F.E².A.R — The Return of the King — Data Driven Expectations and Validation
Setting the Context
Product Managers often start with an Outside-In perspective. That is also the right thing to do. At the same time, customers usually tend to attribute symptoms as a problem. An insightful discussion and probing questions drive a better and more sustainable solution that results in better value creation and capture. That’s where I find the framework help quantify the value proposition cross-functionally.
Of course, new realities will emerge as they discuss further with the Engineering, Sales, and Legal teams. We saw an example of value creation and capture in the previous article. While the TAM presented an initial opportunity of $150M, the immediate possibility (SAM) might only be $45M (the states that only require an E-signature). If your market penetration is currently 50%, the obtainable market is about $22M. The questions are:
- Can you build an economically viable solution?
- Can you identify market segments and customers to whom it will be most applicable initially?
- Can you sustain the revenues (a poor solution = zero revenue)
- Can you reach the entire revenue and profitability potential in the next N years
The framework applies well in the post-execution evaluation, just as equally as when conceptualizing the offering.
For the e-signature example from the previous article, you could conceive the market ask using the framework below.
Fast
We hypothesized that the solution could reduce cycle time by up to 15 days. The minimum cycle time reduction that the market needs is ~5 days. Realistically this presents an achievable decrease between 5–8 days.
KPI-1: Cycle time reduction. Hypothesis: Average 7 days with 99% of claims with at least four days of cycle time reduction.
We have yet to determine which beachhead customers we’d go after first, so this hypothesis can change. Crucially, we have a starting point!
Economic
While several metrics are valid here (value creation, value capture, profitability, etc.), we’ll focus on one of them here.
The TAM was $150M, and the SOM was $20M from the description above. The MVP would need to target specific customers. For example, you could choose an Insurance carrier that exclusively operates in certain states OR, based on their business process, runs each state autonomously. This information is crucial — I cannot reiterate enough why Product Managers need a solid relationship with Customer Success Managers to glean such information. Let’s define the next set of KPIs.
KPI 2: # Insurance Carriers using the solution — Hypothesis: 2 in year 1, 10 in year 2, 20 in year 3, 50 in year 4
KPI 3: Annual Revenue — Hypothesis: $500K in year 1, $2M in year 2, $10M in year 3, $20M in year 4.
Note that our “Minimum was $10M”. However, we should understand that a transformative solution needs time. Executives need to see this. The biggest issue I see when product managers present is a poor presentation of cash flows. You might also ask, “If there are 400+ Insurance carriers, how do you get to $10M with just 20 carriers?”. The top 5 insurance carriers insure ~70% of vehicles in the US. I did not say this, but KPI2a would be to identify “the big carriers” and find a way to make the solution work for them!
Accurate
We said the following were important to Insurance carriers:
- Consistency — A new solution cannot make some claims faster at the cost of making the business process more complex.
- Simple — Training is crucial, but adherence requires the solution to be intuitive and straightforward.
- Compliant — As a highly regulated industry, can the solution guarantee that the rules are applied consistently?
My view of the above requirements is that they need a seamless transformation. One way to approach this would be through a mix of technology and BPO upgrades. When creating a claim, the details will route to a digital signature or a queue that a human resource will process. Easier said than done if you have zero experience with a BPO! This decision will be a strategic call that subsequently leads to the available market and beachheads. Note also that this is a moving metric. It is possible, with learning, to shift right with more claims going through automation.
KPI-4: %Paperwork initiated through the new process: Hypothesis: 40% average, no less than 30% and up to 100% for some regional carriers
Reliable
The solution is merely a paperweight if the people that matter do not adopt it. Understanding their incentives are crucial, but that’s for another day. The cycle time reduction is impossible if the end consumer chooses to print, sign and send. Product requirements are critical, but so is identifying the right demographic and creating a frictionless environment.
KPI-5: %users that complete a digital signature: Hypothesis: 70% take rate, no less than 60% for every insurance carrier and state.
Ecosystem
When considering the transformation, think of the ecosystem of partners you need. It might not be evident unless, as Ron Adner describes in “Winning the Right Game,” you build a value architecture. A value architecture captures the business value chain of how value flows from start to end — it is not a technology blueprint. Below is an example of the Value Architecture that represents the flow from start to finish.
Did you notice the number of new partners you might have to work with? Which ones do you need first? Who would be willing to work with you? What are their incentives? For example, the two largest Salvage yards are Copart and IAA. They manage about 80% of all Total Loss vehicles. If one of them refuses to take digital — what do you do? It would be best if you returned to the framework to reconsider your KPIs and hypothesis. You could work with another partner to lobby the state to accept digital signatures. That would also imply you break through other barriers. Ecosystems are not superficial relationships and require considerable subject matter expertise and thought leadership. This consideration is specifically true for transformative solutions.
Summary and Final Thoughts
- The FEAR framework is an iterative process, even with initial assumptions. With economies of scale and learning, you can do more with less and a periodic repriotization is critical.
- When building an ecosystem, consider the MVE (credit again to Ron Adner!). You cannot boil the ocean, but you must introspect about what you bring to the table and what you need from others to be successful.
- The KPIs you create will require a double and sometimes a triple click. The data capture is crucial to explain your observations. For example, suppose someone starts a digital signature but fails to complete them. In that case, you should know how to analyze a root cause.
- The results and analysis should be accessible to your Customer Success Managers. Their QBRs need to translate into business value.
