Making Room for Innovation in Your Portfolio

Everyone talks about innovation, but when you get right down to it many companies don’t support real innovation.

Most good innovation projects die because conflicting priorities prevent their success. Many organizations are so choked with incremental projects that they have insufficient resources to seriously pursue innovation, no matter how “strategically important.” Companies that don’t create space for innovation may face a slow, long slide into mediocrity.

Why? And what can be done about this?

About 30 R&D and innovation executives from companies such as Ingersoll Rand and DuPont-Pioneer gathered at the Back End of Innovation (BEI) conference in Silicon Valley last fall to work on these issues. Participants proposed and voted on “must-dos” to make room for innovation in their companies’ portfolios.  Clustered and interpreted, these statements communicate the spirit and findings of the session.

Coming up with innovative ideas for your company is just the beginning – the real challenge is in making innovation work. It is not enough to support innovation, declare its importance and fund a few “scout” projects. You also must eliminate enough nonessential, incremental projects to make enough room and resource in your portfolio for innovation. Innovation needs time, attention and resources, and the more successful it becomes the more it needs.

The most painful innovation failure is a project that succeeds initially, moving beyond inexpensive scout stage to the point where it requires real attention and resources, and is then starved. Don’t let your innovative ideas wither on the verge of success because you cannot find resources. Prepare the way by incorporating these must-dos into your organization, based on the output of our BEI session.

Making Room for Innovation

The first set of clusters, shown in blue, describes what your organization must do:

  • Fund Greatness – Put money on projects that lead to innovation instead of mediocre momentum;
  • Transparency – Ensure all the decision makers have all the information and nothing is hidden;
  • Make Decisions – Many companies procrastinate too long and fail to actually decide what to do;
  • Real Conversations – Focus on what creates value, rather than politics, favorites or avoiding conflict.

The second set of clusters, shown in orange, describes how you must do it, using your portfolio process and system:

  • Common Metrics — So projects can be assessed comparatively;
  • Options Approach to Value — So value of innovation is visible directly in the portfolio;
  • Embrace Uncertainty — So innovation can be represented fairly;
  • Calibrate — So that evaluations are credible and comparable.

A major challenge to accomplishing these must-dos is project management habits, which brings us to the last cluster, in green:

  • Escape Project Management — Focus on wealth creation, not execution.

Creating room for innovation in your portfolio requires a deep commitment to driving growth in the company, not just having innovation around as a sideshow to the real business. This means doing what it takes and making hard choices.

Don’t fund the incremental business just because it has clear business cases and political power. On the other hand, don’t fund innovation just to pursue a vague strategic dream either. Up the rigor, up the quality of discussion and have the courage to invest in the future.

Let’s explore the must-dos in a little more depth.

Fund Greatness
Most companies are littered with mediocre projects. Often they come from incremental thinking and momentum. Sometimes they come from great ideas that have lost their way or been beaten down. You must face the truth and recognize the level of mediocrity in your own portfolio.

Then commit to finding, nurturing and funding greatness, being willing to overcome history and momentum to create a new future for your company. Specific companies participating in the BEI session expressed this must-do in various ways, from the direct “don’t settle for mediocrity” to “favor and promote pearls and oysters” to “don’t focus on bread-and-butter projects.”

Make Decisions
A key challenge to creating room for greatness is getting rid of the clutter. Jettisoning bad projects is one thing, but you also must be willing to cut projects that are merely good to create the room for the great ones. Many companies found that their portfolio processes did not put this kind of decision making at the center. Consequently their innovation investments were superficial, lacking the real ability to get sufficient resources.

The result of not making the tough decisions may be the high cost of missing an opportunity. Expressions of this idea ranged, from “say no to several good projects until project load is appropriate” to “make plain the implications of decisions and non-decisions,” to “make portfolio decisions.”

Real Conversations
Making decisions requires confronting uncertainty, ambiguity and conflict. It is human nature to shy away from these tough issues, but they are inescapable in innovation. Often companies create portfolio processes that get in the way, creating conversations about questionable metrics and scores. Real issues vary from company to company, a few common ones are around the upside potential of innovative projects and how to create it, and the fact that you have to say no to some small projects that have strong support.

“Make plain the implications of decisions and non-decisions” made it into both this and the above cluster, while others include “quality conversations about value” and “consider and communicate the upside.”  Another that makes it into this cluster and the next is “create transparency to foster real conversation.”

Transparency
Portfolios have lots of project in them, and visibility to all projects and all information is essential to drive real conversations. The easiest way to question a decision or avoid the real conversation is to question the validity of the numbers, to claim “garbage in – garbage out,” while some people want to maintain their political power by hiding information.

The best weapon against these dysfunctions is transparency – make it clear what is known and what is unknown, and be comprehensive. You will then get the best information humanly possible. Perspectives on this issue range from “be transparent” to “enable transparency in project evaluation” to “create transparency to foster the real conversation.”

So, how do you execute on that? Your portfolio process and systems can aid in accomplishing the above objectives or get in the way. You must put the following at the center of your portfolio.

Embrace Uncertainty
Most companies make business cases to evaluate projects. This works fine for incremental projects where estimates are reasonable and more-or-less understood, but puts innovation projects at a tremendous disadvantage. Estimates for innovation are highly uncertain, and therefore perceived as risky or less credible.

The key is to include uncertainty in your estimates. What is the upside? What is the downside?  Innovation is about finding and creating the unreasonable upside, not delivering on a specific reasonable promise. Get clear about what you need to learn to prove out an innovative hypothesis and fund that learning.

Participants expressed this idea as “factor uncertainty into portfolio management” or “identify and quantify as much uncertainty as possible” or “reduce uncertainty early and fast.”

Option Approach to Value
Once you’ve embraced uncertainty in your portfolio and moved beyond business cases, how do you actually value opportunities? This is where options thinking comes in. Innovation investments create options that can be abandoned if they do not work out or pursued further if they do.

Incorporate the uncertainty into your metrics for value, typically probability of development success and a range of commercial contribution if successful. Use decision analysis methods to bring this into actionable measures for project evaluation and comparison.

Typical statements include “consider and communicate the option value of riskier investments”, “use option approach for evaluation and selection” and “use objective analysis to find high risk/high reward projects and accept them into your portfolio.”

Common Metrics
Now that you’ve got an option approach that can express the value of innovation along with incremental projects, use it to compare all the projects – whether innovative or not – on a common basis. Incremental projects can be treated exactly the same way; they just have a lower degree of uncertainty. Avoid getting into squishy metrics like “innovativeness score” – work to really understand the economic and financial implications of all projects on a common basis.

At the end of the day, portfolios are comparative. Statements include “develop a common language for metrics” and “treat all projects equally” and “formalize the presentation of project metrics to allow effective assessment”.

Calibrate
With everything on common metrics, you need to ensure that the data is actionable. Many companies pursue precision or accuracy in the portfolio, drilling in on the evaluations of specific projects to make sure they are “right”. This is a mistake. Credibility and comparability are more important than accuracy.

You need a step where you review and compare all the key evaluation inputs, for example probability of success, mature year revenue, and range of uncertainty in commercial value, to ensure that they make sense together. Before you get into discussions of decisions, bring your best knowledge to bear on the data collectively. Then people will be in a better position to make and accept decisions.

Examples statements in this area are “standardize and calibrate criteria for projects,” “look for calibration tools” and “don’t allow senior executives to bring in bias”.

These must-dos to make room for innovation in your portfolio go against some strong habits in the organization. You need to recognize this and make a space for strategic portfolio conversations, leading to our final must-do.

Escape Project Management
Most of our day-to-day routine is running projects, delivering on promises and making things work. We’ve all been trained to make plans and keep them. When we think of portfolios, our first reaction is often to think of a giant Gantt chart, flowing down from strategy to deliver results. You want to track milestones, budgets and timelines.

While this is good as far as it goes, this mindset can undermine innovation in many subtle but powerful ways. Make sure your portfolio process and systems has a strategic focus. What is the value of your opportunities? How do you make them better? How does the portfolio drive wealth creation in your company?

A great innovation success may refine the strategy of the company. Specific statements include “create incentives for overall value, not just project success,” “focus on the portfolio, not just the projects” and “build a culture that rewards early project termination.”

 

Thank you to the innovation veterans and thought leaders who helped run the workshop:

Udi Chatow, Hewlett Packard
Rich Duncombe, University of Oregon
Neal Gutterson, DuPont Pioneer
Michael Wynblatt, Ingersoll Rand

And to all the company delegates who participated:

Bayer Healthcare
Hollingsworth & Vose
Genentech
HP
National Board of Medical Examiners
National Research Council of Canada
Hormel Foods
Vanguard
Remington Arms
Nooter/Eriksen
Intel
Daimler
AARP
NASA
Emerson