How do you innovate “Innovation” ..

A couple of days ago, I submitted my entry for the HBR/McKinsey M-Prize Challenge run by Management Exchange.
This challenge is about “Innovating Innovation” and will be judged by some of the greatest thinkers in innovation.
You can find below my submission for the challenge. If you like my thoughts, request you to vote for my submission here.
SUMMARY

Its not the lack of ideas that stops organizations from being innovative, but the way resources are allocated & employees rewarded that is the key.

We need to change the way we set and manage KPI’s, the way we allocate funds (quarterly budgeting with reduced budget year-on-year for standard activities) and the way we recognize and reward teams (based on IQ – Innovation quotient).

PROBLEM

Currently, organizations are managed as follows:

KPI’s and organizational strategy:

  • The top management decides the strategy and the key initiatives for the organization.
  • These are then cascaded down to the different lines of businesses.
  • Each LoB head then defines the goals for his team based on the organizational goals

Challenges in this process:

  1. This process resembles the election of a Pope. That is, the average employee has little to no understanding of, and input to, the process, and is instead reduced to waiting for the output of the process (“the white smoke up the chimney”).
  2. This tends to dis-empower the employee base, but perhaps most importantly, robs decision-makers of the useful “push back” that the broader organization (particularly those working at the “front line”) can provide.

Budgeting:

  • Each LoB head takes his last year cost, adds a percentage (maybe 5 or 10%) to the cost and submits the same for approval.
  • This is an annual process and gets repeated only next year

Challenges in this process:

  • This is where power turfs are created which lead to a lot of power tussles in the organization which help no one.
  • This process also adds a lot of fat in the organization. If you are continuing to do the same tasks year-on-year, you should be getting better at the task & can find better ways to complete the same, thereby freeing up resources for the more important activities of the organization
  • Increases the cost of doing business as-usual
  • Due to the annual cycle, so many resources are wasted by continuing to pursue ideas or projects that should have been killed. This also means that other ideas/projects have not been allocated those very same resources.
  • There is a separate LoB responsible for product development or R&D or innovation.

Innovation:

  • This team also goes through the same process as all other LoB for KPI definition and budgeting.
  • Makes it difficult to get the right amount of funding for the innovation efforts.

Challenges in this approach:

  1. This puts the imperative of innovation on a small team instead of the fact that everyone one in the organization should have innovation on their agenda.
  2. This also reduces the total resources available for funding new innovations as this team also has to compete with other LoB’s for resources.

Rewards & recognition:

  • Individual employees are then rewarded and recognized based on their performance as measured against the cascaded KPI’s
  • A lot of times these KPI’s do not have any component about innovation as it is considered to be the responsibility of the Innovation department
  • This creates a culture of competition among employees as the rewards and recognitions are limited and all employees (alright, most of them) want a piece of that cake.
  • Most organizations have a bell curve for evaluating and rewarding employees, which means that in every team, they expect a few employees to be below average, a few to be above average and all others average performers. This hurts most when you have a great team with super employees. By definition, you prohibit such teams to form and thrive.

Challenges in this approach:

  1. Innovation is a team activity. Running an organization is also a team activity. So, why rewarding individual performance results in a few lone wolves who might not be great team players getting a lot of .
  2. By following the bell curve, you are naturally encouring average performance from the team and discouraging high performing teams with high performing employees.
  3. Individual top performers who care only about their performances get rewarded, recognized and promoted. These are the kind of people who are most likely to get involved in turf wars and create what we call the mid-management wall or bulge.
SOLUTION

In my opinion the following approach would work much better:

  • KPI’s and organizational strategy:
    • The top management involves the frontline employees (sales, delivery, support, etc) who talk to customers/partners every day in the process of defining organizational strategy and key decision.
    • This process of discussion to also involve in defining the key challenges (with respect to product/service and competition). These challenges then become the areas to innovate.
    • The top management can now come out with the “Commanders Intent” of what they want to achieve and leave the details to the frontline staff to manage themselves, to achieve the intent.  
  • Budgeting:
    • Each LoB gets a cut in budget every year (maybe 5 or 10%) to manage their business as usual activities. The rationale behind this is the fact that if you are doing something regularly, you can always find ways to improve the same on a continuous basis and hence should be able to manage at a lower cost. This is an annual process.
    • There is a second budgeting cycle that is executed quarterly. This is to decide on the funding for various innovation projects in the areas identified as the focus areas during the process of forming the strategy or any other activity that can give competitive advantage to the organization. In any case, these projects could focus on one of the following:
      • New product or service creation
      • New business model creation
      • New market development
      • Process improvements that lead to improved topline or increased bottom-line
    • New projects are pitched and existing projects provide an update on their progress. As this is a quarterly process, the organizations can decide if any of the existing projects require to be killed and if new projects show promise and need to be funded. A panel consisting of senior executives, front-line managers and the relevant functional experts takes decisions on the funding for the various projects.
    • Projects where the team is convinced about the viability but the management is not sure, should have an option to get into the start-up mode with the organization providing the seed funding, provided the team is able to get funding from other VC funds. This with the option that the organization gets the first right of refusal for further funding and buy-out. At a later stage if the employees want to kill the project, they could also be considered for re-hire based on the then open situations.
  • Innovation:
    • A small team of innovation coaches created who can be used by the different teams on their innovation projects. They work as consultants, coaches and bring in the outside-in perspective to the problems and also facilitate the process of innovation.
  • Rewards & recognition:
    • Teams are rewarded and recognized rather than individuals.
    • Better performing teams are rewarded more than average performing teams or low performing teams.
    • Individual performances are still evaluated, recognized and rewarded, but within the framework of the performance of the team. So, if the team did well, your rewards will be better than if the team did not do well. So, in order for you to succeed, your team should also succeed. The individual performance evaluation is done by both managers and the peers.
PRACTICAL IMPACT

The impact of my ideas would be as below:

  • KPI’s and organizational strategy – advantages:
    • This process ensures that the perception of the senior management is put to test and corrected if required, thereby eliminating the risk of creating strategy based on wrong perception.
    • This process also gets the front-line employees to participate in the creation of strategy that they are expected to execute. This increases the chances that the execution of strategy will be much better than otherwise. As many CEO’s will vouch that the difference between great organizations and not so great ones is this ability to execute their strategy well.
    • With the commander’s intent for the organization in place, employees can respond better to any situation they encounter and hence the ability of the organization to respond to change quickly and correctly is greatly enhanced. In times of great uncertainty, this ability to respond fast can be the difference between survival and growth.
  • Advantages of the 2 stage Budgeting process: 
    • This process ensures that there is continuous improvements in the process and does not create a situation where there is more staff than there is work or worse, managers invent additional work for their staff, thereby creating a culture of improvement & innovation.
    • This process frees up a lot of resources that can be used to fund a lot more projects that can address the key challenges identified in the strategy building stage.
    • This also takes care of situations where the project team believes in a project and is willing to take the risk of starting up in order to continue their work. If they succeed, they win big and if they fail, they still have a chance to re-join the organization.
    • Innovation becomes the responsibility of the entire organization and not of one small team in the organization.
  • Advantages of the “Everyone Innovates” process: 
    • Clear identification of the key challenges helps in focusing the efforts of the organization in solving these problems which will have the biggest impact on the organizations success/failure.
    • Creates the opportunity for innovations in areas where they are needed the most as the employees who face challenging situations are also more likely to come up with solutions.
  • Advantages of the new team based Rewards & recognition:
    • This approach ensures that all employees are working together as a team as their individual success rewards and recognition depends on the success of the team.
    • This drastically reduces the chances of someone succeeding (at their KPI’s) at the cost of their colleagues or customers.
    • This also eliminates any bias (perceived or real) that might creep in the performance evaluation by the manager
    • This will create an environment of trust and togetherness, which by itself, leads to a better environment which fosters creativity and high productivity.
CHALLENGES
Challenges that one will face during implementation of the above approach:
  1. This involves complete overhaul of the management processes used in the organizations currently, which means that change management is a big challenge in implementing this idea of management.
  2. There will be resistance from the mid-managers as they will perceive to be stripped of a lot of power that comes with being in the mid-manager layers that they have enjoyed so far. Unless, this is handled well and there is buy-in from them, the entire process can potentially fall apart, which will then make it even more challenging environment for the CEO to start fresh.

This said, the upside of being able to implement this approach to management is very high and is still worth the risk.

FIRST STEPS

The process can be implemented in phases or pilots:

  1. The senior management can initiate the workshop with front-line staff for strategy definition, along with the mid-managers, to identify the key areas where they need innovations or solutions to current challenges that have been identified. This can be done by any management at the start of their strategy cycle.
  2. Create and communicate the “Commanders Intent” to the entire organization. Challenge the entire organization to move towards achieving the “Commanders intent”.
  3. Create a team of experts who will work as coaches to teams that want help in addressing the challenge that they want to solve.
  4. Identify 2 or 3 managers (of high performing teams) who are open to try the new team based performance appraisal system. Help them to get the buy-in from the team members.
  5. Publicly announce the pilot of the appraisal system with the team and congratulate the teams that have taken the first step to adopt the new practices.
  6. Budgeting process will need to be the last process change to be adopted. If the previous steps have yielded good results, the adoption of the budgeting process becomes so much more easier (as the senior management would have already won the trust of the organization).

Do you agree with the approaches that I have suggested above. Do let me know by commenting below or tweet your thoughts to me at @rmukeshgupta.

 

PS: Some interesting videos on Innovation:

 

 

 

 

 

Fueling growth from existing customers

It is a well known fact that it is much more expensive to acquire a new customer than retaining an existing customer. But as they say, common sense is not so common. We find that businesses are going out of their way to attract new customers by offering them great deals. I do not think there is anything wrong in this, but when you exclude the offer to your existing customers, you are inviting trouble. 

This is a very important reason for customer loyalty to become so rare. There does not seem any  benefit for customers to remain loyal anymore as they miss out on such attractive offers in the market that are only available to new customers. So, they keep changing loyalties.

In the short term, everyone is happy. The businesses are gaining new customers and the customers are getting attractive offers. However, in the long term all of them stand to lose. The customer has to keep negotiating with new vendors with associated risks. Constant change in the suppliers can also mean in-consistencies in the supplies/services which in the long run can hurt the customers’ business.

The businesses spend so much more to attract new customers and the cost of customer acquisition goes drastically up and hence the cost of sale and the profitability starts its downward trend as businesses will need to continually come up with more and more attractive offers to attract new customers and this becomes the only way for top-line growth as repeat business starts to shrink due to lack of loyal customers.

Once businesses realize that they are in this downward spiral, they decide that it is important to retain existing customers as well and hence start offering the attractive offers to existing customers as well in addition to new customers. Still they will find that retaining customers is a challenge.  

A clear example of this phenomena playing out currently is in the Indian telecom industry. All the players like Airtel, Vodafone, Tata DoCoMo, Idea, Reliance, Aircel and the other players are all creating very attractive offers for new customers and incentivize customers to switch from one player to another. This has led the profitability of the entire industry downward. These businesses will be able to sustain their top-line growth and profitability till the overall market keeps growing. Once this stops, then we will see a shake-out of the players in the industry.You will then start mergers and acquisition starting to be considered and there will be only a handful of player be left in the market and the same cycle will get initiated with a similar result.

Now the question is “What are the alternatives?”

I think that there are a couple of alternatives that they can consider:

  1. Incentivize your customers to bring in additional customers for your business. Make your customers your evangelists.
  2. Incentivize your sales teams more on bringing in repeat business than net new customers.
Let me elaborate on both the alternatives.

Incentivizing your customers to refer additional customers for your business:

There are a few things that you will need to put in place in order to turn your customers to evangelists:

  1. Deliver and delight your existing customers by the high standards of quality and service!
  2. Make them your raving fans!
  3. Create an opportunity for your customers to refer your business/products/services to their peers, friends and family!
  4. Make it much easier, simpler, and faster to do repeat business with you!
  5. Recognize/reward all your customers who have referred your business to their network
  6. Never show new customers are more important than the existing one’s!
As you can see that this is a cultural change that businesses will need to undergo. This focus on customer delight will take time and effort but is worth all the time, money and effort that goes into this as this will create a competitive advantage that will be hard replicate. You can even go on to.

An example of one such company is Apple. In this age of declining customer loyalty, Apple customers are still one of the happiest lots and do a lot of evangelizing for Apple.

Incentivize your sales teams more on bringing in repeat business than net new customers.

Businesses often realize that new customer acquisition is of paramount importance and hence expend a lot of their energies in acquiring new customers. Sales people are incentivized for bringing in net new customers for the business. Marketing is busy creating the next great offer to attract new customers. All of this leads to the state that no one is bothered about the potential business opportunity with existing customers and their networks.

  1. Set a rewards/recognition program for sales teams where they get more rewards and recognition for Repeat business generated from existing customers, Net new customers referred by existing customers and slightly less compensation for Net new customers who were not referred by existing customers
  2. Introduce a step in your sales process where sales people ask for the customers/prospects to refer you to people in their network. Request for referrals even in the opportunities where you have not won the deal.  
  3. Reward sales people who get more repeat business transactions (irrespective of the volume of transaction).
  4. Initiate a customer satisfaction survey for 2-3 customers of each sales person. Choose the customers randomly.
This will clearly give out the message to the sales teams that it is very important to provide excellent service to existing customers. They will also learn to explore options to generate repeat business and to keep their customers happy all the time.

I know that there are businesses that have customer referral programs in place that intend to achieve the same outcome but I have not seen any of them achieve it. This by itself is a deep topic which I will discuss in a separate post. 

I have not come across a business which has implemented this system for increasing business from existing customers yet!

Happy selling !