Ten to one.
That’s how triumphantly American pilots emerged from the battle in the skies during the Korean War.
It’s not because they had superior aircraft. They didn’t.
No, it was because of two fundamental reasons.
What advantage did this give the Americans?
Vision and adaptability.
In the words of military strategist, John Boyd, they were able to observe and orient themselves to changing circumstances faster than their adversaries.
Information, adaptability, and speed are fundamental to success in uncertain environments; whether that be 20,000 feet above the ground, or in a boardroom on Lexington Avenue.
Today, exponential technology growth, disruptive business models, changing consumer sentiment and a complex geopolitical landscape have combined to make the business climate more uncertain than ever before.
Gone are the days where companies could release five-year plans, rest their hat on that, and simply execute.
In order to survive and thrive amidst growing uncertainty, large companies have to make like an F86 and get better at adapting to changing circumstances. In order to avoid jumping to conclusions though and over-investing in the wrong things, they need to experiment. Failure to do so will leave them eating the dust of companies that do.
The challenge for many incumbents and traditional companies is that their infrastructure; their processes, systems, policies and even their culture, is more suited to a 20th Century business landscape, when things moved at a much slower rate and the future was a lot more predictable.
In these companies, funding for ideas are usually granted on the back of an approved several-page business case.
The business case will ask for all sorts of financial metrics — ROI, IRR, NPV, payback period — that we can’t reliably predict if we’re taking something fundamentally new and untested to an incredibly uncertain market.
As a result:
Not only that but getting business case approval can take months, compromising speed — a fundamental driver of innovation.
The thing is, in the world of early-stage innovation, we don't talk about ROI or IRR when measuring innovation. We use leading ‘innovation metrics’ such as click-rates, conversion-rates, opt-ins and so on. While such learning metrics help to guide us towards product-market fit, they don’t mean much to many senior executives and beancounters at most companies.
Because of this, a company’s need to innovate, and the way it goes about applying capital to new ideas, are in conflict. This means that potentially great ideas never see the light of day.
In order to address this major pitfall, innovators need to speak executive and finance’s language.
Doing so will not only help to secure buy-in, but maybe more importantly, keep it long enough to get ideas through to experimentation, and hopefully, something resembling commercial value and impact.
Common unanswered questions:
Innovation happens at intersections of different disciplines and domains, so I reached out to a seasoned financial analyst, and by combining our experiences, we came up with a tool that can help corporate innovators — in fact, all innovators — to better answer these questions.
“So, how does it work Steve?”
Sam works for a large Fortune 500 company and she has an idea for a product that she thinks can create a lot of value for the company.
In order to help us calculate the valuation of the idea at different stages of the lifecycle, we use free-cashflow (FCF) margins — a measure of a company’s profitability indicating how many dollars of free cash flow a company gets from each dollar of its sales. We add an average FCF margin based on competitor or on industry averages.
Depending on how nuanced the idea is, the probability of progressing through the stages can either be based on professional judgment or on readily available data on both corporate innovation and venture investment success and failure rates.
In this example, we have four experiment stages based on the early stage innovation lifecycle, but additional stages can be added as deemed fit.
Here, Sam thinks that the likelihood of validating the problem is 15%, the solution 15% and the business model 30%. Of course, probabilities can be revised as more information is obtained through testing.
Note: If she needs to hit a specific ROI at every stage of the cycle to keep finance happy, she can edit how much is invested at each stage to hit the ROI, and then do her best within those financial constraints to validate the stage.
So once all of this is done, what are we left with?
We can thus communicate, based on a number of interworking financial variables:
In this case, the numbers stack up to support Sam’s proposed investments in each stage of the lifecycle with a very healthy IRR and ROI throughout.
This tool fundamentally helps us to:
It helps us align innovation teams and finance teams, and support getting and keeping buy-in to run experiments and help companies adapt to the fast-changing environment they find themselves in.
This is, of course, the first version of this tool, and it will no doubt evolve based on the feedback I receive. With that, I welcome your feedback, opinions, comments and criticisms.
If you would like access to the tool, email me on firstname.lastname@example.org
This eBook explores the reasons why organisations struggle to innovate, the innovation blockers within companies and how your organisation can setup a culture that supports innovation.