investiledysfunction

Not hearing much talk about corporate innovation these days, eh? Most of the talk is about retrenchment and fortifying and strengthening the core given our economic malaise. Interestingly, when times are good, corporations often assume that the good times will continue so let’s keep doing what we’ve been doing that got us here - essentially fortifying and strengthening the core. Innovation is a bit more talked about in the good times because there is money to spend on it, but it often is just talk.

This focus on fortifying and strengthening the core in the good AND bad times is the Innovation Paradox. Essentially, innovation is often caught in a weird Bermuda Triangle perennially under-appreciated (despite the talk) and under-invested in.

Without going into the appropriate way to structure an innovation effort (the subject of many other potential blog posts), let’s take a look at what finance can do to help.

Finance sits at the nexus of a great deal of information (operating and financial data) within the company. Depending on the nature of your industry, finance can and should provide an understanding into how much of the company’s revenues and profits are coming from products & services launched in the last 1, 3, 5, etc years. Note that the duration will change based on your industry’s dynamics (product life cycles, time to launch, etc) but essentially, the idea is to see how much of your organization’s revenue and profit is coming from innovation. If a heavy majority of the company’s revenue is coming from products & services not launched in the last X years, this is direct evidence of underinvestment in innovation. Remember that what got you here will not get you there.

Please note that there is no ideal percentage for the amount of revenue/profit that is coming from new products & services in a particular year. There is no magic 20% or 40% or other number. It varies. If someone tells you there is, they’re substituting an expedient answer in lieu of the right one.

But with this knowledge, finance can do what it needs to do which is shine the light on the truth. But shining the light on the truth may not be enough as there are often people too busy or too disinterested in seeing these facts. This means, finance should shine the light on the truth and then go and tell everyone about it in the venues they have at their disposal. Make sure people understand that only “2% of our revenue and profit comes from products & services launched in the last 3 years.” They should reinforce this message on a continuous ongoing basis because larger organizations are rarely epiphany driven. They will require a steady stream of facts that hammer on the truth over time. And eventually, someone will say “Ok I get it. This is a problem.”

In doing this, finance should also make clear what is a new product. Tweaking a product’s attributes is not innovation - it is good business. Finance should take a hard line on what is and what is not innovation in arriving at their data and conclusions.

Beyond internal data, finance should also look at what is going on in the external marketplace with startups and the venture capitalists that back them. An industry where large players are not innovating represents a great opportunity for entrepreneurs to step in and solve for inefficiencies and product offering gaps that they see. And these startups do not have millions or billions of dollars in market cap to lose and so they’ll innovate at a more rapid pace and also be able to change directions more nimbly. Access to this information which previously could cost tens of thousands of dollars is available for free now via sources/platforms like ChubbyBrain which is a free database that contains information on 13,000+ startups and over 1000 investors (VCs, angel investors, etc). It will let you understand what is going on in your particular industry in the startup world which can often tangibly demonstrate activities that new entrants are undertaking to disrupt your business. (note: ChubbyBrain is a spin-off from our advisory firm, Brilliont)

This startup activity is a good way to supplement your internal data with what is going on in the external marketplace. Keeping informed on these fronts is also helpful for other groups internally, e.g., business development or corporate development who may be interested in partnering with or even acquiring these upstarts. This is a great way for finance to add value amongst these other groups as well and build relationships in other parts of the organization.

While innovation and the finance function don’t necessarily get associated with one another, the ability of finance to provide dispassionate views into internal and external information is very helpful in creating awareness about innovation (or the lack thereof) that is occurring. And with these efforts, finance can help to play a key role in minimizing the innovation paradox that we so often see organizations trapped in.

I’d previously written and complimented Domino’s Pizza Tracker in a post entitled “Innovative Pizza Technology“.  While skeptical at first, I did find the Pizza Tracker to be a pretty useful little technology.

For the exact opposite in pizza technology, we have Papa John’s Order Online Widget which they’ve created for Facebook.  This technology marvel has 34 users so far.  As Caroline Waxler points out in her Nov 2008 Fast Company article entitled Social Misfits, the widget “lets customer place their order upto 21 days in advance of their preferred delivery date or pickup date and time.”  She goes onto to appropriately state this functionality is great if you just sit back and “Remember that time you got a pizza craving for two weeks from next Tuesday @ 7pm and couldn’t act on it?”

Building a Facebook, iPhone app or using Twitter doesn’t make you current or cool if you’re not doing anything to actually help you enhance your brand and ultimately sell more stuff.  These attempts are just as misguided as the me too social networks which were cropping up regularly but which the current market malaise seems to have squashed a bit.  Technology for technology’s sake, no matter how cool, is a bad investment.  These gizmos must help people actually do something they want to or might be interested in doing and ideally help them do it better.

Here’s the Papa John’s widget.  I’m going to get going now and order a pizza for Nov 23rd now.

As anyone who reads this blog knows, I’m addicted to CNBC in the morning.  It’s an unhealthy habit, but I find the talking heads on CNBC hilarious because of their extreme short-term’ism.  If you watched earlier this week, you got to see tons of folks predicting the bottom based on one day’s good performance.  Where were all these smart people to tell us about the bloody October we were going to have?  Oh wait, these guys are mostly Monday morning quarterbacks.  In any case, it’s a channel for those with A.D.D.  Insights are infrequent but for me, entertainment value is high esp with folks like Joe Kernan and the morning crew who seem to be in on the joke.

In any case, I was watching Donny Deutsch tonite (The Big Idea is one of the best shows on TV so check it out)  and he had Jim Cramer on.  Cramer is a massive personality and for me personally, his picks have done well for me.  On The Big Idea, he was talking about the economy, the market, etc, and it was pessimism to another level.

Per Cramer, those with entrepreneurial ambitions should put them on hold for the next few years.  While a good stock picker, I think this type of generic device is wrong.  What I think Cramer should have said is “Those with entrepreneurial ambitions that are half- or partially-baked should put them on hold forever.”

Per my earlier post on the downturn resulting in smarter startups, having a good idea that solves a real problem will always be in demand.  And being contrarian, e.g., when there is blood in the water, can be exactly the right time to start a business as talent may be cheaper, there may be cheap office space and computers available and you may be competing against a lot less fluff to get attention from partners, the press, etc.

As Warren Buffet says, “Be fearful when others are greedy and be greedy when others are fearful.”

I’m a big fan of P2P lending as my prior post on the topic will demonstrate and so I keep abreast of developments in this arena especially as I believe that this business has some very disruptive possibilities.  The last couple of weeks have seen some interesting developments, notably:

1. The entry of newcomer, Loanio, to the space.  Their pitch doesn’t all that different than Prosper, but I haven’t done much diligence on them so may be I’ll get around to that.  Their website is clean, but browsing a couple of posts, they seem to have a handful of loan requests but not a ton of bidders to this point willing to fund those initiatives.
2. The bigger news of the week is the departure of Zopa from the US market to focus on the UK, Japan and Italy.  While my first instinct was that they chose to avoid the crazy credit markets of the US, it seems they ran into regulatory roadblocks that prevented them from ever getting started.  This is surprising given they seem to have a much more seasoned team and more money than Prosper and Loanio, but I guess stuff happens.

If regulatory reasons were the impediment to them getting started in the USA, it is a shame.  With credit markets tighter now, there may have been an interesting opportunity for players like Prosper, Loanio, Zopa and LendingClub to step up and fill a void as many consumers and small businesses may be finding it difficult to get credit given tightening conditions.

If Zopa is leaving because they couldn’t take the heat in the US “credit kitchen” as some have suggested, this indicates the company has little faith in its risk modeling capabilities.  If you’re only willing to play in a market when you perceive times to be good, that is not much of a business.

Let’s hope it was just regulatory issues.  I hope the rest of the guys will make some inroads during this time and begin to put P2P lending on the map.

I’ve been reading about how Silicon Valley is adjusting to the downturn as it’s a popular topic in many blogs.  Many prominent VCs have issued memos to the CEOs of their portfolio companies telling them to raise more money, control expenses and focus on profitability because things are going to be rough for the foreseeable future.  This is all pretty good advice.  Of course, the sinister, conspiracy theorists amongst those I’ve read feel this is an easy way to instill fear and get better valuations for VCs.  I’m not so skeptical so as to believe this.

But the outcome from this recession/downturn from an entrepreneurship and innovation perspective is going to be positive in my view for 2 reasons:

Reason 1 - As I mentioned in my Part 1 post, there are going to be a lot of unemployed or disillusioned people who say “I’m going to invest in myself instead of getting a job or investing in the stock market”.  These people will pursue new ideas, develop new technologies and will start new companies.  Out of this might emerge a few great companies and many more which will employ people and inspire even more entrepreneurs.

Reason 2 - This shakeout is going to get rid of a lot of crap ideas and companies.  There is no other way to say this.  Many of the “me too”  social networks or “iPhone/Facebook app” developers hoping to generate a userbase that they’d one day magically figure out how to ‘monetize’ may not make it.  They won’t make it not because they don’t have a cool idea that is fun and even potentially useful, but because many of these businesses were “built to flip” as a friend of mine at a prominent Sand Hill Road VC once commented.  And so they were never predicated on a real business model that could bring in more revenue than the dollars they spend.  This is a risky proposition and unfortunately, and such businesses don’t allow you to make it up in volume.

And while some of these ideas were marginally useful or fun as I mentioned, I also don’t know if they were solving real problems, e.g., building stuff that people really needed or finding a better way to do something that enough people cared about.

So what we’ll see in my estimation is the bar will get raised and better ideas will emerge and a new crop of more well-conceived startups will come forward.  With VC funding tightening up, entrepreneurs will need to do this.  Things that solve really big problems and that are built with an eye towards becoming sustainable businesses which are lean, mean and profitable are what will come into vogue.  A dollar and a dream may not be enough but a dollar, a dream and some serious discipline will be required.

In essence, for every Facebook, there will be many others that don’t have the backing to make it through the next several years.  And honestly, even if they did, being the social network for ex-convicts was never going to be that big (sorry guys).  I do think that many of these smart people who don’t make it out of this cycle will come back with better, tighter, more refined ideas the next time around, and this type of cycle is healthy.  Of course, this all only holds until the next bubble.

With technology development becoming cheap, it seems everyone is churning out a new web application (or app for the cooler amongst you).  And to be honest, most of them are cr^p.  Beyond the web app, it is now requisite soon thereafter to develop a Facebook and iPhone app as well.  The underlying premise behind this is I presume is that if you make a cr^ppy application ubiquitous, people will somehow like it.  This is from the same school of thought as a startup I once worked for called Kozmo.com which lost money on every order but figured they’d make it up in volume.  The logic is warped but who needs logic?  I certainly didn’t when I was at Kozmo.

So what’s wrong with this?

In some instances, nothing is wrong with the lack of logic.  When it’s a couple of guys in their dorm room or garage who are putting things together, this is fine because the opportunity cost to them of spending time on this is probably a few less games on their X-box.  These guys are tinkerers, and this is actually a great thing which should be encouraged.  My money is on the fact that they’ll learn some stuff and keep rolling it into bigger and better ideas down the road.

The problem is with those ideas that raise some money or that a founder or two go “all in” on which have no business model and/or where they are addressing a problem that is just way too small, e.g., the market opportunity is not that big or already way too crowded.  Any number of social networks, iPhone or Facebook apps or software as a service/cloud computing, etc upstarts today fall into one or multiple of these traps.

And then sometimes, you come across an idea that is exceedingly simple but which captures your attention and might even have an outside chance of becoming something of some scale (even though the business model may be a bit uncertain today).    In this camp is a new company called Sidetaker.

1. A husband or wife (or boyfriend/girlfriend) posts a complaint they have with their significant other
2. An email goes to the significant other for them to respond
3. After they have responded, the public weighs in with advice, commentary, etc.

So for example, wife puts up a post about how husband fails to put down the toilet seat.  Husband responds and then the public weighs in with advice or commentary.  It can range from ideas that have worked for others in similar situations to making fun of the neanderthal husband.

At this point, the site is focused on getting people to put up their sides, but they do offer some digital ebooks on marrying millionaires, relationships, etc which those coming to the site might enjoy and which might make some money for the Sidetaker team.  It seems they’ve thought of some ideas to monetize (remember that word) the traffic they’re getting but of course, the first goal will be to generate a community of SideTakers.

This taps into a need people have that will never end and which uses technology intelligently and elegantly to solve.

• People have problem in their relationships
• Others love to give advice
• Being a voyeur into someone else’s life is very popular (especially on the web)

The one deficiency is that this concept is not too hard to replicate, but people said the same for Craig’s List and they’ve doing well despite efforts by eBay, Google, Yahoo, etc to unseat them.

At some point, Sidetaker can take all their user-generated advice and become the WebMD of relationships or the goto place for online marriage counseling (a multi-billion industry based on the # of relationship self-help books and marriage counseling providers out there).  Of course, the site might just be a fun diversion for its founders, but here is one web app that I think could go somewhere with the right focus.  Time will tell.

When working with clients and helping them set up their innovation efforts, there is invariably a checkpoint with the in-house counsel (lawyers) especially in the largest firms.  And when the innovation efforts involve, as they should, getting ideas from around the organization, the legal teams often put together legalese which effectively says that anything that people within the organization come up with (ideas, prototypes, etc) is the intellectual property of the firm - no ifs, ands or buts.  Most of the times, people might not even read these terms & conditions before submitting so the company may think it’s not a big deal, but people who really have good ideas will read these because they’re smart.

And so while we sympathize with and understand the need for protecting oneself, the simple fact is that this legalese often goes too far and so becomes counterproductive to fostering innovation.  I’ll explain first what we’ve seen and then share examples of how Cisco and P&G handle this and the results.

The logic for not putting these legal shackles on idea generators is pretty simple.  In its worst form, people with really good ideas will not submit them.  Or another troubling consequence is they’ll be demotivated after they do.  Or perhaps they’ll leave.

In one instance at a client, we knew a very smart mid-level executive with a great idea (and awesome potential) who didn’t submit his idea.  His response when asked why:

“Why would I?  The odds are that the company is not going to select it, but because the intellectual property is owned by the company, I can’t do anything with it down the road.  And even if they do and make a lot of money off of it, I won’t get credit because I may not get to work on it or some senior person will own it.  And I’m not giving a multi-million dollar idea for a pathetic extra $10k in my bonus.”

This sentence may make someone in the General Counsel’s office smile.  For those who are corporate drones, you may also feel that this person is being selfish and not doing what is in the best interest of the organization.  But for managers and executives living in reality and seeking innovation, this should make you cringe.  Why?

• You lost out on a potentially good idea
• The organization’s ability to select good ideas is being questioned
• You’ll likely lose this entrepreneur (intrapreneur as we’ve heard them called) at some point because they’re demotivated
• You’re rewards (recognition and financial in this case) are not aligned with self-interest of individuals submitting ideas

None of the above is good.  Sure you may have lots of other ideas that did get submitted, but you’re not interested in the volume of ideas.  You’re interested in the “goodness” of a few ideas in most cases.

So how do you try to solve this innovation trap?  It requires being open first and foremost.  With all the talk these days of open innovation and collaboration, this type of legal heavy-handedness is counter to such efforts.  It also requires you to consider what will make your best people develop and submit their best ideas.  This comes down to “enlightened self-interest”.  Your best innovators want something in return.  There is NOTHING wrong with this.  You scratch my back and I’ll scratch yours is what this is about.  Anyone who is just doing things out of the kindness of their hearts is not someone capable of coming up with good ideas - they’re just fools most likely.  The best people are interested in recognition, money, status, power, flexibility, freedom, access or any combination of these - and sometimes they want all of them.

So how do you appeal to people’s enlightened self-interest?  Let’s explore how three very innovative companies have done this - P&G, Cisco and Google.  Interestingly, they all do this in different ways.

P&G lets idea submitters take ownership in the ideas they submit.  This means they not only can work on the ideas but if the idea does very well, they can be rewarded for it as owners.  This lets you be an entrepreneur within a large company setting.  This is something that people with the entrepreneurial itch find difficult in large organizations but P&G’s program helps foster this.

Cisco lets some of its best people get absurdly rich to keep them by developing “spin-ins”.  To keep his star salespeople and engineers after some mass layoffs, John Chambers, CEO, did the following according to Forbes Magazine.  “Soon after the mass layoffs a few star Cisco players, who might otherwise have left, were given $84 million to start a data storage firm called Andiamo.  The company grew to about 300 employees in a year, at which point Cisco, its only customer, agreed to buy the company for $750 million.”

They did this again in August 2006 when they backed Nuova with $50 million and then bought them in April ‘08 for $678 million.

This isn’t to say spin-ins are without their perils as former Cisco employee Jayshree Ullal alludes to. “Spin-ins are a creative model to accelerate innovation and bring in engineers you couldn’t normally recruit - and financial gains go to entrepreneurs, not venture capitalists.  It’s a nightmare when the guy in the next cubicle is a multimillionaire and you aren’t, because you weren’t chosen.”  (quote from Forbes)

Like any effort in the corporate world, not everyone will be happy.  But if such efforts can foster innovation and push the company in new growth areas they weren’t in before, these hurt feelings may just be a natural and required consequence to achieve an end-goal.

Yet another way to foster entrepreneurship within an organization is Google’s Founders Awards.  Per the New York Times, “The first two Founders’ Awards consisted of restricted stock that was worth $12 million stock when it was awarded last November to two teams of a dozen or so employees each.”

So even when there may not be as much upside in Google’s stock, employees can get paid handsomely for making innovation and entrepreneurship happen.

Moral of the story:  Control your lawyers and ensure you’re appealing to your employees enlightened self-interests.

David Hasselhoff has started a social network.  I will let those words sink in for a bit before I move on….

Okay here goes.

He talks about it on his website.  In Brilliont’s Top 10 Un-Commandments of Innovation, we talk about things corporations should not do as they go after innovation.  Without the authority to do so, I’m adding an 11th.

11th Un-Commandment of Innovation - If David Hasselhoff is doing it, it’s time to think of something else.

When growing up, I was a fan of Knight Rider, but is this is a sign that this whole social networking thing is going just a bit too far?  On his website, Hasselhoff (herein referred to as The Hoff) writes about Hoffspace as follows.  I’m unable to detect irony in any of the below so I assume he is serious.

In my travels round the world I have always been surprised that no matter where I go people recognize and know me, from Europe, Australia and India to the Philippines and the Zulu Nation in South Africa. This got me thinking… I realized that while two people from two entirely different countries and backgrounds may seem to have nothing in common, the only thing they might have in common is me… So I decided to start a network where people from across the world might come together and get a conversation started over me. Where it will lead, I don’t know but the world would be a better place if everyone talked a little more to each other…

So here is HoffSpace. There are videos and photos of the adventures of my life (THAT NO ONE ELSE GETS TO SEE) and also from the lives of other members. Read the discussions or start a forum on a topic that interests you. Check out Hoff TV, where I go live often. Chat with other members from around the world and make friends. Design your own home page. Add music and share your lives with others. Send me the weird, wonderful and wacky things that are happening in your life. Tell me the stories of how you are making a difference in your life and, if you need my help, ask… One man or woman CAN make a difference…

That not crazy enough for you?  Well, as of today, there are 14,217 members of Hoffspace.  Facebook, MySpace and LinkedIn needn’t worry.  That is 14,216 more than I would have expected, but who knew?

In all seriousness, perhaps the craziest part of all this is that The Hoff’s social network will likely do better than many of the new half-brained ones being launched today dubbing themselves the next Facebook, LinkedIn, MySpace.  (Read my colleague’s post on one such perpetrator, TalkBizNow by clicking here).  That said, the verdict is out on whether even these big boys of social networking really have a business.

While it won’t be valued at billions of dollars, HoffSpace will allow rabid fans of The Hoff to follow him in his exploits and let him sell more t-shirts, shot glasses, autographed pics and other assorted items to his fanbase.  The Hoff has this base and has actually figured out a way to tap into it.  Other social networks which are emerging don’t have this base and because of the network effects required for a social network, they will likely crash and burn quicker than you can say Baywatch.

For corporations, what does The Hoff’s emergence on the social networking scene really mean?  The one thing I’d take away from this is that before some innovation consultant tells you to start a social network for your customers or employees, ensure your customers or employees are engaged and care enough about you to join your social network.   In essence, does your company pass The Hoff test which is “Could you realistically get 14,217 people to your company’s social network interacting on a regular basis and doing something meaningful which strengthens your relationship with them?”  If you’re not sure or the answer is no, move on to another, better idea and leave the social networking to Facebook, LinkedIn and The Hoff.

I was at a Wegmans, a regional supermarket chain, in NJ earlier today and noticed a small touch which made an impression.  They have checkout lanes which are marked “No Candy Lanes”.

Companies spend significant effort attracting new customers and often try lavish loyalty programs, but sometimes, its little gestures that show you understand your customers that make a real impression.  For all those parents who now don’t have to worry about their children begging for candy at checkout, Wegmans has made grocery shopping a bit more pleasant.  And all of this by some simple signs above the checkout lines.

My wife and I just ordered Dominos for the first time in a long time.  Blame it on laziness and a desire to eat empty unhealthy calories occasionally.  In true New Yorker fashion, we’ve also chosen to have our pizza delivered even though it would only take 5 minutes to walk and get it.

To take things even easier, Dominos now lets you order online.  This removes the need to call and wait on the phone.  It also lets me basically continue to work as the process is pretty easy.

After ordering, the pizza technology and innovation go a bit crazy with Dominos Pizza Tracker.  As the name implies, this lets you track your pizza.  When I first saw this, I thought, this is ridiculous.  But the Tracker is strangely compelling.  I like to know that Lorenzo started making my pizza at 859pm and when it goes out the door so I know when it is likely reach me.  This lets me plan my time better (I can do errands, make some phone calls, etc).  The pizza tracker just made delivery a bit more convenient if that was even possible.  Nice job Dominos on the innovation front and your use of technology to make your customers lives easier.

One note of caution - please don’t start a social network for pizza lovers and screw things up now.