will determine a path forward.
Managing capital investments through stage-gating helps improve project management and the reporting quality, thus ensuring a larger return. Many projects are time-sensitive, requiring immediate capital. This is where Reliant Funding comes in to offer fast, flexible funding for businesses who need working capital quickly. Reliant Funding has dedicated and experienced representatives to ensure that your business has the capital and the tools it needs to realize a maximum return on its next project.