Structuring Innovation in Multiple Business Line Company - Financial Structure
In my previous post, I highlight the challenges and opportunities surrounding innovation in a multiple business line companies. I proposed a innovation law that stated:
Law of Muli-Business Line Innovation: The potential rewards and challenges of cross-business line innovation exponentially increase as you add strategically related business lines.
We all talk about the processes to fuel innovation, but we rarely discuss the supporting structures necessary to make these processes work. I would like to discuss how to create a financial structure that fuels proper innovation investments in a multiple business line company while driving individual business line operation excellence. I am definitely treading into the theoretical world of an ideal and recognize that it may be difficult for a company with its own financial structure to implement this recommendation, but we should shoot for the best and I like this approach.
Set aggressive short term goals for the business lines
First, multi-business line companies, especially public ones, are driven by top and bottom line results. Their industry environment is likely very competitive and they need their business lines to be ruthlessly goal orientated and focused on operational efficiency. That is why I support incentivizing the business lines to this end. Goals should be set that drive internal growth and operational cost reductions. They will still need to align these incentives with some select corporate innovation goals, but the bulk should focus on the short term.
Create a central review board for big "I" innovations
As a company matures, most big innovations will come outside of individual business lines; whether from cross-business line co-operation or new areas of emerging strategic importance. A corporate team dedicated to exploring these opportunities should be formed. They will need to be skilled at building business cases and evaluating opportunities; cross-functional; understand market research, iterative learning, and the great potential that options hold for a company. This team will need to regularly report to a review board consisting of key executives from each business line and top corporate management. This board will vet the evaluation team's conclusions, prioritize and approve projects.
Create an internal venture fund supported by business lines
Projects approved by the review board need funding and that funding should come from a central venture fund. Each year set a budget band for the fund (a minimum and maximum amount). Ask your business lines to subscribe to fund it as they would any VC fund. How we can encourage this behavior is somewhat tricky. Here is my thought. Remember the short term goals that we have focused our business lines around? I assume they will have some EBIT or contribution margin goal. Offer the business lines, a guaranteed EBIT credit to their goals for each dollar invested in the venture fund.
For example, lets say we want our business lines to generate at least an annual return of 25% for each dollar invested in new projects. Then offer an automatic EBIT credit of $25 for each $100 contributed to the fund over the past 5 years. The beauty of this system is that it will force the business lines to critically evaluate their internal investments. If they realize they can't generate a 25% return, they are likely to subscribe to the fund. If they believe they can, they will not contribute. This creates an automatic balancing mechanism that encourages business lines that are slowing down to divert their investment dollars to new external opportunities and those that are growing rapidly to continue to invest internally. In order for this to work we would have to create a fixed investment pool for each business line during the budgeting process. For example, each business line can reinvest 3% of previous years revenues. This guaranteed fixed amount creates an internal investment pool that should be diverted to the areas that generate the highest returns.
Tie performance bonuses to cross-business line co-operation
The weakness in any multiple business line innovation is aligning priorities across internal and external projects. Project development plans should have funds to hire most of the expertise needed, but projects may need to access a unique resource that is controlled by a business line. In the structure proposed here, the best way to ensure alignment is to strongly link support of the central review board's projects to a business line's performance bonus. It would likely have to be in the form of a participation goal such as in order to qualify for the bonus, you must support all central review board projects with required resources as specified in the approved project development plans. The above four part structure is designed to align your multi-business line company towards innovation that goes beyond individual business lines and hopefully leads to sustainable competitive advantages that your competitors will struggle to match.
I acknowledge that I know of no company using this process, but working to spur innovation in a multiple business line company has given me a front row seat to the challenges faced by such companies. This is definitely not the only way to align a company, but I like the beauty of a self-regulating mechanism that encourages money to be diverted from business lines that are reaching maturity to new growth opportunities. I would love to hear other people's thoughts on this issue and others of innovation.
