Home Economy, Policy & Business How CEOs can think of innovation like a balance sheet (and innovate more as a result)

How CEOs can think of innovation like a balance sheet (and innovate more as a result)

Darren Thayre
In today's rush to digital, most firms have had to add new capabilities and products in a short span of time. Yet few of these initiatives achieve genuine organisational transformation
Head of Innovation, Global Strategic Initiatives at Google

Innovation as a process is expensive and the outcomes are often uncertain. Yet innovation as a goal, as a way of businesses existing now and long into the future, is almost universally considered to be a positive thing; the sign of a dynamic company, with its ‘finger on the pulse’.

For CEOs, this dynamic can present multiple challenges – many of which compete strongly against the traditional business norms that may have seen your business grow into a successful entity.

As the first sentence of this article highlights: innovation can be expensive. When firms go about their innovation efforts incorrectly they can absorb high levels of cost with limited return. Deciding what, when and how much to innovate is therefore no small decision; there is a real risk that a lot of capital will be spent on something that does not produce significant revenue. Innovation efforts which generate one million dollars in a multinational, billion-dollar organisation are insignificant in the grand scheme of things and may even be a distraction.

Alongside this concern is one we have heard directly from CEOs. In research that will be made public in August 2022, Google surveyed around 1,000 CEOs, asking them to summarise their pain points within their organisations. An overwhelmingly common answer was ‘innovation in a vacuum’. Why was this so common? And what does it mean practically?

Innovation in a vacuum is a result of disparate teams within large organisations pressing ahead on innovative projects that do not have named senior leadership team buy-in or a plan to have the micro innovations become macro organisational change.

The results of these innovations are often innovative initiatives that have their moment in the sun and then fizzle out disappointingly quickly. They rarely impact global organisations, partially because they never succeeded in being relevant to the CEO or senior leadership team.

The high cost and low organisational success rates of innovation can therefore produce a reticence to invest among CEOs. Innovation can become a by-word for ‘high spending’. Saying ‘no’ to innovation projects can become easier in this environment. Many don’t see the light of day as far as the general public is concerned and rarely do they produce material revenues. The risks are well documented. In this environment, innovation stalls.

To summarise: the status quo in large organisations can often be that innovation is seen as expensive and non-transformative. Assigning budget to innovation projects goes hand in hand with risk and may be avoided. For CEOs brave enough to embrace innovation in this environment the result may be a level of pressure to be more frugal with innovation spending, given the lack of short term and certain results that positively impact share price.

So, what can CEOs do to change things?

Below is a model for innovation adapted from Geoffrey Moore’s Zone to Win. The model has been deployed successfully and practically in my transformation projects for some time now and, from experience, it works to correct many of the above innovation challenges.

There are three primary reasons why this model works.

  • It encourages CEOs to think of innovation as a balance sheet. Innovation has a cost: you need to spend money to innovate. To spend money on innovation you must therefore account for it elsewhere. Innovation can only result if the balance sheet balances. This model gives CEOs a mature and sophisticated balance sheet to show they know how innovation within the business is funded monetarily, strategically, through people deployment and through other factors that must be accounted for.
  • The model allows for success and failure and shows how each will be dealt with. Again, this success and failure is dealt with as a balance sheet would be. The issues with too much failure are obvious and can cripple a business. Too much success can cause challenges around where to focus your efforts, time and investments. A balance sheet mentality ensures neither occurs.
  • The very presence and use of the model itself ensures that innovation never happens in a vacuum. Innovation is always visible and where it is successful it is given the support—the ‘air time’—to produce genuine organisational transformation.

The diagram of the model demands context and requires explanation, so let’s spend a little time on each of the four ‘zones’ that make up the balance sheet.

Top right – Proven cash cows

The easiest section to explain: this is what pays the bills on the balance sheet. These are the day-to-day products or services, which continue to produce multi-million (or even billion) dollar revenues. They are part of your future (and your balance sheet) because of these revenues and high customer demand. Do not get tricked into including vanity products or services here. Only your true cash cows, as evidenced by customer demand, belong in this section. This is your ‘safe space’; everything else has a home elsewhere. These products or services either have already been digitised or should be, to increase demand still further or appeal to new audience segments. This is incremental product development, rather than disruptive innovation.

Bottom right – Sunset

If the top right quadrant is the easiest to define, the bottom right quadrant is the one CEOs and corporates at large most often get wrong or, worse, avoid. What got you to where you are today may not get you to where you need to go tomorrow. Because the process of sunsetting means admitting failure, organisations avoid it. The longer they avoid admitting and addressing the issue, the greater the problems it can create. Look at your current product or service set with a critical lens and identify what no longer needs to be there. You must leave vanity and ego at the door. Products and services which belong here are frequently not in the top 3 of the available products in their respective category. They may be non-competitive in their marketplace, be struggling to produce profit or be suffering from falling demand due to changing customer behaviours. In any of these cases it is time to sunset these products because the resources, funding and leadership support dedicated to them can be better deployed elsewhere.

Dealing with products in this quadrant is a difficult job, and must be assigned to someone within the organisation. Traditionally, receiving this sort of assignment was an unwelcome promise, which often resulted in redundancy once it was completed successfully. That no longer needs to be the case and in progressive companies it is handled completely differently. The people doing the sunsetting work are your heroes. They are freeing resources from dying, low profit margin areas of the business so that it can be dedicated to innovative new areas instead and they deserve to be rewarded appropriately. In Google, individuals dealing with sunset processes receive bonuses and are often promoted on those sunsets and, at the conclusion, benefit from new appointments to innovative areas. As always, when considering how you will deploy this model in your business, it will be of long-term benefit to consider the people involved as the primary factor. Imagine how incentivised your people would be to drive these sunset projects if they felt there were big rewards and future opportunities at the end of the journey.

Bottom left – Moonshots

Now to the innovation.

On your balance sheet, the bottom left quadrant is part-funded by the savings delivered in your bottom right quadrant, in addition to any strategic investments made by the company. This means you have a direct source of funding to dedicate to innovation. You can quantify it and point to specific figures that are moving from antiquated products to exciting innovation that will grow the company. Sunsetting those products and services that saw you through the last 10 years will help fund your company’s next 10-plus years.

The specific products, services or initiatives in this segment should number around 5-10 and they should be significant ‘moonshots’. They need to be innovations which have the capability to be transformational, to spearhead your organisation’s growth. Common examples currently include things like artificial intelligence, or a business model change, such as a move to ecommerce, if you were traditionally a bricks and mortar firm. These moonshots are incubated in this section of the balance sheet until they show the ability to progress to fully realised products or services.

The nature of how these moonshots are incubated should also be addressed. Often it is desirable to simulate the urgency, speed and excitement of a startup, with progress monitored on 90 day cycles. Every 90 days your initiative owners must ‘sing for their supper’, showing what they expect to deliver or prove in terms of value over the next 90 days. If they hit or exceed these projections, they secure their ongoing funding. If they don’t you have the option to reduce cycles to 45 days, while you take a closer look at why they are not progressing as they should. The initiative owners are forced to act like startup founders, delivering results quickly and showing a good grasp of how to apply frugality to their activities in order to demonstrate a viable business model.

Top left – Materiality

Moonshots from the bottom left move into the top left materiality quadrant when they show signs that they are sustainable for the organisation to adopt on a mid to long term basis; when they have shown their materiality and that they have the ability to survive as their own business or product.

In the event that moonshots never achieve this materiality there must come a point where it is accepted that the innovation was noble, but failed. These products move to the bottom right segment and are sunset. Again, it is important to place ego and vanity to one side if this move must be made. Failure is a necessary part of innovation and needs to be embraced for genuine innovation to thrive. In Hollywood, writers are often told to ‘kill their darlings’. This refers to removing a hard-worked character or major trope in a script that works and is skilful in isolation, but does not work for the film as a whole. It is why movies are littered with stories of famous faces who only ever saw ‘the cutting room floor’. The same is true in innovation. Sometimes the best ideas have to be cut for the greater whole.

When graduating an idea from moonshot to materiality, it is important to progress only one at a time.

On one of my projects an insurance CEO followed this model and got in touch excitedly at the point two moonshots had been successful. And they really were successful – one was a genuine unicorn opportunity. The CEO had promoted both ideas from moonshot to materiality. Within three months both ideas were fighting for senior team mindshare, funding, leadership support and resources.

Remember: these ideas are transformative; genuine innovation that will drive your growth for many years. For them to be adopted at an overall business level they require significant attention at the materiality stage. Over time, these are your cash cows for the next 10 years. Be very intentional early on about what materiality means for each initiative and how it will change your business. Is materiality $10million in revenue or 1 million customers? How will each impact your organisation? Determining this early will remove any emotion or subjectivity around whether your moonshots have reached materiality.

A model for innovation

Innovation is exciting, but it can also be daunting. As CEO—particularly of an incumbent multinational in 2022—your job is to nurture innovation.

Treating innovation as a balance sheet and working with the above structure helps make this possible. Innovation delivered like this still has no boundaries, but it does have structure. That structure protects you from undue exposure and risk, while moving your business away from products that have served their usefulness and towards ideas that will transform your company for the next 10 years or more.

The model for modern innovation is an exciting balance sheet of opportunity that will help your business to find a transformative future. When thinking about your company’s approach to innovation, are you using a balance sheet? Or do you risk a combination of undue exposure and innovation in a vacuum?

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Darren Thayre
Head of Innovation, Global Strategic Initiatives at Google

Darren is a digital transformation subject matter expert. He has worked with large enterprises all over the world on their digital plans and change programmes. He heads up Digital Transformation and Digital Ventures for Google across Asia-Pacific, Japan and China. Darren can now call upon the vast Google and Alphabet resources to help customers with their transformation journey. Previously Darren led a consulting transformation team in Amazon Web Services, where he was responsible for some of their largest digital transformations globally.

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