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Hey folks —
If you follow the chain up high enough, most digital transformation and innovation efforts stall out in the CFO’s office. Inevitably, any conversation about new initiatives, investments in facilities or new staff or rethinking the company’s go-to-market strategy impacts the company’s financial projections. We’ve talked here before about bringing the entire organisation — not just product development — into the transformation conversation but without the right funding model, most of these efforts will fail.
What are the challenges of changing the way Finance thinks about modern work? As corporate finance is not my area of expertise, I spoke with two of the smartest people I know on the topic, Tendayi Viki (author of The Corporate Startup) and David Binetti (Creator of the Innovation Options Framework and Author of forthcoming “The ROI of Innovation”) to get their insight.
Tendayi told me that, “The problem with traditional project financing is that it is treated as a one-shot event. You either get all the money you need to build and launch or you get nothing.” In other words, if you can’t predict the outcome of your proposed initiative it won’t get funded. And, perhaps worse, if you DO predict the outcome of your initiative you are now officially on the hook to hit those numbers. If you don’t, it becomes what some would call a “career-limiting move.” David added that, “these practices require the most critical decision be made at the precise moment there is the least information.”
Software-driven initiatives are filled with uncertainty. It’s the nature of the medium. Assuming you can predict exactly how long it will take to generate specific customer behaviours rarely succeeds. The digital innovation teams funded this way have no flexibility to adjust their plans (and predictions) based on insight they learn along the way. Yet, it’s exactly this uncertainty — this variability in the outcome of the project — that perplexes the Finance department. “[Finance officers] traditionally don’t have a process for investing in ideas that have no financial projections attached.”, Tendayi continued. They rarely go back and check on how well new products hit their projections, he told me, but when they do they realise that very few, if any, hit their initial targets. Those big bets failed every time. David suggests, “…position[ing] innovation as a hedge that protects your existing cash centers against future disruption.” It’s like an insurance policy. You pay a little bit every so often to ensure that an extinction-level disruption event never happens.
So what’s the answer? Tendayi and David both suggest a “VC style” approach to corporate funding. Instead of rolling out large, untested and heavily capitalised initiatives, invest small amounts of money to test new ideas. See which ones generate interest with your target audience. Fund them further to see if there’s a real market there and whether or not your company can support growth in that market. If, and only if, the results of these “portfolio experiments” provide positive evidence of new potential business increase the funding — but again, incrementally. David calls these “Innovation Options” and he explains them as, “…Innovation Options make no guarantees (which under conditions of uncertainty are impossible by definition) and instead calculate value based on the speed and accuracy of market learning, thus tying directly to the objectives of lean/agile.”
What your organisation is actually doing here is using evidence-based funding to decide where to best spend your teams’ time instead of blindly trying to predict it. Successful teams get more money. Unsuccessful teams move on to new initiatives.
If we can expand our organisation’s agility to include the Finance department we increase the chances of truly transforming the way our companies pursue long and fruitful innovative futures. How does your company fund projects? Have you found a way to bring agility to Finance? Let me know.
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Sense & Respond
Now up to 16 5-star reviews, Sense & Respond continues to make waves in the business management books category. If you haven’t read it, Josh Seiden and I essentially make two points in the book: (1) You are in the software business and (2) managing a software-based business is different. This book is for managers, leaders and aspiring leaders trying to understand how to manage and incentivize organizations transforming into digital businesses.
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