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.

We’ve seen Kraft, P&G, Pernod and many other companies in the recent past get on the organic growth bandwagon as they’ve also realized it is the least risky and most coveted by investors.  Our analysis of organic growth efficiency of the S&P 500 over the period from 2002-2007 actually reveals that companies with higher organic growth efficiencies also are rewarded with better shareholder returns.

To that list of the enlightened, let’s add Wells Fargo.  John Stumpf, Wells Fargo’s CEO, states this in no uncertain terms in the August 25th issue of the Financial Times when questioned about doing a mega-deal.  He states, “We don’t need to do a deal.  Organic growth is the core growth engine in this company.”

He later added, “We come from a culture where bigger is not better.  You get bigger by being better, you don’t get better by being bigger.”

Mr. Stumpf hits on organic growth in a practical way and also rightfully disparages the size matters credo which has especially infested financial services.  That said, Wells Fargo is no stranger to acquisitions, but it has tended to do smaller, regional deals which it can fold in to existing operations.

The increasing push and discussion around organic growth is one that we find heartening.  If companies invest in measures to improve their organic growth capabilities, we’ve seen that the numbers paint a very good story.

Fortune’s March 17 issue contains an excerpt from a book entitled The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation which is by P&G CEO, A.G. Lafley, and management consultant, Ram Charan, which has a couple of passages which are brilliont (nice, eh?). Before I share Lafley’s awesome insights, it is worth looking at P&G’s stock chart since he took over in 2001. So take a look at the chart below and notice the stocks dismal to pathetic performance until 2001 and then look at when Lafley took over. That is some chart, eh? So how did he do it?

Organic Growth

“We made sustainable organic growth the priority. Organic growth is less risky than acquired growth and more highly valued by investors…Adding a few points in market share can mean hundreds of millions in new revenue.”

Instead of chasing inorganic growth through M&A, Lafley astutely realized that optimizing their portfolio of internal investments in product development, marketing, etc could drive significant value in a much less risky. And the price chart shows the fruits of this effort. This really is one of the best examples I’ve seen of the power of organic growth and the fact that it works. Managing your investments as part of a corporate portfolio really drives performance.

On Innovation

“Long known for a preference to do everything in-house, we began to seek out innovation from any and all sources. Innovation is all about connection, so get everyone we can involved: P&Gers past and present, customers, suppliers, even competitors. The more connections, the more ideas; the more ideas, the more solutions. And because what gets measured gets managed, we established a goal of that half of new-product and technology innovations have some contribution from outside P&G - such as licensing or buying a technology, finding a partner, or making an acquisition. We are already beyond that figure, compared with 15% in 2000.”

I’m really beginning to like this Lafley guy. On the topic of innovation, he hits on so many key elements of innovation and the best part he actually did this in his organization - didn’t theorize or pontificate on it. Let’s dissect his most brilliont points.

• Set goals and measure it - Innovation doesn’t happen. And proclamations about innovation are just that - proclamations. You have to set goals and put them into people’s objectives and then make sure they are achieved. They did this.
• We’re not the smartest guys in the world - Innovation doesn’t happen because the top 10 people in the company think of an idea and go do it. There is no monopoly on ideas. And so opening up the organization and being receptive to ideas from everywhere is smart business.

I hope to meet Mr. Lafley at some point. In the meantime, I’ll settle for his book. For more info on the book, check out it’s Amazon listing by clicking here.

I’ve spent the last bit going through an old issue of the McKinsey Quarterly hence my second post on an article from them.  This article is titled “The Granularity of Growth” and is authored by Mehrdad Baghai, Sven Smit and S. Patrick Viguerie and is in their issue #2 in 2007. 

Unlike my prior post on the McKinsey M&A article which contradicted itself, this one has an underlying premise/approach which is sound and actually quite useful.  Unfortunately, the results are completely unbelievable and 100% contrary to our own very similar research.

First, let’s discuss the portion that makes some sense - the methodology.  Revenue is disaggregated into its three components: revenue from market growth in segments in which it competes, revenue gained through M&A and the revenue gained/lost through market share gain or loss which is effectively organic growth.  So breaking up revenue into its components makes total and complete sense.  Companies spend a ton of effort understanding expenses but the revenue side is often not as carefully studied or broken down.  Their methodology is fairly sound, but I’d recommend breaking up the organic component into revenue attrition (customers who leave or who are asked to leave the franchise) and organic revenue growth (for example, revenue from new customers to the organization or gained through deepening relationships with existing customers). 

I actually utilize this method in my recent article in Business Finance Magazine entitled “The Care and Feeding of Plus-Sized Portfolios.” (To see a .pdf of the article as it appeared in the magazine, click the following link to download the article.  Download business_finance_magazine_article_anand_sanwal_corporate_portfolio_management.pdf) 

With a sound methodology in place, the authors disaggregate revenue to deliver their findings as follows:

• “A company’s growth is largely driven by market growth in the industry segments where it competes and by the revenues it gains through mergers & acquisitions”
• “These two elements explain nearly 80% of the growth differences among the companies we studied.”
• “Whether a company gains or loses market share - the third element of corporate growth - explains only 20% of the difference.”

They conclude that “executives ought to complement the traditional focus on execution and market share with more attention to where a company is - and should be - competing.”  They in the sentences prior also comment that “although good execution is essential for defending market share in fiercely contested markets and thus for capitalizing on the corporate portfolio’s full-market-growth potential, it is usually not the key differentiator between companies that are growing quickly and those that are growing too slowly.”

Here is where I disagree quite vehemently.  First and foremost, the hint that execution maybe less important strikes is a half-baked idea.  Also, from an analytical, data-driven perspective, we’ve completed a similar study which found that companies that control attrition and grow organically (both functions of resource allocation and the management of the corporate portfolio) actually outperform their peers on a shareholder returns basis.  Our findings reveal that not all dollars of top line growth are created equal and that in fact, the market favors a dollar of organic growth more than one from M&A.  Part of the discount for M&A revenue maybe that it is risky.  Look at the history of M&A deals and it is obvious they are inherently and highly uncertain. 

What about the market growth piece you might ask?  As I speak about in the aforementiond article, “Market growth in the near term is really not under an organization’s control. If you happen to be in an industry growing at double-digit rates, good for you. Conversely, if you are in an industry that is growing at a slow rate or even shrinking, too bad. The short of it in either case is that there is not much you can do in the immediate term to juice market growth.”

The short of it is that portfolio repositioning strategies are sexy as is M&A, but both are uncertain, costly and time-consuming.  To deliver better returns, the component of growth most under an organization’s control is what should be optimized and that is organic growth.  Furthermore, the organic growth can come from a variety of sources including from existing customers as well as the creation of new services & products through innovation.  It is likely that these are more controllable and hence the value per unit of risk that is possible is higher.  Companies like AmEx and P&G have realized this and continue to be rewarded by the market for this. 

Execution matters the most and drives the most important lever of revenue growth - organic.  M&A is a miserable way to grow revenue and portfolio positioning, while important takes time and is not something that can be changed quickly.  Additionally, positioning your portfolio in higher growth segments also means you will compete with others head on who’ve also realized the growth in this segment.