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Payback: Reaping the Rewards of Innovation by Boston Consulting Group Senior Vice Presidents Jim Andrew and Hal Sirkin addresses the innovation disconnect and shows companies how to manage innovation for profit and use the cash curve as payback reality check.
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| Consulting-Times E-zine
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Innovation continues to confound even the most savvy business leaders
Although 90 percent of senior executives rate innovation as a top strategic priority, almost half admit to being dissatisfied with the return they get from their innovation dollars, according to a survey by The Boston Consulting Group (BCG) of more than 1,000 decision makers.
A key reason is that most companies confuse ideas or inventions with innovation. True innovation must lead—directly or indirectly—to increased profits. And even when companies recognize this, they're generally unsure how to determine which innovation efforts are on the road to payback, and which are destined to become "cash traps"—projects that drain valuable resources that could be better invested elsewhere.
That's according to Jim Andrew and Hal Sirkin, BCG senior vice presidents and coauthors of the new book, Payback: Reaping the Rewards of Innovation (Harvard Business School Press, January 9, 2007). Based on BCG's innovation–focused work and research involving hundreds of innovation decision makers and global corporate leaders, Payback analyzes the innovation problem and uses scores of detailed examples to show that companies can get beyond "innovation intoxication" and gain a clearer picture of innovation efforts from which to make smart decisions and align key players.
"Focus & Finish" – And Do It Faster
According to Jim, "The innovation problem has little to do with good ideas. There are a lot of them. In many cases, idea worship derails and dilutes companies' focus on getting payback from innovation. Even at the best companies, up to a third of all innovation initiatives are wasting cash and human resources and will continue to do so. Cash traps in innovation portfolios are more damaging—and prevalent—than most companies realize."
The challenge is to identify which projects need to be curtailed so ones with real potential can be focused on and brought to market faster—with a higher probability of success. In many companies nothing is ever finished. Companies need to ensure they put real critical mass against their winning ideas and accelerate their path to market—and cash.
Innovation's Missing Links: Managing Innovation as a Process and Having a Reality Check
"Companies aren't very good at identifying, establishing, and sticking to evaluation metrics that assess projects through the lens of payback, or incremental profit—metrics that would help leaders make the right choices in terms of trade-offs, further investment, giving projects more (or less) time, and so on. Often this is because innovation projects are 'homeless' within an organization, owned by too many people or by no one at all," adds Hal.
The Solution: The Cash Curve
According to Payback, the cash curve offers leaders a way to create a picture of any innovation effort—a "payback profile" of an innovation and its critical stages. This picture helps ensure that everyone involved is seeing and evaluating the effort from the same perspective, and provides the basis for sound, reality-based discussions and decision-making. The cash curve takes into account the four key variables that contribute to—or prevent—payback: start-up costs, speed to market, speed to scale, and support costs.
"We call these variables the 'Four S's', and they're the levers that innovation leaders can use to fine-tune efforts. By analyzing these variables on a cash curve, companies can clearly see when to kill an effort, when to invest more, or when to speed up or delay a launch. The cash curve provides a clear picture of whether innovation efforts are on track to payback, and is an effective tool for alignment and intelligent, dispassionate decision-making. Getting the cash curve right takes effort, but it's probably the most important thing an innovator can do," says Jim.
The "Right" Innovation Metrics Are Also Critical
Measuring innovation is another issue that companies struggle with. "Most companies are looking for a 'silver bullet' metric to help them predict or force a perception of profitability—or they're using a collection of metrics that aren't very valuable. What they really need is a set of metrics that provides not only a picture of the outputs of innovation—cash payback and indirect benefits—but also inputs, including time, money and people, as well as the overall effectiveness of the innovation process," says Jim.
The "Indirect" Benefits of Innovation: Even These Must Generate Cash
Payback addresses a number of the "indirect" benefits of innovation efforts-including knowledge acquisition, brand enhancement, ecosystem strength and organizational vitality. But the book stresses that these indirect benefits have little value unless they too add to profits. "Pursuing a project simply for morale or knowledge could be counterproductive if that added knowledge or morale, in a measurable way, does not lead to incremental profit. So the answer to the question, 'Is innovation about more than just money?' is 'No!'" Hal contends.
The Best Approach to Innovation Often Lies Outside A Company's Experience and Comfort Zone
Payback explores the three business models for innovation: integration, orchestration, and licensing. Companies may have experience with one or two of these models—and thus a comfort level and tendency to use them by default. But this is a mistake, since the choice they make affects payback. "The right business model depends on the cash curve, as well as the company's risk tolerance and resources," explains Hal. "For instance, a company that's always done everything itself—an 'integrator'—may need to start licensing in order to get an innovation to market quickly enough to make money."
Payback Analyzes Innovation Successes and Failures
To underscore the importance of the cash curve and a clear focus on payback, the authors explore the experiences and lessons of "payback pros." These include Samsung, which transformed itself from a maker of cheap, copycat products into one of the most respected—and innovative—companies in the world; BMW, whose tightly aligned organization supports innovation and payback at every level, from strategy to measurement; Seagate, which has mastered the "integrator" model of innovation by doing everything in-house; and Microsoft, the greatest innovator—in terms of payback—in business history. Payback also examines innovation failures, such as Polaroid's attempts at the digital camera and the Concorde—great inventions that never generated payback.
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