Managing risk in your product portfolio
Risk is defined as the possibility of something bad happening.
For example in the US, the risk of accidental death is much higher riding a motorcycle than flying based on exposure.
Risk in finance
In financial terms, risk is defined as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.
Standard deviation is a common metric associated with risk. Standard deviation provides a measure of the volatility of a value in comparison to its historical average. A high standard deviation indicates a lot of value volatility and therefore a high degree of risk.
A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk an investor is willing to take, the greater the potential return.
In business, you try to manage risk by
- reducing risk as much as possible
- making sure that for the risk that you are accepting there is a proportional upside
- diversifying your portfolio such that risk balances out to an extent
Risk in product management
Typically product managers try to maximise impact and minimise cost in the presence of ambiguity.
We manage our investments based on our estimated ROI.
ROI = Impact /Cost
Our ROI estimate will have risk (variability) associated with it. They can be broken down into various categories.
- Value risk (whether customers will buy it or users will choose to use it)
- Usability risk (whether users can figure out how to use it)
- Business viability risk (whether this solution will deliver the intended outcome for our business, work within legal, ethical constraints)
- Feasibility risk (whether our engineers can build what we need with the time, skills, and technology we have within budget)
Products before Product-Market-Fit will have high risk in their estimated impact compared to growth stage products.
Risk Management
Strategy 1: Reduce risk as much as possible
You try to reduce risk by collecting evidence that improves your estimate of impact as cheaply as possible.
Strategy 2: Make sure that there is a proportional upside
You prioritise products/features/initiatives based on a model that takes into account risk in estimation
and make sure that for ambiguous problem areas, the upside is significant. The problem size, market size and potential impact is large enough for you to take the on the ambiguity.
Strategy 3: Diversify your portfolio
You spread your investment into different initiatives.
Netflix’s product strategies for 2005 and metrics that they monitored
Strategy 4: Monitor your portfolio at a regular cadence and pivot when required
I remember a well respected entrepreneur telling that “entrepreneurs do not take unwanted risks; instead they manage risks”. The same applies to product managers.