We often think that innovation starts with a great idea, maybe a drawing on a napkin or a Saturday-afternoon “aha!” moment. But in reality there is often a process for how ideas become concepts and prototypes and pilots. When considering new and innovative projects, it is critical that the organizational culture is prepared to:
- Manage under uncertainty
- Manage innovation as a portfolio
And that can be very different from how most large businesses operate. I recently attended the Frost & Sullivan New Product Innovation & Development conference, acting as the moderator for an “Ask the Experts” panel titled “Translating Innovation Strategy to Execution of New Product Development.” Long name, short explanation: how can we get great ideas out of the lab?
One of the things I heard many times throughout the conference was this idea that it’s not about the process, the metrics, any of that. Rather, you’ve got to have a culture that’s prepared to embrace innovation at the most senior levels of the organization. And this is something virtually every organization struggles with. Building innovation into a risk-averse business is a challenge.
So what can we do? Consider ways to shift those conversations. Two simple tools are often used that can fundamentally shift the discussion away from point estimates on single projects towards a portfolio view of probabilistic outcomes (sorry, Intro to Statistics came flooding back).
Consider how wrong you can be and still make the right decision.
At the beginning of a new and exciting project, someone on the team sits down and builds an excel spreadsheet that spits out a forecast number, then sits in a room and tries to defend it in front of the committee. “Why do you think revenues will grow by 3%? Why not 2%? Why not 4%?” “How confident are you that we’ll hit break even by year three?” And then we judge the success of the product manager based on the accuracy of their forecast … years in the future for a market that doesn’t exist today. Good luck with that.
In a Monte Carlo simulation, we work in probabilities. We don’t assume that we can charge $10 for a widget and that we’ll sell 1M widgets in year three. But we might be 90% confident that we’ll be able to charge between $7 and $12, that we’ll sell between 500K and 700K units in year one, and that annual growth will be between 2% and 5%. Monte Carlo simulation tools allow us to think and model future outcomes in this manner. It allows a business case to then be stated as “90% of our simulated outcomes were between X and Y, and 80% of the outcomes exceeded break even.” Thousands of simulations can be run in minutes to deliver a range, not a single number.
Suddenly, instead of the innovation team trying to “sell” the executives on a particular outcome, there is an opportunity for a real conversation to happen around the most important variables in the model to understand, and how much uncertainty we are willing to accept. We can talk about the assumptions, the likely ranges, the variables, etc. It becomes much more collaborative, and much less about, “is this answer right or not?”
Turn project management into portfolio management.
We work on projects. We become attached to those projects. We are rewarded for the success of that project. But true innovators and the cultures in which they operate aren’t constricted by a single project; rather, they’ve taken the approach of a venture capitalist. They build a portfolio, knowing that out of, say, 50 projects, 30-35 will get scrapped or simply fail, but four or five will turn out to be hits and those hits are expected to fund the costs of the overall portfolio.
We have all seen the fallout from new projects, whether they’re successful or not – there’s a mad dash either into the room or out of the door. It is the old adage “Success has many fathers, but failure is an orphan.” Innovation with a portfolio management orientation tends to define failure quite differently. It is not a question of if a particular project fails. The rational questions include, “did this project fail for a reason that could have been foreseen?” and “did we identify the problem accurately and quickly such that resources could be redirected promptly towards other projects more likely to lead to success?” When a culture is able to redefine their innovation processes around portfolio management and managing probabilistic outcomes, the culture can be much more open to innovation and change, and that is when magic can happen.
I talk about innovation and development on Twitter – connect with me at @dkhartung.