Does a short term horizon and financial focus hamper innovation in publicly traded technology companies?This is first of a three-part series aiming to discuss the merits or otherwise of the short term financial focus, which is seemingly inherent in public companies. The first discusses the innovation process, the second discusses metrics and measurements of success, and the final part shows the results of a fun exercise looking at TechReview’s most innovative companies and analysing their success against criteria such as public / private and whether or not they are in an industry which generally focuses on the short or long term.
Part 1 – The Innovation Process
We hear a lot of talk about how GDP is an insufficient measure, how Governments are trying to measure happiness and how some people think that financial measures alone are not enough to measure a company’s success at creating value. I am one of those people, and my hypothesis is that focus on financials alone is counterproductive in the longer term.
This belief led me to wonder whether or not being publicly traded – and being measured on financial metrics alone – affected the ability of a company to innovate. This in turn led to more questions, such as how to define the boundaries of innovation, and whether we even need innovation in publicly traded tech companies or not.
The best innovation definition framework that I have found is Doblin’s Ten Types which appears to be the most comprehensive, and accommodates all the types of innovation that I can come up with – and more besides. (See (3) in related reading below.) For these articles, I’ll be using Doblin to categorise different types of innovation.
As for whether we need innovation in tech companies – we absolutely do! Innovation is needed in tech companies to survive – see HBR article (1). Tech companies need to be able to reinvent their products, profit method and processes and reorganise themselves around these changes – all in very short order. The rate of change in technology demands this!
So we need innovation. Additionally we need ideas to fuel the innovation, and they should be able to come from anywhere: a customer, a security guard or the CEO’s daughter, but then they must be sanity checked for viability as they progress, and ideas need funding. The challenge is to manage the ideas, pick the best ones to invest in and make them happen whilst checking they still good ideas along the way. (And what is a ‘good idea’……..? That’s another post.)
But publicly traded companies need audit trails and processes to show their shareholders that they are investing wisely. Hence the arrival of the stage gate process, where an idea is developed along a particular methodology and conforms to various requirements before it moves on to the next stage. This – in theory – allows a company to only invest in the best ideas and limit the financial risk. However, there are some critics of this approach – Nagji & Tuff (1) included – who say that a stage gate process is potentially dangerous for what they call “transformational” innovations.
Indeed, 3M do not have a prescriptive methodology as such; they created the much talked about 7 Pillars of Innovation.
Here’s how 3M (enabled by William McKnight’s philosophy) managed innovation with their 7 pillars:
- From the chief executive on down, the company must be committed to innovation.
- The corporate culture must be actively maintained.
- Innovation is impossible without a broad base of technology.
- Talk, talk, talk. Management at 3M has long encouraged networking — formal and informal — among its researchers
- Set individual expectations and reward employees for outstanding work.
- Quantify efforts. 3M is able to judge whether its R&D money is being spent wisely.
- Research must be tied to the customer.
This is not a prescriptive process: it is more of a mindset, a philosophy, or a set of guiding principles, although they do quantify their efforts along the way to justify the funding. At 3M everyone’s an innovator, and within their culture the best ideas gain momentum, and must be grounded by actual perceived value by the customer. 3M is arguably the longest-standing, continuously innovative, public companies of all time, so they are clearly a positive example in answer to the main question of this post.
(What about managing risks though?)
Nagji & Tuff in their HBR article (1) suggested a possible alternative solution to the problem of the stage gate process.
They suggest having ‘allocated innovators’ and a budget for innovation for those entrepreneurial initiatives. This would ring-fence the risk and allow the company to decide how much they want to invest in innovation, which can then be controlled against other financial metrics. Here’s the idea in brief, as they say…..
- Talent should include a diverse set of skills and be able to deal with ambiguous data.
- Integration – how closely should the innovators work with the day-to-day business?
- Funding – should come from an out of budget pot.
- Pipeline Management – a tracking system to measure progress.
- Metrics – carefully selected metrics (not always numbers in the early stages).
A safe suggestion from our HBR friends, but it doesn’t allow for ideas to feed in from all areas, and it doesn’t mention the cross-functional team required to come to consensus on whether or not to pursue an idea. We all know that is no mean feat. As 3M have identified, innovation needs to be part of the culture in order to facilitate change which is the inevitable result of an innovative initiative of any kind. 3M have embedded an acceptance of change and created a Learning Organisation which is committed to continuous improvement. The first two pillars of innovation are about leadership and culture, whereas, Nagji and Tuff’s suggestion is mainly about ring-fencing financial risk (which is a key consideration in publicly funded companies), whilst still enabling the less tangible elements of innovation and fostering entrepreneurship in specific areas.
So how does this kind of approach (a focus purely on financial risk) impact on the innovation capability of a company?
With regard to the process and all that contributes to it (eg roles and responsibilities, funding, inputs and outputs, hand-offs, measurements of success, controls and communication structure) an approach which focuses solely on financial risk may actually work against itself. For example, if a new initiative were put forward without the understanding of the business risk tolerance of the company, the initiator may suggest something wide of the mark and consequently not get the funding approved: there is a need to allow for company’s risk appetite, which often diminishes post IPO. Additionally without the correct measurements (as identified by both 3M and Nagji & Tuff), proving success along the way will be challenging and make it more difficult to continue to fund an initiative. This will either slow the process down, or cause the initiative to fail unnecessarily or prematurely. One challenge that public companies may come up against is the ability to measure success within the early stages of an initiative, when not much is known about its potential – financial metrics are meaningless stabs in the dark at this point. (Part 2 looks at metrics in more depth)
Before moving on to Part 2 – Metrics, below are some additional considerations for any company looking to harness the power of continuous innovation and foster entrepreneurship in the heart of its organisation.
Ideas and Culture
If a company assigns “innovator” roles (as with Nagji and Tuff’s recommendation) then it would limit where the ideas can actually originate from to just a few roles. Ideas for improvements and transformations alike could come from any level inside or outside of the company, and to harness those ideas, a culture of innovation, learning and change is necessary.
Ownership and Stakeholders
Some companies have an engineering-led NPD process, others have Marketing leading the charge, or IT, or sometimes Operations depending on the kind of company. It’s probably fair to say that in this respect, it should be ‘to each his own’ in order to reflect different structures, business models, products services etc. However, without a clear owner of the process, progress will always be slow. This owner enables decision-making along the way.
The stakeholder group should reflect the cross-functional teams and departments who have an active, vested or passive interest in the various initiatives being progressed. Innovations according to Doblin can take on different forms – Doblin has identified Ten Types of Innovation, signifying the potential complexity of any given initiative. Complex innovation projects and “transformational” initiatives invariably require involved stakeholder management, and in the words of Monarth & Harrison (2010), “Any time lost in a shared decision-making process is more than made up for during the implementation phase because all the inefficiencies born of lack of buy-in are diminished.” The stakeholder group needs to be involved in the process so that they don’t use their VETO powers just as you want to go to market. So the owner enables the decision-making and the stakeholder management enables agility.
In order to visualise the proposal above, here is the Innovation Fire-Triangle comprising ‘Understanding Risk Tolerance’, ‘Funding Availability’ and a ‘Measurement Framework’, supported by the Stakeholder Group and fed by a culture of developing ideas and learning. The process fails if the triangle items are not considered and agreed by the stakeholder group.
The Stakeholder Group, led by the department who owns the process, is the control area for assessing new ideas and choosing which should be developed. The learning from which must be fed back to the wider organisation in order for future ideas to be closer to the ideal. This breeds the right culture and makes the overall ability of a company to innovate in an agile manner much more efficient – less wasted effort, and more group learning. The remaining piece is to know when it’s working and when not, in order to focus resources in the right directions.
Link to Part 2 – Metrics.
“Nearly 100% of innovation – from business to politics – is inspired not by “market analysis” but by people who are supremely pissed off by the way things are.” – Tom Peters
“Since we live in an age of innovation, a practical education must prepare a man for work that does not yet exist and cannot yet be clearly defined.”
— Peter F. Drucker