Sense of Urgency Critical to Driving Change

I have seen many a process improvement and organizational change projects fail. In fact, studies have shown that 90% of cost cuts are reversed within 3 years. In fact, 60% of the organizations are dissatisfied with their return on process improvement tools such as six sigma. Here is another interesting insight from Forbes about change management (The Biggest Mistake I See: Strategy First, Urgency Second) :

Some people think a “burning platform” gets people urgent and committed to change. Other leaders think that they can announce the change and then leave it to everyone else to make it happen. Both are mistakes. But the biggest one I’ve run into is when someone says, “We’ve done our research, we have our strategy, we’re ready to get everyone on board.” In the video below I talk about why this approach just doesn’t work for large-scale change, and what you need to do instead: start with a sense of urgency.

The message is clear, a strategy is not enough. Change requires a clear purpose, vision and urgency from senior management. Change also requires continued engagement from executives, leaders. Finally, change requires clear accountability, metrics and reinforcement systems to ensure it sticks.

Corporate Performance Management in volatile times

Here is an interesting article from Research & Technology Executive Council about consideration for improving and managing corporate performance:

Corporate performance outstripped many people’s expectations in 2010 and, as a consequence, senior executives have been given oversized 2011 growth goals that are consistent with a recovering business cycle. The problem is that we are not yet in the midst of a runaway recovery.

Although the article is focused on financial performance management, the ideas discussed are also valid for other disciplines (including R&D). Here is what I learned about robust performance management process:

Target setting: Use stretch targets judiciously. Take into account factors that the team can control and those they can not. For example, if the entire market declines by 20%, the stretch goal of increasing revenues by 20% might not make sense. Another approach would be to use competitive benchmarks to decide targets (Stretch goal is at least 10% better than my closest competitor).
Metric selection: Right metrics that support the targets are extremely important. As we have seen in the past, there is a strong temptation to fudge the metrics to get rewards. We should focus on developing dashboards that encourage an appropriate level of risk taking and reward good decision making.
Use of IT to provide visibility: Automated performance management systems to help teams focus on performance targets and metrics is useful. IT can help with dashboards as well. However, one has to balance those benefits with costs of setting up and feeding/maintaining such systems. Many times IT leads companies focus too much on the logistics instead of the actual results.
Creation of a ”performance management culture”: Leaders should help setup a culture that uses performance management to drive organization success and discover hidden sources of value. The process should probably incorporate non monetary / financial rewards.

Article first published as Corporate Performance Management in volatile times on Technorati.

How to Evaluate a Training Program

Training is a great way to improve the performance of R&D teams. However, the value delivered by training remains quite hard to measure. We have discussed some approaches to rigorously explore the value delivered by training programs. The Great Leadership blog has a useful checklist on how to evaluate the success of training programs using web-based surveys (How to Evaluate a Training Program):

Since the dawn of time, when early trainers were training their clan members how to improve their hunting and gathering skills, training organizations have struggled with how to measure the impact of their training programs.

Here are my takeaways:

Use the same web-based survey platform to evaluate all training courses
Ask questions about:

Course logistics (instructor, food, venue, etc);
Course material and learning
Course value and business results: Ask participants about the impact of training on concrete business results such as time-to-market, margins, cycle time, costs, etc

Ensure questions are consistent across all courses so the results can be aggregated
Administer survey immediately after the class is complete (but not in-class because people tend to feel pressure from trainers being present. Also, survey should be administered by someone other than the trainer to remove biases)
Administer survey section 4 90 days after the training to measure actual value delivered
Ask managers to validate section 4 results (through the same survey).

Should companies outsource innovation?

Outsourcing has had a negative connotation in the US. However, the trend seems to be here to stay. As product complexity increases, and it is not easy for companies to do everything in-house. Furthermore, competitive pressures are compressing product development cycles and companies have to use approaches such as co-development to grow. If companies are using suppliers for components and subsystems, should they not use them for innovation as well? Collaboration with strategic suppliers has been shown to enhance innovation.

More and more organizations are sourcing innovation from the outside through open innovation or borderless innovation. Leading companies such as Intel work with universities to source innovation. Companies from J&J to Ortho have setup innovation hotbeds to access innovation from the outside. There are interesting approaches to crowd-source innovation and reach-out to the masses for innovation.
Even so, there is a significant amount of confusion and controversy around the benefits of innovation outsources.

A great article in R&D Management journal provides a synthesis or current research in innovation outsourcing (Controversy in innovation outsourcing research: review, synthesis and future directions):

There is a growing stream of research into the outsourcing of innovation activities within the innovation, management, marketing and economics disciplines. Understandably, this coincides with the practice becoming more commonplace in industry. Here, we attempt to synthesize research surrounding the question of whether to outsource or internalize innovation activities and the performance implications of this decision.

As expected, there are many open issues and conclusive consensus has not emerged about aspects of innovation outsourcing. Some research shows that innovation outsourcing reduces costs while other shows that it increases them!

As innovation outsourcing research has progressed, several controversies have emerged in the literature and remain unresolved. For instance, case-based research provides evidence that outsourcing innovation activities can lead to faster product development and cost savings; yet, empirical research shows that outsourcing may lead to higher costs and slower new product development

However, there are some clear trends that R&D managers should pay attention to:

Outsourcing is most likely when specific assets are required, behavioral uncertainty is low, intellectual property is well protected, the activity is not seen as a path to developing competitive advantage and when low cost is not the primary goal of the development effort. Also, large firms have a greater tendency to outsource.

So, it makes sense to outsource when:

Supplier has specific equipment, laboratory or assets that are expensive to acquire.
It is easy to understand and evaluate innovation results from the supplier (low uncertainty about supplier behavior)
Sourced innovation is not critical to the company nor is it a significant competitive advantage (critical innovations are normally controlled by the company)
Costs are not a key driver (companies still tend to feel that sourcing innovation is more expensive than doing it in-house)
Large firms are more likely to outsource innovation than small firms

There is a lot more info in the article, but it is a bit difficult to read…

Should Performance Reviews Be Fired?

Many observers have suggested that performance reviews cause too much stress (for the benefit generated). Even when reviews work as advertised, R&D managers do not have the right tools to use performance evaluations. There are no easy ways to reward good performance, as neither financial incentives nor stock options may be very effective. Furthermore, &D managers do not often have the right approach to address poor performance. A new article from the Wharton School of Business provides some useful information about performance reviews (Should Performance Reviews Be Fired? – Knowledge@Wharton):

Performance reviews typically are not done often enough and all too often are done poorly. A good performance review gives employees constructive, unbiased feedback on their work. A bad one demonstrates supervisor bias and undermines employee confidence and motivation.

Clearly, a vast majority of companies use performance reviews

Cappelli cites studies showing that 97.2% of U.S. companies have performance appraisals, as do 91% of companies worldwide.

So, what are the main problems with performance reviews and what can we do about it?

Frequency: Annual feedback on performance is just not enough in today’s fast paced world.

In addition, reviews encourage employees not to speak out about problems they observe because it could adversely affect their career paths and compensation, Culbert states. As examples, he points to “employees at Toyota, BP and the nuclear reactor site in Japan who knew about defects” in their companies’ products, but failed to report them because of a lack of trust between employees and management.

It might be better to have a project / task based continuous evaluation, a quarterly or semiannual development reviews followed by annual incentive / raise review.
Competing Agendas: Most organizations have two completely different goals for reviews. One is to help employees improve performance and the other is to rank them to decide who gets what rewards. Combining the two in one review ensures neither objectives are satisfied.

Performance reviews “are rarely authentic conversations,” writes Daniel Pink in “Think Tank.” More often, “they are the West’s form of Kabuki theatre — highly stylized rituals in which people recite predictable lines in a formulaic way and hope the experience ends quickly.”

As discussed above, it is probably better to separate performance, development and reward reviews from each other.
Performance Metrics: In many cases, especially in R&D, it is not clear how to measure performance and compare it.

“Companies are concerned that if it isn’t a quantifiable, very objective measure, then it’s not a good measure.”

However, if we do 1 and 2 above, it is possible to make performance reviews more quantitative:

But in recent years, with the explosion of knowledge-based companies, “the ability to assess performance in a subjective and qualitative way” requires a process that looks at “first, what are the key performance criteria that are important, and second, how do you measure them when they are qualitative.” He suggests asking employees during the assessment process “how they do their job, what [competencies] they have developed and whether they are continuously improving their knowledge skills.”
Checking the box: Many managers do reviews just to check the box. This actually is the worst of both worlds – neither do employees know how to improve performance, nor do they feel rewarded for their work.

Finally, some performance reviews under the auspices of human resources departments focus only on getting reviews completed — “100 percent compliance” — not on their quality. A Sibson Consulting/WorldatWork survey found that 58% of HR executives give their performance management systems a “C” or below, in part because managers don’t receive the training they need to deliver effective appraisals.

Points 1, 2 and 3 above might help managers move away from checking the box.

The article shares a case study about SAS which saw improvement when they moved from annual performance reviews to more frequent appraisals. The article also talks about a new performance management tool (for software companies):

Indeed, the importance of frequent feedback crops up in almost every discussion of how to improve performance reviews. Daniel Debow is co-CEO of Rypple, a Toronto-based social software company that creates products designed to help people share continuous real-time feedback and provide coaching. Rypple’s target market is the 50- to 1,000-person knowledge worker firm focused on creative collaboration “where the model of a social network describes what is going on.”

Finally, here are some more ways to improve performance reviews.

Article first published as Should Performance Reviews Be Fired? on Technorati.

Pfizer says 24% cut in R&D is good for the company

Most high tech companies have ferociously guarded their R&D spending even through the great recession. In fact, cuts in R&D spending have been much smaller than the reduction in revenues. Hence, the R&D as a fraction of overall expenditure has actually increased through the recession. It is known that R&D spending does not guarantee increased profits. Many observers have pointed out that companies might actually be protecting the wrong investments.

Reuters had an interesting article recently about Pfizer cutting their R&D budgets by 24% in 2011 (See Pfizer R&D chief upbeat despite smaller budget):

Mikael Dolsten, Pfizer’s president of worldwide research and development, said making choices about research priorities was a ‘sign of a healthy company culture.’ ‘Our action was more a thoughtful deliberation after looking at how the industry has performed as a whole,’ Dolsten said in an interview on the sidelines of the Bio-Windhover Pharmaceutical Strategic Outlook conference in New York. ‘We feel that the amount of investment in R&D that we are committing to is really the right number to drive the priorities we have put in place.’

May be the cut in R&D spending will actually force managers to think through the R&D pipeline and remove pet projects and dead wood. This is especially important because Pharma R&D seems to have declined in efficiency and return on R&D investments have been falling (See Big pharma’s stalled R&D machine).

However, it is also quite common for CTOs to claim that cutting R&D budgets is a good thing AFTER the R&D funding has been cut. TI’s CTO suggested that their 25% cut in R&D spending actually sharpened their focus. What can R&D managers do to actually get the positive results? Freescale’s CTO made some great points about cutting R&D budgets:

Have a clearly defined strategy that drives investment decisions
Decide on what R&D you are NOT going to do and what you are.
Decide what R&D will be done internally and what will be outsourced to strategic partners
Tie marketing into the R&D planning and align roadmaps with customers

Great advice because pet projects have a way to stick around no matter what. Also, 90% of all cost cuts are reversed in three years unless there is a purpose and drive behind them. Here are some portfolio management best practices that you could follow. There is a lot more about portfolio balancing here.

Article first published as Pfizer Says 24% Cut in R&D is Good for the Company on Technorati.

Does modularity reduce innovation?

The Journal for Product Innovation Management had an interesting article on The Impact of Product Modularity on New Product Performance. We recently discussed the benefits of modularity to combat component shortages (Impact of component shortages on R&D). The article points out that modular design may have an impact on innovation. Availability of a large number of alternate modules allows designers to try multiple alternate solutions and select the best alternate:

In light of problem solving, system complexity, and dominant design theories, some researchers suggest that modular product design promotes product innovation through experimenting with many alternative approaches simultaneously. This leads to rapid trial-and-error learning and accelerates new product introduction.

The problem with modularity is that it requires compatibility and limits the solution space because modules need to fit together. Also, if a module is fulfilling 80% of the requirements is available, designers may not push for the rest and hence not be as innovative.

However, others argue that modular product design inhibits innovation because common modules can be overly reused, the degree of freedom for innovation is limited due to module compatibility, and knowledge sharing among module teams is weakened.

The paper has results based on a survey of 115 electronics companies that suggest that the relationship between modularity and innovation is indirect. The main recommendation is for R&D managers to be vigilant and monitor the negative impacts of modularity. One red flag may be too many alternate configurations. Another key concern is communication across different module R&D teams.

If there are any signs of diminishing product innovativeness, problems with poor communication across module teams, or excessive design alternatives, the manufacturers should stop further modularizing their products. Alternatively, manufacturers can take steps to reduce the negative effects of modularity. For instance, manufacturers can develop ways to strengthen communication among module teams. They can also use a set of design rules to reduce the number of design alternatives systematically or a design method to balance product commonality and differentiation during the development processes.

It is clear that as R&D becomes more modular, R&D teams for each module will become less engaged with other teams and more virtual. We have discussed several approaches to boost productivity or drive satisfaction in virtual teams. We could also try project networks to enhance communication.

Article first published as Does modularity reduce innovation? on Technorati.

Steve Jobs Methodology for Apple R&D

Apple innovations such as iPod and iPhone have had a wide ranging impact on the technology industry. New York Times recently discussed How the iPhone Led to the Sale of T-Mobile.

Until Apple introduced its highly popular touchscreen device in 2007, which went on to become the world’s leading smartphone, Deutsche Telekom had been generating decent sales from its American operation, with growth in some years surpassing that achieved in Germany. But after the iPhone went on sale, sold exclusively at first by AT&T in the United States, T-Mobile USA began to lose its most lucrative customers, those on fixed monthly plans, who defected to its larger American rivals — AT&T and Verizon Wireless, which began selling the iPhone in February. The percentage of T-Mobile USA’s contract customers fell to 78.3 percent in 2010 from 85 percent in 2006, according to the company’s annual reports. During 2010 alone, T-Mobile USA said it lost 390,000 contract customers to rivals.

Nokia’s inability to compete with the iPhone led to its move to Windows Phone 7 and resulted in significant layoffs. (See DailyTech – Nokia Contemplates Deep Job Cuts Due to Windows Phone 7)

While Nokia’s growth has stalled, competitors like Apple and Android phone makers (Motorola, ZTE, HTC, etc.) have soared. Now the company is forced to make a big transition as it prepares to move away from the Symbian operating system to Microsoft’s Windows Phone 7.

Apple was not the only reason for these upheavals. Nokia was known to have become an inefficient bureaucratic organization which stifled innovation. But the fact is that Apple’s innovative products and competitive positioning are material contributors to the market landscape. Many observers have speculated that Steve Jobs has been the driver of Apple innovation. But conventional wisdom is that that management involvement actually drives down innovation. In fact, it has been shown that risk averse management can prevent employees from innovating. Research also shows that unless analysts categorize a company as a growth company, pressure from Wall Street also drives down innovation.

So what does Steve Jobs do differently and what can we learn from him about R&D management? Steve Jobs clearly personifies some of the characteristics of innovators. However, is there anything specific R&D managers can do to make their organizations more innovative? I was thrilled to find a treasure trove of information on the Steve Jobs Methodology at the website Cult of Mac (In the transcript of an interview with ex-Apple CEO John Sculley On Steve Jobs). Here is what I think are key lessons:

1. User experience centric design: Steve Jobs always started from the perspective of what the user experience was going to be. However, he did not do that by doing market research or by asking consumers what they wanted to see in the product. He rightly suggested that users did not know what the new products or technology could do. It is the role of the R&D team to decide the user experience. (More discussion here)

2. Long-term vision: Technology may not be mature enough to implement the entire user experience. R&D managers need to be able to map out a development plan that achieves this vision in manageable steps. Jobs started working towards a convergence device like iPhone in 2002. The technology was just not ready at that stage. He had an intermediate product in the ROKR in 2005 and finally reached iPhone in 2007. (More discussion here)

3. Deep leadership engagement: It is not enough for a manager to have a focus on user experience and a long-term vision to get to it. Just like other leaders of successful companies (like Bill Gates at Microsoft, Zukerberg at Facebook) Jobs is actively engaged in R&D. From user experience to industrial design to retail store layout, he ensured a consistent theme through the entire operation. (More discussion here)

4. Small focused teams: Building strong focused teams is a challenge for any R&D managers. Jobs had some interesting approaches to building strong teams. A clear vision and deep involvement from management will motivate most engineers. Even more importantly, designers reported directly to Jobs and were respected more than all other skills at Apple. He insisted on knowing all engineers by name and limited the team size to a number that he can know personally. (More discussion here)

5. Razor-sharp focus on the niche: Apple had a sharp focus on its niche – ultimate user experience. This is extremely important because the broad strategy always leads to conflicts between different goals. The original MacBook Air had a wasteful industrial design to get it to market in a reasonable time, but it definitely delivered on the user experience. (More discussion here)

The results continue to be stunning. Here is what the Japanese consumer electronics engineers had to say about the iPad 2:

Through the teardown of the iPad 2, we noticed that Apple’s design philosophy is clearly different from that of Japanese makers. It seemed that the priority orders of various features and functions were determined based on the company’s aesthetic sense, and it designed the iPad 2 while giving first priority to realizing them. The iPad 2 made us wonder if products developed based on the philosophy of prioritizing costs and specifications can compete with it.

Article first published as S teve Jobs Methodology to Manage Apple R&D on Technorati.

Impact of component shortages on R&D

In Apple R&D and Steve Jobs Methodology: User Centric Design, we discussed how digital technologies let Apple focus on user experience. The ability to focus on user experience, in turn, made Apple succeed where Japanese manufacturers failed – because Japanese companies focused primarily on components.

Apple’s success has had a big impact on the industry landscape. There has been significant consolidation in component manufacturers. More importantly, other companies have increased their focus on user centric design. The result is that everyone is demanding the same set of components from a decreasing pool of suppliers. The balance of power is now shifting again – from system designers to component manufacturers.

The article Getting Through the Shortages: No More Being Choosy in Nikkei Electronics has some very interesting data for R&D managers and strategy developers: “

The shortage in key components that began in summer 2009 is shaking the electronic equipment industry, and bringing about major change in the balance of power between equipment and component manufacturers. In response, equipment manufacturers are beginning to take action to ensure continued access to essential components at low cost.

Here is a great graphic from the article showing an strong increase in profits at the component manufacturers:

So, what are the lesson for R&D managers:
1. Plan and design modular products: If one component becomes hard to obtain, you should be able to swap it out with another. Modular products are always a great idea, but in case of supplier concerns, they become even more important. The article had a great example of HTC Desire that shipped with an OLED screen, but had to be converted to LCD because of supply problems at Samsung.

2. Find commonalities between products: If you can use same components across all your products, your volumes will increase and it will give you a greater clout with the suppliers. This is a challenge for R&D, because common parts will inhibit complete performance.optimization for each products. Here is the graphic from Nikkei:

3. Secure supply by prepaying for parts: Self explanatory. But still important for R&D managers because you will be locking in a particular component for a long term. Designs around them will need to be robust enough to accommodate the parts from the long term supplier.
There is a lot more about R&D strategy and planning at the R&D Management Blog.

Article first published as Impact of Component Shortages on R&D on Technorati.

The psychology of change management

I have discussed the problem with process improvement and change management in the past. We have seen that 90% of cost cuts obtained through organizational change are reversed within 3 years. It has been shown that senior executives are much more likely to imagine that change management projects are successful than middle managers. I liked this 2003 McKinsey article that has a different take on the problem: The psychology of change management:

Companies can transform the attitudes and behavior of their employees by applying psychological breakthroughs that explain why people think and act as they do.

The article suggests that there are four conditions to make changes stick:

A purpose to believe in: The leaders have to develop and describe a story of why the change is needed and why it is important. The story needs to be communicated to build a sense of purpose within the organization around the change. People are more likely to change their individual behaviors if they believe in the purpose (especially when change might cause some people to loose power / benefits).
Reinforcement systems: We have talked about this previously. Metrics and rewards needs to be aligned to make change stick. However, psychological research shows that people get bored of rewards. Rewards alone are not enough to change behavior over the long-term. Hence, the other four conditions have to be satisfied.
Skills required for change: Changes do not happen because many people do not know how to change. We have seen research suggesting extended involvement of mentors (such as six sigma black belts) to make sure change happens and sticks. This will only work if the organization launches a few, highly visible change programs, with a clear purpose.
Consistent role models: I have seen many change management projects fail because the senior managers did not actually change their behavior. Their words were different from their actions. People can easily see the difference between a real change and one in name only. Again, we have seen research that shows that managers need to stay involved in the change for a long time to make results stick.

Overall a great article and worth reading….