Like it or not: for innovation, governance is the theme of the year.

Many corporations are shifting their focus from endless growth to productivity. So they need to figure out how to allocate resources and how (and what) to prioritize across different growth horizons.

With budgets under pressure in most organizations, this is a critical conversation for any leader serious about getting results from their efforts.

During our recent The Innovator's Handbook 2023 launch event, we explored these topics with Tristan Kromer (Innovation Coach & Founder at Kromatic), Dan Toma (Co-Author of Innovation Accounting & The Corporate Startup, Partner at OUTCOME), and Noel Sobelman (Partner at Accel Management Group).

We looked at how to measure what you're doing and how you're doing, how to make better decisions throughout the funnel and, ultimately, how to create a winning portfolio that delivers a proper return (and makes your CFO happy). Here’s a summary of the conversation we had.

How Should Innovation Teams Evaluate Their Portfolios?

Several perspectives and reflection points have emerged regarding what innovation teams should look for when evaluating their portfolios.

Bringing Back Financial Projections

In 2023, it’s crucial to move away from making single point estimates and instead relying more on financial projections. As such, to get an accurate view of their portfolio, innovation teams have to look over each project and assess what they're worth in terms of goals pursued, expected output, and level of uncertainty involved. “Assumptions like ‘this project is going to make a billion dollars’ don’t make any sense because they lack any sort of understanding of how confident we are in the data that drives that evaluation”, says Tristan.

According to Dan, making financial estimates before starting a project can help you surface some assumptions you hadn't thought of. How you set up this process is also essential. “If you have a spreadsheet with 20 tabs, 500 columns each, you're probably not spending your time wisely”, he adds.

Evidence: Strength vs. Speed

There are different perspectives when it comes to defining what would be a good indicator or a metric for measuring a portfolio (or different ventures within a portfolio).

In any portfolio, Noel recommends taking a close look at each project's relative value. “We have a finite number of resources," – he says – "and managing a portfolio it's all about making decisions on which projects we want to allocate those resources to”. This comparison between breakthrough or transformative innovation projects with different horizons can be very challenging. Evidence-based metrics can make that judgment easier.

Dan doesn't entirely disagree with Noel – “Eventually, I'll probably be looking at the evidence as well", he specifies – but to him, speed is essential when it comes to measuring a portfolio and its projects. He believes that, in the innovation realm, teams’ agility must be measured in every aspect, including: how much time they spend at a particular stage of the product life cycle, how fast they move from the previous stage to the next one, and if they honor the process of getting validated learnings.

“Before investing in an idea, you need to invest in the team”.

Of course, speed is a measure relative to your organization and your industry. In general, it can be a critical leading indicator that won't necessarily tell the project's output in terms of economic return. Still, it will tell if the innovation teams are able to successfully discover the right pivot to make along the journey.

How To Set Up Governance For Success?

We’ve talked about the innovation teams, but at what level of the corporate hierarchy should innovation portfolios actually be governed? Who is responsible for the resource allocation? How should innovation teams be staffed? In other words, what does it take to build a proper governance system?

Portfolio Management Must Cut Across Functions

Noel and Dan have no doubt: in the corporate hierarchy, the governance or the Innovation Board should sit where the resource allocation decision is made or, to put it another way, where the money is. “You can't have an Innovation Board without any budget allocation power. So, rule of thumb, the higher it is in the organizational structure, the better”, says Dan.

This overarching position also allows the Innovation Board to identify potential pitfalls early on in the innovation process and react. It must also be, as Noel specifies, a cross-functional board. Innovation is inherently cross-functional, and all disciplines should work together to develop and deliver a new concept. So a cross-functional approach to portfolio management is essential.

People Have to Be 100% Allocated to Innovation

However, sometimes there's a discrepancy: the Innovation Board may have budget control but not people control. A board might, for example, have the power to evaluate, fund, and assign projects to employees who report to a line manager way down in the organization who doesn’t care about innovation. The whole corporate may suffer from such a dysfunctional situation.

"Typically, most companies struggle with people allocation more than money".

Tristan believes people have to be 100% allocated with their time to innovation. They won't be able to innovate if their time is assigned to business-as-usual projects or divided among multiple projects. “We can get that experiment and insight velocity that drives innovation costs down when everybody is 100% dedicated to the project”, he says.

In the end, however, it all comes down to how committed the leadership is to innovation. Suppose leaders treat innovation as theater, something that people can do on the side, or something that comes after the core business. In that case, you just run the risk of having a hobby project. “I'm not condemning people for not having the time. I'm condemning the leaders for asking people to do innovation on a shoestring”, wraps up Dan.

Strategic Fit, Innovation Accounting, and Maturity

Strategy is central to governance. There's no way to proceed forward without a larger, general direction that sets the path. Noel argues that a major part of the Innovation Board's role is translating the company’s strategic vision into a set of opportunity areas. Some people call these areas “hunting grounds” or “hunting zones” but, apart from this, innovation strategy helps you identify projects worth investing in.

“The strategic fit is an important early pillar to assess before you even start looking for important, underserved needs in the market”.

What about innovation accounting? Setting governance up for success also entails evaluating investments to ultimately understand if we’re investing in the right things, if we’re investing too much, too little, and so on. Yet according to Dan, if there's no innovation happening in your organization, innovation accounting is the last thing you need to worry about.

“Don't build stuff that won’t serve you a good purpose”, advises Dan. In other words, if you want to quantify innovation, you need to be mature innovation-wise. In this context, being a mature organization means, first and foremost, having a product life cycle with clear stages, roles, and goals.