Hacking a Corporate Culture: Stories, Heroes and Rituals in Startups and Companies

One of the interesting innovation challenges I've encountered centers on a company's culture. While startups have the luxury of building values and culture from scratch, existing companies that want to (re)start corporate innovation must reboot an existing -and at times deeply rooted- corporate culture. It's not an easy task, but failing to change the culture will doom any innovation efforts the company attempts.---Corporate Innovation Requires an Innovation CultureInnovation in an existing company is not just the sum of great technology, key acquisitions, or smart people. Corporate innovation needs a culture that matches and supports it. Often this means a change to the existing company's culture. Persuading employees to let go of old values and beliefs, and adopt new ones can be challenging.

All too often a corporate innovation initiative starts and ends with a board meeting mandate to the CEO followed by a series of memos to the staff, with lots of posters, and one-day workshops. This typically creates "innovation theater" but very little innovation.

Two McKinsey consultants, Terry Deal and Arthur Kennedy wrote a book called Corporate Cultures: The Rites and Rituals of Corporate Life. In it they pointed that every company has a culture - and that culture was shorthand for "the way we do things at our company." Company culture has four essential ingredients:

Values/beliefs - set the philosophy for everything a company does, essentially what it stands for

Stories/myths - stories are about how founders/employees get over obstacles, win new orders...

Heroes - what gets rewarded and celebrated, how do you become a hero in the organization?

Rituals - what and how does a company celebrate?The Power of a Corporate CultureIt was in my third startup, Convergent Technologies, that I started to understand the power of a corporate culture. The values and basic beliefs of working in this crazy startup were embodied in the phrase that we were, "The Marine Corps of Silicon Valley." If the notion of joining the Marine Corps of tech wasn't something that interested you, you didn't apply. If it was appealing (typically to high testosterone 20 year-olds), you fought to get in.

By the time I joined, the company already had a store of "beating the impossible odds" and "innovation on your feet" stories. It was already lore that the founders had pivoted from simply building an entire computer that fit on a single-circuit board with a newfangled Intel microprocessor to selling complete desktop workstations with an operating system and office applications (the precursor to the PC) to other computer companies. And the CEO had done the pivot in front of a whiteboard of a customer who went from a "we're not interested" to a $45million order in the same meeting.

Each subsequent deal with a major computer customer was celebrated (deals were worth ten of millions of dollars) and our salespeople were feted as heroes. When any special custom engineering effort was required to match the over-the-top sales commitments (almost every deal), the engineers were treated as heroes as well. And when marketing went out to the field on red-eye flights to support sales (often), we became heroes as well.

Finally, there were rituals and celebrations that accompanied each big order. Bells and gongs would ring. The CEO would hand out $100 bills, and gave out a $25,000 on-the-spot bonus that was talked about for years. Once he even spray-painted an exhortation to ship a new product on time on our main hallway wall (so crude I can't even paraphrase it, but still remembered 30 years later).

While my title, business card and job description described my job functions, these unwritten values, stories, heroes and rituals guided the behavior that was expected of me in my job.

Corporate Culture DiagnosticYou can get a good handle on a company's culture before you even get inside the building. For example, when companies say, "We value our employees" but have reserved parking spots, a private cafeteria and over-the-top offices for the executives that tells you more than any PR spin. Or if a CEO proudly boasts about their corporate incubator, but the incubator's parking lot is empty at 5:15 p.m.

I've learned more about a company's corporate beliefs, heroes and rituals by sitting in on a few casual coffee breaks and lunches than reading all of its corporate mission statements or inspirational posters in the cafeteria. In Horizon 1 and 2 companies (those that execute or extend current business models), stories revolve around heroes and rebels who manage to get something new done in spite of the existing processes. Rituals in these companies are about the reorganizations, promotions, titles, raises, etc.

These core values and beliefs and the attendant stories, heroes and rituals, also define who's important in the organization and who the company wants to attract. For example, if a company values financial performance above all, its stories, myths and rituals might include how a hero saved the company 5% from a supplier. Or if a company is focused on delivering breakthrough products, then the heroes, stories and rituals will be about product innovation (e.g. the Apple legends of the Mac, iPod and iPhone development).

Hacking a Corporate CultureFor innovation to happen by design not by exception, companies need to hack their corporate culture. This is akin to waging psychological warfare on your own company. It needs to be a careful, calculated process coordinated with HR and Finance.

1. Assess your company's current values and beliefs as understood by the employees

2. Communicate the need for new values and moving employees to a new way of thinking, is hard. It starts with thinking through the new values and beliefs the company wants to live by

3. Plan a concerted effort to create a new set of stories, heroes and rituals around those values

4. Simultaneously with the creation of new culture, align the company's incentive programs (compensation plans, bonuses, promotions, etc.) to the new values. Failure to realign incentives dooms any new culture change.To create an innovation culture a company needs heroes and stories about employees who created new business models, new products and new customers. Stories about new product lines created out of a crazy idea. Or heroes like an old-guard manager who kept sending the best teams to the corporate incubator; or division general managers who adapted and adopted an acquired product and built it into a successful product line, or engineering teams who got out of the building, saw a customer need and built a product to serve it - and ended up with a new division. And the rituals and rewards need to support this type of innovation (not just existing execution).

Culture change almost always runs into problems - resistance to change (we've always done in this way), obsolescence (the world changed but not our values), inconsistency (we give lip service to our values, but don't

really implement them). But the combination of hacking the culture and reinforcing it by changing the incentives can make it happen.

The result of an innovation culture is a large company with a unified purpose that can move with speed, agility and passion.

Lessons Learned Corporate Innovation Requires an Innovation Culture Corporate culture consists of values, stories, heroes and rituals Startups build values and culture focused on innovation from scratch Existing companies who want to (re)start corporate innovation must

reboot an existing corporate culture - this is hard You can hack the culture It requires careful, calculated and coordinated process with HR and

Finance The result is Innovation @50x

Lean Innovation Management – Making Corporate Innovation   Work Posted on June 26, 2015 by steveblank

I’ve been working with large companies and the U.S. government to help them innovate faster– not just kind of fast, but 10x the number of initiatives in 1/5 the time. A 50x speedup kind of fast.

Here’s how.—–

Lean Innovation ManagementIn the last five years “Lean Startup” methodologies have enabled entrepreneurs to efficiently build a startup by searching for product/market fit rather than blindly trying to execute. Companies or Government agencies pursuing innovation can Buy, Build, Partner or use Open Innovation. But trying to find a unified theory of innovation that allows established companies and government agencies to innovate internally with the speed and urgency of startups has eluded our grasp.

The first time a few brave corporate innovators tried to overlay the Lean tools and techniques that work in early-stage startups in an existing corporation or government agency, the result was chaos, confusion, frustration and ultimately, failure. They ended up with “Innovation Theater” – great projects, wonderful press releases about how innovative the company is – but no real substantive change in product trajectory.

—-

In working with Greg Hannon, the head of Innovation at W.L. Gore, I’ve found two corporate strategy tools developed by other smart people helpful in bridging Lean Startups with Corporate Innovation. The first, the notion of the “ambidextrous organization” from O’Reilly and Tushman, posits that companies that want to do continuous innovation need to execute their core business model while innovating in parallel. In other words, in an ambidextrous company you need to be able to “chew gum and walk at the same time.”

The second big idea of corporate innovation is the “Three Horizons of Innovation” from Baghai, Coley and White. They suggest that a company allocate its innovations across three categories called “Horizons.”

Horizon 1 are mature businesses.

Horizon 2 are rapidly growing businesses. Horizon 3 are emerging businesses.

Each horizon requires different focus, different management, different tools and different goals.

The Three Horizons provided an incredibly useful taxonomy. However in practice most companies treated the Three Horizons like they are simply incremental execution of the same business model.

While these theories explain how to think about innovation in a company they didn’t tell you how to make it happen.

Fast forward to today. To move innovation faster, we now have 21st century tools —Business Model Canvas, Customer Development, Agile Engineering – all adding up to a Lean Startup. We can adapt these startup tools for use inside the corporation.

To do so we’ll keep the concept of three unique horizons of innovation but reframe and combine them with what we’ve learned about Lean Startups. The result will be:

a new, Lean version of the Three Horizons of Innovation an ambidextrous company, and a way for existing organizations to build and test new ideas at blinding speed.

The Lean Definition of the Three Horizons of InnovationIn this new model, the Horizon level of innovation is defined by whether the business model is being executed or searched for.

Horizon 1 activities support existing business models.

Horizon 2 is focused on extending existing businesses with  partially known business models

Horizon 3 is focused on unknown business models.

Horizon 1 is the company’s core business. Here the company executes a known business model (known customers, product features, competitors, pricing, distribution channel, supply chain, etc.) It uses existing capabilities and has low risk in getting the next product out the door. Management in this Horizon 1 works by building repeatable and scalable processes, procedures, incentives and KPI’s to execute and measure the business model. (And if they’re smart they’ll teach Horizon 1 teams to operate with mission and intent, not just process and procedure.)

Innovation and improvement occurs in Horizon 1 on process, procedures, costs, etc. Product management for Horizon 1 uses existing product management tools such as StageGate® or the

equivalent.

In Horizon 2 a company/agency extends its core business. Here the company looks for new opportunities in its existing business model (trying a different distribution channel, using the same technology with new customers or selling existing customers new products, etc.) Horizon 2 uses mostly existing capabilities and has moderate risk in getting new capabilities to get the product out the door. Management in Horizon 2 works by pattern recognition and experimentation inside the current business model.

Horizon 3 is where companies put their crazy entrepreneurs. (Inside of companies these are the mavericks you want to fire for not getting with program. In a startup they’d be the founding CEO.) These innovators want to create new and potentially disruptive business models. Here the company is essentially incubating a startup. They operate with speed and urgency to find a repeatable and scalable business model. Horizon 3 groups need to be physically separate from operating divisions (in a corporate incubator, or their own facility.) And they need their own plans, procedures, policies, incentives and KPI’s different from those in Horizon 1.

Product management for Horizon 2 and 3 uses existing Lean Innovation Management tools such as Lean LaunchPad®, the NSF I-Corps™ or the equivalent.

Using these tools internally a company/agency can get startup speed and urgency. Horizon 3 organizations organized as small (<5 person) teams can talk to 100+ customers in 10 weeks and deliver a series of iterative and incremental minimal viable products.  Given the minimum size of these teams and expenditures, companies can afford to run a large number of these initiatives in parallel.

Get to YesHorizon 2 and 3 activities are not entirely separated from the corporate structure.

To help Horizon 2 and 3 organizations navigate all the processes, procedures and metrics the company has built to support Horizon 1 activities, individuals from support organizations (legal, finance, procurement, etc.) are assigned to work inside Horizon 3 organizations. Their function is to help Horizon 2 and 3 organizations navigate to a “Yes” inside the company.

Horizon 1 operates on goals and incentives. And Horizon 1 managers need to be incented to embrace and support innovation going on in Horizons 2 and 3. Companies need their Horizon 1 managers to both encourage mavericks to propose projects, as well as to support mavericks and then incentive for adoption and scale of Horizon 3 projects.

If supporting Horizon 2/3 is not part of Horizon 1 goals and incentives, then there is no real commitment to corporate innovation.

Oh no! Yes! We’ve SucceededWhat happens to successful innovations from Horizons 2 and 3?

They either get adopted by a Horizon 1 organization (a division, P&L, functional organization,) they reach a size large enough to become a standalone group or they can be sold/spun out. To make this work Horizon 1 execs and managers need incentives and job descriptions to support Horizon 2 and 3 activiities.

One of the biggest complaints from Horizon 1 managers is that successful Horizon 3 innovation projects leave a mess of technical and organization debt that a Horizon 1

organization has to clean up. This isn’t some exception; in fact it’s a natural part of corporate innovation.

What is missing is the realization that there needs to be a dedicated corporate group to refactor (cleanup) the debt from successful innovation projects.

Do it Again!?When a Horizon 2 or 3 program finds success, it can either grow on its own (and hence become their own divisions) or the founders and early employees may get folded back into a Horizon 1 organization that will scale the program. Typically this is a bad idea for all involved. In short-sighted companies the Horizon 2 and 3 innovators get frustrated, and leave.

In far-sighted companies they get to start a new cycle of disruptive innovation.

Lean Is the Language of Corporate and Government Agency InnovationWe have a common language and process for execution–product management tools, financial reporting etc. Yet we have no common language and process for innovation and searching for business models.

We can adopt the Lean Vocabulary–Business Model Canvas, Customer Development, Hypotheses, Pivots and Minimum Viable Products and Evidence-based entrepreneurship as the corporate language of “search versus execution.” And we can use Lean Metrics (Investment Readiness Level and Technology Readiness Levels) and Lean Portfolio management tools to provide rigor to go/no go funding decisions. Finally we can use the open-source lean classes from the National Science Foundation I-Corps and the Stanford/Berkeley Lean LaunchPad classes to run Horizon 3 projects.

Lean is The Engine for the Ambidextrous OrganizationAn ambidextrous company or government agency runs large numbers of Horizon 2 and 3 projects simultaneously while relentlessly improving the way it executes its current business model and serves its existing customers. This happens when the C-level executives share a common strategic intent, a common vision, explicit values and identity, and they are compensated for both execution of the current business model and the search for new ones. They also realize that operating at all three horizons will require them to tolerate and resolve conflicts.

Lessons Learned

Corporate and Government Agency Innovation needs Lean tools

When combined with the business model canvas, the Three Horizons of Innovation provide a framework for corporate innovation

Horizon 2 and 3 (new/disruptive innovation) are run with Lean Startup speed and organization

Lean Innovation management combines Three Horizons of Innovation with the Lean Startup to deliver an Ambidextrous Organization

The entire organization must be incented to value and embrace not only continuous improvement but also successful innovations

Result: 10x the number of initiatives in 1/5 the time

Why Corporate Entrepreneurs are Extraordinary – the Rebel   Alliance Posted on August 25, 2015 by steveblank

I’ve spent this year working with corporations and government agencies that are adopting and adapting Lean Methodologies. The biggest surprise for me was getting schooled on how extremely difficult it is to be an innovator inside a company of executors.

—–

What Have We Lost?I’ve been working with Richard, a mid-level executive in a large federal agency facing increasing external disruption (technology shifts, new competitors, asymmetric warfare, etc.). Several pockets of innovation in his agency have begun to look to startups and have tried to adopt lean methods. Richard has been trying to get his organization to recognize that change needs to happen. Relentless and effective, Richard exudes enthusiasm and radiates optimism. He’s attracted a following, and he had just been tapped to lead innovation in his division.

He’s working to get his agency to adopt Lean and the Horizon 1, 2, and 3 innovation language (Horizon 1 executes current business models, Horizon 2 extends current business models and Horizon 3 searches for new business models) and was now building a Lean innovation pipeline created out of my I-Corps/Lean LaunchPad classes.

Yet today at dinner his frustration just spilled out.

“Most of the time our attempts at innovation result in “innovation theater” – lots of motion (memos from our CEO, posters in the cafeteria, corporate incubators) but no real change. We were once a scrappy, agile and feared organization with a “can-do” attitude. Now most people here don’t want to rock the boat and simply want do their job 9 to 5. Mid-level bureaucrats kill everything by studying it to death or saying it’s too risky. Everything innovative I’ve accomplished has taken years of political battles, calling in favors, and building alliances.” He thought for a minute and said, “Boy, I wish I had a manual to tell me the best way to make this place better.”

Richard continued, “Innovation is something startups do as part of their daily activities – it’s in their DNA. Why is that?”

While I understood conceptually that adopting new ideas was harder in larger companies, hearing it first-hand from a successful change agent made me realize both how extraordinary Richard was and how extraordinarily difficult it is to bring change to large organizations. His two questions– 1) Was there a manual on “how to be a successful corporate rebel”? and 2) Why are startups innovative by design but companies are innovative by exception?–left me searching for answers.

Why Startups are Innovative by DesignIf you come from the startup world, you take for granted that on day one startups are filled with rebels. Everyone around you is focused on a single goal – disrupt incumbents and deliver something innovative to the market.

In a (well-run) startup, the founder has a vision (at first a series of untested hypotheses) and rallies employees and investors around that singular idea. The founders get out of building and rapidly turn the hypotheses into facts by developing a series of incremental and iterative minimal viable products they test in front of customers in search of product-market fit.

While there might be arguments internally about technology and the right markets, no one is confused about the company’s goal – find a sustainable business model, get enough revenue, users, etc., before you run out of money.

Every obstacle Richard described in his agency simply does not exist in the early days of a startup. Zero. Nada. For the first year or so startups actually accumulate technical and organizational debt as they take people and process shortcuts to just get the first orders, 100,000 users or whatever they need to build the business. All that matters is survival.  Process, procedures, KPI’s, org charts, forms, and bureaucracy are impediments to survival as a new company struggles to search for and find a repeatable business model. Founding CEO’s hate process, and actually beat it out of an organization when it appears too early.

In the technology world companies that grow large take one of two paths. Most common is when startups do find a repeatable and scalable business model they hire people to execute the successful business model. And these hires turn the startup into a company – a Horizon 1 or 2 execution organization focused on executing and extending the current business model – with the leadership incented for repeatability and scale. (See here for explanations of the three Horizons of Innovation.)

But often as the company/agency scales, the early innovators feel disfranchised and leave. Subsequently, when a technology and/or platform shift occurs, the company becomes a victim of disruption and unable to innovate, usually stagnates and dies.

Alternatively, a company/agency scales but continues to be run by innovators. The large companies that survive rapid technology and/or platform shifts are often run by founders, (Jeff Bezos at Amazon, Steve Jobs at Apple, Larry Page at Google, Larry Ellison at Oracle) or faced with an existential crisis and forced to change (Satya Nadella at Microsoft) or somehow have miraculously retained an innovation culture through multiple generations of leadership like W.L. Gore.

I offered that perhaps his top-level management would embrace Three Horizons of Innovation from the top-down. Richard replied, “In a perfect world that would be great, but in most agencies (and companies) the CEO or board is not a visionary. Even when our CEO’s acknowledged the need for Horizon 3 innovation, the problem isn’t solved because entrepreneurs run into either “a culture of no” or worse yet the intransigent middle management.

Richard explained, “In a Horizon 1-dominated culture, where everyone is focused on Horizon 1 execution, you can’t grow enough Horizon 3 managers. Instead we’ve found that support for innovation has to come from rare leaders embedded in the Horizon 1 organizations who “get it.” We’ve always had to hide/couch Horizon 3 style change in Horizon 1 and Horizon 2 language, which is maddening but I do what works.  In Silicon Valley, the operative word in any pitch is “disrupt.”  In Horizon 1 organizations, uttering the word “disrupt” is the death of an idea.”

That really brought home the stark difference between our two worlds.

(Lean Innovation management now offers Horizon 1 executives a set of tools that allow them to feel comfortable with Horizon 2/3 initiatives. Investment Readiness Levels are the Key Performance Indicators for Horizon 1 execs to measure progress.)

What about a manual of “how to be a successful corporate rebel”? Serendipitously after I gave my Innovation @ 50x presentation, someone gave me a book saying “thanks for the strategy, but here are the tactics.”  This book entitled Rebels@Work had some answers to Richard’s question.

Rebels at WorkIf you’re a mid-level manager in a company or government agency trying to figure out how to get your ideas adopted, you must read Rebels@Work – it will save your

sanity.  The book, which was written by successful corporate innovators, offers real practical, tactical advice about how to push corporate innovation.

One of the handy tables explains the difference between being a “bad rebel” versus a “good rebel.” The chapters march you through a series of “how to’s”: how to gain credibility, navigate the organizational landscape, communicate your ideas, manage conflict, deal with fear uncertainty and doubt, etc. It illustrates all of this with real-life vignettes from the authors’ decades-long experience trying to make corporate innovation happen.

The Innovation at 50x presentation gives corporate rebels the roadmap, common language, and lean tools to develop a Lean innovation strategy, but Rebels@Work gives them the tools to be a positive force for leading change from within.

After I read it I bought 10 copies for Richard and his team.

Lessons Learned

In a startup we are by definition all born as rebels While startups are not smaller versions of large companies, companies are

very much not larger versions of startups Canonical startup advice fails when applied in large companies The Three Horizons offer a way to describe innovation strategy across a

company/agency Lean Innovation Management allows startup speed inside of companies However:

o Horizon 1 managers run the company and are not rebelso Horizon 3 ideas might have to be couched in Horizon 1 and 2 language

Rebels@Work offers practical advice on how to move corporate innovation forward

Getting to “Yes” for Corporate Innovation

Posted on March 17, 2015 by steveblank

I’ve been working with Roberto, the Chief Innovation Officer of a diversified company I’ll call Sprocket Industries.

I hadn’t heard from Roberto in awhile and when we caught up, it was clear his initial optimism had faded. I listened as Roberto listed the obstacles to the new innovation program at Sprocket, “We’ve created innovation teams in both the business units and in corporate. Our CEO is behind the program. The division general managers have given us their support. But the teams still run into what feel like immovable obstacles in every part of the company. Finance, HR, Branding, Legal, you name it, everyone in a division or corporate staff has an excuse for why we can’t do something, and everyone has the power to say no and no urgency to make a change.”

Roberto was frustrated, “How do we get all these organizations to help us move forward with innovation? My CEO wants to fix this and is ready to bring in a big consulting firm to redo all our business processes.”

Uh oh…

—–

As Sprocket’s Chief Innovation Officer, Roberto was a C-level executive responsible for the corporate innovation strategy in a multi-billon dollar company. Over the last 9 months his staff got innovation teams operating with speed and urgency. The innovation pipeline had been rationalized. His groups whole-heartedly adopted and adapted Lean. His organization ran a corporate incubator for disruptive (horizon 3) experiments and provided innovation support for the divisions for process and business model innovations (Horizon 1 and 2.) He had an innovation pipeline of hundreds of employees going through weekend hackathons and 45 different innovation teams going through 3-month rapid Lean LaunchPad programs to validate product/market fit.

The next day Roberto and I sat together and listed what we knew about the innovation conundrum at Sprocket:

1. Sprocket is a permanent organization designed to execute a repeatable and scalable business model.

2. Roberto’s innovation teams are temporary organizations designed to search for a repeatable and scalable business model.

3. Sprocket had world-class resources and capabilities in brand, supply chain, distribution, sales force, financial metrics, all tailored to execute the existing business model, not to help search for a new one

4. The resources and capabilities optimized for execution interfere with the processes needed to search for a new business model

5. Sprocket needed new and different processes for innovation while retaining the ones that work well for execution

6. Sprocket wanted to use the same organizations that provided support for execution (brand, supply chain, distribution, sales force, financial metrics) to provide support for innovation

Roberto’s group had spent the last 9 months educating the company about why they needed to deliver continuous innovation, and why the execution and innovation teams need to work collaboratively. But while there was lots of theory, posters, memos, and lip-service to being innovative, it wasn’t working.

So what to do?

I offered that a top-down revamp of every business process should be a last resort. I suggested that Roberto consider trying a 6-month experimental “Get to Yes” program. His teams, not outside consultants, would write their own innovation processes and procedures.

Recognizing the RoadblocksMost of the impediments the innovation teams faced were pretty tactical: for example an HR policy that said the innovative groups could only recruit employees by seniority. Or a branding group that refused to allow any form of the Sprocket name to appear on a minimal viable product or web site. Or legal, who said minimal viable products opened the company to lawsuits. Or sales, who shut out innovation groups from doing customer discovery with any existing, or even potential customer. Or finance, who insisted on measuring the success of new ventures on their first year’s revenue and gross margin.

We agreed that the goal was not to change any of the existing execution processes, procedures, incentives, metrics but rather to write new ones for innovation projects.

And these innovation policies would grow one at a time as needed from the bottom of the organization, not top down by some executive mandate.

If we were successful, innovation and execution policies, processes, procedures, incentives, metrics would then co-exist side-by-side. In their day-to-day activities, the support organizations would simply ask, “Are we supporting an execution process (hopefully 90% of the time) or are we supporting an innovation process?” and apply the appropriate policy.

Get to YesThe “Get to Yes” program was pretty simple. Every time an innovation team needed a new policy, procedure, etc. from an existing organization (legal, finance, sales, HR, branding, etc.), they submitted a standard Sprocket corporate “Get to Yes” request form. The form was a single page. It asked what policy the innovation group wanted changed, why it wanted it changed, how it wanted the new policy to read, the impact the new policy would have on other policies and organizations, and most importantly the risks to the core existing business.

The “Get to Yes” request form looked like this:

The appropriate department had one week to ask questions, gather information, meet with the innovation team and evaluate the costs and risks of the proposed process. They could either:

1. approve and adopt2. suggest modifications that the team agreed with3. deny the request.

The approval form looked like this:

Although it was just a one-page form, the entire concept was radical:

The innovation team would be proposing the new process, procedure, metric, etc. – not waiting for one to be written.

There was a hard 1-week deadline for the execution team to respond. Yes was the default answer, a No required detailed explanation. Appeals went straight to the Chief Innovation Officer.

The big idea is that Sprocket was going to create innovation by design not by exception, and they were going to do it by co-opting the existing execution machinery.

The key to making this work was that if the request was denied, it automatically was kicked upstairs to the Chief Innovation Officer – and would be acted on the next week. And it’s there that the execution department had to make its case of why this request should not be approved. (If there was still no agreement, it became an issue for the executive staff.)

The time for a process resolution in a billion dollar corporation – two weeks. At Sprocket innovation was starting to move at the speed of a startup.

Lessons Learned

Innovation by design, not by exception Execution organizations now manage both execution and innovation Innovation teams write their own process and procedures Innovation policy, process and procedures get written as needed, one at a

time Over time a set of innovation processes are created from the bottom up Bias for immediate action not perpetual delay

Organizational Debt is like Technical debt – but worse

Posted on May 19, 2015 by steveblank

Startups focus on speed since they are burning cash every day as they search for product/market fit. But over time code/hardware written/built to validate hypotheses and find early customers can become unwieldy, difficult to maintain and incapable of scaling. These shortcuts add up and become what is called technical debt. And the size of the problem

increases with the success of the company.

You fix technical debt by refactoring, going into the existing code and “cleaning it up” by restructuring it. This work adds no features visible to a user but makes the code stable and understandable.

While technical debt is an understood problem, it turns out startups also accrue another kind of debt – one that can kill the company even quicker – organizational debt. Organizational debt is all the people/culture compromises made to “just get it done” in the early stages of a startup.

Just when things should be going great, organizational debt can turn a growing company into a chaotic nightmare.

Growing companies need to understand how to recognize and  “refactor” organizational debt.

I had lunch last week with Tom, the CEO of a startup that was quickly becoming a large company – last year’s revenue was $40M, this year likely to be $80M maybe even $100 million in ad revenue. They had reinvented a traditional print media category onto web and mobile devices for a new generation of users who were no longer buying magazines but reading online. Their content was topical, targeted and

refreshed daily. Equally important their VP of Marketing had brilliantly executed a stream of social media campaigns (Facebook likes and partnerships, email campaigns, etc.) to drive traffic to their site, which they then turned into ad revenue.

Tom was excited about their next big round of funding that valued them at almost ½ a billion dollars. He talked about how they were trying to maintain their exponential growth and told me how many people they were adding, and the issues of scaling that rapidly. (They had doubled headcount from 100 to 200 in the last year and were planning to double again.) While he kept bringing the conversation back to their big valuation I tried to steer the conversation back to how they were going to deal with:

training the influx of new hires – in both culture and job specific tasks retaining their existing hires who were working for intern-like salaries with little

equity.

His answer centered on the great location of the new building, what great furniture they were getting, and the compensation plans for the key members of the executive staff.

This didn’t feel good.

They’ve Never Run A CompanySince the meeting had been a courtesy to Phillipe, one of their VC board members, I grabbed coffee and asked him what scaling challenges he saw for the company. I was taken aback when I got a reply that sounded like VC buzzword bingo – phrases like “They’re a platform not a product” and the ever popular “they’re a potential Unicorn.”

While the strategy sounded like a great long-term plan, I poked a bit and asked, “So what’s the training and onboarding plan for the new hires? What are you doing about the pay scales at the bottom of the organization? Aren’t you concerned about losing qualified people that the company spent the last few years training but never compensated adequately?” I got answers that sounded like the Tom’s – new stock grants for the executive staff, great new building, and oh, by the way, Tom and his co-founder got to sell some stock in the new round. And let me tell you about the vision and strategy again.

As Phillipe kept talking I listened but not really, because I started realizing that while he was a genius in finding and nurturing great early-stage deals, and had a vision that sounded great for the new investors, he didn’t have a clue about how to actually scale a company. He had never run one, and worse, had never been on a board of a startup making the transition from searching for a business model and product/market fit, to the next phase of “building” the infrastructure to support scale.

Unless they were planning to flip this company, organizational debt was going to hit faster than they could imagine. They needed a plan to “refactor” organizational debt. And Tom wasn’t going to get it from his board.

Focus on Bottoms Up as well as top Top DownWhile the company had a great plan for keeping the top executives, and had all the startup perks like free food and dogs at work, they had spent little time thinking about the organization debt accruing with first 100 employees who had built the company underneath them. These were the employees that had the institutional knowledge and hard-earned skills. Originally they had been attracted by the lure of being part of a new media company that was disrupting the old, and were working for low salaries with minimal stock. And while that had been enough to keep their heads-down and focused on their jobs, the new funding round and onslaught of new employees at much higher salaries had them looking around and updating their resumes.

Surprisingly, given the tidal wave of new hires, formal training and job descriptions were still stuck in the early stage, “we’re too small to need that” mindset. The reality was that with hundreds of new employees coming on board the company desperately needed a formal onboarding process for new employees; first, to get them assimilated to the company culture and second, a formal process to train them in how to do their specific jobs. Unfortunately the people who could best train them were the underpaid employees who were now out looking for new jobs.

Organizational debt was coming due.

“Refactoring” organizational debtI had promised Tom the CEO we’d grab coffee again. When we did, I asked him about his head of HR, and heard all about what great medical and insurance benefits, stock vesting, automated expense account forms, movie night, company picnics, etc., the company had. I offered that those were great for an early-stage company, but it was time to move to a new phase (and perhaps a new head of HR.) Since Tom was an engineer I explained the “Organizational Debt” metaphor. He got it instantly and before I could even suggest it, he asked, “So how do I refactor organizational debt?”

I suggested that were seven things he could do – some quickly, some over time:

1. Put together a simple plan for managing this next wave of hiring. Tell each hiring manager:

No new hires until you write/update your own job description. Next write your new hire job description. Next write how you will train new hire(s) in their functional job. Next write how their job fits into each level upward and downward And how it supports the mission of each level upward and downward

2. Realize his expense plan is too low. I offered that it appeared he put together an expense budget using current employee salaries. If so, he was in danger of losing the people he most cared about keeping. He should stop thinking about 10% raises and start thinking about what he’d have to pay to replace employees who hold critical knowledge and train new ones. It felt to me more like 50% raises in quite a few cases.He needed to have his head of HR:

Do a salary survey of existing employees and industry comparables Identify the employees they wanted to keep Upgrade their salaries and equity ASAP

Some of the harder suggestions had to do with the organization as whole:

3. He needed to consider refactoring some of the original hires and their roles. Some employees don’t scale from “Search” to this new phase of “Build”. Some because they are performance problems, or don’t fit a bigger organization, attitude etc. Some of these may be friends. Leaving them in the same role destroys a sense of what’s acceptable performance among new employees.  This is hard.

4. In addition to refactoring the people, it’s time to relook at the company culture. Do the cultural values today take into account the new size and stage of the organization? What are the key elements that have “made it great” so far? Are they the same? different? how? why? It may be time to re-visit what the company stands for.

5. Now that the company no longer fits in a conference room or even the cafeteria, it needs a way to disseminate information that grows with the organization. At times, this requires the same messages being repeated 4 or 5 times to make up for the fact the CEO isn’t always delivering them personally. Emphasize in the corporate messaging that while it is a period of rapid change, the company culture will be an anchor that we can rely upon for orientation and stability

6. Does customer communication need to change? In the past any customer could talk to Tom or expected Tom to talk to them.  Is that feasible? Desirable?

7. Finally, since this is new territory for Tom and board, create an advisory board of other CEOs who’ve been through the “build” stage from a startup to growing company.

Lessons Learned

Companies lucky enough to get to the “build” phase have a new set of challenges

o They’re not just about strategyo It’s about fixing all the organizational debt that has collected

Onboarding, training, culture, and compensation for employees at the “build” phase all require a fresh look and new approaches

Failing to refactor organizational debt can kill a growing company

Fear of Failure and Lack of Speed In a Large Corporation

Posted on March 11, 2015 by steveblank

I just spent a day working with Bob, the Chief Innovation Officer of a very smart large company I’ll call Acme Widgets.

Bob summarized Acme’s impediments to innovation. “At our company we have a culture that fears failure. A failed project is considered a negative to a corporate career. As a result, few people want to start a project that might not succeed. And worse, even if someone does manage to start something new, our management structure has so many financial, legal and HR hurdles that every initiative needs to match our existing business financial metrics, processes and procedures. So we end up in “paralysis by analysis” – moving slowly to ensure we don’t make mistakes and that everyone signs off on every idea (so we can spread the collective blame if it fails). And when we do make bets, they’re small bets on incremental products or acquisitions that simply add to the bottom line.”

Bob looked wistful, “Our founders built a company known for taking risks and moving fast. Now we’re known for “making the numbers,” living on our past successes. More agile competitors are starting to eat into our business. How can we restart our innovation culture?”

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What Drives Innovation?I pointed out to Bob the irony – in a large company “fear of failure” inhibits speed and risk taking while in a startup “fear of failure” drives speed and urgency.

If we could understand the root cause of that difference, I said, we could help Acme build a system for continuous innovation.

I suggested the best place to start the conversation is with the 21st century definition of a startup: A startup is a temporary organization designed to search for a repeatable and scalable business model.

Startups have finite time and resources to find product/market fit before they run out of money. Therefore startups trade off certainty for speed, adopting “good enough decision making” and iterating and pivoting as they fail, learn, and discover their business model.

The corollary for a large company is: A company is a permanent organization designed to execute a repeatable and scalable business model.

That means in their core business, large companies have a series of knowns. They’ve found product/market fit (what products customers want to buy). They’ve learned the best distribution channel to get the product

from their company to the customer. They’ve figured out the revenue model (subscription, license, direct sale, etc.) and how to price the product. They know the activities, resources and partners (manufacturing, regulation, IP, supply chain, etc.) – and the costs to deliver the product/service and have well defined product development and product management tools that emphasize the linear nature of shipping products to existing customers. There are financial metrics (Return on Investment, Hurdle Rate, etc.) for new product development that emphasize immediate returns. And everyone has job titles and job descriptions that describe their role in execution.

Why Execution and Innovation Need Different Tools, Cultures and OrganizationsTalking to Bob I realized that at Acme Widgets (and in most large companies) the word “failure” was being used to describe two very different events:

failure in execution of a known product in known market failure in searching for innovation when there are many unknowns

Therefore, in a large company, failure to meet a goal – revenue, product delivery, service, etc.– is a failure in execution of an individual and/or organization to perform to a known set of success criteria. In corporations the penalty for repeated failure on known tasks is being reassigned to other tasks or asked to leave the company.

As I sat with Bob and his innovation team, I realized that all of Acme’s new product innovation initiatives were being held to the same standard as those of existing products. Acme was approaching innovation and disruptive product ideas using the same processes, procedures, schedules, and incentives within the same organizational structure and culture as its existing businesses.

No wonder innovation at Acme had stalled.

The Ambidextrous Organization – Execution and InnovationThat companies should be simultaneously executing and innovating isn’t a new insight. For decades others have observed that companies needed to be ambidextrous. So while we did not lack the insight that execution and innovation need to be separate, we did lack the processes, tools, culture and organizational structures to implement it. Corporate innovation initiatives have spent decades looking at other corporate structures as models for innovation when in fact we should have been looking at startups for innovation models – and adapting and adopting them for corporate use.

That’s now changed. The strategy and structure for 21st corporate innovation will come from emulating the speed, urgency, agility and low-cost, rapid experimentation of startups.

What We Now Know about Corporate InnovationIn the last five years, as the need for continuous innovation in companies has become critical, Lean innovation methodologies (Lean LaunchPad/I-Corps) have also emerged. These methods allow rapid experimentation – at startup speed – with the same rigor and discipline as traditional execution processes. Adopted by the National Science Foundation and large companies, over 1000 teams have used the process, and the resulting commercialization success speaks for itself.

But running a Lean Startup inside an organization designed for execution is an exercise in futility. Working with large corporations we’ve learned that innovation groups need their own structure, culture, tools (Lean, Design Thinking, etc.), metrics (validated/invalidated hypotheses, Investment Readiness Level) and processes. And both organizations – execution and innovation – need to understand that the success of the company rests on how well they can cooperate.

Bob’s eyes lit up as he said, “Now I understand why innovation seemed beyond our reach. We were missing four ideas:

1. Accepting failure and running at speed are part of an innovation culture.2. We need to separate out innovation risks from execution risks.3. There are now proven Lean innovation methodologies (Lean LaunchPad/I-

Corps) that we can use off the shelf in building an innovation culture without inventing our own.

4. We need to make sure that management no longer uses execution metrics to manage and judge our innovation teams.

Lessons Learned

In a startup “fear of failure” drives speed and urgency In a large company “fear of failure” inhibits speed and risk Innovation means experimentation in searching for a business model. Often

failure is the norm not the exception. Innovation processes and metrics need to be different from those of

the execution organizations There are proven Lean innovation methodologies that work in large existing

companies