The Hindu Business Line : A lever long enough

I recently met a marketing head who complained that none of the bright young brand managers in his team wanted to move into a role of managing new businesses and talked of how “the younger generation was simply not as risk-taking anymore” . The reasons were not quite as simple as he made them out to be. I had a chat with Venugopal, one of the team members who had been moved into the new business role, and who, disgruntled, had asked to be moved back. In brand management, his key result-areas were market share, brand profitability, sales volumes, and so on. When he moved to head new businesses, his performance was evaluated on the same metrics. This was setting him up for failure — new products cannot, by any stretch of imagination, match existing products on these parameters.

Any new product launched by him was expected to be amazingly innovative, change the top line landscape of the organisation and at the same time, contribute to corporate overheads within a year of launch. These are internally inconsistent objectives — truly innovative ideas which are radically new to the market may not gain traction so quickly, and are likely to need support during the diffusion stage. The compensation structure was linked to the performance of his group and it meant that he earned considerably less compared to what he could have in his old role where he had a mature business and a strong brand to manage. The result: the new-business position came to be seen as a career graveyard by the younger managers, whose enthusiasm and energy could have been used best in the role.

The situation could have been avoided by using indicators more suited to new businesses such as new revenue from innovation, time from idea to profit, the health of the pipeline with regard to the number of new horizon ideas, and their quality, and the alignment of the portfolio of objectives to the strategic objectives. Going further, even marginally risky ventures as line extensions of new products in the same business should have a moratorium period in which the new idea is given time to take root in an organisation. The speed with which the plug is pulled on under-performing launches takes its toll on the innovation process, as, over time, cynicism and impatience get hardwired into the system.

It is disturbing that a large number of organisations lack formal processes to sift through the portfolio of ideas thrown up to separate the winning projects from the others. The organisations that do have a process of idea evaluation use a set of metrics with which to judge their products and businesses. The metric is typically a measure of size: sales in marketing companies, gross assets in banks or core sector industries, or a measure of profitability and, quite often, gross margin. In businesses such as infrastructure development or financing, it could be the internal rate of return (IRR). Sometimes these metrics are formally laid down, sometimes they are inferred from what the CEO concentrates on. Whether explicit or not, metrics exist, and profoundly influence decision-making.

In principle, a new business opportunity should be judged by metrics appropriate to that business. It seems quite obvious that a long-gestation business should not be judged by measures such as current year revenues or profits. That’s in theory. In practice, corporate inertia takes over, and the existing metrics are applied almost automatically to the new businesses.

Metrics influence the outcome of an innovation exercise in an organisation. The options get limited by criteria which work well for existing businesses, but may not be the best for a new venture. On the other hand, disruptive innovation, by definition, brings up a dramatically different world view of business models, products and strategic choices. Rarely will these pass the tests that are traditionally applied to a ‘business-as-usual’ product. Could this be the reason why top management rarely sees game-changing ideas making the cut? Wheel, which had a disruptive business model designed by HUL to take on Nirma, would never have been born if it had been judged on the same metrics as was Surf.

For organisations that wish to be disruptive, it is important to explicitly lay out a new, more meaningful set of metrics for new businesses, if any major ideas are to make it past the initial gates. The right set of metrics would provide incentive and guide the new-product team in creating value-adding products or services, act as an early warning system signalling barriers and hurdles to progress, and keep the rest of the organisation aligned about the progress so that seamless coordination is ensured. A one-size-fits-all approach is to be strictly avoided — the effectiveness of the chosen metrics would depend on how well they are customised to the context: the organisational strategy, culture, new business direction, the business model and the drivers of performance. Ultimately, they need to be tied to the compensation of the managers.

Archimedes’ quote describes the power of leverage — properly designed metrics can act as levers which move employees to shift the business to new levels. One way that metrics influence innovation is through the evaluation of new business ideas. The second, and perhaps an equally important way, is how metrics influence managerial attitudes towards innovation. How do you motivate innovation? More on that in the next column.

(Radhika Chadha is a consultant in strategy and innovation and co-author of Innovative India: Insights for the Thinking Manager. Karate-gy is the proprietary name of the strategic exercises conducted by Paradigm Management Knowhow Ltd.)