One of my previous posts, The Perils of Innovation & Opportunity stirred up quite a bit of dialog here, so I thought I would write another post on the topic of innovation. Who knows, maybe this will turn into a regular series here at ServiceLive. In this post, I want to talk a bit more philosophically, but I assure you it won’t be that deep. Heck I had to look up how to spell philosophically.
Most corporations today provide Wall Street quarterly earnings forecast in order to provide some level of transparency and insights into their business. The more consistent this insight, the more Wall Street loves the company. Apparently, it turns out that most folks on Wall Street don’t like to work too hard to figure out a company’s prospects and they would prefer to just ask a few softball questions on quarterly conference calls and build relationships to advance their careers. As a result of this dance, corporations must produce internal monthly forecasts, which require weekly forecast meetings, which in turn, require multiple types of forecasts given disparate systems, data, and audiences. People need to be hired to create forecasts, manage forecast, and ensure people provide forecasts that meet with executive expectations. All this just sounds like good business on paper and why would you ever think of questioning it. In fact, I started my career with an electric utility company and this process was quite simple and accurate, just understand your states population migration pattern and barring some bizarre weather pattern you could predict with near certainty your financial results. In fact, we were often told to take a training class, do some extra maintenance, or refresh our technology to ensure we did not exceed our targets by too much in fear the regulators would be unhappy and subsequently pursue pesky rate adjustments.
Contrast that to when I launched my Plumbing company; I knew the city population, I knew how many competitors there were, I knew what relationships I had, but could I forecast quarter by quarter revenues? Not a shot! Did I try to predict this? Not with much effort! I knew my expenses and I knew how long my cash would last, but I could not predict if I would land that big account in month 3, 6, 9, or even month 12. In fact, my first 9 months were terrible and I found myself wondering what the heck I was even thinking. By all accounts it had looked like a terrible decision and the business should be shut down. However, I knew the tide would change, I knew large accounts take time to crack, I knew I had made real progress in building relationships and I had even become the back- up Plumber for some significant customers. I could not model it or forecast it, but I could feel it. Luckily, I stuck with it and was able to successfully exit to a publicly traded firm in under 3 years for a very tidy profit.
The fact is, innovation causes challenges for companies of all sizes. Innovation just does not fit the typical corporate models. In fact, many times the innovative idea itself appears to make little if any logical sense to who wants the innovation in the first place and it may even destroy the existing cash cow. So what do many companies do? They create innovation departments! Really, innovation departments! Like innovation comes out of a few folks in white coats in the back forty! It is crazy, but everyone wants to innovate, they have to innovate, and structuring a group for innovation with a headcount and budget fits their governance model. I read a quote from Jeff Bezos from Amazon one time that basically said, he was willing to look foolish for 5 to 7 years while the world came around to what he already knew. At this point I know you are thinking what does any of this have to do with Art, okay here comes the connection.
My wife is an Artist and she approaches the world from a different perspective than most. If she were to start a project and I were to ask her to tell me how much red paint, blue paint or yellow paint, she was going to use; how many small brushes, medium brushes, large brushes she would use; how many brush strokes she would use; how many days it would take to complete, etc., she would look at me like I was crazy! She would explain to me how the process emerges, how the canvas will start to speak her, how the seed of an idea will take root and the piece will emerge and come to life. The cynic in me says that why the term starving artists has gained such notoriety, but there is no arguing the creative process is and should be different than your typical corporate governance process. For innovation to occur, these stark differences need to be understood and managed. In a world of competitive capital allocation a blank check book cannot be the standard. However, much more leeway needs to be given and management must be in tune with the ebb and flow of the business. Rail must be established, milestones need to be managed, progress needs to be made, but we need to use a compass not a GPS to measure our results. We also need to realize failure is part of the creative process. Companies and Wall Street need to become more comfortable with quarterly uncertainties. In the words of Steve Jobs……….. there is a hell of a lot of craftsmanship between a great idea and its ultimate implementation. I am hopeful however; a recent WSJ or Barron’s article highlighted a new approach to evaluating companies based on factors like the gross margin trends and level of capital investment. It turns out some Wall Street analyst was not a sleep at the wheel and took a look at companies with improving gross margins and increasing capital spending and found out these firms outperformed the market by some 4% a year. Turns out it actually makes sense to invest more in the short run to build a long term business if your business model is right. Who would have figured?