Executive question: How to manage an innovation funnel?
A short while ago, I had a coffee chat with the Chief Digital Officer of an ASX100 consumer goods company who is currently leading the digital transformation of a product-based company into the digital world.
She is constantly approached by “silver bullet solution vendors” and expressed her surprise at just how many charlatans there are in the field of business transformation. She resonated with the rigor that Strategyzer and I bring to the innovation practice, and was curious to learn more about how Global 500 companies efficiently feed and manage an innovation funnel, so we got chatting.
We started by discussing how managing an innovation funnel is different from managing a technology project portfolio, where the first key difference is uncertainty. In her digital transformation initiatives, I shared that ideas and projects could be placed on a spectrum from relatively low uncertainty (e.g. digitizing a paper process in existing operations) to high uncertainty (e.g. using available data to build completely new products and services).
Traditional methods involving the creation of a business plan and then execution of the plan work well on projects where uncertainty is low. But new business ideas with high uncertainty cannot be managed the same way and would need to adopt a portfolio approach.
The second difference is that managing an innovation portfolio is a volume game. It’s fundamentally different from managing the carefully curated and limited list of projects in a typical technology portfolio. To illustrate this point, I used data points from the venture capital world: if an entire industry loses money on two thirds of their investments, it is delusional to think that corporate executives could “pick the winners” from the start and successfully lead new business ideas all the way to market.
To create a new sustainable business, a company has to let a lot of ideas enter its innovation funnel and make small investments in them. In the chart we extrapolate on the VC data to show that a company whose objective is to create a new business with a 50x return would need to invest in 250 early-stage initiatives.
The third difference is that managing an innovation portfolio requires killing the vast majority of ideas, initiatives and projects along the way. That’s not something leaders in large organizations are usually comfortable with.
On a typical technology project portfolio, once executives have approved a project, they expect it to go all the way to completion. Most leaders will use their power and influence to help the project team achieve project objectives. Yet managing an innovation portfolio requires sorting through a large volume of innovation options.
To do that efficiently, leaders should act like venture capitalists, doubling down on ideas, initiatives and projects that show promise while cutting off the ones that do not before they waste too much money and valuable resources.
A few cups of coffee later we moved on to discussing process, governance and funding.
Typical phases in an innovation project are discovery, validation and acceleration. How does that translate at the portfolio level? As seen earlier, discovery should enable the exploration of a large number of ideas. Validation should help reduce the uncertainty of new business ideas with solid testing. Acceleration should facilitate the rapid growth of tested business models with high potential. Other interesting characteristics at each phase can be found in the table below.
I spoke to her about how metered funding for teams can act as a powerful guard rail against too much waste in the innovation portfolio. It consists of providing just enough funding for teams to test the most critical hypotheses in the phase they are in, but no more.
We then talked about decision making. The common ‘kill ratio’ at each phase still came as a surprise to her: more than 80% of ideas explored in discovery should be killed in this phase. More than 80% of projects in validation phase should be killed in this phase. I clarified that this is not an absolute rule, but more of a useful guide to maintain a healthy portfolio.
As she was imagining herself making those decisions, we went through the three criteria that executives overseeing an innovation portfolio can base their decision on:
- Strategic fit.
- Opportunity: the expected return of an initiative as visualized on the vertical axis of the Strategyzer portfolio map.
- Evidence: the evidence brought by the team (progress) as visualized on the horizontal axis of the portfolio map.
We discussed how the selection headache is actually resolved by the portfolio approach, as good ideas will emerge on the portfolio map and poorly performing teams will drop off.
At this stage of the conversation she asked me about concrete examples, so we discussed the high level actions taken by a global pharmaceutical company ($45bn+ revenues) that we work with at Strategyzer.
To feed their growth innovation portfolio, this company started with an intrapreneurship support program. Twice a year, they manage an application process where global intrapreneur teams can submit their new business ideas. Successful applicants enter a 3-month program to explore their business idea. The intrapreneurship support program is designed by the corporate innovation team to facilitate the discovery phase and includes metered funding, skills development and expert coaching.
More recently they added Strategyzer’s Spark offering as an additional way to feed their portfolio. (Spark is a virtual toolkit that guides teams through a 12-week innovation process at low cost.) And they included a bridge to the main intrapreneurship support program for successful teams.
Teams that survive the discovery phase can then access further funding and coaching. Strategyzer supports the validation phase for those teams with our innovation sprint that helps teams drastically reduce the uncertainty of their business ideas with 10 weeks of intense testing and high impact coaching.
After several iterations in the validation phase, a few successful teams should achieve a tested business model and be ready for acceleration. Even though this stage can seem closer to execution (a task that large organizations usually excel at) there are still critical obstacles to overcome.
Unfortunately, we had to slow down and stop our discussion at the critical point of acceleration, as we ran out of time. What a great place to pick up our next conversation though!
A quick recap on key ideas for feeding and managing an innovation funnel:
- Manage ideas with high uncertainty with a portfolio approach.
- Play the volume game: make lots of small investments at the beginning!
- Kill the vast majority of ideas, initiatives, projects on your portfolio.
- Use metered funding.
- Make portfolio decisions based on strategic fit, opportunity and evidence.
- Enable discovery, validation and acceleration of new business ideas.
What are your key questions on innovation and business transformation? Let me know in the comments.
This article was initially published on the Strategyzer blog. There are many resources available on the Strategyzer website (blog posts, books) if you want to go further on the topic of managing an innovation funnel.