Thursday, December 20, 2007

Innovation Management - Role of the Accounting function

"If you ever become a marketer, then your friend in the company should be the accountant"

These were the words of advise given to me by my Marketing professor at Red McCombs School of Business in University of Texas, Austin. I recall this statement every time I think of costs involved in new product development or in every marketing endeavor I undertake.

The above words also applies to all persons leading an Innovation projects: Be it new product development, process improvement or research.

In the world of innovation, accountants & their contribution are one of the least appreciated. A success/failure of an innovation project is credited to the project manager or product manager or the development manager, but rarely the name of finance controller/accountant are even mentioned - sad but true.

The reason for this apathy is really simple: Engineers or product managers or development managers are far disconnected from the world of finance & accounting departments, that they really have no clue about the actual numbers. The problem is more acute in large companies, where functions and roles are so widely distributed that the development/product manager has no clue as where the accountant works! Added to the organizational complexity, there is a natural tendency among engineers to focus on the product - rather than monitor the expense accounts. Many engineers also find it extremely challenging to read an account books.

Accounting is a very important function

The role of the accountant is to maintain records of all expenses, keep financial checks and balances within the organization. All the great innovation ideas and projects can vanish in the wake of an accountant’s recommendation - So never underestimate the power of the accountant. Accountants control the money taps - they can turn it on or off.

Accountant is your partner

I remember a time when I was bidding for an IT project. The person with whom I had to work closely to develop the financial model was an accountant - a Chartered accountant. Together we developed the cost models and based on the cost models, we cameup with a pricing model to present it to the client.

When developing a plan for an innovation project, it is best to sit with an accountant and comeup with a financial plan. Gather the financial information that determines the viability of the project, at what levels of expenditure the projects become unviable, develop a plan to monitor the project expenses and constantly review the viability of the project. To do all this, you have to work with the accountant as a partner in progress.

Also remember this: Money speaks louder than ideas!

So if your idea is backed by the accountant, then people will listen to you.

Track all your Costs
Once a project is approved, then managers need to keep a close tab on the costs of the project. But that’s in an ideal world.
Reality in most organizations is that product/development managers have little clue of what their current costs are, what their total costs is, and how much more money will they need to complete the project. I have spoken to several development managers in several fortune-500 companies, and they don’t know their numbers, instead they will talk about the time frame of the project, head count etc., but not the numbers - because they do not know the numbers and nobody in the organization will ever tell them.

Smaller companies tend to do better. Managers in smaller companies know the costs and therefore can take better and faster decisions.

Understanding all the costs is a critical step in managing the project. It will help you plan better and know when and where to manage the costs. Accounting information also helps you to know when it is a good idea to kill a project. Kill the project when you know that the project does not deliver the promised financial returns to the investors. Here again your friend in the accounting department can give you with the required data for NPV, IRR financial analysis.

Money speaks louder that your ideas

Investors are constantly looking at the returns on their investments. So when you have a bright idea - but do not have the numbers to support it, the chances are that your ideas will not be considered for investment. But when you can substantiate the idea with profitability and have a thorough financial plan to support it, you will be heard and often the ideas will get approved.
New products will never sell itself to investors without the financial justification.

Product Development & Budgeting

New product development requires money - and that means budgets & an exercise in budgeting. Accountant will keep a track of the money spent for the project and can notify you at the first sign of trouble - way before you can exceed the budget. Such timely warnings will help you manage the operations and take better decisions.

Closing thoughts

Innovation Managers must know at least the basics of accounting to understand the numbers. Managers should take the initiative to contact the right person in the accounting department and then work as a team.

Risk Tolerance & Innovation in India - A cultural insight

Indian businesses are known for their low risk tolerance. Even in a high competitive, research oriented industry such as Pharma, Indian firms: Cipla, Ranbaxy, Dr Reddy Labs, Sun Pharma etc., thrived on reverse engineering and producing generic versions of patented drugs.

Things changed in 2005, when India switched to product patent regime. Indian pharma companies promptly adopted by hiving off their R&D divisions into separate ventures. Their main rationale to spin of the R&D centers:- "Reduce Risks"; Drug research is expensive and returns are not guaranteed, therefore investments in R&D will affect the profitability of the company and will reduce share holder value, thus by spinning of the R&D unit into a separate venture, the R&D expenses will be off the books. Since the Indian investors are looking for immediate returns - which will be met by selling generics, companies were happy to spin off their R&D wings.

For more information see:

The other rationale for spinning off the R&D part of the business is to capitalize on India’s R&D strengths by having tie-ups with global pharma firm’s R&D efforts.

"Four major drug firms -- Dr Reddy's Laboratory, Sun Pharmaceuticals, Nicholas Piramal India Ltd and Ranbaxy Laboratories -- spun off their research and development and drug discovery operations into separate units to unlock better value for shareholders and attract funds for new products. The collective market capitalization of new research entities is estimated to touch $120 billion in less than a decade."

For more information see: Indian pharma cos on R&D drive in 2007

What can we learn for this?

The collective exercise of Indian pharma companies gives us insights into the workings of the Indian culture and its attitude towards innovation:
  • Indian companies will invest in product innovation only when they are forced to do so.
  • Protecting shareholder value is most important. I.e., Companies are not high on risk tolerance, unlike the American businesses, Indians will not bet the company on any product innovation.
  • Indian companies are high on leveraging their strengths - Spin off their R&D units and get external investors to fund the R&D part of the business. Thus attracting a different set of investors who have higher risk tolerance

Wednesday, December 19, 2007

Killing Creativity

Employees are always creative, so the organization takes all the efforts to kill creativity. Often times when an idea is generated, it will still be in infancy and may sound impractical - or even absurd. Thus making it the perfect time to kill the idea.

The common phrases used to kill ideas are:

  1. A good idea, but …
  2. Let's sit on it for a while.
  3. Let's form a committee.
  4. It is against company policy
  5. Who else has tried it?
  6. Costs too much
  7. All right in theory
  8. Be practical
  9. Too hard to administer
  10. The old timers won't use it.
  11. We've never done it that way.
  12. It's not budgeted.
  13. It's not good enough.
  14. It needs more study.
  15. Don't start anything yet.
  16. We've been doing it this way for a longtime and it works.
  17. Why hasn't someone suggested it before if it's such a good idea?
  18. This is way ahead of the times
  19. Let's take a survey first.
  20. It's not part of your job.
  21. Let's discuss it.
  22. Let's get back to that.

If you are a manager or a leader in your organization and is reading this blog, then please remember not to use the above phrases and kill a creative idea in its bud.

Tuesday, December 18, 2007

Why Companies fail to innovate?

Today companies are scrambling to be innovative. Success stories of innovation at Apple, Google, Toyota, Samsung, GE, P&G, etc., has made innovation as a key requirement in many organizations.

Several companies in BRIC economies are now thinking on how to build a culture of innovation in their organization. However hard they may try, many of these firms will fail to build a culture of innovation if they do not overcome the following shortcomings.

I have compiled the areas where most Indian companies have serious challenges when it comes to creating a culture of innovation in their organization. The challenges can be classified into three broad categories:

1. Leadership

  • Lack of Vision or strategy for innovation
  • Setting short term goals for innovation
  • Lack of an innovation policy or an unclear policy
  • Focus on past & current successes rather than the challenges of the future
  • Company wide commitment towards innovation is missing
  • Company leaders do not take ownership for innovation
  • Innovation is deligated to mid-level management
  • Top leadership is constantly shifting priorities
  • Top management is unwilling to change at the pace demanded by innovation.
  • Company Politics in resource allocation for innovation and recognition
  • Stong hierarchy - over-management and review of new ideas
  • Micromanagement by top management
  • Risk aversion at the top management - Punishment for failure
  • Rewarding crisis management rather than crisis prevention
  • Underfunding new ideas in the name of profitability or business needs
  • Unwillingness to kill an innovation projects that are not succeeding.

2. Human Resources

  • Inadequate "innovation coaching"
  • Lack of awareness towards Intellectual property rights
  • Lack of creativity training
  • Lack of proper brainstorming facilties
  • Idea review by "senior" committee
  • No reward & recognition programs
  • Innovation not part of the performance review process
  • Innovation management is an ad-hoc process
  • Innovation is a function of R&D department
  • Culture that promotes hierarchy & power position over merits/performance
  • Overloaded workforce - capable persons are overwhelmed with work
  • Micromanagement by mid-level managers
  • Lack of creativity time for employees
  • No policies to encourage and manage networking with other organizations
  • Lack of opportunities for employees form formal & informal networks
  • Lack of customer interaction or Inadequate understanding of customers’ needs
  • Addiction to left-brained, analytical thinking - "data is God".

3. Company Systems

  • No systems to capture and document ideas
  • Inadequate knowlege management & knowledge sharing systems (KMS)
  • Inadequate systems to capture knowledge from past failures & past successes.
  • Lack of Innovation management tools
  • Lack/limited of access to global information databases
  • Lack of work collaboration, work flow management tools
  • Lack of interaction with Universities and other organizations
  • Current IT systems are rigidly managed with little inputs from users

In most cases, the task of creating a culture of innovation involes removing the above mentioned bottlenecks and then create adequate support systems to encourage innovation. People are naturally creative, when they are provided the right environment, innovations will start flowing naturally.

Ninedots, an Innovation consulting company in Bangalore helps organizations build a culture of innovation by looking into the organization’s current leadership, current practies and systems and advising on the action plan. Ninedots also conducts training in creativity, innovation, change management, problem solving & decision making, innovation managment, IPR, and leadership for innovation.

Tata’s EKA will usher a new computer revolution

A month ago world was surprised by Tata’s EKA - the world’s fourth fastest super computer built by Computational Research Laboratories (CRL) ), a wholly owned subsidiary of Tata Sons.
For the first time in the world, a private company which has no experience in building computers - let alone high performance computers(HPC), has ever build such a computer. The story of EKA’s development will be good innovation casestudy.

"CRL's supercomputer, EKA, has put India at the forefront of high performance and supercomputing technology globally. EKA gives us the ability to address applications in multiple disciplines including software development and research," said S Ramadorai, chairman of CRL and CEO and MD of Tata Consultancy Services. "The successful launch of the supercomputer has been driven by an exemplary team at CRL working collaboratively with scientists across the Tata Group."

Tata Industries have always demonstrated their risk taking abilities and their vision for the future. With EKA, Tata’s have heralded a begining in the era of super computing for the masses. EKA can provide an ideal platform for Tata Consulting Services (TCS) to offer high performance computing services - The opportunities in this space is estimated to be about $31 billion. EKA opens the doors for TCS to offer a wide range of services in terms of:

  • HPC consulting, (HPC - High Performance Computing)

  • HPC Software development,

  • Outsourced Product development

  • Data center management,

  • Remote Infrastructure management

  • Grid Computing or Offer computing power as an utility

  • Build, sell & maintain super computers for other agencies.

Having demonstrated such a spectacular success, Tata’s should now capitalize on it. India can become a center for offering super computing services.

IBM, Google, Yahoo, Amazon and few others are contemplating on offering Grid computing, TCS or Tata’s can join them in doing the same by selling computer power to corporations, R&D labs and government agencies all over the world.

Selling massive amounts of computing power is made feasible by Tata’s VSNL, a long distance telecom company, that is built the largest undersea fiberoptic network - to carry all the needed bandwidth.

This is just the begining of Indian Innovation powers. Indian Innovation and Entrepreneurship will be the key driver of the global economy in the 21st century.
Congrats & Thankyou to all the team members who developed EKA.

Also See:
Google and the Wisdom of Clouds

Value of Divergent Thinking

Assume that you are a manager and you assemble your team for an important meeting to solve an existing problem. In this meeting, the moment you describe the problem, there will be one or two persons who will come up with a possible solution and the rest of the team members agree with one solution or the other, and finally the team votes or builds a consensus on the proposed solution. The meeting is over and every one come out happy with the quick result.

An alternate scenario will be that, the moment the manager describes the problem, everyone agrees with the problem statement, and the manager immediately explains his solution to the problem & every team member agrees with the manager and the meeting is over.

Another possible scenario will be that, once you have described the problem, there will be two or three possible solutions being proposed by the senior/experienced staff members - and the rest of the team takes sides with one person (and the associated idea) and the meeting breaks down into a fierce debate - being fought on political grounds, where each party wants to prove that their solution is better than the other group’s solution. Often times the political battle rages on till one side wins or till the problem disappears.

In most cases( ~99%) the standard response to the problem being posed will fall in the above categories. Only in a rare case, the group will come out of the meeting with the idea that they need to think for more possible solutions. And in the rarest of circumstances, the team will come out with hundreds of possible solutions - this is almost a one in a million case.

In my experience, I have always seen that most people are happy with one or two satisfying solutions to any given problems. Many a times managers, who are responsible for problem solving, limit the ideas to a small set and then encourage people to discuss the merits/demerits of the limited set of ideas. Even when managers are presented with a complex problem and the manager calls for a brainstorming session, the final set of ideas/solutions taken out from the session will be very few - mostly one or two ideas.

This type of behavior is called convergent thinking - i.e., people tend to converge and select on a small set of possible solutions - which are then analyzed in great detail before implementing it. People want to find a solution to the stated problem at the earliest and the first solution which satisfies the need becomes the final solution.

Convergent thinking is a natural process for all adults. People are often forced to think that there is only one correct answer, thus when they find the fist answer, they stop thinking. It is also influenced by our ability to carry multiple ideas in our heads and think through all the possibilities. This behavior is also seen in sports: Only in a few sports such as chess, Golf, & poker players tend to work on multiple options while in rest of the sports the response is immediate - almost done on instinct or with very little thought.

Divergent Thinking

The term "Divergent Thinking" was coined by Joy Guilford. Divergent thinking refers to the ability to generate several ideas from a single input. It is the ability to produce many ideas, to produce unusual and original ideas, and to take an idea and spin out elaborate variants of the idea. Not all ideas generated by divergent thinking need not be necessary correct or even workable; the ideas may be fanciful, outlandish, impractical and even absolutely wrong.

Divergent thinking is an innate human ability to think of several ideas or possibilities - all ideas generated by the human brain. Human brain has the ability to imagine things and come up with ideas; even when we are aware that such an idea may not be practical or viable. Most often, people do not express such ideas; instead people tend to express what is perceived as feasible ideas only.

To illustrate, think about traveling from your home to your workplace. The moment you read the sentence, you would have thought of one most common route, and then a few alternative routes. This is typical convergent thinking. If I were to ask you to chart out 100’s of different route to travel from your home to workplace, then you will take time and think of all possible ways, and many of them will be wild & absurd ideas(eg. San Jose to San Francisco via New York), but a few will be practical options ( Can I use BART, Caltrains or take a bus? Or look up the map for what other alternates I can use to drive) This is divergent thinking.

Benefits of Divergent Thinking

The value of divergent thinking lies in making people think, making people think deliberately and in that process, people come up with some great ideas.

In a typical business scenario, the normal practice is jump into a final solution at the earliest. This is almost an instinctive behavior. But this limits the options and it often relies on past experience and almost never considers the new & untested ideas. Divergent thinking on the other hand, forces people to think of all possibilities and in that process generate new ideas or solutions.

Take a look at all the successful products that are out there: Starbucks Coffee, Tivo, iPod, Google, Pentium, etc. These were not the first in the market, they were late comers to the market and they succeeded beyond the wildest dreams of their creators.

A common factor among them is that the success of the products relies on a new idea - a new way to sell coffee, a new way to enjoy music, most effective information gathering in Internet, a new way to market CPUs.

These ideas are the products of divergent thinking.

Another way to look at the value of divergent thinking is to look at the competitive markets. When two companies are competing, their product lines will be very similar, so if one wants to outsmart the competition, then one has to think of ideas that are dramatically different that that of the competition.

Pepsi & Coca Cola are fierce competitors, and Pepsi was able to surpass Coca Cola by entering into enegry/sports drinks, fruit juices etc.

Success is fully dependent on execution of radical ideas - but radical ideas is the starting point - One can get these radical ideas only by divergent thinking.

How to do divergent thinking

Divergent thinking is not a natural process for the human mind. One has to deliberately work it out. The most common way to do divergent thinking is to brain storm. Brain storm for 10-15 minutes, document all the ideas that came out and discard the first 10-15 ideas. The ideas that come out in first few minutes are all based on past experiences and there will be nothing radical in it.

The next step is the true divergent thinking - Continue to brain storm for next one hour and capture all these ideas. The ideas that flow in this stage are truly the products of divergent thinking. At this stage, people will come out with new, untried, untested, bold, radical, crazy, impractical-at-the-first-sight ideas. These ideas will be tough to act on and often people in the room have no clue as to how they can execute these ideas. This leads to the next stage - the stage of critical thinking.

Divergent thinking requires a new way of working. This is best illustrated by the following figure:

The first step is to clearly define the problem statement or the task at hand and then describe the desired end state, i.e., describe what is that we want to achieve. Next, indulge in brain storming for few hours, capture all ideas generated. Note: During brain storming, do not juge the ideas or do any analysis of the idea, just generate ideas and document the ideas.

The next step is the critical thinking or critical analysis. In this step, people will collectively analyze all the ideas generated and look at the merits/demertis of the ideas, combine different ideas, select few ideas for further analysis or converge on few ideas for implementation.
Critical thinking is quite a challenge. The ideas generated during the divergent thinking phase often looks impractical but in the critical thinking phase we need to extract practical ideas out of new, untried, untested, bold, radical, crazy, impractical-at-the-first-sight ideas. This process is what I call "Ideas to concept".

There are tools and methods for developing ideas into concepts and I will write about it in future. For now, lets just say that during the critical thinking process, we have to analyze all the ideas generated and select few ideas for further analysis or converge on few ideas for implementation.

This process will give richer and more distinguishing ideas for implementation and will almost certainly give you a competitive edge.

However, I must warn you that there are great dangers in divergent thinking. Firstly the stake holders (& the organization) must be open to new/radical ideas, else all efforts are bound to fail. Secondly, it takes courage to present and implement a bold/radical/new idea - often times, people have natural tendency to confirm with the surroundings and not to be an odd-man-out.

Closing Thoughts

Divergent thinking is a very powerful way of thinking up new ideas. In recent times, several leading thinkers and practitioners have successfully demonstrated it: Starting with Leonard DaVinci, General Rommel, Field Marshall Montgomery, Steve Jobs, Steven Spilberg, Ophra Wenfrey, Mahatma Gandhi and lot more.

Also read: