Scaling Innovation
It’s a classic story.
Create a startup to disrupt a market of incumbents.
Start a skunkworks initiative in a larger enterprise to enable a small team to innovate faster.
Sounds simple. And, it often works in the beginning. Startups — I’ll call both scenarios above startups for simplicity — are highly constrained. With few customers, limited geographical or channel focus, and only one main value proposition they are trying to fulfill, innovation comes almost naturally.
This is the setting where the Lean Startup philosophy excels. But what happens after that? What happens after you have had success in building something that matters, and of value, to a highly engaged customer?
The Classic Innovation at Scale Problem
All startups are unique, but there’s a very common pattern in how they try to grow up.
Phase 1 (adolescence): You’ve built a startup that’s found product market fit, and you start growing. At this stage, you’re competing against other startups. Generally, to beat other startups, you just need one dimension of differnetiation that aligns with a very strong affinity among a large enough segment of customers. You found that dimension, it matters to the biggest customer segment in the market, and you’re killing it.
Phase 2 (teenager): Large, incumbant enterprise technology vendors start to care. It’s pretty scary at first. If you’re lucky, the dimension you built the company on will still differentiate you. Maybe it’s ease of deployment, or total cost of ownership. But, if as a startup you built your reputation as being more “enterprise-grade” than the other startups, you’re going to face a problem at this stage. You need to figure out the single dimension that will allow you, as a single product company, to beat a large enterprise that is selling a whole suite of things to the same customer. You need to be a specialist.
For skunkworks projects within a large enterprise, this is where the dominant business starts to feel threatened. Either resources are being taken away from them, or they are losing customers to the side-project. These threats from within are a real test to company leadership. Side-projects are sometimes forced to fold into the larger team at this point, often killing them. Great companies will let skunkworks projects grow, compete and eventually even beat the internal legacy business if that is how the market pans out.
In either case, to win at this stage a startup needs to for sure be executing on all cylinders. But, you still have the luxury of being more focused than your main competitors. And, large orgnanizations can take years to turn the ship. Their initial attempts at copying you will be abysmal. Your focus will often be key in winning customers away from your larger, market-dominating competitor.
Phase 3 (young adult): Business is booming, and with that, you have expanded in many directions — more geographies, use cases and industries. Startups grow revenue through expanding market opportunities with more products across more geographies and verticals and with larger customers. During this expansion, the pace of innovation per product is often just “good enough” while the organization scales the service and tackles use cases that were unique to new types of customers to grow the pie.
This is where things can get fragile. As you expand, you open the door for more focused startups. Yet, you are not at a large enough scale to win a “bundled” approach against a large incumbant. Your sales team gets worried that you are not innovating fast enough.
Phase 4 (middle age): You dominate a market segment that lets you grow into a large independent organization, or you join forces with someone bigger.
Digging Deeper: the Root Cause of the “Young Adult” Problem
Each phase above has its challenges, but the “Young Adult” phase can be the most tricky. It’s because the friction against innovation sneaks up on you.
Organizations often simplify innovation as just simply building new products. But to get to the root cause of the Phase 3 problem, we need to expand our view beyond just products. We need to look at all the things that take up engineering resources. Here’s a plot of what is likely happening.
As you satisfy more of the requirements of the X axis, while maintaining engineering leadership, your ability to innovate reaches a limit. This can creep up on your quickly. The paradox here, is the more quickly you are successful, the faster you hit this innovation crunch.
Generally, teams are pushed by sales or company initiatives to support the X axis dimensions. It’s easy to see that if you can sell to a new type of customer or sell a new product, you can grow revenue.
Engineering is tasked with ensuring the platform maintains security, availability, reliability and quality and that the codebase is periodically re-architected to continue to build efficiently.
The Y axis is what people usually think of when they think about innovation, even if they don’t articulate it that way. It’s made up of “Use Cases per Product” or UX. These drive differentiation. They create a more clearly better product for a broad set of customers. Use Cases per Product and UX give you more ways to add value for what you sell and what you charge. They help you command a higher margin over the competition. This also directly drives revenue, but it is harder to see the direct impact. It does not lead to a new deal. It does perhaps lead to 10% higher prices across all customers, which may drive more revenue than one big new enterprise deal.
To combat this problem, product teams might decide to make fewer one-off customer commits, but selling big technology deals to large enterprises is complex. You don’t know all the things they will need to be successful ahead of time. Teams try their best, but still end up doing significant work to support scale or new types of opportunities. This might come in the form of a level of scale on an aspect of the product not previously expected, or addressing a unique requirement for a specific vertical that was unknown to be unique by both the customer and the vendor. Building these features allows you to make customers successful and to sell to more customers like this new customer, but these new features do not differentiate you for your broad base of customers.
New products also expand sales opportunities, but they do not help differentiate existing products. You might be able to bundle, but at the “young adult” phase you will still get out-bundled by your larger competitors.
Finally, this problem appears in go-to-market activity as well. It becomes challening to sustain enough marketing, sales enablement and go-to-market focus to differentiate and drive pipeline. The features are not there to differentiate because of the aforementioned engineering problem. And, go-to-market is also spread thin in trying to address new products, verticals, geos and larger customers.
The Solution: Holistic Focus
The way out of “young adult” and into “middle age” is what I call “holistic focus.”
First, you need clear information to make proper decisions that span all dimensions of the drains on innovation. You need to look at the big picture. What engineering resources are being used to satisfy expansion on every one of dimensions in the Constraints on Innovation (chart above)? Then, compare that engineering cost to the serviceable revenue opportunity from that dimension.
You could do the following:
1) Tag each JIRA ticket (or whatever engineering tracking system you use) with one of the dimensions in the chart above.
2) Add up how much engineering time you are putting into each dimension over 6 months
3) Evaluate the revenue opportunity from each dimension
4) Divide (Revenue / Cost) for the relative value of each expansion
5) Roll back expansion on the bottom 2 dimensions (by Revenue / Cost)
At a minimum, I think that greater insight into this problem can help you articulate to customers what it is that you do that is special. A lot of the engineering work for expansion doesn’t make its way into customer value propositions. Just having this deeper understanding somewhat solves the differentiation problem, but you are still faced with the fact that it might not be broadly valuable to your customer base.
Ultimately, if you can use this insight to make smarter decisions with how you focus resources company-wide, you can innovate fast enough for enough customers to get escape velocity. Neither startups nor large incumbants will be able to touch you, and you’ll reach middle age.
Yeah, I know, middle age doesn’t sound spectacular, but that’s a whole other problem…
