Can stage-gate systems deliver the goods?

• Author: Anderson, Richard E.
• Position: Includes related article - Management Strategy

Cost considerations aren't always the best yardstick for a new product. Take a look at stage-gate systems -- a brave new world for financial executives.

Do any of these scenarios sound like your product-development process?

* The managers closest to technology can't authorize project feasibility studies, because it's tough to get funding approvals from higher-ups.

* Promising projects that emerge outside the normal financial planning cycle are unlikely to be funded. And product champions can't get past unit budget constraints to secure seed money because alternative funds aren't available.

* A cost mindset creates an under-staffed project, limiting slack time for innovation or "tinkering." That means missing market windows and opportunities to profit.

* Financial measurements ignore the cost-time trade-offs in time-to-market factors.

* Financial and technical functions have become adversaries, so finance is excluded from product-development teams and restricted to a narrow budget oversight role.

An increasing number of companies have concluded that these problems, all of which spring from a cost mentality, are symptoms of a product-development process that isn't serving them well. These companies are rethinking their processes, a change that has major implications for financial executives, since cost must now yield to other measurements like time, quality and customer service. In fact, a paradigm shift in product development is on the horizon, and it calls for a new finance role in bringing products to market.

To product developers, the traditional cost attitude affects the entire product-development spectrum. It starts early in the process, when they must justify the cost for a new project even before they can accurately estimate its future value. In most U.S. companies, the development budget is still the main performance measurement, while schedules, which affect the time to market, are routinely expected to slip in the face of cost restraints.

For the most part, companies are going back to basics by installing or revamping the stage-gate system for developing products. A stage-gate system is a disciplined process that brings products through the corporate maze from concept to customer. The payoff is more new product successes and more efficient development. This approach offers a strong role for finance, while giving product developers more cost latitude than usual.

WHAT'S IT ALL ABOUT?

The stage-gate system breaks a company's new-product process into a series of development stages. These stages are partitioned by a series of gates -- quality control and cost escalation checkpoints. The project must meet a set of criteria before it can pass through a gate and continue down the development path. The CFO and other senior managers review the project's progress, controlling financial, technical and market risk as projects are approved for market launch.

Companies usually tailor their stage-gate systems to satisfy different product-development needs. Usually, the number of stages ranges from three to 10. Xerox has three major stages, while General Motors' new copyrighted development process is called the "Four Phase" system. GE incorporates a 10-stage "Toll Gate" process in many business units. Motorola and Northern Telecom each use four development stages to bring new...