Imagine this scene. A team is pitching an innovation project to leaders using a slide deck with five year revenue projections, an execution roadmap and assumptions that are being presented as facts. After the presentation, the leaders take things from bad to worse. The finance director states that she cannot approve any investment in this new idea because it does not meet the company’s financial hurdle rates. The rest of the leaders agree and tell the team to go back and work on their spreadsheets and only come back to the board for a decision when their numbers meet the required hurdle rate.
At first glance, this seems like a logical conversation, but it is in fact absurd. The team was just presenting a spreadsheet describing the five year performance of a product that does not yet exist. In response, the leaders are implicitly asking the team to go and finesse these numbers so they can feel comfortable giving them money. The financial hurdle rate they are describing is not a real one – the product has not been created yet. The hurdle rate is an imaginary one on a spreadsheet.
This scene is a classic example of innovation teams doing the wrong things at the wrong time and leaders asking the wrong questions at the wrong time. This ritual is repeated daily in many businesses across the world. When it comes to innovation, leaders need to be asking the right questions at the right time. There is nothing wrong with asking financial questions. In fact, they become more and more important as the project nears its launch date. However, during the early stages of innovation leaders need to be focused on a different set of questions.
It makes sense that the first thing we need to think about as leaders is the idea itself. However, leaders have a tendency to think that it is their job to pick the winning ideas on day one. As such, when they are listening to pitches they are trying to figure out whether they like the idea or if the idea has a good chance of success. When it comes to innovation, leaders cannot pick the winning ideas on day one. Leaders can only create the context in which winning ideas emerge.
When reviewing an idea, my advice to leaders is to focus on strategic alignment. Leaders need to provide clear strategic guidance on the arenas they want their innovation teams to explore. It is on the basis of this guidance that they can then evaluate whether an idea is worth investing in. I am of the strong belief that ideas that are aligned to strategy should get approval if there is budget and if the ideas also meet a second criteria (i.e. innovation portfolio balance).
The criteria of portfolio balance concerns whether, as an organization, we are investing across the three types of innovation; efficiency innovations that improve the operational aspects of the current business, sustaining innovations that build on top of a company’s existing business model and transformative innovations that explore opportunities beyond the company’s traditional business. Even when an idea is aligned to strategy, leaders need to be careful that they are not only investing in efficiency innovations, while neglecting transformative innovations. This concern should inform resource allocation and whether a strategically aligned idea should get investment.
Evidence Of Progress
If an idea is aligned to strategy and helps to balance our innovation portfolio, then the next question concerns the current status of the idea. How much progress has the team made towards success? The most important question during the early stages of innovation is not how much revenue the idea will generate in five years. The most important question is how close the team is to finding a business model that works.
As leaders, our concern should be around progress towards success. What has the team done so far to increase the likelihood and magnitude of success? It is also important to note that we are not simply taking the team’s word. We are interested in the evidence of progress. What evidence does the team currently have that there is a real customer need, that the value proposition resonates with customers, that customers are willing to pay and that we have the right capabilities as an organization to create the value proposition?
These are some of the questions that leaders can ask. It is not the expectation that teams provide definitive answers to every question. However, the teams should provide clarity of what they have done so far, what they know based on evidence and what they still don’t know. Questions around what they still don’t know will then lead to the next set of questions that leaders can ask.
If we accept that teams are not going to have all the answers in those early stages, then the next question concerns what they are going to do next. The expectation is that the team makes clear which elements of what they still don’t know they are going to explore next. This where leaders can step in and guide the team on whether their choices for next actions are appropriate. For example, should the team start creating a minimum viable solution before they are sure about customers’ willingness to pay.
Another way in which leaders can be helpful at this stage is by reviewing the experiments that teams are planning to run. This review should not be a detailed analysis of the methods and artefacts that teams are going to use to test their assumptions. Instead, leaders should focus on whether the planned experiments will generate the kind of evidence they need in order to make informed decisions when the teams come back.
The final question for leaders to consider is whether the resources the team is asking for are reasonable given their innovation stage. The principle at play is that companies should be making multiple small bets that increase over time, but only for those ideas that are showing progress towards finding a business model that works. This means that in the early stages, teams should be asking for minimum resources to support their work in validating customer needs. In later stages, they can then receive greater resources to fund the development and testing of minimum viable solutions.
An example of this process is Bayer’s Catalyst Fund that was run like a venture fund. Innovation teams received €10,000 in the first phase and this number rose to €90,000 if the teams showed progress. The exact amount that teams should get depends on your company and the industry it operates in. Principles trump tactics. As long as leaders resist the idea of investing large amounts based on just a business plan, we have already started to make progress towards innovation best practices.
If we return to the scene I described at the beginning, we can clearly see the absurdity of the conversation. Telling teams to go back and work on their spreadsheets until their numbers meet our hurdle rates does not help leaders make better decisions around investing in innovation projects. Instead leaders need to consider their innovation strategy and the balance of their innovation portfolio. But even more important to consider, is the evidence of the team’s progress and a review of what they plan to do next.