Rethinking Governance for Digital Innovation
Rapid, iterative, customer-centric innovation is possible in large companies — but not if you carry over your traditional ways of working. Innovative ventures need innovative governance.
I was honored to be featured in the fall 2023 issue of MIT Sloan Management Review. I was invited to write on the subject of reinventing governance—one of the key themes of my new book, “The Digital Transformation Roadmap.”
In my work advising enterprises on their digital transformation (DX) journeys, I have discovered one of the biggest barriers to organizational change is the unthinking carry-over of “BAU” (business-as-usual) governance.
Rules, procedures, and processes that were developed over the years to manage the core business (well-known, long-established, and low uncertainty) are thoughtlessly applied to teams that have been tasked with testing and discovering new paths to digital growth and innovation.
The result is familiar: large organizations putting up roadblocks in front of their own best people as they try to push the enterprise forward and adapt to digital change.
In my book, governance is the fourth of five steps in the DX Roadmap, and the subject of the book’s longest chapter.
In my article for MIT Sloan Management Review, I introduce the challenge of governance, explain why it matters, and share some of the critical ingredients that I have seen in every company that succeeds in its digital transformation.
Here is the article… with a link at the end to the conclusion on MIT’s site (no paywall).
Rethinking Governance for Digital Innovation
When global chemical company BASF launched its Onono lab in São Paulo, Brazil, its mission was to accelerate innovation through rapid collaboration with local partners and startups.
But Onono’s director, Antonio Lacerda, faced an immediate hurdle from corporate governance: He was told that his lab would have to follow the same corporate data policies used to secure BASF’s entire cloud infrastructure — which would have made it impossible to partner quickly and nimbly with new startups.
Lacerda postponed the launch until he was able, with significant political capital, to arrange an exception: a “sandbox” of separate data for his team, with special permission to share that data through APIs with new partners.
Lacerda’s experience, and that of so many innovation champions, points to a fundamental problem for digital transformation: In large companies, innovation teams are left to fight for waivers in the face of business rules that contradict their own mandate for change.
But innovation will never happen at scale as long as it relies on ad hoc exceptions approved by senior leaders. Instead, we must rethink our approach to governance and design new management practices for innovation at the speed of digital.
Designing repeatable processes for innovation is essential for growth in the digital era, yet it is incredibly hard.
In too many organizations, new ventures are green-lit based on a single executive sponsor. Once started, ventures move slowly, managed by teams that sit in traditional silos. Resource allocation is slow too, as promising projects wait weeks or months for their next round of approvals. Because each project is backed by an influential executive, no one wants to shut it down, even if it shows little promise. Meanwhile, risk aversion leads businesses to fund only their low-hanging fruit — incremental improvements in the core that bring a guaranteed, quick ROI.
This path will never lead to transformation. Instead, you need governance that embraces uncertainty and supports growth both within and beyond the core. (See “How Governance Helps or Hinders Innovation.”)
Digital transformation requires that governance be carefully designed to address several issues.
The first is oversight. Who approves new projects? To whom do they report? And who shuts them down?
Next is funding. How will you allocate resources across a portfolio of ventures to maximize opportunities for success?
Equally critical are people. Who will staff new ventures, whether inside or outside your organization? How will teams be formed with the right mix of skills?
Governance must also include metrics. How will you measure the progress of new ventures?
And, crucially, how can you bring discipline to regularly shutting down ventures, a practice so often neglected at large enterprises?
In this article, we will discuss how to design governance models to drive digital innovation across any enterprise, by focusing on two critical work groups: the people engaged in building new ventures and those overseeing and assessing their work.
We’ll delve into the top governance issues for managing growth at scale, including how venture teams and supervisory boards work together.
And we will explore how to manage ongoing decisions to green-light new ventures, grant additional funding to those that merit it, and shut down others to free up resources.
Design Teams to Drive Innovation
Decades of experience have shown us that, in established businesses and small startups, meaningful new growth always starts in one place: small teams, effectively empowered.
These teams do the work of rapid, iterative experimentation, which is at the heart of every modern approach to innovation — whether agile, design thinking, lean startup, or product management. Every innovation team’s job is to take a proposed new venture and rapidly test every facet of its business model to validate what will or will not work in the market.
Within any established enterprise, the rules governing innovation teams are critical to their success. Many readers will be familiar with the idea of small multifunctional teams. But size and composition are only part of what matters for team success.
By studying innovation in digital natives like Amazon and Google, and digital transformers like Walmart and Mastercard, I have identified five essential pillars of team governance.
Great innovation teams are:
Small. Research has shown that small teams communicate, coordinate, and make decisions much faster than large ones. Small teams are foundational to agile methods, which use a rapid cadence of short sprints in which every team must deliver new working code, test and learn, and adjust priorities. At Amazon, innovation teams are called two-pizza teams because each one should be small enough to be fed by two pizzas (a maximum of eight people).
Multifunctional. Great innovation teams have diverse members who cut across functional silos (for example, marketing, engineering, and design). The goal is for each team to have members who can provide all the essential skills needed to do its work. Instead of constantly waiting for another department’s input before taking the next step in its project, a multifunctional team is able to push ahead entirely on its own.
Single-threaded. The best innovation teams have all members dedicated full time to the team’s work. At a minimum, the innovation team’s leader must be single-threaded, meaning they cannot be splitting their workweek between the team’s new venture and other projects. Leading the team is their full responsibility.
Autonomous. Successful innovation teams have clear decision rights that give them the authority to work under their own direction. They should not need to get approval on their work from anyone outside the team — whether it is on product design, what tests to run next, or which customers to pursue. Autonomy also means there are no prohibitions on contracting resources from outside the company.
Accountable. Autonomy is possible only if the team is also clearly accountable for the results of its work. Here, good governance demands a clear definition of success, which is defined in terms of outcomes, not deliverables. That definition may include quantitative metrics as well as qualitative principles, and it must be agreed on with leadership before the team’s work begins. Effective accountability also requires transparency: At any time, the team’s results must be visible to anyone inside or outside the team. Every test run, every MVP built, and every metric tracked should be visible to anyone in the company.
Establish Oversight With Growth Boards
Innovation teams’ most critical partners are the managers who will allocate funds and oversee and support their work. In my experience, the most successful model for sponsoring corporate innovation is the board.
In the board model, a small group regularly convenes and deliberates to decide whether to sponsor various possible innovation ventures — much like a group of VC investors listening to pitches from startups. One innovation board will sponsor and support multiple teams working in parallel.
This approach contrasts with what I have found to be all too common: organizations where new ventures are approved by a single sponsor. In these companies, one or more executives may use their clout within the organization to sponsor a new digital venture they deem strategically important and promising.
This model is inherently ad hoc, with decisions based on the instincts and judgment of different individuals. And once a sponsor puts their name and reputation behind a project, it is very hard for them to let it die, no matter what market validation shows about its prospects.
By contrast, the board model — with its greater diversity and impartiality of decision-making — is inherently better for managing innovation at scale.
Effective corporate innovation boards — also known variously as growth boards, venture boards, or growth councils — should number no more than eight people. They should include members with topical expertise and knowledge of the market. A board should be able to challenge company orthodoxy, advocate a long-term view, and bring in ideas from outside the industry. The best boards combine internal stakeholders from different divisions and at least one member with an external perspective. Members should be senior enough to have real clout in the organization but not so senior that they can’t make board work a priority.
The job of the board is to regularly meet to green-light new ventures, provide strategic guidance to teams, decide on each stage of additional funding, and make disciplined decisions about when to shut down ventures.
Here again, decision rights are critical. The innovation board must have complete funding authority for each team in its portfolio. Its decisions should be informed by open and lively debate with the team, but the decisions remain with the board. Other senior executives, including the CEO, may advise and provide input on ventures, but they cannot vote on or overrule the board’s investment decisions.
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Read On…
The remainder of the article explains in detail how growth boards work with innovation teams on three key processes: 1) green-lighting new projects with an initial allocation of resources; 2) funding those new ventures in a highly iterative process unlike traditional budgeting; and 3) exiting most projects with a process of smart shutdowns that free up resources, capture learning, and redeploy talent for better opportunities.
Read and share the complete article at: https://bit.ly/Governance-MITSMR (no subscription required)
**NYC Book Launch: Oct 4th**
If you are near New York City, I hope you can join me October 4th for a special launch event for my book at Columbia Business School.
Seating is limited, so register today!
Details and registration: https://bit.ly/DXR-book-launch
Brilliant insights and I feel this should be required/must reading for all pragmatic practitioners of Digital Transformation initiatives in their current professional lives.