Insights From CIO West

I recently attended the Chief Innovation Officer Summit in San Francisco on May 18 & 19. The conference was worthwhile for me as I met a number of serious innovators, particularly in the audience. These individuals are sincerely trying to make a difference. I loved and enjoyed interacting with such an excellent group of professionals. 

For those of you who couldn't make it, I thought it might be useful to summarize some of the themes I heard over and over again during the two day event.

1. Innovation is all about culture

One of the most striking themes in the conference was the never ending discussion of corporate culture in large, established businesses. Every speaker mentioned culture. If I had to guess, I would say about 70% of the presentation content focused on cultural issues.

What are the cultural barriers that stifle innovation?

Can you change corporate culture? Is it impossible to change culture? 

What do you do if your culture is not conducive to innovation? 

Can I large company be innovative if it doesn't have a CEO who is known as an innovator?

The discussion of the importance of corporate culture was so pervasive, the organizers could have named the conference the Chief Cultural Officer Summit. Culture was everywhere at the conference.

It strikes me that the tools, frameworks and solutions available to help us manage and change corporate culture are woefully inadequate. Participants and presenters talked about an innovative culture as something you have, or something you don't. The is an underlying theme that culture is incredibly difficult to change, and it's massively frustrating for CIO's to take this task on by themselves. Many are frustrated and the life has drained from their eyes when they talk about how stifled they are sometimes. In summary, they can't really do it alone. Many times, it comes down to the CEO's mindset. The CEO is either committed to doing new things, taking risks, developing new innovations, or she is not. 

Perhaps in reality, CIO's hope they work within an innovative culture. And if they don't, they should be looking around for a new job at another company that is more innovative. 

To me, this suggests we are at the very early stages of understanding the relationship between innovation, culture and executive leadership. CEO's and executives, who are largely trained an experienced running established businesses, have a challenging mindset when they need to create new businesses.

2. Multi-Dimensional Thinking is Required For Innovation management

Another common theme was the consistent recognition that disruptive innovation processes occur outside of the core business. Many speakers and audience members talked about the separation between the "core" business and the "new" business opportunities they were pursuing. In almost every case, there was frustration and uncertainty around the amount of resources senior leaders are investing outside of the core business.

A good explanation of what is going on here can be found the the Three Horizons Model for managing innovation initiatives. This model separates projects in to three Horizons.

Horizon 1 projects are aimed at improving the core or mature business. These projects have known customers, problems, solutions and distribution methods. They are typically mature, established businesses and are slow growing. Projects aimed at improving the core business are considered sustaining innovations.  

Horizon 2 projects are for rapidly-growing businesses. These businesses have customers, are growing quickly and the business model is partially known. Projects aimed at Horizon 2 involve validating the unknown elements of business model and optimizing the proven elements to sustain rapid growth. Typical projects focus on optimizing customer acquisition, user experience, product and infrastructure to handle the massive growth ahead. 

Horizon 3 projects are focused on untapped opportunities where the business model is undefined or unvalidated. These projects may be no more than an idea and are sometimes based on an new technology or a new application of a known technology. These projects are highly experimental and are focused on searching for scalable, repeatable business models.

The CIO speakers and attendees were consistent in the belief that all established businesses invest in Horizon 1 projects, but few sufficiently invest in Horion 2 or 3 projects. Since most of the innovators at the conference were working in Horizon 2 or 3, their frustration was understandable.

To attempt to add some clarity to the differences between Horizons, I created the following chart to illustrate how different the operating models are for these different types of projects.

The required people, processes, metrics, output and culture are completely different between Horizon 1 and Horizon 3. Horizon 2 is a hybrid of the two. In my opinion, this is one of the reasons many innovation initiatives fail within large, established businesses. They are trying to develop new businesses that are in Horizon 3 by using the same processes as projects in Horizon 1. It just doesn't work well. This is because the goal of an Horizon 3 project is fundamentally different than a Horizon 1 project.

To be an innovator, you really need to think in three dimensions.

How do we hit our plan this month and this quarter?

This year?

In the next five years?

Innovators switch mental gears and are always considering all three levels with a focus on a long term view of what they want their company to be in the future. Think of Jeff Bezos from Amazon. One minute he's talking about Amazon cloud services and the next day he's announcing a new smart phone. This kind of innovative thinking requires mental agility that few CEO's posses. 

This raises the question, how much should an established company be spending on Horizon 2 and 3 projects if it wants to be considered a true innovator?

I've done some work on budget levels and I will answer this question in a separate post. 

3. Budget Approval Is Always An Issue

Closely related to underinvesting in longer term horizons, is the commonly-expressed frustration around budget approval for innovation initiatives. 

I think this is an understandable frustration if you consider how a typical budget process works. The first step for gaining approval is to develop a business case, or a spreadsheet that predicts how much revenue and contribution margin the project will contribute to the business. By discounting these projected cash flows into their net present values, CFO's can properly evaluate all projects based on their relative potential to increase enterprise value. This is a reasonable approach. 

What some CFO's and financial leaders miss is that Horizon 2 and 3 projects are inherently unpredictable. They are an apples-to-oranges comparison to Horizon 1 projects. Just because someone made a bunch of assumptions and put them into a spreadsheet does not mean this person can accurately predict the future. So, the CFO is in a tight spot. Should she believe the crystal ball forecast around an unproven the business model, or should she invest in the core business where there returns are more certain? Based on how underfunded later-stage Horizon projects are, CFO's are making the rational decision to bet on a sure thing. This natural tendency tends to underinvest in Horizon 2 and 3 projects.

This really sucks if you are working on truly new and disruptive projects. Leaders in these areas are bringing a knife to a gun fight, and they are failing to get the resources they need. 

The solution is for the enterprise to make a proper assessment of each project and place it in the correct horizon. Then, the evaluation team should apply different metrics and expect different outcomes depending on which horizon the team is operating in. Using this approach more accurately assesses the relative risks and rewards for all projects.

Horizon 1 Output - Revenue, margin, EBITDA, revenue growth, EBITDA growth, competitive benchmarks, % variance to plan

Horizon 2 Output - Customer Acquisition Cost, Customer Lifetime Value, Customer Engagement, revenue per customer, margin per customer and per product, penetration rate by customer segment

Horizon 3 Output - Customer insights, number of pivots, pivot rationale, early traction as evidence of product-market fit for a well-defined customer segment, experimental design, efficiency as measured by meaningful pivots per dollar invested

By assessing each project and team based on which horizon they are in, the enterprise is properly managing innovation projects and is giving all of its teams a chance at success.

4. Team Dynamics Matter

Another common theme among presenters was the importance of team mix and team dynamics. Several innovation leaders mentioned this aspect of team management and described its importance on whether a given project team is successful. 

There were several insights and suggestions that emerged from the discussion.

  • Innovation leadership must be supportive while remaining flexible in how the team approaches the market opportunity
  • It's up to the team leader and the executive sponsor to create and environment where team members are free to experiment and fail without fear of retribution for failure
  • The best innovation teams have very little hierarchy
  • Effective teams are set up so the best idea wins, regardless of where it comes from
  • CEO attitude and background sets the cultural tone for innovating teams to operate

In our work with large enterprise clients, we've observed and interesting correlation between those who are innovators, and those who are good at politics. Based on empirical data across hundreds of different employees, we've observed a simple fact - that those who are great at disruptive innovation, are really bad at politics. And when I say really bad, I mean they routinely get fired.

To help add some clarity to this insight, we developed a simple framework focusing on two dimensions that dictate employee behavior - disrespect for status quo and political awkwardness.

Politicians are those who have low political awkwardness. In other words, they are politically savvy individuals. They manage well across, up and down the corporate hierarchy. They also have great respect for the company and its organization and have very little disrespect for the status quo. These folks are good at getting things done within a large organization, but they typically aren't very innovative themselves.

Innovators are what you want on an innovation team for obvious reasons. They have very high disrespect for the status quo. As such, they often come across as complainers, or too negative or difficult to work with. As they express dissatisfaction with the current state of affairs, their words and facial expressions are often misinterpreted. In reality, they deeply care about the company and they are sincerely concerned the business is not living up to its full potential. 

Peter Principles are those who are not politically savvy and while they have high respect for the status quo. These individuals have limited value as they struggle in a large organization and don't often come up with break-through ideas. They are often nay-sayers and can be toxic to an innovation team's progress. As their name suggests, they've typically reached their highest level of competence in their current job.

Unicorns are a theoretical group of people who have high levels of disrespect for the status quo and low levels of political awkwardness. In my opinion, it is fairly incongruent to both disrespect the way things are while maintaining a sense of political mastery and savvy. While these individuals may not be helpful in developing innovative ideas, they will be a great asset for getting things done within a large organization. Unicorns are as rare as their name implies. If you find one, grab her and bring her into your team. 

When you are assembling an innovation team to create disruptive business models, find those who have high levels of disrespect for the status quo, regardless of their political skills. 

5. Open Innovation - Adding An External Perspective Is Critical For Success

Since the conference was in downtown San Francisco, it was perhaps not surprising there were a lot of references to Open Innovation and the importance of adding external perspective to innovation efforts. 

I completely agree this is a critical aspect of any disruptive innovation project. I've witnessed first hand how internally-staffed innovation teams struggle to deliver a meaningful business impact. They just can't seem to escape the many cultural and structural barriers that stifle their innovation initiatives. It's as if they can't escape their corporate culture precisely because they are still part of it.

The chart below shows three possible team configurations for an innovation project. The ideal team member size is between four and six people. The mix of internal versus external personnel is an important dimension to consider. In general, the more disruptive the project, the more you need external folks on the team, preferably experienced entrepreneurs.

As the name suggests, Internal teams are staffed exclusively with existing company personnel. In this configuration, the company is trying to develop disruptive capabilities in-house. The intention is good here, but in our experience, these teams struggle to deliver the necessary impact. They just don't have enough startup or early-stage experience where the tasks are focused on searching for disruptive business models. Our Bootcamp and Intrapreneur Apprenticeship programs go a long way to close this gap, but you need to think in terms of months or years to develop an effective innovation team in-house.

In contrast to an Internal configuration, an Outsourced team is made up exclusively of external personnel or "consultants." I don't like using the consultant label here because consultants are not the most effective team members. Consultants deliver powerpoint slides and that's not what is needed for an innovation team to be effective. Instead, we recommend using experienced entrepreneurs who have built a new business from scratch. These individuals are out there and we've assembled a large number of them in our entrepreneur network. 

Finally, a Hybrid team is made up of a mix of internal and external personnel. These teams are typically evenly balanced between the two. The trick with this configuration is to put an entrepreneur in charge, not a company employee. While the team doesn't have a strong hierarchy, it's helpful to have a leader or to allow a leader to emerge naturally in the process. 

Summary

These are the most prominent themes I took away from the Chief Innovation Officer's conference a few weeks ago.

  1. Innovation is all about culture
  2. Multi-dimensional thinking is required for innovation management
  3. Budget approval is always an issue
  4. Team dynamics matter
  5. Open innovation, adding external perspective, is critical for success

What did you take away from our two-day session? Do you have anything to add? Add a comment or email me at dave (at) insightstudios.co.

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Dave Linhardt
Founder & CEO