Business Innovation: Killed by ROI?
Is innovation a strategic, operational or process related activity? If a worker performs a new activity that substantially betters a result is that also innovation? Or is just a new product or entering a new market innovation? Does innovation happen on all levels? Can innovation itself be turned into a process? Is innovation relative, because it changes or replaces an existing product, process or activity with one that produces a more desirable outcome? If a change is judged by immediate quantitative comparison, is it just optimization? Are innovations that never pay off or are more expensive less innovative? Is it only innovation if it converts inventions or ideas into financial success? Are too many innovations killed because they are seen as too risky from a short term financial perspective? Too many questions with books full of answers …
M. Johnson writes in “Seizing the White Space” that too many business innovations falter, because they are being pushed for revenue growth inside the mainstream business before a profitable new working model is established. He says, that before you can accelerate you need to test early if the model is profitable. One must consider profitability before Return On Investment (ROI). Profitability always turns into ROI, but revenue volume doesn’t. ROI is however the number one item that businesses are looking for when they decide upon an investment. A recent HP study about IT projects found that in North America the ROI payback times are expected to be between six and twelve months, or 12 to 24 in Europe. Johnson found that true business innovations take 3-5 years to achieve ROI. I conclude that most ‘innovations with great ROI’ are just quick-fixes heaped upon quick-fixes and at best optimization. A focus on short-term ROI may improve the bottom line, but it DOES NOT enter new markets, drive growth, and improve quality or the competitive edge.
In “The Innovator’s Dilemma” Clayton Christensen dares to say loudly that the risk-averse, financial focus holds large businesses back against cropping up competitors. Accountants hide sunk costs of failed projects in fancy terms such as capital employed to produce ROI on paper because no one wants the write off on their books. An executive who had a failed CRM project on his hands told me that his accountants and financial advisors said that the stockmarket would not favor a $20m write off. So the business was stuck with it AND – even worse – a non-functional CRM.
What is so difficult about innovation? In their successful book “From Business Strategy to IT Action” Benson, Bugnitz, and Walton also target a better bottom line by requesting that IT spending is aligned with business strategy. Not much of an a-ha moment here. However, when executives design a strategy for business innovation, IT must be the driving force! I could not agree more, but innovation needs investment, possible against the grain of return on capital, short term profits, and longer ROI payback times. So the most innovative strategy can be shot down by today’s rigid budgeting process. The disconnect between strategy, operations and process is the culprit. While innovation can’t be automated, switching from fixed budgets to a real-time, goal-focused investment process would create more financial headroom for innovation.
Intuition is more powerful than logic!
As a final clue as to why strategic innovation and ROI might not be compatible, we can step once more into the domain of human decision-making. My long-term claim that human decisions are mostly emotional was recently supported by research discussed in a Havard Business Review article titled: “When Emotional Reasoning Trumps IQ.” In a study a group of managers were asked to contemplate strategic and tactical problems while being brain-scanned by fMRI, to show which areas of the brain are the most active. The YouTube video is not related to the article, but just illustrates the detail of brain activity that can be achieved today. We still know little about what exactly each brain areas does, but also here it is technology that drives innovation.
Surprisingly (not to me), the people who performed best DID NOT rely on the rational, abstract thinking abilities of the prefrontal cortex. They mostly employed the insula (emotional response), the anterior cingulate cortex (emotional memory), and for tactical (execution) problems also the superior temporal sulcus (emotional human interaction). A bit more bluntly put: If the best strategic decisions are not rational, how could they be related to numbers? Great executives use emotional decision-making for strategic-thinking, because they intuitively know that the number games do not predict the future!
One year ago, Financial Times Columnist Stefan Stern asked if old-style business strategy was dead, because how can you have a strategy when there is no way of knowing what the future will bring? Stern said that in times like these (a.k.a. financial crisis) an ‘adaptive’ strategy is needed that needs access to good business data to allow quick reactions. I do not agree, because a strategy is about objectives and principles and not numbers. I propose that a good strategy does not need ‘adaptation’ or changes when the market conditions change. A good strategy provides the business with the resilience to deal with change. Like the strategy employed by the human immune system, where resilience is achieved by white blood cells attacking the baddies directly and not needing a doctor who first analyzes the blood and only then can prescribe some antibiotic that might work or not.
The problem solution is therefore not an ‘adaptive’ strategy based on numbers. Frequent strategy changes make the business lose its focus. A business strategy holds it all together! On the other hand, the tactical, operational hierarchy needs to lose its bureaucracy of long-planning and reporting cycles and empower its knowledge workers with ‘adaptive’ processes’ to free up cashflow for strategic innovations with longer ROI timeframes.
Conclusion: It is rigid, financial planning that suppresses innovation. Long range, strategic innovations are not possible because the ROI payback is considered too long. Even the running costs of unsatisfactory, outdated solutions are considered investments that can’t be written off. IT costs even have to be cut further to make up for sunk costs rather than to provide innovative, empowering technology. Business processes are automated and standardized to avoid risks and write-offs. The only thing that remains flexible is a completely pointless business strategy that is no more than an ad flick for stock market analysts.