Does digital transformation require new management or new metrics?

By

Tony Qui

EY Global Transaction Advisory Services, Chief Innovation Officer

Passionate digital leader and innovator transforming companies in disruptive growth through M&A, partnership and JVs. Connector of corporates and start-ups. Proud father of two children.

8 minute read 24 May 2018

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Many big businesses are still struggling to innovate. Is the problem with managers, or the metrics-based management model?

Today, the explosion of digital and data is compelling businesses to innovate in order to compete in the new economy. Visionary CEOs actively inspire and encourage their companies to innovate. Boards are mostly supporting this aim.

But a recent EY survey found most companies are still struggling to innovate effectively, and find themselves trapped in the “theater of innovation”: making a big show of innovating, but failing to deliver anything truly transformative.

The leaders of these companies have the right intentions – they may even have innovative teams and managers that come up with really good ideas. But for most companies, being able to commercialize and scale digital innovation remains a challenge, because of way the traditional management model operates.

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Chapter 1

Fail fast, get fired fast

With the wrong metrics, innovation can be discouraged.

With start-ups, you often hear the phrase “fail fast and learn fast.” That’s how they test, learn, iterate and innovate.

Well, guess what? In most companies, if you fail fast, you will be fired fast. You have targets to hit, you have metrics by which you’ll be measured. Fail to meet expectations? You’re out.

This traditional metrics-based mindset of the current management model is almost perfectly designed to discourage innovation – because to innovate effectively in today’s environment, you have to make a bet. You will hit upon some good ideas, some good products, but you’re not going to hit the bullseye every single time.

This is why, while CEOs and boards may be encouraging digital innovation, the real issue comes when it gets rolled out in the organization, into country P&Ls and service line P&Ls. That’s when the innovation gets squashed – because those senior vice presidents, managing directors, and departmental managers are all still being measured on profitability and growth.

The core problem with today’s business model is it tends to be working to the wrong timescales – the wrong metrics – for measuring and scaling innovation.

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Chapter 2

Failing now to succeed in the future

Keep the ultimate vision in mind.

With today’s unprecedented pace of disruptive change, long-established business models and revenue streams can be overturned in a flash. But many of the world’s most disruptive start-ups have been working on their innovative products, services, and business models for years.

If you look at all of the major innovators of the digital era, almost none of them made money in the first five years. Some of the biggest unicorn start-ups – despite being valued at over $1 billion – are still not profitable after years of operating.

This is because they – and their backers – have made a bet. They invested in a vision. They were developing that vision. They’ve allowed it to grow and experiment. They were testing. They were pivoting. They were working out which products and services would allow them to totally differentiate themselves in the market. They were failing fast and learning from their mistakes – while keeping that ultimate vision firmly in mind.

Small failures that enable an ultimate goal are not failures at all.

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Chapter 3

The time trap of the metrics-based management model

Does a “dual strategy” need to be so elusive?

But where the most disruptive start-ups take a long-term view of success, most established corporates tend to work to relatively short timelines to decide if new approaches are successful at generating a return on investment.

Many leadership teams today are still working to an annual budgeting and review process, based on rigid metrics of revenue targets. They let a project run, and in 12 months they come back and say, “Did it work? Did it make as much money as we expected?” If the answer’s yes, then they set a budget for the next year. If no, projects will often get scrapped altogether.

Some sectors, like pharma, with more established R&D functions, can and do take a longer-term view on product development. But for most industries, this idea that it could take years to see profit on a new product or service line (and that even then it might fail) is simply too daunting. Especially so if upstart new market entrants are threatening established business models, and you’re worried investors will want to see a rapid response to these emerging disruptive threats.

“The biggest challenge for our clients in this changing environment is really having a dual strategy,” says Uschi Shreiber, Global Vice Chair – Markets and Chair of Global Accounts Committee, EY. “So that's about continuing the business as we know it today, while at the same time, already pivoting to the new.” Discover our approach to the helping clients navigate the transformative age and escape the “theater of innovation”:

The current management model of annual (or quarterly) revenue-based reviews creates a dual trap that can lead to innovation failing:

  • First, as we’ve pointed out, digital innovation projects that take too long to prove their profit potential can get scrapped long before they’ve had time to truly blossom and please the corporate powers that be.
  • Second, projects with little potential can continue being funded for far too long – because few managers will be willing to risk being seen to fail by admitting their projects are not going to succeed before the year is up.

There’s incentive to succeed – but no incentive to either take a longer view or be agile.

This is why much of today’s innovation is coming from outside of the big companies. The disruptors are the innovative, small companies, who are able to innovate freely and quickly pivot to new products or new ways of research and development. But – crucially – they also tend to have funding that allows them to think and act outside an annual business cycle.

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Chapter 4

How to measure success in a transformative age

The answer lies in agile project management.

With any digital innovation project, as a chief executive, a board member, or an investor – whatever you’re trialing, whether it’s a new operating model, a new product or new services – you naturally want to see a clear outcome to decide whether to press ahead. But with the pace of today’s technological change, you’ll rarely have the detailed technical knowledge to be able to judge if this is the next big thing, or the next big flop.

In a time of rapid change, you need to be checking in to judge progress more often than simply quarterly or yearly. You need to de-couple innovation evaluation from the annual budgeting cycle and adopt a mentality more like that of agile project management, which has been used so effectively by so many disruptive tech companies to drive their successes.

Rather than focus on arbitrary metrics, based on set targets, timeframes, and projections of profits, businesses instead need to change their focus to understandable outcomes.

If you have clear, outcome-focused milestones, then you’ll be able to make more effective decisions: you can stop a project quickly, help it course-correct, or give it more funding to help it deliver on its promise as quickly as possible.

Some outcomes could be demonstrated in weeks, some in months, some may take over a year. Some outcomes can be measured in hard dollars against the bottom line, some can’t. And every innovation project’s desired outcomes are likely to be different.

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Chapter 5

How to fail for success

The fundamentals remain the same even in a world of change.

To understand your progress towards outcomes, you need to know what questions to ask. When you don’t fully understand the technology, knowing what questions to ask can be daunting. But in practice, it’s pretty simple:

  • What is the problem we are trying to solve? Is it a clear customer need?
  • Is there an obvious differentiator in the market?
  • Are we trialing it with our clients?
  • Is the technology working?
  • Are we gathering market sentiment and feedback?

All of these are traditional measures. The fundamentals are still the same. You’ve got to see evidence, you’ve got to see the proof of whether the idea is going to work or not. You still need to do due diligence to truly realize the value of that business. The only difference is these traditional measures aren’t bound to traditional, set time periods.

And, as with everything – the better the question, the better the answer, and the better the decision on whether this particular project is going to be transformative, or just another short-lived scene in the “theater of innovation.”

EY wavespace is a highly connected global network of growth and innovation centers in some of the most well-recognized innovation cities. Join us at EY wavespace to explore innovative ideas that will help you successfully navigate the Transformative Age.

Summary

Many big businesses are still struggling to innovate. Is the problem with managers, or the metrics-based management model?

About this article

By

Tony Qui

EY Global Transaction Advisory Services, Chief Innovation Officer

Passionate digital leader and innovator transforming companies in disruptive growth through M&A, partnership and JVs. Connector of corporates and start-ups. Proud father of two children.