Find Pearls and Drive More Innovation in Your Portfolio
David Matheson, SmartOrg
Originally published: 2013 (PDMA Visions Magazine • Issue 4, 2013 • Vol. 37 • No.4)
Read time: 10 minutes
While virtually every company today is trying to grow through innovation, very few are successful. Fifty-eight percent of companies have too few innovative projects, according to innovation executives I have surveyed at various conferences. While these companies aspire to obtain more from innovation, they are failing to deliver. Simply trying harder or generating more innovative ideas does not work, since most portfolios are choked with the low-value projects: 88 percent have too many incremental (small value) projects in their portfolios. Are we doomed to a future of mediocrity?
During a recent innovation conference, I facilitated a group of executives from 20 companies gathered to challenge the pessimism in these statistics and determine a positive way forward: How to drive more innovation in your development portfolio? The companies represented a wide range of industries, including consumer-brands powerhouse Church & Dwight, nitty-gritty business-to-business oil energy services company Nalco, diversified computer company HP and specialty-chemicals company International Food and Fragrances.
After extensive discussion and comparison, we identified three key insights for driving innovation:
- Where you invest matters more than how much you invest;
- Use an Agile portfolio process; and
- Think critically about strategic and economic issues.
Let’s investigate each of them.
Key Insight One: Where You Invest Matters More Than How Much You Invest
The first reaction an executive has upon realizing that the company has too few innovative projects is to invest in more of them. Unfortunately, simply investing more in innovation does not guarantee better results.
We divided into two groups to compare the differences between companies whose innovation efforts produced high revenue and/or profit growth vs. those whose investments in innovation produced disappointing results. It was our initial hypothesis that there was a direct correlation between the level of investment and successful results. We were wrong; there was no correlation. It became apparent that the level of investment alone is not necessarily an indicator of success.
The conclusion: Where you invest in innovation matters a lot. Companies that create exceptional value from innovation tend to invest in quite different types of projects. Those that are less successful tend to let mediocre projects accumulate in their portfolios. Those who reported greater returns from innovation developed portfolios that focus resources on creating large potential returns.
Collectively, we identified two types of companies: a “typical” company that invests 80 percent of its resources in projects with small impact on profitable growth and a “model” company that invests 50 percent or less in small impact projects. As Figure 1 shows, the model companies produced as much value from 20 percent of its innovation investment as the “typical” company produced from 80 percent of its investment in innovation. Our conclusion: The size of the investment is not necessarily correlated with profitable growth (value).
The difference in performance between model companies and typical companies de-pends on doing more than simply throwing money at innovation. By playing it safe and setting the bars too low, management unintentionally encourages what our executive group called “mediocre innovation.” Many forces contribute to mediocrity, including an environment that punishes failure, promotes predictability and encourages people to remain in their comfort zones. In such an environment, there is little incentive to take risks on game-changing innovation.
We agreed that a successful innovation portfolio should contain projects that increase revenue or reduce cost by at least 5 percent. One company uses what they call the board-room test: Will the project have a big enough impact that the board of directors or senior executive team will pay attention to it?
The challenge is that the biggest opportunities, the ones worthy of board attention, are often the most difficult. To understand this dilemma, our group considered four types of projects based on the innovation screen, a 2x2 grid crossing size (from small to large) and difficulty (from easy to hard), see Figure 2.
Four Kinds of Innovation Projects
- White elephant projects: These are projects that are hard to do and if successful, produce relatively low return on the investment. Remove them from your portfolio to free resources to apply to more valuable opportunities.
- Bread and butter projects: These are easy-to-do projects that will produce relatively low value if successful. You need to invest in many of these projects to support ongoing business needs. However, they seldom support high-impact innovation. Consider culling them.
- Oyster projects: These are risky projects. They are hard to do but have potential to produce game-changing returns. Model companies—those who excel in innovation—will have a sufficient number of oysters in their portfolios to produce a few pearls.
- Pearls: These are the relatively easy projects with big returns that the board wants. Pearls usually come from oysters that have proven out. Unfortunately, not all oysters produce pearls, which is why you need to include a reasonable number of oysters (high risk/high value) projects in your innovation portfolio.
Shifting investment from bread and butter projects is hard. Typically these projects are tied to clear customer needs, while others may be incremental improvements or pet projects proposed by powerful people. To free resources to apply to oysters, you will need to say “no” to some bread and butter projects. Our group felt that a good target would be to cut bread and butter projects by 25 percent.
The bottom line is that great companies seek pearls, which are created by first investing in many oyster projects. The resources to support these investments can be augmented by killing white elephants projects and reducing resources devoted to bread and butter projects.
The challenge with oyster projects is that they fail a lot. Shucking oysters takes work and you may not find a pearl very often. The key to producing pearls from oysters is first have a reasonable number of oysters in your portfolio and then focus on taking a series of project steps, failing early, rapidly and cheaply, so you can iterate and try again.
Key Insight Two: Use an Agile Portfolio Process
Most portfolio and project management practices focus on execution, which emphasizes predictability and efficiency. Innovation is very different. Innovation is fundamentally a learning process, which emphasizes discovery and creation. Early and too much focus on execution inhibits learning and thus limits innovation.
Our group felt that many project/portfolio management “best practices” drive innovation out of the portfolio. While practices such as Stage Gate process, portfolio reviews and resource allocation are of value during project execution, they can result in dire, unintended consequences for innovation.
For example, one executive described a problem his organization faces around decisions to pursue hard but big oyster projects. Things proceed nicely until there is a resource crunch. At this point, people are reallocated from oyster projects to meet short-term crises. Innovation projects often lose during such political scrums, creating unintended barriers to successful innovation in his company.
Our group identified unintended barriers to innovation from common project/portfolio management best practices, as shown in Figure 3. To make Oysters work, you have to find ways to remove or mitigate the barriers.
Innovation inherently involves uncertainty. Agile processes provide the flexibility to deal with uncertainty as you proceed through development. The Agile process recognizes that a project is live and ongoing and that decisions are iterative, resolving uncertainty as you learn through experience. These are not merely prioritization efforts, which are fine for later-stage development but detrimental to earlier-stage innovation.
To return to the oyster analogy, merely shucking oysters to search for pearls is too much work. You need to increase your odds. You want to put irritating grains of sand in your oysters, forcing them to respond and create pearls. People often avoid addressing irritations in projects because the irritations are typified by uncertainty and ambiguity.
One executive offered an example from his company: A project was proceeding along the technical development path, even though market size was most uncertain and had the biggest potential impact on success. The team avoided dealing with the “irritation,” saying: “We cannot control the market size.” Management recognized that market size was a “proof point” and took the team from their comfort zone to apply efforts to gain better under-standing of the market. Meeting the proof point was key to the success of the project.
The Agile portfolio process provides transparency and discipline to help executives prioritize and to help project teams focus on identifying the best opportunities (see Figure 4).
Key Insight Three: Think Critically About Business and Economic Issues
When people think about learning and agility, they naturally apply it to the domains they know: identifying a need and developing a solution. In innovation, this creates a huge gap that leaves the success or failure of an innovation up to chance. The Agile portfolio process addresses this gap by including a third domain of leaning around business and economic issues.
As outlined in Figure 5, the work of innovation involves answering three questions:
- Can we do it (technology/design)?
- Does anybody care (customer/market)?
- Should we do it (strategy/economic)?
Companies generally have relatively strong capabilities in responding to the first two questions but are often systematically weak when addressing the third. Sixty-two percent of the participants in our group agreed that “Should we do it?” needed the most improvement in their companies.
There tends to be little discipline around business/economic thinking. A typical practice is to make a number of assumptions and put them into a financial model that shows a hockey stick return. (You want to make the assumptions big enough to be exciting and worth investing in but not so outrageous you completely lose credibility.) This approach is more of a political tool than a tool that helps teams figure out how to improve the prospects for creating a high-value project.
Without strategic/economic discipline, oyster projects tend to move back and forth between two bad situations. On one hand, they get ignored and are not subject to thorough analysis. This results in projects that move but often fail to create the promise of high-economic return (extinction by instinct). On the other hand, they get intensively scrutinized and put through the torture of detailed analysis well beyond what knowledge of the opportunity can support (paralysis by analysis).
When in extinction by instinct mode, companies omit evaluations all together, sometimes relying on mandates or shortcut evaluations such as scoring rules, questionnaires, verbal descriptions or speculative assumptions. None of these help determine how an oyster project can contribute to returning exceptional economic returns.
When in paralysis by analysis mode, companies often develop detailed financial models, perform complex simulations or ask for an absurd level of precision in forecasts in an attempt to resolve high levels of uncertainty. None of these approaches are of value when dealing with ambiguous, uncertain projects.
Several of our group participants described, in painful detail, oyster projects that were whipsawed between these two extremes, sometimes multiple times, until project teams disbanded and fled in utter frustration.
The most successful companies, felt the members of our group, find a middle ground for the evaluation of uncertainty and ambiguity typical of oyster projects. The middle ground involves using ranges of uncertainty around economic variables, identifying proof points at critical junctures and encouraging discussions around them using the language of probability. Participants emphasized the value of creating multiple alternatives and working to identify the best alternative to pursue.
Is Your Oyster Farm Sufficient
To drive more innovation in your portfolio, ask yourself: Are you investing in enough oysters? Do you have too many barriers to their success? Have you really thought through how your oysters can win economically? Is your “oyster farm” sufficient to produce valuable pearls?
Where do you need to improve?
About the Author
David Matheson, who cofounded SmartOrg, has helped senior management of firms improve their results from portfolio management, product development, innovation, R&D, capital investment and strategy. He also is a board member of startup Photozini, Inc. and a Fellow with the Society of Decision Professionals. His Ph.D. is from Stanford University where he teaches Strategic Portfolio Management at the Stanford Center for Professional Development.