The business models of large corporations are being disrupted faster than ever before. For example, Netflix is disrupting the video distribution industry, while new lucrative markets are being created by innovative start-ups such as Uber, Nest, and SpaceX. As a result of these developments, corporations are starting to realise they will need to reinvent their disruptive innovation model.
We have proposed a new model that brings together corporate venturing, intrapreneurship, corporate development and business development. In order to determine whether they can successfully achieve their disruptive innovation goals, corporations will also need to find a way to measure their track record under this model. For this reason they must identify the right key performance indicators (KPIs), which I call innovation KPIs, to distinguish them from execution KPIs. Silicon Valley’s ecosystem, particularly venture capitalists (VCs), can play a key role in the innovation model’s reinvention and offer best practices for relevant innovation KPIs.
Large corporations are in a bind because they need to address two conflicting sets of goals. They need to continue to execute on their existing business model. But they also realise they will not be able to achieve big gains just by tackling efficiencies and productivity improvements. To achieve such gains they need to improve their ability to disrupt.
Corporations must establish two distinct types of KPI in order to track their performance – execution KPIs, which we associate with the performance of existing business models, and innovation KPIs, which we associate with the achievement of disruptive innovation-related goals.
Execution KPIs are precise, with well-understood roles and responsibilities for the organisations being measured. They are easier to define and have been studied extensively. For example, IBM continues to build its big data analytics business. For this business it may use a “percentage of professional services-only big data analytics contracts completed during the past four quarters that will convert to analytics software and services contracts over the next two quarters” as an execution KPI in order to measure the effectiveness of its big data professional services and software sales teams.
Innovation KPIs, particularly those associated with disruptive innovation, measure long-term, less precise and therefore more conceptual goals, with less-understood organisational roles and responsibilities for achieving them. They measure the performance of businesses, or projects, with unknown paths to success – as any VC who invests in early-stage companies will attest, most such efforts fail – undefined or poorly understood technologies, unspecified business models, underdeveloped markets, and often all of the above. As a result, corporations have a hard time defining innovation KPIs or even establishing a culture of measuring the impact of their disruptive innovation efforts.
For example, IBM’s CEO recently stated her hope that by 2018 the Watson business would be producing $1bn in annual revenue and $10bn by 2024. Creating a new business that can grow from $0 to at least $1bn annually is the most frequently stated innovation KPI and has all the characteristics mentioned above. Google’s, Amazon’s and Apple’s CEOs have also used this innovation KPI around their YouTube, Kindle and iPhone efforts respectively.
In my experience most corporations that attempt to measure the return on investment (ROI) of their innovation efforts tend to track only the performance of their research and development organisations with KPIs such as “number of patents issued per year”, or “annual revenue generated through the licensing of intellectual property”. They do so because they can easily measure the achievement of short-term, concrete goals such as those associated with the issuance of filed patent applications or the revenue generated from the licensing of patents.
To assess the performance of their disruptive innovation efforts better, companies will need innovation KPIs that measure the ROI generated from the integrated and collaborative efforts among the four organisations participating in the proposed disruptive innovation model – corporate venturing, intrapreneur development, corporate development and business development – and relate them to corporate or business unit goals.
- Identify and invest in innovative start-ups and their visionary teams.
- Prune away – by shutting down or selling – portfolio companies with a low probability of generating significant value during the time horizons they set, while increasing the investment in the companies emerging as winners.
- Manage businesses with unknown paths to success, undefined or poorly-understood technologies, unspecified business models and underdeveloped markets, in the process mitigating a variety of risks and driving to high-value exits.
Around these activities VCs set their own innovation KPIs. They assess their performance on the value or ROI they generate, to their investors and the employees of their portfolio companies, through their investments; the capital and time efficiency with which this value is generated; and the level of risk they underwrite while creating this value or ROI. The generated value can be measured in terms of returns from exits, year-on-year portfolio revenue and profitability growth, and the valuations resulting from new financings of existing portfolio companies.
VCs use their networks to forge new partnerships for their portfolio companies, help them acquire new customers and recruit employees. In other words, today’s successful Silicon Valley VCs combine financial, business development, corporate development and entrepreneur selection and development skills in order to achieve their goals. The KPIs VCs use are uniquely appropriate for becoming the basis for innovation KPIs corporations can establish to measure the performance of their own disruptive innovation efforts.
With that in mind let us now revisit the Watson case, the stated $1bn annual revenue by 2018 innovation KPI and how IBM’s groups can collaborate to achieve it, measuring their performance in the process. I should point out that in addition to the new business unit IBM launched around Watson, which includes business development and corporate development groups, the company has formed a venture fund to invest in innovative start-ups and create an ecosystem, and continues to expand the activities of its Silicon Valley-based venture capital group. With these resources IBM should:
1. Use its Watson venture fund to invest in both external start-ups – working with entrepreneurs – and internal start-ups – working with its intrapreneurs – that address problems the business unit does not want to or cannot address. These start-ups must be viewed as having seven to 10-year horizons to success. The investments should be meaningful – $0.2m-$1m in seed-stage companies, $2m-$5m in early-stage companies, $10m-$20m in later-stage companies; similar in size and scope to the investments Google Ventures or Salesforce are making. Start-ups that are not creating value – according to some or all of the VC measures listed above – to Watson’s overall goal should be pruned away, whereas investment in the ones that continue to
demonstrate promise and value should increase.
2. Use the corporate development group to acquire companies with $30m-$100m in annual revenue that can provide to the Watson unit ROI in three to four years by adding to the revenue it generates organically, improving the management talent, and expanding its overall solution; and to acquire the fastest-growing and maturing of the start-ups funded through the Watson fund. This is similar to what Google has done with Nest – investment by Google Ventures followed by acquisition.
3. Use the business development group to establish partnerships among the start-ups in the Watson
fund portfolio, thus increasing their probability of success, as well as between each portfolio company and the business unit. If the acquired companies are left to operate independently for some period after the acquisition, then use the business development group to set up partnerships between the Watson fund portfolio companies and each of the acquired companies, again in order to mitigate the risks associated with the funded start-ups, as well as improve the ROI derived from the acquired companies.
Innovation KPIs should be recognised as a separate type of KPI. Their definition is hard but necessary if companies are to become better at understanding the impact of innovation to their business. VCs can provide best practices for innovation KPIs and work with corporate innovation groups to define them.