By: John Carter
Having a process for the front end of innovation is necessary but not sufficient. It also requires proper levels of funding, and a governance structure to support it. In this article, we’ll look at how these aspects tie together, and how your company can support your full innovation lifecycle.
As an experienced leader of innovation or a member of an innovation team you know that new ideas are fragile. In their earliest stages, before they’re fully funded and have a place on the release schedule, innovations can easily die from neglect. Without the proper funding, and without a structure to support new ideas, the front end is the most dangerous place for innovations, because they tend to be visible when not protected within an innovation skunk works.
The portfolio of innovations probably includes some items that are virtually worthless while others might be the next iPhone or Amazon Web Services. How the whole organization rallies around the best ideas — or fails to do so — can make the difference between a blockbuster and an also-ran.
Few companies have an adequate process to support the front end of innovation, to vet new ideas and put them on the road to development. Even fewer understand that process is not enough. They are lulled into a belief that their process is their savior. It’s not. This is why having a process alone is a recipe for failure.
Contributors and managers down in the trenches often need to step back and account for everything it takes to bring a new idea to realization, from a sketch or sentence on a napkin, to the moment when it alleviates a customer’s pain point. To seize the opportunity innovation offers, companies need three elements that together form a complete system for the front end:
- Appropriate, targeted funding for innovation programs
- A governance structure for with total authority over the funding
- A clear and proven process for managing the portfolio of early stage innovations
Portfolio Budget: How to Fund Innovation
Treat your innovation teams as a collection of start-ups, each competing for venture capital. In this model, innovation leaders are like mini-CEOs making a pitch for resources. By analogy, an executive team examines the ideas that bubble up from everywhere within the organization, seeing them as possible businesses in which the company will choose (or not choose) to invest. Thus these executives function like a venture capital firm.
But innovation can’t be funded as a one-off, special case. The funding must come from the other operating budgets. As the executive team goes through its annual budgeting exercise, it will earmark a portion of its development budget to innovative projects. Here is a guideline for the amount of funding in question: approximately $1M per each one-hundred professionals. The executive team will allocate about one-half of this budget for existing innovation projects, while teams seeking funding for brand new, innovative ideas compete for their piece of the remaining pool of funds. The pool of funds for innovation should be enough to fund a small handful of new projects, until they are vetted and integrated into mainline development.
Since the overall budgets for product development tend to run about 2% to 20% of sales, what is the best mix of investments among the many possible innovations? Assets come in many categories from an incremental tweak to a product or process, to stunning, new-to-the world products. Getting the right mix of investments depends on the risk tolerance and maturity of the company.
Research suggests that an established company might allocate 70% of its budget for projects that amplify and augment its core business; products in adjacent markets might swallow 20% of the budget, while 10% might go for innovative products. That’s a relatively low risk approach. A tech startup might allocate 40% to its core business, 40% to adjacent offerings, while it places fully 20% in potentially transformational innovations. There’s no single investment profile for your portfolio, but across industries, consider your appetite for risk and your industry’s maturity.
Venture Board: How To Create a Governance Structure for Innovation
In addition to securing funding, senior management must be involved in the governance of the innovation portfolio, for the entire lifecycle, from the napkin stage and throughout the customer journey.
The main purpose of this governance structure is to create a protected space for innovation. When the executive team shelters new ideas, it removes them from the grip of bureaucracy to foster an environment where innovative teams are truly free to be creative without undue interference from functional managers.
We call this governance structure a Venture Board. The Venture Board greenlights new projects and allocates resources to them from the pool of funds carved out during the annual budgeting activity. This board is a senior team tasked with protecting fragile innovations, seeing that they are funded, and moving the best ideas into the pipeline.
A Venture Board works most effectively when the C-suite is represented. The chairman of this board should be the CEO/GM, a Chief Product Officer, a VP-Products, or another comparable business leader. It should be a senior executive with experience in driving innovation, and with strategic oversight.
The Venture Board establishes exit and entrance criteria for the front end of innovation. New ideas enter the front end process and exit it, entering the development pipeline, only if they meet certain criteria. These criteria resemble the parameters venture capitalists might use to make investment decisions.
For example, for an innovative new consumer product, entrance criteria might include the proposed project’s fit with strategy, the size of its potential market, and the quality of its leader or champion. These are the sorts of criteria an outside investor might consider. Exit criteria, governing the proposed product’s exit from the front end of innovation, into a more formal, gated development process, might include a written business case, a proposed budget, and a development plan.
The Venture Board acts as a gatekeeper, allowing new innovations to germinate within a protected space. They own the portfolio of early stage innovations, fund them, and nurture them through the product life cycle.
Lightweight Innovation Process: Managing by Exception
The process flow for the front end of innovation begins with funding and allocation from the investment pool. It then moves proposed innovations into the protected space, i.e. a Discovery process where the team works to meet the exit criteria that will then launch the project into full-scale development.
Inside the protected space there should be very few rules. The Venture Board, having established the exit criteria, leaves the team alone, unless the team requests otherwise. Senior executives intervene only if the team sees that it may not deliver on the criteria set out at the beginning of Discovery. If the team begins to drift off-track, then it must inform the senior team, who can then establish new criteria, smooth out obstacles in the team’s path, or kill the project.
Teams within the protected space are ruled by two major considerations: fit of the innovation to the company’s vision and strategy, and the market potential of the product. In many cases, the Discovery process involves multiple iterations, and a great deal of learning.
Process Alone is Not Enough
Although individual contributors and managers often do not have the authority to enact a total innovation system like the one described above, it does help them to understand that process alone is not enough. If companies want to take innovation seriously, they need to fund it and to govern it with the right team, at the appropriate level of the enterprise.
Having a process for moving innovations from the earliest phases to Development, and then scaling up to release, is vital for nurturing these fragile plants. But placing these sprouts within a larger context, defined by proper levels of funding, and a Venture Board that nurtures them from day one, and throughout the product or process lifecycle, is equally important. The Venture Board is at the appropriate executive level to span the functions, and bring exciting new innovations to the world.
The trio of funding, governance and process together make a complete system for growing superb, innovative products, processes and services. A process mapped out on paper might be necessary but it’s not sufficient. The funding and governance pieces represent a commitment to innovation at the highest level of the organization.
About the Author
John Carter is a widely respected adviser to technology firms and the author of Innovate Products Faster: Graphical Tools for Accelerating Product Development. He is Founder and Principal of TCGen Inc. He has advised some of the most revered technology firms in the world including Apple, Amazon, Cisco, HP, IBM and Roche.