Recently I received a cry for help. “How can I fight the spreadsheet managers in my organization? They are killing our innovation efforts!”. So how do you win the battle for funding with these spreadsheet managers? One thing is for sure, if you play by their rules, innovation will lose out. Instead, try to use reverse-income statements and soft metrics to weaponize yourself.
What are spreadsheet managers asking for?
Spreadsheet managers are looking for numbers that they can use to compare investment opportunities. Investments into today’s operations and future options.
The recently passed away innovation guru Clayton Christenson warned against the use of such financial metrics. Already in 2008 he wrote:
“...we’d like to name the misguided application of three financial-analysis tools as an accomplice in the conspiracy against successful innovation. We allege crimes against these suspects:
- The use of discounted cash flow (DCF) and net present value (NPV) to evaluate investment opportunities causes managers to underestimate the real returns and benefits of proceeding with investments in innovation.
- The way that fixed and sunk costs are considered when evaluating future investments confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack.
- The emphasis on earnings per share as the primary driver of share price and hence of shareholder value creation, to the exclusion of almost everything else, diverts resources away from investments whose payoff lies beyond the immediate horizon.
These are not bad tools and concepts, we hasten to add. But the way they are commonly wielded in evaluating investments creates a systematic bias against innovation… ”
For a detailed reading of why these metrics are flawed and biased against innovation projects, I refer you to the original Harvard Business Review Article.
The problem with these financial analyses and metrics is, that they are based on the premise that things are stable and predictable. When dealing with innovation projects, that is not the case.
The root cause of the problem is of course that managers are under so much pressure to focus on short-term performance that they pay less attention to the company’s long-term health. Consequently, they are reluctant to invest in innovation projects that don’t pay off immediately.
The financial analyses criticized by Clayton Christensen gives these spreadsheet managers the ammunition they need to shoot down any long-term innovation effort. As these financials demonstrate that innovation does not pay off. However, that is only a half-truth. Innovation does not pay off in the short term, is what these financials tell.
Stage-gating makes it worse
The stage-gate process consists of a series of review meetings at which project teams report to senior managers what they’ve accomplished. The senior managers then decide which projects should continue.
The key decision criteria at each gate are often the size of projected revenues, the expected profits from the new offering, and the associated risks. Revenues from products that incrementally improve upon those the company is currently selling can be credibly quantified.
However, potentially disruptive technologies, products, or business models cannot be bolstered by hard numbers. Worse, their markets are initially small and substantial revenues generally don’t materialize for several years.
Thus, when disruptive innovation projects with the potential for large gains are pitted against incremental sustaining innovations in the battle for funding, the incremental ones sail through while the seemingly riskier ones get delayed or die.
Another drawback of the stage-gating process is that it is not designed for changes and pivots. At the start, funding is given to execute upon a plan, not to discover what the offering and plan should look like. Yet, the latter is exactly what needs to happen, especially in the early stages of the innovation process.
Commonly used weapons
Below I start with two commonly used weapons that I would not recommend. They can be quick fixes and give your project the funding you need to continue. However, in the long term, these tactics will do the innovation efforts in your organization more harm than good.
Find a champion high up in the organization
Finding a champion high up in the organization for your project is a good idea regardless. It is always good to have someone in senior management who is familiar with your project and knows what you are trying to accomplish.
Like in this case, your champion can give you the decisive win in your battle with spreadsheet managers (unless they are the spreadsheet managers themselves of course – in which case you will have to find another champion).
Unfortunately, pet projects of senior managers that get funding no-matter-what are the reason that innovation projects often don’t deliver. So be careful here, getting senior management involved in your fight with spreadsheet managers can be a double-edged sword.
Fabricating the numbers
Fabricating the numbers is another easy fix, that I don’t recommend you using.
One advantage you have as an innovator is that you can easily manipulate spreadsheet calculations. If you build your own spreadsheet, it takes only nanoseconds to tweak an assumption and run another full scenario and get the desired projections. Tweaking the few assumptions underpinning your financial model by just 2% or 3% each often already does the trick.
I don’t like this approach, because you will be held accountable for these numbers. Using the excuse “few innovation projects make their numbers anyway”, will only strengthen the arguments of the spreadsheet manager. Now, you are saying yourself that innovation projects never deliver.
Fortunately, there is a double-edge sword here too. Your spreadsheet manager undoubtedly has heard of sensitivity analyses. If you can show them that the predictions he or she is asking for are really fickle, he or she may be open to considering other alternatives.
Winning the battle
What can you do to strengthen the case for funding innovation projects in your fight with spreadsheet managers?
Below a few options.
Reverse income statements
Realizing how useless financial projections are, Rita Gunther McGrath and Ian MacMillan suggested to essentially reverses the sequence of these calculations for innovation projects.
“Its logic is elegantly simple. If the project teams all know how good the numbers need to look in order to win funding, why go through the charade of making and revising assumptions in order to fabricate an acceptable set of numbers? Why not just put the minimally acceptable revenue, income, and cash flow statement as the standard first page of the gate documents? The second page can then raise the critical issues: “Okay. So we all know this is how good the numbers need to look. What set of assumptions must prove true in order for these numbers to materialize?”
When using the reverse income statement approach, the project team is asked to create an assumptions checklist—a list of things that need to be proven true for the project to succeed. The items on the checklist are rank-ordered, with the deal killers and the assumptions that can be tested with little expense toward the top.”
This approach is called creating a reverse income statement (source).
More than the Lean Startup approach
The Lean Startup approach was built on discovery-driven planning. The testing of assumption is what has remained in the lean startup method. Unfortunately, the reverse income statement got lost. Perhaps because it is not as relevant for startups.
For innovation teams that must survive within the walls of their organization, reverse income statements are a must-have tool. It shows your spreadsheet managers that you take their world seriously. You aim to match the numbers that they are dictating to the rest of the organization, and are tackling these numbers right on.
With your reverse income statement in place, you then can make the argument that you don’t have a crystal ball and therefore need to do the work that is needed to prove that these numbers are realistic. And for that, you need funding.
Teams that follow our accelerator program will create a reverse income statement as part of their business case.
What more can you do?
There are two more things that you can do to make the case of why investing in innovation pays off in the short and long term.
When pressed to show financial metrics, it may help you to unbundle the innovation portfolio.
Often there are a few big “losers” in there. Pet-peeve projects from senior management or large IT initiatives that distort the numbers and turn innovation into a revenue losing proposition. If you take the worst performers out, what does the ROI of the innovation portfolio look like?
Isolate these cases and start the discussion on why these projects are performing worse than the others. How can you create more winners? The goal here is to show that you should not throw the baby out with the bathwater.
Your last resort is soft metrics. While this may sound “soft” – it does not make these metrics less valuable. However, because soft metrics are more difficult to qualify and quantify, it rarely makes for a powerful weapon against spreadsheet managers.
The “soft” successes are all those areas impacted by innovation efforts that are not so easily translated into financials on a balance sheet. Examples are:
- Customer satisfaction with regard to innovation outcomes
- Customer satisfaction with your ability to solve something quickly in an innovative way
- The number of new markets and customers that were added last year as a result of innovation projects
- Employee satisfaction
- Staff turnover – retain more employees and in particular talent by engaging them in innovation projects
- New talent that has been recruited
In short, all performance indicators that are important to your manager and CEO – those who decide over the innovation budgets – but that are more difficult to express in terms of financials. How do innovation initiatives help them to score well on this?
Soft metrics won’t win over spreadsheet managers but may convince the leadership of your organization that innovation contributes to the organization’s short and long term goals. Not innovating is not an option, it is a necessity to survive.
Putting the best metrics in place to assess innovation projects, so that you support winners and weed out less promising efforts, is a common goal you and the spreadsheet manager can both agree on.
To win the battle, you need to show what these metrics are and how to put them in place. That should be your focus. Don’t try to fight the targets themselves. Innovation is not a charity.