E250 | From Failure To Success: Getting Innovation Right with Alex Osterwalder
How do you manage your metrics around innovation? How much investment do you need to put into innovation as a mature business? How do you give people the time and structure needed to innovate in your business? This week we asked one of the most influential strategy and innovation experts to come back to The Melting Pot to answer these and some other questions about innovation.
Founder and CEO of Strategyzer, Alex Osterwalder reckons that seven out of ten projects that you start within your business need to be killed. And maybe one in ten of your innovation projects is a go, but you’re going to need to build a portfolio of maybe 50 live projects that are at any one time to get enough innovation going in your business to make a material change, to get a return on your investment. He also introduced us to the concept of AKIs (Aspirations and Key Insights) – as opposed to Objectives and Key Results – for innovation teams not to produce results, but key insights to understand whether they should kill, iterate or scale a product.
Fantastic conversation with Alex. If you’re in the innovation arena, this is a must-listen for you.
Download and listen to learn more.
On today’s podcast:
- What’s the ideal innovation team
- How and when to kill your innovation ‘zombie projects’
- How to ‘fail faster’ in innovation
- Getting the best ROI
- AKIs (Aspirations and Key Insights) vs OKRs (Objectives and Key Results)
Follow Alex Osterwalder:
How To Build A Successful Innovation Process in Your Business
Alex Osterwalder is the founder & CEO of Strategyzer and one of the world’s most influential strategy and innovation experts. A leading author, entrepreneur, and in-demand speaker, his work has changed the way established companies do business and how new ventures get started.
Ranked no. 4 of the top 50 management thinkers worldwide and a visiting professor at IMD, Alex is known for simplifying the strategy development process and turning complex concepts into digestible visual models. Together with Yves Pigneur, he invented the Business Model Canvas, Value Proposition Canvas, and Business Portfolio Map – practical tools that are trusted by millions of business practitioners from leading global companies, including Microsoft, Coca-Cola, Nestlé, Mastercard, Sony, Fujitsu, 3M, Intel, Roche, Colgate-Palmolive, and many more.
Strategyzer is an innovation powerhouse, providing online courses, applications, and technology-enabled services to help organizations effectively and systematically manage strategy, growth, and transformation.
He holds the Strategy Award from Thinkers50 and the European Union’s inaugural Innovation Luminary Award. In 2019, Osterwalder chaired the prestigious Drucker Forum, the premiere annual business management conference. A frequent and popular keynote speaker, Alex travels the world discussing his ideas and strategies at Fortune 500 companies, premiere innovation conferences, and leading universities.
Why Strategizer doesn’t work with startups
Alex’s company, Strategizer helps established companies worldwide build innovation engines, whilst creating tools for every business person on the planet, from startups to the most senior leaders in the largest companies on the planet.
However, Alex says anyone, from startups to established businesses can use their tools. One of their conceptual tools, for example, the strategic management tool, does one thing and it does it really well: it describes a company’s business model or a person’s idea of what they want to build their company around. For startups, you have an idea of a business model, or you’re looking for it. If you’re an established company, you already have one. But, as a company, they work with established businesses because it’s’ more lucrative. That’s their starting point, he says.
“Our vision is to start from the top a little bit like Tesla started with expensive cars, and then they go downwards. So as a business, we start with acquiring big customers and then ultimately we’re going to democratise the tools in our Strategizer platform for small, medium-sized companies and startups.”
So that’s the way forward, because the tools are for everybody, for every single business person. But the most lucrative market where they can actually start building a business model is large companies.
Alex’s favourite success tale
One of Alex’s favourite stories of success using his toolbox isn’t actually from an established business. Instead, he talks about the student project, Owtlet, that participated in the International Business Model competition, where he was a judge along with Steve Blank. They didn’t show up to show their idea and how brilliant it was. Instead, they showed the journey of testing and iterating that idea, and turning it into value propositions and a business model that could work.
“Today this is a company that is publicly listed over a billion dollar worth, and it’s a really nice journey of how they systematically derisked their idea, actually adapted their idea and that really worked out. And of course, it’s not just the tools in the process. It was a brilliant management team as well. Tools are just tools, you still need really, really good people to use those tools well.”
The ideal team size
For Alex, whether you’re a startup, an innovation team, or a corporate venture team, when you start, the team should be very small (from one to three people). Three is actually the ideal size, says Alex. And what you need is a diverse group of people.
“I think creativity is overweighted. You actually don’t need a lot of creative people, you need people who, if you want the driver is the entrepreneur. Entrepreneur is somebody who can see patterns in the data that others can’t, they can look at and find that opportunity.”
You need people who can see something others can’t. But then, for any innovator or entrepreneur, what is really important – and that quality could be in the same person or somebody else in the team- is being relentless and not getting tired. You have to overcome every single obstacle. So, it’s this idea that you just don’t give up for a very long time until you can’t anymore because you ran out of money.
“And in corporations, sometimes you should cut the money because we have all these zombie projects. But that team with these mixed skills, rarely in one person, more in two or three is extremely important and really the executor, not in the sense of executing a plan, but keeping people on track to not get distracted. Focus is everything in entrepreneurship and innovation, because there’s so much you could do, but you have to go towards something that can work.”
When to kill your ‘zombie projects’
When he speaks at a conference, Alex asks the audience ‘how many of you are talking about zombie projects? He then asks, ‘How many of you have projects in innovation that you know should be killed?’. Every hand goes up – at least 60 or 70%. So, why?
“It’s not because these are not smart people, but it’s because, number one, we don’t want to show failure, so we keep on going. Number two, we believe we’re going to pivot ourselves to success. So if we just search long enough, we’re ultimately going to get there. And number three, the metrics are broken to really kill these projects.”
This is something we can do today based on very clear metrics, says Alex. And those metrics simply don’t exist in the innovation space today. So many projects still get funding because we don’t really know when to let them live and when to let them die. But this should not be the case because we now know how to evaluate innovation projects.
“So we’ve actually, in some companies, one of the big pharma companies, we introduced a kill rate, and killing sounds brutal, right? So our friend at Bosch UVA Kirschner likes to say, ‘successfully retire’. So you need to retire nine out of ten projects because only one is probably going to succeed. And you need to do that in a structured kind of way with the process.”
Learning from failure in innovation
People don’t want to recognise failure. From an innovation perspective, the focus shouldn’t be on failure, but on the learning that occurs from it. We now know that this didn’t work, and that’s actually a positive result.
“Failure is never the goal. Nobody wants to fail. But failure is an inevitable side consequence of innovation. It’s the flip side. You just can’t innovate without having a lot of failure. It’s not the goal. But in innovation, what do you do? You do a lot of things. You experiment, and success will emerge.”
So, you will let ten teams run, and the best teams and ideas will emerge. In innovation, you don’t pick ideas. The best ideas and teams emerge. So you need to accept there will be failure. You need to actually encourage being bold, and bold exploration with the right process, so we can manage resource allocation in a way that failure is not expensive. And that’s why we say fail fast, adds Alex.
“And failure is a good thing. In innovation, it’s going to happen. But the processes haven’t changed. So if people acknowledge it’s part of innovation, they haven’t changed the processes and the culture well enough to actually embrace that aspect of innovation, that you will fail and you will fail a lot. Only a few companies really have that in the DNA of their company.”
How to fail fast in innovation
When you start the innovation process you don’t even need money, says Alex. People usually say they need money to build an MVP, for example. But, Alex’s response to that is don’t build anything in your first sprint. He calls this a discovery sprint, where your only task with a small team is to invest time to figure out the customers’ job, pains and gains. You can do that with very cheap experiments that require little money. Then, you ask the teams to come back with evidence of those jobs, pains and gains that exist. If they don’t have any evidence, the project is dead. And, should you want to extend the project, you need a very good reason for it.
“But the most important is expectations management. Teams need to know what to show after three months. Not a PowerPoint deck, not an Excel spreadsheet, but evidence. So you make the evidence shine. Not the idea, the evidence that supports your idea.”
Here’s an example:
“You’ve talked to 100 potential customers, and 80 said “I’m struggling with this every day, and I have the money, but there is no solution. I have a budget. There’s no solution. If 80 out of 100 said that, then you need to go a little bit deeper. Now you’re going to make some experiments. For example, they can sign a letter of intent. If you’re in B2B, they can make a down payment. So you need to get stronger evidence. We talk about light evidence: ‘people said’, and strong evidence, ‘call to action’. They did something where there’s more skin in the game. This is what we use in our innovation metrics, stronger and stronger evidence over the time of the exploration of the idea. So interviews are not enough, it’s a great start, not enough.”
Alex argues that three months is a great initial sprint to get customer evidence. Then, you kill at least 50% of the projects –ideally 70%. So, you only allow 30% to get to the next level. Then, you give those three teams out of the initial ten, six months and some money to build a minimal viable product, or do some more expensive experiments to get stronger evidence.
“After six months you reduce the three teams to one. So the best team and idea bubble up. And that’s what we call a portfolio. It’s like venture capital from seed stage to a series AV. You do that inside the company, and you do it really fast.”
Building the product: inside or outside the company?
If your business has a very strong immune system, your company’s ‘antibodies’ are going to kill any idea that’s not going to work. So, for Alex, what you need is something that is outside, more in the cultural sense than the processes. For instance, if you’re working on a new product that’s going to live in the same business model, same business unit, and PNL, there needs to be a strong engagement of the leaders from that profit and loss statement from that business unit. If they’re not, they’re going to kill it.
“So that’s how you keep the integration between the core and the innovation. Now, if we’re talking business model innovation, then it needs to be very separate, and the CEO needs to give new business models legitimacy and create new PNLs. We see tons of companies that explore ideas and have wonderful evidence, and then they don’t scale it because it doesn’t neatly fit into somebody’s PNL. Even worse, sometimes it cannibalises somebody’s PNL.”
You need to have the Amazon mindset where you’re willing to create a completely new PNL arena around Amazon Web services. Everybody said, ‘no Amazon, you’re a retailer, don’t do this’. It turns out it’s now the most profitable part of their business. That’s long-term thinking, creating new business units, new PNLs that have a lot of potential but still somehow integrate with the core, adds Alex.
Getting better ROI from your investment
Alex says that, in companies, the key to success is not being smarter in picking, but having a lot more assets.
“Leaders say, I need 10 million, 100 million or a billion for this to move the needle. But here’s the thing, they frame it the wrong way. They say, ‘I need this project to create 10 million or 100 million new revenues.’ What they need to say is I need to build a portfolio where the likelihood of a $10 million business or $100 million business or billion dollar business emerging is very high.”
So you invest in a portfolio, not in a project. In exploit, running your business, you invest in projects, you think a lot, you invest, build a new factory supply chain, and you expand. It’s predictable. In innovation, it’s not predictable because uncertainty is high. So you diversify your risk, and you invest in several projects. Now the detail here is the bigger the return you want and the more radical the innovation, the broader the funnel needs to be.
Today, the best companies invest in over 200 projects because they know the success rate is 10% (if you’re very good). The bigger the return should be, the broader your portfolio should also be. So you calculate the return on your portfolio, not on the projects.
“That’s the difference between innovation, exploration, execution and management. In management, you look at return on project when you calculate return on investment, in innovation, you can’t pick the winner so you can’t recalculate return on project. You calculate return on portfolio because you’re going to put your money into a broad basket and that’s what’s going to generate the ideas and teams that will win. You let the teams and ideas emerge, you don’t pick them”
The cost of building a portfolio
If you wanted to kick off 50 projects to build a portfolio, what’s that going to cost you? Alex argues this is very industry-dependent. In the software business, building MVPs is going to be a lot cheaper and faster because all you need is a couple of coders that can build it. If you’re building jet engines, that’s a different story.
“So, as a rule of thumb investment, for your first sprint, I would say put together a team of three people, 20% to 40% of their time. So you’re only going to have salary cost somewhere between 5,1K for their salaries”
For Alex, it’s not enough to give people time. You need to give them the system to use that time in the right way and to judge those ideas in the right way. For instance, Google today is probably one of the biggest bureaucracies in the world. They’re a bit slower than they used to be. They’re still a brilliant company, but it’s getting a little bit difficult to really innovate and time is not going to be enough.
“I think 20% to 40% of a small team is great. And why is it not 100%? Because it’s harder to kill an idea when you have ten people spending 100% of their time on it. Guess what? After three months, that’s starting to become a lighthouse project. Nobody wants to kill an idea that we invested a lot of money in. So the cheaper the first phase, the easier it is to kill. So that is extremely important.”
Setting goals for innovation: AKIs vs OKRs
Alex explains that some of the tools and concepts they come up with at Strategizer come from their own challenges. Companies often use goal setting (e.g. OKRs), which is a very good tool for execution. What they realised was that innovation projects tend to become execution projects very quickly, so even when they say they don’t know if something is going to work, but they set a random target that they want to sell a million, then all of a sudden it becomes a goal.
“What we really want to do for innovation stuff, we want to call it AKIs (Aspirations and Key Insights). Because if we need to treat it differently, call it differently. So our Aspiration is to earn money from that new product – like $5 million –, but we don’t know if it’s going to work. So we need to not produce results. We need to produce key insights to understand, do we kill that product? Do we iterate that product? Do we actually scale that product?”
That way you get a lot more focused on a different process, and you accept it might not work. So we have a goal, but we call it an Aspiration because we know that it’s not a stretch goal. And if you call them differently, OKRs for managing and AKIs for innovation, you mentally separate these two projects.
“If you look at some of the world’s best entrepreneurs, they were able to bridge that gap, build a team around them. The early Steve Jobs was fired from his own company. The Steve Jobs who came back was way more mature and was able to create an execution machine, an innovation machine, and an exploration machine at the same time because he matured as a person.”