“Companies should devote R&D to new business models just as they do to new products. A new CEO today will need to preside over a changed business model three or four times in his career, but no one really knows how to do it. It’s not taught in business schools, and there is much to learn about how to manage a workforce that is no longer just within the four walls of an organization”.

AMEN!…and AMEN! This quote by Saul Kaplan, executive director of the Rhode Island Economic Development Corporation, from CFO magazine’s “Gaming the System” article, is fascinating because of the dearth of information in the media about innovation of business models. Almost always, innovation refers to products. My last post dealt with how TopCoder uses freelance competition to code software for it’s clients. Kaplan’s quote was raised in the context of applying the “competitive freelance” concept to other services- in this case freelance “C-level” types who have been through a few business cycles and business model changes.

I see it already in my own work. The idea of going from project to project for seasoned people is nothing new. But it is growing largely because more jobs are becoming information based because of technology that enables them. The question that the article raises is how other services, besides software development, can become competition-based, meaning you complete the assignment before knowing if you “win” the project.

I don’t think the kind of consulting provided by former C-level executives could fit the competitive model used by TopCoder. But I do think that business model innovation can be drastically increased by use of an outsourcing model- in fact, I think that the value of business model innovation is far higher than the value of product innovation. The key is unlocking the ability of the company to look outside of itself and it’s industry for the innovations. A PMO-like organization can facilitate this (refer to my “Choosing the Right PMO Vision Series“), and tapping into the multi-business cycle experience in the marketplace can further enhance it.

How do you manage business model innovation? Do you have a PMO and/or outsourced C-level expertise to assist? What is an example of where your company either increased it’s competitiveness through business model innovation or lost out to a competitor’s innovation?

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Think of a business model where a firm provides services with a global freelance resource base: is it writing? editing? software development? CFO magazine’s article on “Gaming the System” introduces TopCoder, not only as a global freelance software development operation, but one that has participants compete on providing the best code for it’s application work. This is business competition where you have to finish before knowing whether you will be paid or not, because you have to win.

It seems that TopCoder’s success and growth is based on the fact that they were more of a non-business community in the first place where attraction to their “model” was proven out- i.e., coders like to compete and would do it for free. The addition of a monetized-win competitive approach seemed a natural. Also, they actively flesh out their projects with previously built modules and specify “small enough” new modules that they say result in high quality code. They claim that their software development model results in more savings as applications get more complex- interestingly, I didn’t see any client statements to that effect.

CFO asks whether or not this model would work for other types of services that solve organizational problems as economic conditions tighten. More on that in my next post.

What do you think about the quality of work done in an outsourcing, competitive (finish work) environment? Have you seen this business model work in software development? What about other areas?

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A great article in Strategy+Business, “A Blueprint for Strategic Leadership”, concentrates on how to lead innovation. In it the authors emphasize that the best leaders pay a great deal of attention to the design of the elements around them. Seemingly basic, but powerful, things to do are:

1. Articulate purpose,
2. Create effective teams,
3. Prioritize and sequence initiatives, and
4. Redesign the organization to make execution easier.

Apart from revealing the importance of doing the right projects, the article is full of fascinating examples of the deployment of these principles by the best executives; two from the experiences of A.G. Lafley, chief executive of Procter and Gamble, stood out:

1. Moved the divisional presidents’ offices nearer their staffs, converting the old executive space into an employee learning center. This is not only practical but sends a message that they are serious about creating an environment for innovation.

2. Plans careers of top 500 people by reviewing assignments, capabilities, and how he can help them grow. This goes beyond periodic performance reviews to showing a genuine interest in how the organization can help develop the careers of people.

You don’t have to be a CEO to pay attention to the design of the elements around you. How can you incorporate the four “things to do” into your management style?

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A Booz Allen Hamilton survey and report in Strategy+Business (register for free) found NO correlation existed between R&D spend and innovation. It turns out that higher innovation performers spent less but made sure that innovation projects aligned with corporate strategy and paid careful attention to customers. This idea that a company can spend less and innovate more makes sense. Throwing money at innovation processes that are not well organized and/or measured and not serving the customer doesn’t work.

Black and Decker revealed the two key factors related to their innovation success:

1. Strategy alignment- align innovation strategies to corporate strategy.
2. Customer focus- processes are in place to pay close attention to customers from idea generation to product development to marketing.

Although this article tended to focus on product innovation and R&D spending, Black and Decker’s customer focus reveals that business process innovation is often required to coincide with product changes. One example is a strategy project I worked on for a metals distributor where we segmented the customer base a variety of ways to discover which segments were willing to pay for inventory management services. The change in what was being sold and provided affected sales processes, how inventory was managed, frequency of delivery, and ultimately how raw material and components were purchased. This clearly reveals how market based projects can affect internal business processes.

Excellent project management was a key success factor for these high innovators. The authors revealed the “one R&D tactic” used by all high-growth innovators:

“insistence on managing the innovation process from start to finish as tightly as possible…a disciplined stage-by-stage approval process combined with regular measurement of every critical factor, from time and money spent in product development to the success of new products in the market…combined with a strong portfolio management program…”

Sounds like strong project management and project portfolio management are basic preprequisites for successful innovation. What do you think? Does all this apply to a small company?

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Sometimes you get unexpected insights. My post “What’s Harder? Project Management or Management” elicited a wonderfully simple “boxes” analogy from Ren Garcia at Accounting Solver. In it he said:

“In a standard hierarchical corporate organization, you have specializations through boxes (i.e., departments, divisions, sections, etc) identifying finance, marketing, production, human resources, etc. Frequently, the specializations become rigid over time and the boxes neglect to communicate with each other (The managers or heads of boxes are supposed to be doing this, but often neglect).

Consequently, integration of all the functions / tasks / responsibilities within the corporation becomes a difficult process. The entire organization needs to be on the same page and move towards the same goal. What you don’t want to happen is one box (function / task / responsibility) undoing what another box is trying to put together. A classic example is the finance department trying to bring down accounts receivable and the marketing department keeps giving credit…

Projects & Project Management bring together managers and technical / professional staff and is a potent form of integrating an organization that has become too specialized. Without any extra effort at all, boxes (departments / divisions / sections) talk to each other more frequently and productively and get to understand what the other boxes are all about. In a project team, the talk is not all about the project and there can be a lively exchange about non-project issues, including relevant corporate-wide issues.”

Ren’s insights elicited my (mildly edited) response:

“Ren- nice analysis. The boxes analogy helps. I’ve been referring to the divisions as “silos” but “boxes” better aligns with some current thinking about “getting outside the box” related to innovation. Also, I appreciate your view that project management facilitates breaking down the barriers between departments.

One of the first things that one strategy consulting firm does is to simply have all executives present to each other about what all the other departments are doing. This enables executives to do a better job of determining strategies and creates the cooperation necessary to later execute them.”

As I recall Ren had some hesitancy to comment on my blog because he felt a little intimidated by the subject matter. I, of course, knew better and encouraged him to offer his views. Now I need to comment on his because he obviously has a lot to say.

What’s holding you back? I’m sure you have something to offer.

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Fascinating conversation with an executive of an agile software development firm about transformation projects as they compare to lean manufacturing initiatives. Lean transformations have settled into starting with training heavily laced with practical activities. The reason that this is so important is that the approach is NOT intuitive.

Lean requires a person to experience how the concepts can change and increase the value of a process, whether it be software development or manufacturing products. One of the most valuable exercises is the traditional lean manufacturing simulation consisting of 4-5 iterations of improvement to clearly reveal how each lean concept influences results. Many times an executive level version of this simulation kicks off a lean project because of it’s powerful way of revealing the value of lean principles. For more on lean look at the excellent web site www.leanexecutive.com.

The paradigm shift is the most difficult barrier to overcome in both lean and agile. The agile company used to have a client strategy of doing an agile project first followed by a transformation project. The current approach flips the order to start with transformation efforts with “practical” training. It’s remarkable how similar the lean and agile approaches have evolved AND there is much to learn from being a student of both. For example, my post on agile estimating serves the lean community well. As techniques and approaches are proven out in each area, innovative application to the other area should be considered. This is a great example of looking outside the four walls for business process innovation.  

Let me know what you think about how lean and agile compare to each other.

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A recent September 2007 Gartner study titled “Building Agile Manufacturing That Enables Transformation” made several great points:

1. Changing forces in market, customer expectations and technology demand more agility and quickness in business processes.

2.  Using a ”myths” leading to “misses” discussion they challenge people to look outside their environment for innovations saying that people and companies tend to “lock in” to solutions because of tradition and inability to search outside their four walls.

3. ”Chaos-tolerant” business processes are what is needed in the future. Using a technique called capable-to-promise as an example of chaos-tolerant business processes, they say that future technology will enable them.

Capable-to-promise is basically the ability to quickly determine if a customer order is doable by considering both material and capacity constraints simultaneously.

My one disagreement is with the point that chaos-tolerant business processes require whiz bang technology. My experience with a solution in the on-time shipment area reveals that the innovation lies in it’s simplicity, not it’s technology; plus it has the ability to transform information already in current systems to drastically increase the productivity of knowledge workers like planners and master schedulers. It’s lack of whiz bang is what makes this solution so easy to evaluate and implement. The proven value of 20-30% throughput and inventory improvements by eliminating data collection and expediting activities in short-term prioritization efforts is chaos-tolerance at it’s best. 

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Excellent “Strategy+Business” article (free registration required) on “See For Yourself” advice for executives wanting to short circuit innovation cycles; it is a great history on lean/”go and see” origins of Toyota, Wal-Mart and others who have adopted these techniques. The idea of short-circuiting the cycles created by the barriers of multi-level organizations, approval and budgeting processes exists in agile software development and any kind of project environment.

Most projects surface innovations as they drive to satisfy their original intent. Many of these innovations are simply canned because they don’t fit with the original specification. Key projects require an executive level approval to stray from original goals. An executive that watches for, and then “goes and sees” innovation possibilities can short-circuit the change process by confronting the innovation and deciding, then and there, whether or not to assign the project team to analyze, justify and subsequently implement the innovation.

An interesting truth is that most innovations are copied. In the “See For Yourself” article Sam Walton said that all of his innovations were “copied from someone else” meaning other companies or other industries. The key is looking outside of your four walls and then overcoming the hierarchical and process barriers of the organization.

Rueben Slone, Executive VP of Supply Chain for Office Max looks outside his company for innovations. His quote in APICS magazine’s article (sorry, membership required), “Career Essentials: Adept Supply Chain Professionals Help Companies Thrive” caught my attention:

“The difference between a groove and a grave is only the depth.”

He’s speaking about comfort levels and the ability to see beyond the walls of your groove. If you become comfortable in what you are doing to the point of NOT considering new ways of doing it you can lose - your job, your company, and your career. The idea of looking outside your comfort zone, and your company, for innovation is captured in another Slone quote from the same article:

“I think the big opportunity for any executive right on up to the [CEO] is how you inculcate what I call cycles of learning.”

He then goes on to describe outside organizations he belongs to that keep him in a learning and innovation mode. This is great advice for all of us and is the essence of continuous improvement.

Tell me how this changed your thinking. Are you more aware of the potential of your groove becoming your grave?

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I had one of those “you’re messing up” conversations with a person who I have given permission to tell me such things. Miki, who writes Leadership Turn, said that my PMO emphasis seems forced and only for a big company audience. I agreed. The “Office” in PMO seems to conjure up a large group of people running projects. While that may be true, my emphasis has always been how to best set up business processes to execute strategies and bring innovative business processes into a company- any company.

The mechanism to do strategy execution and innovation is what we should be concentrating on, not whether it is a PMO or not. Typically projects are required to improve and change each area. I still believe that the PMO-like processes related to strategy execution and innovation are applicable to every company or entity- they are just smaller scale and probably less formal in smaller organizations. For example, a 2 person consulting firm still has to have a process to determine if a project is going to support a pre-existing strategy. Likewise, the same 2 person firm needs to look outside, do research if you will, to find innovations to potentially apply to their business and create the follow on projects to support the innovations.

Interestingly, most companies miss miserably on executing strategies and innovating because they lack the business processes to support them. Amazingly, the big company rarely sees a PMO as the mechanism to support this and the small company doesn’t formalize a process to get it done.

Tell me about the business processes that you use or have experienced that supports strategy execution and innovation. How are they different from what a PMO would do in a big company?

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