How to Make Lean Work in Large Corporations — Implementing a System Mindset
In a previous article, I did a deep dive into how Lean succeeds in great start-ups and how this success does not always translate in large corporations. Often, these corporations fail because they’re matching Apples to Peaches.
The Lean methodology is driven by internet-age thinking models. It is fluid, fast, and largely free of the rigid, multi-level oversight that underlies the core business processes of large corporations. Successful startups that have applied the methodology admittedly benefit from an agility driven by their small size. But that’s not their only advantage. These organizations are also able to learn quickly and rapidly adjust course as they discover new evidence.
They encourage a learning environment that is driven by a system mindset, which lets them improve between iterations. They are fluid, constantly learning, and producing better products, processes, and ideas. This is an unpredictable environment.
Large corporations cannot very well employ this model throughout their business since it is uncertain — the very thing shareholders and the stock market do not like. Even when they try to leverage on incubators and sprints to generate high-potential ideas, many of these end up dying off, especially when they come into contact with the governance and funding structures of core business processes, or aren’t able to justify the promised ROI.
So, how can large organizations reap the benefits of Lean Startup while learning and iterating rapidly?
The answer is to adopt a system mindset at a portfolio level. Think of new ideas as startups that may or may not deliver on their promise. Just as 90% of startups fail and may not become profitable until 5–7 years, innovation efforts will not always bear fruit immediately.
But just as early-stage VCs understand how to manage startups to profitability and balance their portfolio accordingly as they mature, you should embrace the uncertainty of “loonshots” and fund the continuous learning efforts they demand. And not just in a “let’s throw some money at this and see what comes out” manner, nor with discrete initiatives towards the hottest buzzword technology of the moment either.
It requires a rigorous, structured, and disciplined approach to venture funding and portfolio management, with metrics and measurements throughout the way that will not only help mitigate uncertainty but mainly allow the system to improve on itself.
In this article, I’ll be discussing how this works and how to set it up.
Creating an end-to-end process
The first step for organizations facing the Lean problem is to have an end-to-end process. Your usual product development phase gates need to look a bit more like a continuum from ideation to scale. This allows your process to measure maturity and de-risking levels, not your pre-defined expectations of what your ideas should look like from start to end.
So, instead of assigned milestones to be reached (which only really validates if your previous idea of a milestone was actually reached), you start to classify each venture by their levels of validated learning. Using Innovation Accounting standards, you have key metrics that provide a consistent and evidence-based approach for measuring progress and traction.
These progress levels not only track important deliverables that move the team towards a validated business opportunity, they also create a “common denominator” that allows the board to compare different ventures, evaluate them by risk levels, innovation velocity, opportunity cost, success probability, and other metrics, and make better, data-driven, investment allocation decisions.
It also becomes an indicator of a venture’s maturity and where it sits within your product lifecycle continuum. Now, you’re measuring consistent deliverables throughout projects while maintaining flexibility in approach. This is the first step to start generating metrics at a portfolio level.
Implement a funding process that encourages innovation
This is a second critical component that drives innovation performance: how you allocate money to your innovation ventures. To start, it cannot be done the same way as it is done for every other project in the corporation. It needs a path of its own and I’ll tell you why.
In my article “5 easy metrics to improve your R&D innovation performance and increase short term ROI”, I have shown how adopting a Lean approach to building ventures not only increases your pipeline efficiency by ‘failing projects faster’ but is also the fastest way to increase short-term innovation ROI.
However, from a high-performance innovation standpoint, that’s just scratching the surface. If you maintain traditional funding processes for every new, already highly uncertain, innovation project, you still remain with a very high-risk portfolio. As a matter of fact, this actually increases the overall innovation risk, the exact opposite of what you want in a large organization.
Since budget processes are usually burdensome and often subjective, with a fair amount of corporate politics, organizations typically reduce the number of ideas they would like to see through. By default, they prioritize projects that are believed to have higher chances of success, bigger market opportunity or aligned to strategic corporate goals and present these to the governance board.
This has a number of not-so-great consequences. Not only does this result in various sorts of bias by not using evidence-based data, it also delays time-to-market. Even more importantly, it leads to an increase in the average budget size of projects to justify the amount of effort needed to ask for the budget in the first place.
This then results in a pipeline with fewer projects, of incremental innovation at best, with higher budgets, and very little validation. So even if we do manage to kill one or two bad projects early on, they are still probably costing the company a lot more than necessary. Above all, the budget process initially designed to mitigate risk and increase predictability is now stultifying the entire innovation process and predicting only one thing: that the entire budget is now at unnecessary risk. No wonder a lot of innovation teams are being shut down after Covid-19. They’re not justifiable.
Rather than go through this route, adopt two funding processes instead. Use your traditional funding governance to cater to your core businesses, which will benefit the risk-mitigated, incremental gains that can be derived from established product lines. Then create a second governance process and methodology that supports the patient nurturing of innovation efforts by deploying a tranche investment system (or metered funding) that builds and scales businesses based on metrics that we’ll see up ahead.
Setting up your innovation funding board
The funding board serves as a decision-making forum that selects, funds, and guides early-stage innovation ideas. It provides rapid due diligence to properly evaluate innovation opportunities and identify the ones that are game-changers for your organization.
But it does all this in a supportive climate that supports the exploration of new businesses, crazy ideas, and “loonshots”, while current business continues. There are two important aspects in which IFBs add value to the innovation process:
- Governance: If innovation ideas are like startups, then the IFB is your early-stage Venture Capital fund. It parents new ideas through an oversight process that encourages innovation while applying lean methodologies. Ideas are vetted and scrutinized at pre-established periods to drive accountability and provide the necessary support to nurture winning ideas. This, in turn, increases the speed of innovation through rapid customer-facing “build-test-learn” procedures.
- Funding: Innovation often suffers because of too little or too much funding. The IFB encourages accountability of innovation ventures through limited tranches of funding. Each new tranche is released after evaluating the team’s return based on funding status and learning progress. Utilizing broad-based metrics that track innovation readiness, the IFB tracks innovation ideas as teams conduct iterative experiments and, relying on evidence-based data, makes decisions on them at every formal review stage.
IFBs will typically work together with an innovation process facilitator and innovation venture teams. While the venture teams do the heavy lifting, the facilitator manages and coaches the team and acts as a bridge with the IFB. A suggestion for a good facilitator would be a Business Unit sponsor. Someone that already sees potential in the venture for its own portfolio, supports it from day 1 with mentorship and eventually matches that support with financial commitment along with the IFB.
This culminates in a process that ensures ideas are seamlessly explored from first validations to iterative experiments, and eventually transition to standard governance processes.
Innovation is often a difficult endeavor for any organization. Challenges will arise at every turn, including how to ensure velocity of ideas, quality of ideas, funding decisions, and eventual selection. All of this is expensive and will typically take a lot of time.
But through the processes discussed here, organizations can generate more ideas, rapidly fund, build, test and learn from them, and ultimately identify the best ideas that will drive big results.
In my next article, I will discuss how this is viewed from a portfolio perspective and how metrics, when applied correctly, can improve decision-making on investment allocation, portfolio balance, and, ultimately, allow both more innovative product launches, and with a higher success rate.
At Trimaran, we help organizations understand where their current system may be lacking and how to implement an innovation process that churns out quality opportunities routinely. Contact us for a review of your processes or to discuss how we can help you innovate faster and better.