The danger is that you keep working on it, and develop it in a certain direction. Then we often end up in one of two failure modes:
1. We need something different from what you built. You have to throw your (perfectly good) work away. This is even more demotivational!
2. We need something different from what you built. But you've already built this thing that sort of does what we need . . . so we keep it anyway. This is bad for the organization.
I'm seeing negatives on all sides. Suggestions on how to deal with these situations?
A year later, I said screw it and worked on it anyway, for 2 weeks (manager was out of town). It was an internal tool. It became the most popular internal tool in the office (95% of people have it open in a browser tab all day). At one point, the founder checked it out and said "I love [name of tool]!". Vindication. I left the company after that, and they use the tool to this day.
There's a real disconnect when you are chewed out for having wasted company time on improving a process and it is still used years after you have quit the company. (I actually managed to replace about 20 hours of my work week with several scripts that took two or three minutes to run. The best part is that I also did the same for a project manager - and he would regularly get bored web surfing and come and ask if I ever needed any help.)
Disclaimer: Not at all serious, except the first sentence.
If someone brings something like that to you as a manager, you have to realize that they are highly motivated about what they're doing and that you shouldn't get in the way of that unless its affecting other things that are a priority for you.
Its a very rare case where there is a valid reason to tell someone to completely stop working on something that they're doing, if there is, then outline it in simple terms and have a good discussion about it and how they feel about it, instead of just commanding them to stop.
The only valid reason these side projects are a problem is that they become a distraction for the employee. A skillful manager will know how to use this project as a carrot to let the employee perform better on the major projects that you want them to do. "If you can get me x by the 12th instead of the 15th then I'll give you 2 days to work on your side project on company time".
Its also the case that as a manager, you're overconfident about your abilities to foretell the usefulness of an idea to the firm. Only 1 out of about 5 side projects I've ever done for companies , I worked for, turned out to be total busts, all the others were pretty popular when I put them out but if I bet if I had asked my managers before I did them, they would have told me they wanted me to work on something else.
Overall, show interest in what they're trying to do ... talk through it with them, you'll learn a lot more about your employees by seeing what genuinely excites them than the stuff you just assign to them.
Give the people a reason (a real reason, not a bullshit one). If you don't believe it will be useful say so, if you need to be different in some way say so.
It got to the point where I would only actually do enough to show the boss that I was working on it. I only stayed there because it gave me the opportunity to get paid and work on my own projects/business ideas.
This lasted around 3 years. The company eventually ran out of money because the boss couldn't ever decide on anything and would change his business strategy on a daily (and sometimes hourly) basis. I think he was bi-polar, but I'm not 100% sure. To think, he was making 10 million/year at one point..
I actually wish I could find another company that is like this, so I can fund my next startup.