investiledysfunction

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.

The popular blog on all things technology, TechCrunch, recently had a post on something you don’t typically see on the blog - organic growth.  The entry entitled “Does Google Have an Organic Growth Problem” - discusses an analysis by Citi equity research analyst who argues that Google’s organic growth is decelerating.

It was an interesting post and something we were glad to see given our work on organic growth.  Below are our thoughts on the post and the findings about Google.  We’ve benchmarked and analyzed the entire S&P 500 (of which Google is a member) on organic revenue generation and efficiency over the period from 2003-2007, and our #s reveal a similar story, but the picture still is very positive.

We would agree with Citi’s analysis that the organic revenue as a % of total revenue for Google as well as a % of total revenue growth is declining over the longer period we studied.  As compared to Yahoo (the closest comparable to Google if there is one), we have seen that Google is destroying their peer from an organic revenue perspective.Our analysis goes beyond just organic revenue and looks at the efficiency of generating this organic growth, e.g., how much are companies like Google, Yahoo, etc spending to achieve organic revenue growth.  We call this efficiency ratio the Organic Growth Multiplier (OGM).  The logic behind the OGM is that if one company can spend $1 to get $3 of revenue and another can spend $1 to get $5 of revenue, the latter company is healthier and has more momentum in its business.

When we look at the OGM of Google versus Yahoo and versus the larger S&P500 tech financials category, the picture is actually quite pretty for Google.  They’re tops as it relates to OGM which means a dollar of investment into their core business generates more revenue than the average tech sector company.  They also outshine Yahoo on this count as well.

The indexed OGM for Yahoo and Google over the period from 2003-2007 are 50.9 and 312.84, respectively.  Without getting into the quantitative models that underlie this, the point is that Google’s organic revenue efficiency is far superior to Yahoo.

Most importantly from all this work is that we’ve seen that higher OGM and total shareholder return are positively correlated.  So having the ability to generate organic growth efficiently is a good indicator of shareholder returns.

While the assertion that their organic revenue is declining does remain true, the news is not as dire as I’ve been reading elsewhere from those who’ve picked up on this TechCrunch entry.  Yes, if they can turn one of their acquisitions into a money maker, this will obviously supplement some of the organic revenue deceleration that might be evident in their historical core business, but on the whole Google is still a star when it comes to organic revenue generation and efficiency.  The fact that Citi retains its buy rating despite the organic picture is testament to this.

A bit on the methodology.

There are some notable differences from the Citi analysis which despite the similar conclusions do make our analysis more robust.

1.  We’ve looked at a more extensive time period (2003-2007)
2. We strip out market growth for each company.  In essence, if the market is growing at 10% and your company grows at 10%, we don’t give you credit for this.  This is rising tide growth and is not due to management’s actions and investments in the core business.   Organic revenue, therefore, in our models is only the growth we can attribute to management’s prowess (or lack thereof).
3. In our Organic Growth Multiplier, we also look at the efficiency of generating organic revenue by determining how much is spent by each company to achieve its organic revenue.  This gives a truer sense for the efficiency of the company’s organic revenue capabilities.

Recently, car insurance companies have begun offering insurance rates based on how much you drive and how well you drive - a pay as you go model.  So the more you drive, the more you pay.  If you break abruptly or drive fast, your insurance goes up.  Instead of an actuarial model determining typical behavior for a 18 year old, the companies can now offer more precise pricing and as a result, the responsible 18 year old is rewarded and the aspiring Nascar driver pays more.

This is an innovative way to price insurance and so this got me thinking about the pay as you go model or more generally, pay for behavior models.  Here are some examples of pay as you go models that I appreciate:

1. Google - The old model was advertiser shows ‘impressions’ or ‘views’ and hopes that this translates into desired behavior but never knows.  Google only gets paid when they make a desired behavior happen.
2. ZipCar - This is a great service that lets you rent cars in short increments (a couple of hours) so to do errands around NYC, it’s great.  Why rent a car for the full day when you don’t need it?
3. Yips Chinese - Unless you live in NYC, you prob don’t know Yips but it’s a dive Chinese restaurant chain that sells pretty good Chinese food.  And it sells its food by the pound.  It’s a great concept actually because it seems cheap but they’ve tapped into the “your eyes are bigger than your stomach” phenomenon so every time I’ve gone there expecting to get a deal, I leave having purchased a $13 lunch.

Beyond its current applications, there are probably many other places where pay as you go or pay for performance could work.  Flights for instance?  Should smaller, thinner people pay less?  Presumably, they are lighter as are their clothes/luggage and so they require less jet fuel. The possibilities are endless but the model is a great step forward in many instances of aligning the customer and vendor’s objectives and in incentivizing the appropriate behavior.

I subscribe to several magazines which put out lists of most innovative companies.  They tend to generally have lots of overlap in terms of the companies they profile and generally lack much in the way of creativity and surprises.  Basically, Google Apple, Toyota, etc tend to be towards the top of all the lists and are then followed by the same anecdotes about continuous improvement (Toyota), the cafeterias (Google) and Steve Jobs’ awesome creativity (Apple).  Facebook gets on some of the lists because of their current media darling status. 

They tend to describe innovation as the lifeblood of organizations and other overused terms.  They often profile some up & coming head of R&D at one of the profiled companies and talk about how he or she is shaking up how innovation is done at XYZ company.  In essence, it’s the same article basically reformulated year after year. 

But, amidst all this unoriginality, some points, no matter how often they’re restated, are made which are worthy of repetition.  The best point as articulated by BusinessWeek in their latest list is that “As the recession shifts suddenly from ‘what if’ to ‘how long’, slashing research & development budgets just got a lot more tempting.  That high-risk product in your pipeline?  It’s about to get much more scrutiny…two camps emerge.  ‘One is saying times are tough, so it’s the most important time for us to innovate.  The other is saying ‘we simply don’t have the ability to think about innovation right now’.  There’s a real separation between the innovation haves and have-nots.”

As I’ve stated many times before, innovation is not something you should do when times are good.  It needs to be part of the organization at all times especially during downturns when a solid innovation effort can provide new growth avenues for when times get better.  From a contrarian stock market perspective, why not invest in innovation now?  The Street already has low expectations so why not just go for the gold?  Companies continue to write off billions of dollars and their stock prices go up because people feel the worst is over.  Low expectations are a wonderful thing.

I’d also posit that such times lead to a great deal of innovation from entrepreneurs and startups.  As people get laid off, many who have tucked away some money may look at the time as an opportunity to launch that venture they’d been thinking of.  And in some instances, these upstarts will become threats to big companies in the future.  So for the large, well-capitalized, market-share owning organizations, this is a great time to innovate.  Don’t cut back - invest more.