There is no such thing as Innovation ROI
Nicolas Enjalbert, Design Director at NUMA Paris, and Claudio Vandi, Learning and Transformation Programs Director at NUMA Paris.
Let's face it: in our digital world, innovation covers too various types of endeavours to be tracked by a single definition of success. From improving your current products and services to exploring new markets, to digitalizing internal tools and processes, there is not one single way of measuring the ROI of innovation.
Does this mean that tracking the performance of innovation in your organization is synonymous with failure and frustration? No.
At NUMA, in order to deal with the diversity and complexity of innovation projects, we use an approach called Innovation Portfolio. A portfolio is a framework for keeping an overarching, coherent view on the value of your innovation efforts while giving you the freedom to set specific objectives for each project. The goal is that you smoothly move between a macro-view of the overall performance of innovation in your company and a micro-view specific to each project success metrics.
What's at stake? Becoming a future-proof organization. Standard organizational models, with which innovation is often managed today, are focused on hierarchy and planning. They will be unable to deal with the unprecedented level of complexity of our current world. More than ever, adaptation will need to come from lower-size units, agile and quick enough to detect and react to changes at their own level.
The management needs to provide the frame for this to happen. The Innovation Portfolio is one approach that can help, and has emerged as a key practice of the most innovating companies. Here are a few steps to get it right.
Four steps to start building your innovation portfolio
1. At the beginning was... an intent
When it comes to innovation, it's easier to influence than control. Instead of asking teams to execute a detailed plan, you should focus on giving small cross-functional teams the ability to explore opportunities with a high degree of autonomy. To do this effectively, you need the right balance of alignment and freedom.
Start by defining a vision that will be your portfolio "investment thesis": what kind of impact are you looking for? Are you looking for income or for diversification? Do you want to open new accounts in strategic industries or simply to enlarge your existing footprint? A thesis is the backbone of your portfolio. Start by defining what success will look like and trust your teams on the way to get there.
2. You are what you measure: get your KPIs right
Once you've got your high-level vision, you can move to specific KPIs per project or project families. A fundamental rule here is that you cannot set the same objectives and expect the same achievements for something you already master and something completely new.
The scope and expected ROI of your projects will change accordingly to how “new” the market and the project are for your company. If you launch projects linked to your current business focus and your current market you will likely set “bottom-line KPIs”: How much revenue and profit can be generated by this project? What cost reduction can be achieved?
If you are exploring new territories and creating new assets, you will more likely set "validation KPIs", tracking that uncertainty is decreasing , and "top-line KPIs", demonstrating the project potential : Did we validate a market need? How many customer leads have we obtained? How much revenue (not profit) are we forecasting with the new product or service? How engaged are the early adopters with the service?
Projects in the current business will likely be low-risk, known outcome. Projects that can significantly expand your business will fall in the high-risk, unpredictable outcome category. This is what is highlighted in the simple but powerful Exploit/Explore portfolio canvas.
Note that project KPIs should be aligned with team incentives: if you want people to explore opportunities, incentivize them for learning instead of profitability. However strongly people believe in your strategy and vision, they will never act against what gets them bonuses and promotions. This can bump into established compensation processes and raise objections by proximity management if one of their team members contributes to transversal projects, with goals misaligned with those of day-to-day operations.
3. Quantity vs. certainty
No matter how good your ideas, your teams and your insights are, innovation is an endeavour into risk. At the core of the portfolio is a math game to decrease your risk-taking. Bet on many small projects rather than one large one, and monitor them closely: you will kill those with disappointing potential and nurture those which prove promising.
In order to do this, a VC-like decision-making and funding process is recommended. Assessment gates must be designed so as to test the interest of the target audience in the early stages of an initiative; to support it further if and only if there’s proof of a real market and whether or not your company can support growth in that market; and to incrementally increase funding if business traction picks up steam.
A healthy portfolio management is one in which stopping a project is done with confidence, or even satisfaction, because it is perceived as improving portfolio indicators on the whole.
4. Good news! You already have a portfolio
Before deciding how you design your next-generation innovation portfolio, an examination of your current initiatives and how they were handled in the past can provide very useful information.
An audit of your existing innovation portfolio involves:
- Inventorying all current projects and mapping them to highlight the ratios of core business vs. adjacent vs. disruptive projects, their distribution across the spectrum of strategic priorities, their maturity levels. It will help formulate an impactful innovation thesis and identify first investment priorities.
- Analyzing the way projects have been dealt with: Why did the project fail –or stall? Did you stop them at the right time? Was resource allocation optimized? It will allow you to refine your assessment process, the go/no-go criteria, the levels of funding at each step.
Portfolio is a mindset
The best innovation strategy and optimized portfolio processes and tools will not be enough for an organization to achieve at-scale agility. It takes deep cultural change for teams and their management to shift from a risk-averse, siloed, top-down management system to one enabling the transversality and autonomy now required in ever-more complex environments. Practically, this implies changes in how teams are recruited, incentivized and how their skills are developed.
This is a paramount dimension of our practice at NUMA. We take great care, when coaching teams of intrapreneurs, to make them autonomous using agile methods. We design culture transformation programs that foster the acquisition of skills but also change of posture. As an example, we developed with Jeff Gothelf the training program Agile to agility, dedicated to managers who want to develop agility across the organisation.
We learn from both startups and corporate portfolios. If you want to share your experience in starting or managing innovation portfolios in your company, please get in touch.
And if you wonder whether a portfolio approach is the right step to make, or would like to know more about how to move forward in a lean way, let’s talk!
Nicolas Enjalbert (firstname.lastname@example.org) and Claudio Vandi (email@example.com).
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