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OK to Fail...and Innovate

HR leaders have a key role to play in changing management perspectives when it comes to building a culture of innovation. One way to start is to de-stigmatize failure and start rewarding innovative behaviors instead of outcomes.

Friday, September 28, 2012
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Not long ago, I was approached by a giant media company that had been on a 15-year tear, but whose growth was starting to slow in the face of competition with digital upstarts. The firm wanted to set up a new "growth engine."

The executive envisioned forming a small team to explore new market spaces. The innovation team would be given a multimillion-dollar budget and report directly to the CEO.

The company appointed an up-and-coming manager to run the growth engine. As the manager and her team began their 18-month journey, I helped them as they explored numerous market spaces and selected 10 new business opportunities to pilot.

Each venture received a small amount of seed capital to test key assumptions. Most of the pilots were shut down within six months of funding, but two demonstrated solid long-term potential, even if near-term revenues remained small.

By producing eight failed ideas and two iffy -- but promising -- ones, had the growth engine leader done a good job?

The answer, as HR leaders know, depends -- in part -- on how she was rewarded.

At most well-managed companies today, employees are rewarded strongly on the basis of results. The bigger the win, the better.

So, if the assessment criterion was, "Did the manager deliver tangible results?" then chances are you and senior management would deem the growth leader's performance decidedly subpar. And indeed, that's exactly the view her company management took. One Friday afternoon, it shut down the group and fired the manager.

But what if her company had a different method of assessing performance, one based on behaviors, not outcomes?

If the assessment criterion was, "Did the manager follow behaviors that are consistent with innovation success?" then the leader would have appropriately earned rave reviews. She followed many of the best-practice innovation behaviors: She cost-effectively tested a range of ideas, developed a portfolio of interesting businesses and learned a substantial amount about a range of markets.

Companies seeking to become world-class innovators need to take the latter approach and build reward-and-incentive programs that focus on innovation behaviors, not outcomes.

Picking the Better Player

To illustrate the payoff of just such an approach, consider a hypothetical blackjack game. Careful Charlie and Holly Hunch are two blackjack players you observe in Las Vegas. You watch Charlie and Holly play two hands. Miraculously, they are dealt the same cards -- a six and a nine, with the dealer showing a queen. Each decides to bet $50.

Careful Charlie asks for a card and draws a 7, losing his money. Holly stays put, and wins when the dealer draws two cards and busts.

In the following round -- with the dealer showing a five -- both players draw a king and an eight. In this round, Charlie stays put while Holly asks for a card, and the end result is the same: Charlie loses when the dealer draws two cards and reaches 19, and Holly wins by drawing a three to reach 21.

So, Charlie ended up losing $100, while Holly won $100. Who would you have backed if you had $1,000 to sponsor one of the players?

If you look at the results, you would pick Holly. After all, she trusted her instincts, made two gutsy calls, and earned $100. However, she was incredibly lucky. And, even though his outcome was worse, Charlie appears to have followed the right decision-making process.

Assuming his behavior came from an understanding of the game of blackjack, he would be a far better investment of your $1,000.

If you, like many HR executives at leading companies today, are being asked to help build a world-class innovation capability, you will want to create a culture that not only encourages but also rewards the behaviors that Charlie and the growth leader share.

Here are three ways to get started:

* Take a lesson from the quality movement and focus on the beginning of the innovation process.

Companies used to spend a substantial amount of time and money conducting quality control at the end of a production process. The process was inherently unpredictable, they believed, so the best they could do was catch errors after they occurred and fix them.

This was expensive and time-consuming. The quality movement showed that the right place to focus attention wasn't at the end of the process but at the beginning. If the process was set up in the right way, you could predict its results quite accurately.

In a similar fashion, HR leaders should focus more on the inputs -- the behaviors -- of the innovation process and less on the end.

One way to do this is to create programs that encourage managers to follow behaviors that are consistent with successful "intrapreneurs" -- individuals who skillfully blend principles of entrepreneurship along with access to all the great resources inside large companies.

* Reframe failure and build an understanding of the important role it plays in the innovation process.

Only results should be rewarded -- that's often an unstated orthodoxy at most big companies. Almost everyone knows that the best way to get promoted or to earn that big bonus is to hit your numbers.

This approach certainly makes sense in some circumstances. A leader in a well-understood, mature business in a stable market can be safely castigated when results disappoint. It is safe to judge a worker performing a routine task according to measurable results.

But the inherently unpredictable nature of innovation means that companies can't reward innovation efforts the way they reward core activities: An innovation team can do the exact right things and still fail, or succeed in spite of doing the exact wrong things.

When it comes to innovation, perceived failure is often an important step toward ultimate success. A seminal study in the mid-1980s found many new product "failures" were critical milestones that often presaged future successes.

Typically, valuable insights came in the form of direct feedback about the viability of technology, consumer acceptance of features and pricing, and how to target new consumer segments and geographic markets.

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Remember one of the lasting lessons from Thomas Edison. It took him 1,000 experiments to find an acceptable filament for the incandescent lamp.

The 1,000 failures didn't deter Edison. "I've gained lots of knowledge," he said. "I now know 1,000 things that won't work."

By punishing well-considered risk-taking, organizations will push up-and-coming managers away from the path of how innovation inherently works.

This mind-set isn't tied just to corporations. Consider what quickly became known as "Belichick's blunder" -- a decision made by New England Patriots football coach Bill Belichick in November 2009, when his team was beating the Indianapolis Colts by six points. There were two minutes on the clock. It was fourth down. The Patriots had the ball on their own 28-yard line, two yards short of a first down that would have undoubtedly sealed the victory. Conventional wisdom suggested a punt, but Belichick decided to go for it. The Patriots failed to convert the first down, and Indianapolis got the ball, marched into the end zone, and celebrated a stunning victory.

While pundits jumped all over Belichick, statistical research shows that Belichick actually increased the chances that the Patriots would win the game.

Belichick had a strong enough reputation to withstand the firestorm, but other coaches have surely hesitated before taking similar risks.

One study showed that the average professional football coach makes decisions that cost his team one win a year. That's a phenomenally high number in a 16-game schedule.

* Look for ways to celebrate learning that comes from unsuccessful efforts.

Don't sweep failures under the rug. When you share them with employees and others, you not only reinforce the idea that failure is tolerated but also disseminate crucial lessons that can lead to success.

Consider highlighting big failures as well as big wins in your employee communications. Or borrow from the famed Mayo Clinic -- one of the world's most highly regarded medical institutions -- which gives a "queasy eagle" award to employees who take well-thought-out risks, but fail.

More publicly, Bessemer Venture Partners' website details its "anti-portfolio" -- all the great deals Bessemer missed. One opportunity was a "pre-IPO secondary stock at a $60M valuation" that a Bessemer leader called "outrageously expensive."

Thirty years later, the company -- Apple -- is worth more than $300 billion.

Bessemer Venture Partners is refreshingly candid and self-effacing on its website: "Bessemer Venture Partners is perhaps the nation's oldest venture capital firm, carrying on an unbroken practice of venture capital investing that stretches back to 1911. This long and storied history has afforded our firm an unparalleled number of opportunities to completely screw up."

Even though innovation is better understood than it was a generation ago, substantial risks remain. Individuals need to recognize that failing is a critical part of their growth process, and companies need to be comfortable taking well-thought-out risks.

Scott D. Anthony is author of The Little Black Book of Innovation (Harvard Business Review Press) and the managing director, Asia-Pacific, of the innovation consulting firm Innosight.

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