Have you ever been part of a company where your value to the organization seems to diminish as the company grows? Each time I have worked for a growing company, it reaches a point where the early employees leave (or are asked to leave) because no one seems to perceive their value anymore.
My story about a great company and its growing pains
I saw this happen at a highly successful company with a suite of hardware and software products. When I joined, the founder was leading the product management group responsible for about $250M in revenue. His product vision and his code were key reasons why the company held its dominant position in the market. Repeatable large-scale execution wasn’t his passion or gift, but (like most technical founders), he was an amazing innovator.
About a year after the company went public, the founder was asked to step down from his position. His future with the company was in serious question. In the maelstrom of execution as a public company, he was considered a risk. Why? Everyone was focused on removing any obstacle that got in the way of making quarterly numbers. After all, his strength was on future-looking vision and innovation.
Sadly, it seems that every successful company has moments where the focus on quarterly and annual execution can snuff out the future, both future-looking people and future-looking products.
What is this about?
What happens when a company’s first product goes mainstream and is the source of significant revenue?
- It gets more difficult to to be consistently innovative; innovation seems like speculative investment in the future.
- The inertia of success tends to run over anything that can’t prove its value in this quarter or next.
- The culture tends to shift from embracing uncertainty to embracing repeatable execution.
- Urgency shifts from figuring out what’s going to work to executing on what’s working.
In effect, the company moves away from embracing ambiguity and innovative people. Success is measured instead against steady, efficient execution of those products in the company’s portfolio that guarantee quarterly results. This may appear to be great – as long as what has been working in the past continues to work. The problem is that the pull of the past can be a killer. Why? More and more companies are waking up each morning trying to figure out how to disrupt your market to their advantage.
There are two important books that can help balance the tension between immediate portfolio execution and long-term innovation: Escape Velocity by Geoffrey Moore and The Lean Startup by Eric Ries. Geoffrey Moore offers guidance on how to manage three investment horizons to ensure your company’s future. A great complement to this view, Eric Ries provides a framework for thinking about the extreme uncertainty inherent in new product and new market development.
Both books give new product and market creators great language for making future-looking business cases to execution-oriented people. They also create a compelling framework for portfolio planning. Their combined wisdom offers great insight into why we need to act differently, how to think about portfolio steering in a new way, and what to do in order to invite innovation back into our organizations. This is powerful guidance for investing in the future of your company and building a culture where your people will thrive.
Escaping the “pull of the past”
In Escape Velocity, Geoffrey Moore introduces us to the McKinsey concept of three different time horizons for a business portfolio strategy. The horizons describe ways a company can set itself up to escape “business as usual” and instead take advantage of, and plan for, present and future opportunities for success.
- Horizon 1: Investments are expected to contribute to material returns in the same fiscal year in which they are brought to market, thereby generating today’s cash flow.
- Horizon 2: Investments are expected to pay back significantly, but not in the year of their market launch. Typically, they are fast-growing from birth, but come off a small base and need time to reach a material size. Moreover, because market adoption is rarely linear, there are often fits and starts before they catch fire. In the meantime, however, they are making material demands on go-to-market resources in the current year without generating corresponding material returns, and so they demand patience.
- Horizon 3: Investments here are made in future businesses that will pay off years beyond the current planning horizon. They are not expected to appear in-market during the current planning year, and while they make claims against R&D budgets, they do not affect the go-to-market operating plan.
Moore suggests that considering these horizons in the steering of your portfolio will enable you to “escape the pull of the past” and drive next-generation growth from new lines of business. I think this is key to being a successful Agile company with both a future-growth product strategy and people who remain proud and engaged.
(To get a good overview of Moore’s perspectives on these horizons and how Agile portfolio steering helps organizations achieve escape velocity, visit our website for the video on his talk from December 2011. To learn more about his perspectives on Agile organizations in general, check out the video of an interview Ryan Martens and I conducted with him last September.)
Inventing the future
A young startup working to put their company on the map lives in Horizon 3. Here, it’s all about learning: learning what the customer looks like and learning what product or service will inspire them to get their wallet out. This involves tremendous uncertainty. People who thrive in environments of uncertainty love to figure this out — knowing there are no obvious answers, and the questions to ask are pretty vague. My experience is that founders and early employees love the challenge and meaning of doing something no one else has done before.
Planning is still important here, but the plan itself isn’t the greatest value. There is something much more important going on. The company and the people are inventing the future, not predicting it. Deviation from the plan is expected. The only form of failure is not learning (or not acting on learning) and instead, sticking steadfastly to the plan. In fact, instead of revenue measurement, internal learning milestones are often a key success metric.
Growing, but not there yet
In Horizon 2, things are starting to work. A product is meeting a market need and has started to generate some revenue, but it hasn’t hit a tipping point yet. There’s still a lot of opportunity to learn, many ups and downs, and moments where it feels as though the company is taking steps backward in the market.
Those who thrive here have a different comfort zone: executing on what’s starting to work. Even though there is still uncertainty, patterns are beginning to emerge, and translating those patterns into repeatable execution plans to exploit what is working is key. Early employees are now surrounded with people who can appreciate uncertainty, but are more comfortable executing. Performance in Horizon 2 is typically measured by some combination of internal milestones, market indicators of tipping points and revenue.
Today’s cash flow
In Horizon 1, it becomes all about executing on the repeatable game plan that was developed in Horizons 2 and 3. The company has shown that by spending more, they can predict marginal increases in revenue. Success is now measured by typical performance metrics: planning and predicting future revenue and executing to results.
The company puts hundreds or thousands of people on money-making Horizon 1 initiatives, and the 30 to 60 people who were highly valued during Horizon 2 and 3 begin to feel lost. In an environment of certainty, those who are passionate about future growth (where learning and discovering is more important than exploiting a repeatable game plan), may only see monotony.
This is a dangerous place. When those who love uncertainty are asked to scale their execution, it can bring varying results – along with damage to their reputations. Many will lose their sense of value as execution and certainty dominate the company. They may feel compelled, for the future of the business, to inject uncertainty into a machine that has been optimized for execution. This is dangerous to Horizon 1 folks and for those around them. It’s no wonder why most of them leave or are asked to leave and return to much smaller, more uncertain environments.
Successful companies with products that are generating returns today face a common challenge: creating future successes. This entails investing in and nurturing next-generation products in high-growth markets. Why? Because the portfolio strategy required to sustain a growth company can’t be found only in current business. Here is a worst-case scenario: one day the business wakes up and realizes the game plan they’ve been executing isn’t working anymore. There are no future opportunities that are ready. Nothing has been incubating in Horizon 2 or 3, where it takes time for ideas to move through incubation. And, if the current market shifts and you have no options in Horizon 2 to generate tomorrow’s cash flow, you’re stuck.
A company can invest in its future and its people at the same time
In The Lean Startup, Eric Ries shares the necessary conditions to work on future initiatives within larger, more mature companies. (To get a good overview of Ries’ perspectives on helping entrepreneurs increase their chances of building successful businesses, visit our website for the video interview Ryan Martens and I conducted earlier this month). He argues for three main conditions:
- Scarce but Secure Resources
- Independent Development Authority
- A Personal Stake in the Outcome
Just as important are the people assembled to work on future initiatives. Your star performers focused on current initiatives in established markets may not be wired for this work. They excel at predicting the future and delivering a portfolio plan that consistently meets or beats those projects.
Forward-looking work should be full of people who embrace and excel at uncertainty. Consider the original people who initially led the company through Horizon 3 and Horizon 2 the first time. These are great people to take off of Horizon 1 work. Invest their time and passions instead toward the speculative work of inventing the future of the company.
Improving your odds of success and survival despite uncertainty isn’t easy
Inventing the future isn’t easy and it isn’t without its casualties. Once you make the leap of putting the correct people on future work, then comes the task of improving the odds of their success and survival. Venture-backed startups have a failure rate somewhere between 50% and 90%, but large companies do have one advantage over startups: they have a significant foothold in an existing market.
With this advantage, large companies nonetheless suffer two big disadvantages:
- Horizon 2 and 3 work will be expected to not disrupt any current activity. This can be a hard pill to swallow.
- Horizon 2 and 3 work may be subjected to inappropriate measures of progress based on a skeptical Horizon 1 mindset. The skeptics may view new product development as an unmeasurable art and therefore far too risky as an investment.
Execution-oriented people need to see a disciplined approach to investment
Historically, Horizon 2 and Horizon 3 portfolio investments have been made with a very fragile agreement that goes something like this:
“Give us a chunk of money and an independent corner of the business to operate within and we will invent the future. Trust us.”
This isn’t fair to either side of the agreement. Without an alternative, execution-oriented people will naturally measure the progress in ways that make sense for Horizon 1. But those aren’t fair measures for Horizon 2 and 3. Without a disciplined approach and a specific set of measures appropriate for Horizon 2 and 3 progress, the execution side of the company will become the executioners. The portfolio investment in Horizon 2 and 3 will fail and the failure will place inappropriate blame: on the teams that were engaged in that work.
The Lean Startup process provides a way to show progress and build trust
First, The Lean Startup provides a disciplined way to manage the innovation process within the portfolio steering. Secondly, it describes the innovation process in a language Horizon 1 execution-oriented people can appreciate.
The Lean Startup process allows for a much healthier agreement across the Horizon 2 and 3 teams and the rest of the business. The conversation goes something like this:
“Give us secure resources, we don’t need much. And give us the authority to run the team following the Lean Startup process using Agile development techniques. In return, we will constantly report on our progress using the metrics of Innovation Accounting. You can see our process and measure our progress. Through our continuous transparency, we will create trust in your investment in our part of the portfolio.”
The key is making sure the execution side of the company understands the process you’re following, because that is how they look at the world. They also need to value the new measures necessary to understand your progress. Even in extreme uncertainty you can be measured by your ability to incrementally learn what customers want and are willing to buy. That is the key shift. Disciplined learning is both the currency and the metrics of Horizon 2 and 3 initiatives in your portfolio, not cash in.
Before Eric’s book and the Lean Startup process, there wasn’t great language to describe this shift in thinking. Most successful early entrepreneurs naturally understand this. But often, these highly successful entrepreneurs couldn’t put it in language that Horizon 1 execution-oriented people within large companies could appreciate. That’s the brilliance of The Lean Startup – it works in early startups as well as within well-established companies.
Prepare your portfolio in a new way right now
The inertia of success can run over anything. You may find yourself having to prove your portfolio investment value every quarter. Your culture may shift from embracing uncertainty to embracing repeatable execution. This is the “pull of the past” articulated by Geoffrey Moore.
Now is the time to act
You need to ensure your future by creating teams focused on Horizon 2 and Horizon 3. You need to embrace this approach in your portfolio steering. And, this isn’t just a funding issue. Find a handful of your early employees and founders who may be trapped executing the known playbook. Bring them Eric Ries’s great work on The Lean Startup process. Get this independent team on the important business of freeing your company from the pull of its past. Give them a sandbox where they can innovate. Compel them with a personal stake in the outcome.
When you prepare to do this, you will give your company and these people the gift of meaningful work, while investing in your future.