Welcome to our second podcast. We had a blast on our first one last time around with Dr Robina Chatham, and this time we are welcoming Chris Hodgson. We are looking at whether corporates can imitate some of the principles of start-ups - those new companies who introduce new business models, new services to consumers and corporates.

Chris is a Baxter Thompson associate. He specialises in lean startup and digital innovation. He’s helped start ten businesses as well as building his own digital business from scratch to over 35 employees and has worked with many more helping them to tackle the challenges from launch through to scaled up innovation.

Jon - You’re specialising in lean principles and you apply them in doing these startup ideas. Is there a methodology associated with this, or can anybody just hack away and see if they win or lose in the game?

Chris - Well, people hacking away is essentially what they used to do and what a lot of people still do. For me it’s a yes - lean is a structured approach to the world of start-ups and arguably comes out of the fact that because so many start-ups have been created in the last 20 - 30 years, and there’s now enough people doing it, it was inevitable that a methodology or a structured routine would develop to tackle the problems that a start-up faces.

The lean startup approach - lean, again we have to clear about the terminology we use - lean has been around for a while, originating from manufacturing and it has evolved and has been adapted to different industries until it has been adapted to the start-up world. We have what we call the ‘lean start-up’ which was originated by a guy called Eric Ries in 2005. My knowledge and expertise is around the lean start-up and not around other terms of lean. There are experts who specialise in lean but have no idea of what lean startup is.

The lean startup is a structured approach to deal with environments of uncertainty and really extreme uncertainty. So environments where you either have not done this before, or where no-one has done this before, so it’s impossible to know what you’re supposed to do before you go about doing it. To try and deal with this scenario you’re forced into a trial and error approach, but if you just go about trial-and-erroring, or worse, not even trialling-and-erroring and trying to plan for it, then you will fail. You want to have an approach that you can follow and you can understand and that you can refer to as you progress through this minefield where you don’t know where you’re going, where the obstacles are, where the obstacles are going to be, and how best to react. That’s really what the lean startup is defined to help you to do

Jon - I come from a technology background of the last 14 years representing the IT department to all the other business stakeholders in a corporate environment. It’s a very different picture - we like certainty, but we’re also dealing with a lot of existing systems, processes, everything is very much solidified. The way you would do a purchase to payment for example, has been codified with instruction manuals with no room for uncertainty at all.

In addition to that we mainly deal with business requests that come in about the existing systems and processes.  If they’re wanting to make a change to the way they’re doing purchasing, then it’s like which bit of the purchasing process and which bit of the system, so it’s more a short term tactical thing. Other examples could be that we get a last minute request to on-board a new client, or expose information to suppliers so they can do some analysis or something like that. Or maybe we’ll get requests around a data compliance issue or an audit - mainly operational stuff. So when you’re talking about massive uncertainty and adopting those principles, then that’s’ great. I’ve got a long list of projects and don’t have the time to even think about them in a different way

Let’s say for example that do we recognise that digital is important, we do recognise that innovation is important. How best would it be for a corporate for it to start using principles from a lean startup world?

Chris - It’s important to realise that all of the challenges that you’ve raised there are valid challenges for existing businesses, for large corporations. But it’s also important to realise that the world is changing and there are other challenges that they need to be paying attention to and staying on top of.

There is a really good stat that I like to use when I’m talking about this sort of stuff with corporate organisations, and that is of the companies that were in the FTSE100 in 1999, only 50% of those were still in the FTSE100 in 2015. They predict that of those companies that were in the FTSE100 in 2015, by 2020 only 50% of these will still be there. The message is that things are changing and they are changing pretty quickly so if you are only focused on operational and looking for minimal gains and fine margins, then you are going to miss the big shift and movement that is coming your way and not have time to react to that once you realise what’s actually going on.

So it’s actually imperative that you not only focus on your list of 100 things that are going to deliver incremental gains on the work that you’re doing, but you also keep an eye on bigger picture challenges. What’s interesting is that the lean start-up innovation approach is critical for your business to survive, but it operates almost in a complete antithesis to how big corporations currently work and there have been a lot of challenges in trying to incorporate two processes or approaches into a single organisation.

The way that has been most successfully adopted is to implement what’s called a ‘three horizon’ approach. To explain it quickly, if you imagine that horizon one is your BAU (Business as Usual). This is what you do already, this is your bread and butter; this pays for everything. Horizon two is your traditional innovation on top of what you do already - so this is a new feature or an idea for a new product that you can add that adds value to your current customers. And you’ll trial it, and it’s going to be amazing. Think KitKat coming up with a peanut butter KitKat; that’s Horizon Two innovation.

The Horizon Two innovation is where your business is going to go in terms of its core revenue in the next 3 - 5 years. So you are seeding the potential revenue, future revenue for the business as the environment shifts and the market shifts, and you’re adding your new products and that’s going to take care of your business - hopefully if you get it right - in the next two or three years’ time.

Horizon Three is what’s going to take care of your business in five years’ time, in ten years’ time. Where we’ve just demonstrated by that statistic, that the world is changing so quickly, that in five years’ time 50% of the biggest companies in Britain will no longer be the biggest companies in Britain, there will be a complete change. And you don’t know what is going to change and how it’s going to change, so you need an approach that’s going to find that out for you in the most effective way possible.

The value of splitting it into these horizons is that you can then approach each horizon from a different perspective. The most important thing to realise is that the measurements of success for each horizon are different. All the things you were talking about earlier, like improving the efficiency of teams, or getting a consultant in to improve a process - is very much an ROI measurement. You spend x and get a 10x return, or whatever it is you’re looking for.

Horizon three , however, is the exact opposite - you are not going to get any financial return from the money you’re spending. What you are looking for, how you measure success, is by learning from the tasks that you do. So you might spend a month working on something and the value you get from that is by learning how well received that activity is according to the assumptions you made upfront. But you’re definitely not going to get a financial return because you’re operating in an environment where it’s far too early for there to be.

Jon - that’s a big impact and it contrasts very heavily with the expectations. Say if you’re dealing with a statesman in an established industry who is all about ROI and premiums and then say ‘we’re going to do some blue sky thinking, and guess what, you’re not getting any money out of it at all’. That is a massive shift in thinking.

Chris - Absolutely. What you quickly realise is that you cannot have the same people working across the horizons. You have to have separate teams and separate individuals so that they are not faced with that battle of focus and priorities. If you have a guy who is focussed on ROI and KPIs, and financial returns, he’s never going to operate in horizon three. You need a new guy, and a separate team. But naturally if you adopt lean principles, you don’t want a big team, you want a small team. One of the advantages of the lean start up world is that it moves through ideas and hypothesis and activities very, very quickly and it does this through having small teams that try and get things done as fast as possible and are unhindered by the mechanics and bureaucracy of a large corporation.

Jon - that’s a key insight for me actually, it’s a useful way of thinking of three horizons. Horizon three is long-term planning five to ten years. Horizon two is two to five years, and the tactical operational stuff is the stuff we need to do in the next eighteen months. And there’s different approaches for each.

Chris - Very different approaches, and the people who are best suited to delivering one approach are probably the worst people to be delivering the other. The three horizon approach has been relatively widely adopted and the most common mistake that’s made is that you apply the three approaches to the same team. So then what you have is a guy who is supposed to be splitting his time 80% on Horizon One, 15% on Horizon Two, and 5% on Horizon Three - or 70/20/10 maybe - but he’s going to be measured on ROI on one, a cross between ROI and effectiveness of implementation on two, and making mistakes on horizon three.

As we all know in this day and age no-one has enough time to do everything that needs doing in their day to day jobs. You never find yourself in a position these days where you have no more tasks on your to-do list. Everyone has more work than they can actually do. The act of prioritising your work is something we all have to do every day.

How do you prioritise your work when you’re being measured across these three contrasting measurements of success? The reality is that you can’t, it’s almost impossible. Inevitably what happens is you drift back towards - where the organisation tries to apply the three horizons to the same teams, it starts off well when it’s all new and exciting - but it doesn’t take long for everyone to drift back to horizon one, because it’s the easiest one to understand and the KPIs are already established and it’s a very obvious gain. If you’re stuck between two tasks - an experiment to see if something is a good idea or a bad idea, or spend four hours working on a process which will get a 1% increase in the revenue of that system - it becomes easy, they will always go for the ROI task. It’s important to completely separate them and make sure they’re not burdened by each other.

Jon - for me that’s key - if I look back on my corporate career, as an IT Business Partner, lock stock in those short term tasks where everything is about ROI. Putting business cases together where I show ROI, working with stakeholders. Now if I’m thinking what horizon three sounds a lot more sexy, and then I’ll have to think completely differently and my success is measured on making mistakes, which is bonkers.

Chris - The question is that who is to say that horizon three is the best horizon for you? That might not be the case. It’s important to note that horizon one is just as important if not more important than horizon three, but you need to have all three if you want to effectively manage your strategy for innovation.

Another analogy that I quite like to use which is that of a football team. The forwards are the exciting players on the team, they score the goals, and get all the glory. But they would be nothing if the defence was not rock solid, and they hold the team together. The defence is on horizon one and it’s critically important that works really well. The better the defence works the more you can let the strikers loose, and let them roam the field, exploring new opportunities, trying to score this goal. But you need a rock solid team. It would be incorrect to look at horizon one as a bad place to be.

Jon - I wasn’t saying it’s a bad place to be but it’s certainly a mind shift from thinking in terms of ROI to exploring, as you say, a completely different way of doing things.

Chris - What’s useful about talking is that once you get people to understand the three horizons it becomes a much easier conversation about the work you’re trying to do. Where does this fall? Is this horizon one work, or two, or three? Who’s going to be responsible for this? How do we measure success? What time and budget do we give it? It suddenly becomes a whole lot easier and it gives itself a much better chance of succeeding.

Jon - that’s brilliant insight there Chris, and it’s helped me.

Chris and I have been putting together an Innovation Workshop, which relates to a lot of the comments and insights that Chris has provided today in this podcast. The point is that we can start experimenting today and it doesn’t have to be a massive investment, but we can sample these new approaches, so what we’ve done is created a workshop - which is a day long - which samples some of the main steps and the principles, and gives something useful for those participants who attend the workshop. It helps people experiment and understand what’s going on without the risk of big organisational change.

You can find out more about this workshop at Innovation Workshops

Thank you to you for listening, and for Chris for sharing his insight into innovation.