How to leverage failure to keep exploring
Dr. Simone Ahuja, best selling author of Jugaad Innovation and innovation strategist at Blood Orange interviewed Andy Cars, the founder of the innovation strategy firm Lean Ventures. The interview was done as part the Innova8rs Virtual Summit that will be held between 28 November - 8 December 2017.
Simone: Many organizations today say that failure is an accepted part of their innovation practices - but is it really? Would you agree that those who take risks and "fail" are often penalized rather than rewarded?
Andy: I would not necessarily say that people are penalized for failing when trying to innovate. It’s just that there isn’t an incentive for them to innovate in the first place. That’s the real problem. The responsibility to innovate is often slapped on top of everything else that the employee already has on their plate.
And there are no incentives or proper training and coaching to help them to work in new ways. This keeps them focused on performing well in their existing line function but with little concern for innovation.
We actually did some research on this and we published our findings in a report called “How Large Mature Companies Tackle Innovation”.
We spoke to 30 people responsible for innovation in large companies. When we asked them about their top three challenges in making innovation work in their companies, 1/3rd of the respondents said that “our culture is inherently risk-averse”.
Also, the results of the survey and interviews that we did very clearly showed that what large companies think is of “high” or “very high” importance is not something they do very much about. Or to put it bluntly, when it comes to innovation many large companies don’t “walk the talk”.
This is hardly surprising, but we got some additional insights as to where the major gaps are and it can be summed up as:
- No budget
- No process
They are ok at ideation but lack the resources and commitment to test and scale these ideas, or as someone said “we suffer from Hackathon amnesia” – basically the inability to absorb the results of ideation.
Simone: Since failure is an integral part of innovation what can do to reward failure?
Andy: Before we can reward or celebrate failure we need to include failure on the agenda and start to measure it. And with failing I mean “failing smart” or as some people like to call it “failing forward”.
Failing smart means that we should not accept failure without learnings and to get to learnings we must measure what we do.
And that’s where Lean Startup really comes into the picture. By employing Lean Startup we turn the fuzziness of innovation into a measurable and disciplined process (build-measure-learn loop). This helps us to turn our failures into opportunities by learning and drawing insights from the data that’s generated from such a process.
Once we set it up in that way the rewards then become more intrinsic than extrinsic. It becomes more about satisfying the team's curiosity about their customers and what their business model will look like and perhaps less about monetary rewards.
I really like Daniel Pink’s thinking on this. He talks about Autonomy, Mastery, and Purpose as the main drivers for motivating teams. We use that as a framework when we help companies to build incentive structures to motivate innovation teams.
People should be given the AUTONOMY to find out HOW to reach the vision and their targets. No micro-management is allowed.
And they should be given the opportunity to achieve MASTERY at what they are doing. This means supporting them with training and coaching so they can become really great at innovation.
And last but not least there should be a clear and worthwhile PURPOSE that the teams can rally around. We like to use the UN Global Goals (gender equality, no poverty, zero hunger, climate action etc.) as a basis for discussing with the company how what they do, support one or more of those goals.
But I think it’s also fair to say that entrepreneurs are not only driven by curiosity and a deeper purpose how they can change the world for the better, but also by owning a nice slice of the company they are trying to build and grow. But in my experience, I have never seen intrapreneurs being offered shares in the ventures that they help to build and grow.
Briefly coming back to our research, 50% of our respondents said they have no incentive structure in place to support innovation. 25% said they are working on it. Only 12,5% said they have an incentive structure in place.
Simone: What's the most effective way to share the knowledge that emerges from failure across the organization?
Andy: I don’t know if you’ve ever been to a FailCon or FuckUp Nights. We have FuckUp Nights every month here in Stockholm. FailCon is a conference while FuckUp Nights are more like Meetups. What they have in common is that they are both dedicated to sharing and drawing insights from entrepreneurial failures.
One way could be for a large organization to run their own version of that in-house to celebrate and reward smart failures from across the organization. Make it a quarterly event and have some fun.
I’ve heard that Intuit gives a special award for the Best Failure and holds “failure parties” and Tata, the Indian conglomerate gives out a prize for the Best Failed Idea. Maybe you’ve heard of other examples?
Another way to share the knowledge that emerges from failure across the organization is to run regular pivot or proceed meetings connected to OKRs (or Objectives and Key Results). With regular I mean weekly or bi-weekly if possible.
During these meetings, we look at the experiments done over the past week or weeks and see which ones hit the target or fail criteria, and which ones didn’t. Then based on the insights that we draw from the data we decide wether to pivot or proceed.
Let’s say you have two innovation teams doing sprints in parallel, one team may be hitting their targets all the time – or to say it differently – they never fail, and the other team is failing about 50% of the time. Which one do you think is doing a better job?
Yes, exactly. Probably the team that’s failing 50% of the time. The other team was just low-balling their targets, setting fail criteria that they were sure they would reach. Or they weren’t trying to validate something that is risky. That’s not the way to do it. Metrics have to hurt and the point of the experiments is to learn about things you know little about but can have a large impact on the business model you are trying to build.
The risks we need to design experiments for and test for first are those where we have the lowest level of customer validation and which carries the highest risk to our business model.
But blowing past the fail criteria shouldn’t be a walk in the park. The fail criteria should be tough enough to keep the team excited about reaching the target.
Besides setting up proper fail criteria another great thing about OKRs is that it’s transparent for anyone within the organization to see. By using SaaS platforms like 7Geese, BetterWorks or Perdoo this can be done relatively easy.
At Google, they even integrated a direct link to their OKRs from within the company’s telephone directory. So whenever you’re looking up someone’s contact data you can also see their OKRs or what they’re working on at the moment and how they measure that.
OKRs help with strategic alignment and increases the understanding amongst employees what other teams are doing. It also minimizes duplication of work, helps with the cross-pollination of ideas and saves time.
If I want something from some other team I can quickly check their OKRs to get an idea of their focus for the week, month and quarter. That way I know if what I am asking for is something that fits in with their priorities. If it doesn’t I should probably rethink my approach.
Most people that I meet who are working with innovation have never heard of OKRs and much less understand the difference between OKRs and KPIs. We introduced OKRs to Tieto, a Finish IT company with about 13 000 employees. Besides Tieto, I don't know of any other large company in the Nordics that have embraced OKRs.
Simone: How can failure be reframed as learning. What kind of metrics can be used to support the right kinds of failures?
Andy: When we talk about innovation metrics, also sometimes called learning metrics we are focused on learning about the customer and if we are making progress towards building a scalable and repeatable business model.
By measuring initial user interest and initial user engagement we can see early on if what we have in mind can be validated to hold true also in the real world. These are the type of metrics that we need in order to measure progress during the flat part of the hockey stick.
A great framework to measure learning metrics is the conversion funnel that consists of 5 basic steps – Acquisition, Activation, Retention, Revenue, and Referral or what Dave McClure referred to as Pirate Metrics since the abbreviation or AARRR is the sound that pirates make when they board your ship. :-)
Later on, if we start to reach product-market fit we can also add the steps, cross-sell, next-sell and up-sell. But at the beginning, the focus will most likely be on retention and referral and later to optimize for acquisition and activation. When we move past product-market fit and towards optimization and scaling we're moving into the realm of Growth Hacking, a term coined by Sean Ellis and a whole new ballgame compared to empathy building etc. that goes on pre-product-market fit.
Something else that we should keep an eye on is experiment velocity, or how many experiments that the teams are running each week and the speed of learning, which stands in stark contrast to the way business as usual measures things.
They are more focused on traditional KPIs such as increased revenue and profit margins, ROI, IRR, NPV and so on. These metrics make sense once you’ve reached product-market fit. But before that, you’re basically dividing one question mark by another as Steve Blank likes to point out. You don’t yet know who is your customer, how to reach your customer, how to price or package your product, etc,…
We are searching for a business model, we don’t yet have one. So we need to measure progress towards that instead of typical execution type metrics that project into the future stuff that’s already been shown to work in the past.
Coming back to our research report, 30% said they apply the same metrics for innovation projects as they do for their core business and 17% said they don’t measure their innovation projects at all. Only about 30% said they apply innovation metrics in some way.
This is of course great news for us since there's plenty of work to be done. :-)
Simone: Thank you for the interview. This has been really great. Do you have any concluding remarks that you would like to make?
Andy: Thank you. Likewise. Yes, my mantra is that innovation is not only about the mindset or the tools and methods. It’s also very much about putting in the hours to practice innovation, and that, of course, depends on the willingness and vision of the almighty leadership.
END OF INTERVIEW.
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