Last year in our Playing Lean expert webinar we dived deep into professionalizing lean innovation in the company and what conditions are needed to be set up to achieve it.
We were joined by Esther Gons, the author of The Corporate Startup, winner of the 2019 Golden Axiom Business Book Award and the 2018 Management Book Of The Year Award.
She is currently working together with Dan Toma on her book on Innovation Accounting that provides a practical guide for measuring your company's innovation ecosystem.
Esther’s background is in helping startups, as Lean Startup is one of her passions from way back when she started several startups of her own. She was one of the first people to bring the Lean Startup methodology to the Netherlands, and held events that would make the Lean Startup practical for other startups.
For her Lean Startup has real value when it is done for the purpose of systematic innovation. Startups know this methodology will help them because it is essential to how they can lower the risk of spending too much money – the money they do now have.
Lean Startup should be just as relevant within bigger companies because it brings a new mindset to a company, it is a way to bring innovation into a company and become more customer-centric in their digital transformation.
But if you want to professionalize innovation within your company, it is essential to guard that process of setting up innovation and make it into something that you can scale across more initiatives in a company, and not just one.
When there are more than one or two initiatives, guarding the qualitative process is needed because you need to ensure that lean innovation is being done in the same way across all teams.
This is combined with pressure from above – the board, that needs proof of the value of your innovation process, other than changing mindsets. That is why it is important that the board also commits to this innovation process, rather than just a few initiatives committing to it.
Esther pointed out the 5 conditions that are needed to professionalize innovation.
The most essential one is to avoid confusion of who is doing what. You need to have a clear understanding of what innovation is in the company, and the systems that go with them.
In her experience, when she has asked companies what innovation is she got different answers: customer centricity, digital transformation, agile transformation, startups, social innovation.
These answers can't help you understand what to do or when to do innovation, and if you can have the same approach to all of them.
Some companies tell her that they have different types of innovation in their company, being core, adjacent, and transformational, or McKinsey’s Three Horizons Model. These types will help you in terms of strategy and to determine how you want to approach things, but it will not help you determine how you should approach certain types of innovation or how you should judge them.
We are all familiar with the search vs execute dichotomy by Steve Blank. A company is based on executing business models, but startups are always in a context of uncertainty, new markets and searching for something that works.
A company has a big ''company rulebook'' which is good for them because it contains all the processes, rules, and all of the systems that are set up are based in the root of cost reduction growth for the safety of their current business model.
But for Lean Startup and innovation to work, you need to have a different system, a system that deals with searching instead of executing current processes within the company. So if you want to define your innovation, this kind of perspective may be needed.
It doesn't really matter how you call the types of innovation or if you call it innovation at all. It is important to see it from a perspective that the business goals contribute to the current business model and that you can do it within a current system. An update to a process may be needed, but the current system should be able to judge it because it will contribute to growth and sustain the current models and optimize it.
When talking about basic research we should know what to do. There is a lot of uncertainty, and there is no other business goal other than finding new discoveries that will hopefully lead to a new business model.
Fast changes in technology or science opened up a new kind of innovation, that has uncertainty and isn't aligned to your business goals in that it's contributing to the current business models. You need to find new models for the new future, that might end up being your current model, but are not aligning with your current business goals.
That kind of innovation needs a new system to thrive, to be able to do lean innovation professionally and scale it in the company. There needs to be a clear understanding so that not only you and your team, but also managers and stakeholders will understand.
Esther often sees startups as floating in space, and the business with all its attachments on earth. They have different rules and a different perspective. While managers see growth when numbers are going up, startups see growth when they get a lot of insight into customer problems.
To be able to set up lean innovation in a proper way, you also need to make sure to set up a new system that is embedded within the company in different layers, so that it helps you become less dependent on the whims of one manager or the CEO.
You need an agreement on a framework or product lifecycle so that you can judge these internal startups that are doing lean innovation on proper things, on where they are in the process.
Right questions need to be asked at the right time to be able to judge them properly, to see if you want to continue and if there is enough indication for it to be true or do we need to stop something.
Another important condition is to have a unified way of working on your innovation processes. For Esther it is important to adhere to the Lean Startup process and to give teams a structure that they can work within, that they can be creative within. If you set it up like that you will see progress, learnings and if there is enough validation within the team.
The only way to compare teams to each other is by giving them a structured approach to lean innovation. A structure of innovation sprints that go through a cycle over and over again, and don't limit people in their creativity, how they approach things or how they test something.
So a unified way of working and a unified approach to innovation is the only way to compare teams and see what value they are bringing to the table.
To measure that you need to have a new set of KPIs that reflect that search, rather than financial outcome.
In big companies it is normal that everything you ask for in terms of judging initiatives, has to do with some kind of financial output. That is the only way companies are used to assessing risk in relation to their current business model.
Since there is no financial outcome at the beginning for startups, you need new KPIs that will still give you the feeling of control, and help you make the right decisions based on data – whether or not a certain project should be continued or not.
If we combine the stages of the framework, and look at the relevant focus for each stage, we can easily come to new KPIs that reflect that search. We can ask relevant questions for each stage that teams have to work towards, to be able to see if there is still progress and if there's still validation for the basis of the idea, rather than just making up numbers because the board wants it.
If you give stakeholders insight into customer problems and learnings, and give them these KPIs over and over in the same way, then it will become normal for them, and it will become a new system they can relate to.
Last condition needed to professionalize innovation is a VC attitude towards investing because it will help the board and management to look differently at startups within a company.
Usually the budget innovation teams are given from the board is seen as a cost. As soon as the board sees something as a cost, they will ask for a return. This is where a VC attitude is needed.
They need to understand that what they're doing is a high risk investment. If they see it that way, then they will look at the process differently, and understand why lean innovation is there in the first place.
It's not a controlled pipeline, it's about betting a lot of small bets on potential in the beginning, saving for a few bigger bets of those that proof their potential along the way.
The ideal funnel should look like a lot of initiatives in the first stage, and only have a few left in the later stages – those with more potential.
When the board is looking at it that way, then they develop a different mindset, and eliminate those that have no potential at all and bet on those that show potential.
When setting up a new system and following these conditions to professionalize innovation in a company, struggle is inevitable. Teams may think that the board wants to stifle innovation, and various departments (Risk and compliance, Legal and Finance usually) will want to hold the teams back.
As these departments are often the biggest hurdle for teams, giving them a feeling of involvement and control in the sense that they recognize that they are there for a purpose, will help everyone to work better together.
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The ''Innovation Accounting'' book by Esther Gons and Dan Toma is now available for pre-order! The book helps you to measure your innovation ecosystem's performance. You can pre-order your copy here.