Innovation Project Governance Do’s & Don’ts
By Noel Sobelman
Innovation project governance is a decision-making discipline where corporate leaders determine which ideas to pursue, how innovation budget is allocated to projects, and how resources are assigned. Through this process, senior management leads innovation, implements strategy, and empowers teams to create new sources of growth.
Despite its importance, the governance process is often ineffective and may even slow down rather than drive innovation. Large upfront investments made when risk and uncertainty are high wastes precious resources. Decisions based on ivory tower judgement, opinions, or politics result in solutions customers don’t want. Indecision leads to too many dormant “zombie” projects that seem to languish without visible progress.
When poor decisions are made, most people conclude that leadership is at fault. In most cases, the challenge is not the capability of senior management but the decision-making process itself.
Marc Randolph, Netflix Co-Founder, describes the role leadership plays governing innovation project teams this way, “See that mountaintop over there? I’ll meet you there in 3 weeks, here’s what you’ve got to have ready when you get there, and I trust that you are going to figure it out. You’re going to bump into stuff you didn’t expect. You’re going to have to change and adjust your route and I’m not going to be there (along the way). I trust you to achieve what you need to achieve, but I’m giving you the total freedom to do it your own way.”
He goes on to say, “This is easy when you have a dozen (projects), it’s really hard when you have 100. It’s even harder when you have 700, and Netflix has 7000 now. That is the cultural achievement and accomplishment of Netflix. They scaled it.” From the Future Squared podcast, October 23, 2019.
Leadership’s primary role in innovation, as Mr. Randolf points out, is to establish a strategic ambition while empowering teams to discover, validate, and scale new opportunities. Companies that do this well have established a decision-making group and process that connects exploratory growth strategy to implementation. This leadership group is commonly referred to as a Growth Board (other names include Venture Board or Innovation Board) — a cross-functional leadership team that determines which opportunities to fund and how innovation resources are allocated. They make clear the organization’s growth goals and areas of focus, set opportunity size guidelines, allocate innovation budget, establish operating principles unique to exploration, remove roadblocks, and provide an environment where innovation teams can thrive.
Here are some practical do’s and don’ts to consider as you stand up and build innovation governance capability in an established organization:
Membership & Structure
Growth Board membership in small to mid-size organizations typically includes the CEO or COO and the heads of Marketing, R&D, and Finance. Larger organizations might include Growth Board members at a level below the C-suite or at the business unit leadership level. In either case, the CEO needs to personally drive the exploratory growth agenda and the inevitable tensions between exploratory innovation and the core business need to be confronted at the highest levels of the enterprise. Failing to do so legitimizes conflict and lets unhealthy behavior fester.
Because the Growth Board is a decision-making group, it should remain small. Six to eight executives is an appropriate size. If the number of members starts to grow too large, ask yourself, “Would I be willing to make an innovation project investment decision without this person present?”
Structurally, exploratory innovation projects require their own governance that is kept separate from the efficiency-oriented core business. Unlike core business governance, which manages for efficiency with predictable schedules, traditional financial metrics, and pre-defined go/no-go gate decision criteria, the explore portfolio uses an iterative test-and-learn process, evidence-based funding criteria, and venture-style metered funding.
While the exploratory Growth Board is structurally separate, it is not isolated from the core. Leadership will need mechanisms that allow them to prudently leverage the assets in the core business, especially as explore projects begin to scale (e.g., resources, channels, customers, brand).
Do: Establish a Growth Board with cross-functional membership that is dedicated to governing the pipeline of exploratory innovation projects.
Don’t: Combine exploratory innovation project governance with core business project governance.
Linking Decisions to Portfolio Objectives
The purpose of a Growth Board Review is to make an individual project persevere, pivot, or cancel decision supported by evidence and a recommendation coming from the project team. When making the individual project decision, it is important that broader business strategy and portfolio objectives are well understood. The Growth Board is evaluating each project based on its potential relative to other projects in the innovation portfolio. Funding and staffing an innovation project may mean that something else in the innovation portfolio gets cancelled. The job of the Growth Board is to say “no” to projects that are languishing so it can reallocate resources to more promising opportunities with stronger evidence.
Do: Link individual project funding decisions to aggregate portfolio objectives and say “no” to free up capacity for your most promising projects.
Don’t: Avoid tough decisions to cancel projects. A high cancellation rate in the early stages, while investment is low, is a good thing. It’s a funnel not a tunnel.
What is the right cadence for reviewing and making investment go/no-go decisions on innovation projects? There are two common approaches, schedule-based and event-based. Schedule-based reviews are held after the passage of an agreed amount of time (e.g., every month, every 12 weeks). Event-based reviews are held at pre-established progress milestones (e.g., problem-solution fit, solution validation, or defined evidence strength thresholds). When using the event-based approach, project teams are empowered and held accountable to continue to the next defined milestone (also referred to as Investment Readiness Levels) or until their funding runs out. Either occurrence triggers a funding review with the Growth Board.
Event-based reviews have the advantage of ensuring the review has a clear purpose with Growth Board questions appropriate to how far the project has progressed. This helps keep the review focused on the decision at-hand, so it does not turn into an unproductive status update. Event-based milestones also give the Growth Board and individual teams a common language and a way to assess progress relative to other investment opportunities in the innovation portfolio. Those that progress faster than others (lowering risk, increasing confidence) might warrant accelerated investment. Dormant project that are languishing too long before reaching their next milestone are candidates to be cancelled.
Do: Whether you choose an event-based or schedule-based approach, make sure the Growth Board Review has a clear objective and outcome (i.e., a decision), teams come prepared with a recommendation supported by customer evidence, and leaders ask questions appropriate for the project’s stage.
Don’t: Hold Growth Board Reviews too frequently. Doing so makes the team feel obligated to provide a project update or status on what has transpired since the last review which is not the intended purpose. Frequent reviews also open the door for well-meaning Growth Board members to tinker with day-to-day project details and micromanage project teams.
Funding for new growth initiatives resembles a venture-model, with metered investment based on the achievement of evidence-based learning objectives. It requires teams to show evidence at each stage that is appropriate for the budget they are requesting. Funding starts out small and increases as new business models and value propositions are de-risked. This approach allows Growth Board decision-makers to invest small amounts when uncertainty is high, and increasingly larger amounts as confidence builds.
Do: Invest in tranches as new opportunities are validated, risk and uncertainty are reduced, and confidence builds.
Don’t: Invest ahead of learning or through the annual budget process.
Project Evaluation Criteria
Early in the innovation process, when uncertainty is highest, project teams run experiments to test assumptions and de-risk the most critical aspects of a transformative new idea. The goal of these experiments is to produce a measurable customer action or behavior that proves they are progressing toward a profitable, scalable business. When using evidence strength across desirability, viability, feasibility, and adaptability dimensions to evaluate a new business, the Growth Board conversation changes from opinions or guesses in a spreadsheet to facts. Instead of asking, “When will we see an ROI?,” the Growth Board asks “How strong is the customer evidence that demonstrates the viability of the solution?”
Do: Use strength of evidence across desirability, viability, feasibility, and adaptability dimensions to evaluate highly uncertain, transformative innovation projects. Create guidelines or a simple scoring model to level set expectations for evidence strength thresholds at key milestones as projects move from problem confirmation to solution validation, market introduction, and scale up.
Don’t: Use traditional financial metrics for innovation projects that are going into brand new territory with no history to draw from. Projecting an ROI in the early stages of a new-growth innovation is guesswork at best.
As risk and uncertainty are reduced and projects move closer to launch and scale-up, innovation teams get significantly larger. Projects need to tap deeper into functions like manufacturing, supply chain, procurement, marketing, quality, regulatory affairs, and customer service.
This is where most companies struggle, as core and exploratory innovation project teams compete for the same resources. The job of the Growth Board becomes more complex than simply deciding which innovation projects to advance.
When the Growth Board decides to continue investment in a promising project, they are also approving the resources the team needs to successfully run their next series of risk-reducing experiments. Those headcount resources must be “real”. Companies that do this well understand resource demand versus supply and work out staffing conflicts with functional resource owners in advance of the Growth Board Review meeting.
Do: Identify potential resource constraints and confirm resource availability in advance of the Growth Board Review.
Don’t: Approve a project to continue without first making sure the resources needed for the next series of experiments are available. Especially those resources that are shared with the core business.
It is difficult for leaders who have been successful operating businesses at scale to change their decision-making behaviors. They might expect project teams to come to the investment decision meeting with project financials, predictable project schedules, and detailed execution plans. These leaders got to where they are by holding teams accountable for answers, being decisive, and making decisions based on years of experience. However, the Growth Board forum requires a different approach. It necessitates a switch from a manager mentality to a mentor mentality. The role is not to judge or state opinions, but to help surface business model assumptions, to ask questions, to be open to learning, and to let customer evidence guide decisions.
When kicking off a Growth Board, it helps to gain agreement on how members will treat common project review situations. And when these situations occur, and they will, members must hold each other accountable to the agreed-upon ground rules. Here are some typical review situations:
- The Growth Board is unable to reach a decision due to insufficient or questionable evidence
- The Growth Board is unable to reach a decision because the review surfaces broad strategic issues outside the scope of the project team
- The Growth Board is unable to reach a decision because of differing opinions on investment priorities, evidence strength, or other factors
- A Growth Board member changes his/her mind outside of the meeting
- A project team recommends killing a strategically important project
- A Growth Board member is unable to attend the review. Is it okay to send a delegate?
- A Growth Board member leads discussion into inappropriate detail
Do: Agree on a set of Growth Board decision-making ground rules and hold each other accountable.
Don’t: Revert to decision-making behaviors used when managing the execution-oriented core business. Your behaviors will send the wrong message to project teams who are building the skills to de-risk uncertain new ventures.
Building effective innovation governance is a journey. It requires changes to fully formed mindsets that will make leaders uncomfortable at first. As they build understanding of the capability differences between operating the core business and exploring the future, the pieces will start falling into place. Customer evidence will replace spreadsheet projections, metered funding will replace big bets, and asking questions will replace expressing opinions. Excitement will build as a portfolio of many ideas narrows to a few fully validated solutions ready to scale and the future of the company begins to take shape.
Innovation methods have come a long way in the last decade. Companies now have a methodology and growing toolset appropriate for discovering, validating, and scaling new, disruptive business models. Innovation project governance, the practice wherein company leaders provide strategic direction to project teams, make project funding decisions, and allocate innovation resources, has emerged as one of the most important elements of the innovation system. As Marc Randolph, Netflix Co-Founder points out, scaling a process that empowers teams to create new opportunities is the ultimate accomplishment.