Operational Excellence Can Kill

The meeting with the executive committee isn’t going to be easy—for yet another year, the company’s innovation efforts have yielded only lackluster growth. The head of the core business, which has been in a long, slow decline, will undoubtedly challenge you again:

I appreciate the efforts of our Head of Innovation, but there’s a significant gap between the goals of our innovation program and the reality of its achievements. Perhaps we’re over-investing in innovation. I could drive incremental growth in the core business if we redirected a little of the funding.

Maybe this time, his words will have more impact—you need a real innovation success.

A few years ago, it all started so well—idea fairs, lots of new projects, and bold ideas. The executive commitment to renewal and growth through innovation drove excitement across the organization. But somehow, things haven’t lived up to their promise. While many efforts have delivered results, most big ideas seem to have produced only meager returns. And the boldest projects seem perpetually struggling and often underfunded. You’ve heard whispers of “innovation theater” a few times in the halls. Confidence among the ranks is waning.

Strategic versus Operational Portfolios

“Portfolio Management” is a slippery term with a few distinct interpretations. Most of the energy goes into what I would call “Operational Portfolio Management.” Its focus is project resourcing—who works on which projects, budget levels, and scheduling priority. The underlying analogy is a giant Gannt Chart or work breakdown structure. The central question is how do I make sure I get everything done to meet the portfolio objectives in the most efficient way? Or, as a colleague puts it, “How do we get more juice from the lemon?”

This perspective on portfolio management is built on a foundation of Operational Excellence:  Make reliable promises and keep them. Get stuff done. Exercise good budget discipline. And so on.

In contrast, the “Strategic Portfolio Management” perspective is very different. The focus is fundamentally economic—what creates value, what the big opportunities are, how I do well no matter how the world works out. The primary analogy here is an investment portfolio, and the central questions are where and how much do I invest and how do I drive the upside?

This perspective on portfolio management is built on a foundation of Strategy:  Embrace uncertainty. Play to win or get out. Create options. And so on.

Here’s the rub:  these two approaches to portfolio management work at cross-purposes, and innovation is often the unintended victim. What happens when you think you’re being strategic, but you’re actually applying the rules of operational excellence? The law of unintended consequences is a devastating invisible innovation killer.

Lowered aspirations

First, enforcing reliable promises causes project leaders to lower their aspirations.  However bold or creative you exhort people to be, if you hold them accountable to reliable promises, they quickly learn to promise only what they can deliver. But innovation cannot make such promises.  Nor do truly innovative projects have the data to convince skeptics that they are a good bet, so innovation leaders often have to risk their personal credibility to explore a big idea.

Innovation project leaders find themselves getting mixed messages—be bold but make reliable promises. This contradiction generally forces them into a position of justifying their projects based on big dreams but actually pursuing efforts where they can reliably deliver. The result is big ideas trapped inside small projects that cannot possibly deliver on the big idea. Project leaders usually explain the disconnect through a handwavy strategy like “winning this customer will create a platform for future growth.” The project is focused on winning the customer but does nothing to create a platform or show future growth potential. So, executives believe innovation is bold and exciting (“platform for future growth”), but the results are mediocre (“win this customer”).

Strategically, it is better to have a big dream fail quickly and cheaply and move on. The truth is most big ideas don’t actually work out, but the few that do cover all the losses and renew the organization. So the key strategic issue is the effectiveness of reducing the uncertainty and ambiguity of a big dream.  Operationally, it’s better to lower your aspirations so that you can deliver on your reliable promise. Strategically, higher failure rates are better. Operationally, small wins are better. The unintended result of this paradox is that with a focus on operational excellence, innovation becomes mediocre.

Take a close look at each of your innovative projects. Is each really aimed at the big dream that inspired it? Or is it just a mediocre project that won’t actually deliver, dressed up in the big dream?

This typical plan all too often kills innovation because the first customer isn’t really the vanguard of a big market. In such a case, the “innovation” project is, in fact, clutter and simply isn’t on track to contribute meaningfully to new growth—even though we think it is.

This “default” innovation plan is actually backward. The plan should be:

1. Find evidence of a big market need, then
2.  Work with customers representative of the whole market to get the details right.

Don’t get me wrong, delivering on customer needs is critically important, but that alone is not enough to create innovative new growth for a market.

At the portfolio level, clutter adds up and further kills innovation by crowding it out. So much time and attention go into the small projects that there’s little energy left over for the innovative ones. It isn’t just budget; it’s also resources like staff and executive attention. The organization becomes distracted by clutter and loses track of what projects would significantly impact growth and renewal.

From the operational perspective, we mistakenly think the cost of clutter is small—the resources of doing a little project—but this is dead wrong. Strategically, the cost of clutter is the opportunity cost of the big moves that get crowded out. But these crowded-out opportunities are rarely visible to the decision-makers; it takes some effort to develop the strategic view.

For example, upon analyzing his portfolio from the strategic perspective, one CTO was astounded that about half the projects had very little impact on corporate growth.

What I’ve learned from this is whether these projects succeed or fail, it doesn’t matter. I need to put these resources onto projects where if they succeed, at least it will move the growth needle for the company.

Having experienced many such moments in many companies, I typically find 30% or more of projects in a portfolio simply do not need to be done.

How many of your projects are clutter?

Wounding

Third, the pursuit of operational excellence wounds many projects. Let’s take the perspective of an individual innovation project leader. You’ve avoided lowered aspirations and getting crowded out by clutter. You still have a big dream; you’ve designed your project to move towards it, and you dodged the trap of merely getting something urgent done. But you’re struggling with resources, which have been cut past the point where you have any reasonable chance of success. Your project is wounded.

Operationally, it’s a good practice to pressure project plans a little, to challenge teams to get more done with less. Often this inspires creativity and better projects. For projects where the path to success is clear and can be completed relatively quickly, this practice works pretty well. Then, as the project progresses through its gates, you make some course corrections and reaffirm the funding.

But innovation isn’t like that. If an innovative project starts to succeed, it will increase the confidence in its business case but will now require significant new funding. The path to success is not clear and has many twists. Essentially, a fresh investment decision needs to be made many times; it’s not just a reaffirmation of a project on a clear path.

For example, perhaps you’ve realized that the key to your gaming VR headset is to get rid of the tether and put the computer into a backpack, so the user has mobility instead of being connected to a cable. Now you legitimately have major new costs that weren’t on the original plan. This revision is a good thing, a sign of success in innovation.

But in a budget-disciplined organization, this money is pre-allocated, and there is relatively little room to maneuver. So, the team has to make do with what they already have, creating a no-win choice.  Either they pursue the original plan, which they now know to be a bad one but which lets them stay on budget, or they repurpose their money and fund what they can for the new essential product requirement and leave some other critical task aside. They usually come up short.

Either way, the innovation project is now wounded. It doesn’t have the resources to create its own success. The team is making do with what it has to do the best it can, but its ability to create significant growth is compromised. This is the first wound, fundamentally driven by difficulty predicting investment costs in innovation grinding against the inflexibility of traditional budget processes.

Another wound comes from the vagaries of budget cuts that often compound against innovation. In many organizations, innovation projects often last long enough to face multiple rounds of budget cuts; for example, “we need to tighten our belts to meet this quarter’s P&L targets for the street.” When the financials of an organization come under pressure, the organization’s first move is often simply to cut 10% from everyone’s budget. According to operational excellence, this isn’t usually a bad thing because such pressure increases creativity. But after a couple of rounds of this, the innovation projects can be seriously cut. More traditional projects are often completed before the next round of budget cuts, so they only get hit once.

The result is that the longer an innovation project has been going, the more likely it becomes wounded. I’ve seen projects running with 30% reductions on their original plans, which were already aggressive and optimistic while maintaining the original goals. They’re seriously wounded and have no realistic prospect of delivering on the big idea.

During one strategic portfolio assessment, project teams asked me to clarify the standard for cost estimation. Should they estimate what resources they thought they could get for their project or estimate what they thought it would take to have a reasonable chance of success? Unfortunately, the wounding had become so endemic that project leaders no longer even asked for the minimum resources needed!

At the end of the strategic portfolio assessment, we found about half the projects were wounded. The R&D resources that everyone traditionally squabbled over were about 20% oversubscribed. But that actually didn’t matter. The marketing resources were far short across the whole portfolio—they had only about half of what they needed. The wounding on the marketing side had become so embedded that they were blind to this massive disconnect.

The executives took the approach of making choices—saying “no” to projects—so that the remaining ones would have reasonable resource levels, rather than just trying to get it all done. But they were astonished when they realized their only lever that worked to drive growth was where they put their scarce marketing resources. This factor was a more impactful part of the decision than budget or R&D resources. (They also got more serious about building more marketing capability after this assessment).

This situation is similar to the process of battlefield triage. If there aren’t enough resources to fully address the wounds of all the projects, it’s best to choose which projects to save (and fully resource) and which projects to cancel (to free up resources for the ones being saved).  It seems like a hard choice to say “no” to a project, to kill it. But this approach is better than avoiding making “no” choices, wounding (often fatally) many other projects. Don’t merely allocate budgets; make choices.

How many of your projects might be wounded? Are project leaders asking for what they need or what they think they can get?

Unwinding unintended consequences by creating the decision forum

These unintended consequences result from a disconnect between the Strategic and Operational views:  in particular, applying good operational discipline to strategic issues. Good strategic management is not merely a matter of “being strategic” when making a specific decision in your portfolio, but instead of setting up processes that provide the right information, alternatives, and perspective to support an excellent strategic choice.  Operational portfolio management falls short on this point because it focuses on delivering on promises efficiently rather than making hard choices. Unintended consequences start because managers don’t distinguish these two types of decision-making or the processes needed to support them.

The first step is to recognize the different logic and practices that support good Operational Portfolio Management and good Strategic Portfolio Management and give each the space and attention it needs to be successful. Creating a platform of new growth from innovation requires strong support from both pillars, but they must stand separately to support it. When these pillars are too close together, usually because Operational dominates, the platform is unstable, and growth is unreliable.

The next step is to create separate decision forums for the operational and the strategic. Operational forums tend to become project reviews and fighting over limited resources based on relatively established objectives. Strategic forums are creative and conflict resolution forums on how we win and where to place bets. They are different forums.

The Strategic Portfolio Management forum is where you hold the conversation about where and how much to invest to close the inevitable gap between aspirations and reality. Leaders need to set goals that are ahead of where the organization is at the moment, so a well-led organization always has a gap between aspirations and reality. Dealing with this gap and the conflicts it creates is an important strategic conversation. Take these conversations out of your Operational Portfolio Management process and let the operational forum focus more cleanly on execution efficiency. Run each forum separately, and refine your business processes to support the deliberation required to make good choices in each.

When you have Operational Portfolio Management and Strategic Portfolio Management in balance, you’ll find that both processes become more effective, and you will reduce unintended consequences.   Most importantly, your executive committee will find your innovation portfolio drives more of the growth your company needs.

Next time the nightmare scenario won’t be a nightmare:  The meeting with the executive committee is going to be easy. While many innovation projects did not work out, the cost of proving them wrong was low, and one project turned into a great success. It’s a potential new line of business:  the technology works, many customers are demanding it, margins are high, and our position is defendable. Are they ready to invest in its growth? The head of the core business, which has been in long slow decline, grumpily admits you are on to something: 

I was skeptical, but you did find a real opportunity. Driving new top-line growth has been tough in the core, and I think we could be more profitable with this innovation than if we focused only on cost optimization.

His words have real impact. You’ve had a real innovation success!