All senior management teams must walk a tightrope between funding exciting ideas for new products, services, or markets and keeping costs and risk-taking in check. Shareholders, boards, and managers alike understandably don’t want to waste money or take unnecessary risks that harm the reputation of carefully cultivated brands or cost a lot of money in fines and work to remedy the problem.
However, as in-depth analysis shows, those companies that have been able to consistently grow faster than industry peers, even in tough economic times, do fund bigger, bolder ideas. They have also have invested more consistently in transformational growth bets, achieving a 79% greater return on R&D spending over the average organization.
In short, these “efficient growth” companies are successful because they weight the R&D portfolio toward more transformational innovations. This is certainly easier said than done, but those that have managed it, first address barriers or “anchors,” such as red tape, an emphasis on cost reduction, short-term biases, and fear of failure.
Two Steps to Take
R&D teams should work with corporate leaders and peer functions such as Finance to identify smart risks to take, rather than dwelling on uncertainties to avoid. To encourage calculated risk taking, R&D teams can take two steps.
Accept a higher degree of uncertainty for new growth ideas: Given the uncertain nature of big bet investments, the R&D team at one large oil and gas firm that CEB, now Gartner works with often struggled to secure internal approval for transformational projects. To overcome senior leaders’ apprehension, the CEO established new criteria for evaluating long-term, breakthrough investments.
While the company continued to perform net-present-value and return-on-investment calculations for transformational project proposals, managers deliberately shifted to emphasize qualitative drivers of strategic value — particularly a project’s alignment with corporate growth objectives and ability to offer a competitive advantage — to account for the unreliable nature of quantitative projections when evaluating transformational investments.
Establish exit triggers to objectively end initiatives: While many R&D teams have criteria for initially evaluating investments, it is crucial to also outline “exit triggers” to help objectively determine when to end — or when to persist with — a big bet initiative.
To ensure projects receive the appropriate level of scrutiny, the R&D team at a big maunfacturer set a 30- to 90-day “churn period” to investigate a project proposal for uncertainties; this reduces emotional attachment to “pet projects” while also ensuring promising ideas are not under-scoped. At the end of this period, the company can feel confident that a project has undergone fair and thorough vetting before it is approved or rejected.