Reconciling Company Fit, Ambidextrous Organization, and Governance
The RPP mismatches between core business and the needs of exploratory activities are why companies need to develop ambidexterity. Ambidextrous leadership means leaders can recognize the needs and benefits of aligning RPPs to different activities or parts of the business. Custom governance effectively defines “explicit” RPPs for those different activities or parts of the business. Defining explicit and focus-appropriate governance enables an ambidextrous organization. The challenge that scaling transformative businesses exposes is the need to consciously blend the RPPs (and therefore the governance) of the Explore and Core parts of the business, as illustrated in the diagram below.
Options for Dealing with Company Fit Mismatch:
The principle of Company Fit alignment is simple: to avoid the RPP mismatches that can kill a promising new business, Company Fit assessment and custom governance models to mitigate specific RPP mismatches must be made a conscious and deliberate part of the business design from the beginning. One way to approach this task is to list all the existing company RPPs that are likely to conflict with the new business’s needs. Those conflicts can then be classified into four buckets:
Bucket 1: Live with it. Some battles are not worth fighting. If the Company Fit for a given Process or Priority is poor, but it’s not a factor that materially threatens the fundamentals of the new business, the team should live with the friction. Just knowing that the conflict is coming can enable the team to take proactive action and plan for it.
Bucket 2: Change it. In some cases, the RPPs that are likely to create conflict have outlived their usefulness and need to be changed for the entire company anyway to allow greater flexibility and break down resistance to change. These kinds of potential conflicts should be addressed with senior executives and relevant stakeholders, but the pace of change may still be a risk factor for the new business.
Bucket 3: Create an exception. Sometimes, the correct answer is not to change the RPPs for everyone but to create a process allowing controlled exceptions. Offering this path as part of the official innovation program and institutionalizing the process to make such an exception is helpful to the company because it reduces the risk of the development of a rogue “ask permission later” mentality and ensures appropriate guardrails are installed for the exception.
Bucket 4: Increase autonomy. Where the innovation is truly transformational, a separate brand, legal entity, or compensation system may, in fact, be required. In these cases, the innovation team must have the ability to create the needed degree of organizational autonomy in an efficient, controlled, and repeatable manner, all of which require custom governance to support.
If the identified Company Fit risk cannot be resolved with one of these approaches, two choices remain: (1) change the business to improve the Company Fit, or (2) disposition the business (sell, spin-out, or shut down).
Company Fit analysis should be integrated into every evaluation/decision milestone, just as product-market fit and financial analysis are, to determine whether the business and company RPPs are well enough aligned to allow the venture to proceed. Many great transformational innovations will not be a good fit for every company; the trick is to realize when the Company Fit is not good enough, enact appropriate measures to improve the fit, and quickly terminate or dispose of the innovation, despite its business value if the fit can’t be sufficiently improved.
The Mezzanine Governance Model: Solving the Graduation Problem
Enabling autonomy with custom governance in the exploration domain is comparatively easy. The bigger challenge comes in the scaling stage, which requires the selective blending of RPPs designed for the new transformational business under the exploration governance in the incubation environment to be reconciled with the core business’s sustaining RPPs. Where the RPPs do not and should not align, the parent organization management team will need to see a significant return to justify institutionalizing exceptions. Graduating a business from incubation too early will complicate the conversation around these adjustments. A new, growing business is not likely to have the same rate of return as more mature, sustaining businesses, making it difficult, if not impossible, to justify exceptions in conventional terms. Graduating too late or relying on external sources of transformative innovation such as external incubation, investment stake in startups, or targeted acquisitions can be equally dangerous because those increase the scale of resources aligned to the misaligned RPPs that still must be reconciled with the core business RPPs, often making it even more challenging to integrate the new business back into the company and the cost of failures even greater.
Mezzanine (transitional) Governance Model
The solution is the Mezzanine Governance Model for transitioning successful new businesses back into the core company. In this model, funding and governance come from both the new business organization and the existing business unit. In contrast, funding continues to follow the Lean Startup milestone-based approach that drove the new business’s early growth. The joint governance structure allows time for graceful handoffs between the stakeholders and, more importantly, creates a grace period during which blanket organizational efficiency changes are off limits, protecting the new transformational innovation in its growth phase. The transformation innovation benefits the parent organization’s capabilities, further increasing its likelihood of success. At the same time, the transition period makes the differences in RPPs between the new transformational innovation and the mature business unit visible to both management teams so they can be managed proactively and transparently.
The shared visibility of and conscious agreement to the new business’s custom RPPs by both the innovation leadership and the core business unit leadership make it useful. Leaders of mature business units may not have the ambidextrous skills or experience to appreciate the challenges presented by RPP misalignment between transformational innovation and their mature business. Similarly, leaders of new businesses may not understand the need to align their own business with the mature business’s RPPs or how to do so. The transitional period allows both to gain understanding and negotiate alignment or exception, as appropriate.
Entry/Exit Criteria for Mezzanine Governance
New businesses enter the Mezzanine stage when they have achieved first revenue. This is often when the new business starts to need resources at a scale that only the parent organization can supply, such as a larger sales team, more extensive marketing programs, or additional technical or operational support resources. New businesses stay in the Mezzanine until they both prove the path to profitability and reach a scale large enough to become a priority for the parent organization. Proving the path to profitability does not necessarily mean “achieving” profitability. Rather, it is the point where the business model levers within the company’s control can clearly be manipulated to create a sustainably profitable business, and the parent organization agrees that reaching profitability is probable relative to its own measures. New businesses that are growing and deemed on the path to profitability by the parent organization are much harder to kill, even if RPP exceptions are still necessary for success.
Just as labeling early-stage innovation or new business capabilities as being in an incubator or innovation lab signals their differential status, labeling businesses as being in the Mezzanine stage both signals to senior executives who focus primarily on the core business that those businesses need to be handled differently and gives those new businesses greater visibility. This visibility enables senior executives to collectively monitor such initiatives across the company and recognize the necessary RPP customizations. It also encourages executives to see potential synergies between those new businesses with similar RPP requirements and between new business RPP requirements and the core business. In short, it helps executives think about the new businesses differently and, in turn, helps them think about the whole business differently.
The table below describes the key differences in the governance approach between the Explore/Exploit approaches typically described in the ambidextrous organization model but adds the “Mezzanine” governance approach required to transition transformational innovations during the scaling phase successfully.
The Functional Interface Team (FIT team)
At the same time, however, the practice of implementing a Mezzanine governance model in the scaling stage presents some unique challenges when the new business is small and largely vertically integrated and must collaborate with large, horizontally organized functional teams supporting the core business. A small team can’t afford to interface with all the functional groups within a large organization to address global custom RPP design. While companies typically will have good playbooks for execution within the horizontal functional groups that support the core business, they are likely missing specific processes for supporting transformational or disruptive innovation. In addition, the intrapreneurs attracted to the new transformational innovation are the type of people who are more likely to try to work around large functional groups than address issues with them. That approach, while it may be effective for a single project, is not sustainable or scalable. To address this mismatch, companies will likely need a new capability to bridge the gap.
The solution is to create a Functional Interface Team (FIT Team) made up of members from each functional group, each of whom is an expert in the RPPs of their group. FIT Team members are charged with being available to mentor new transformational innovations and, most importantly, champion innovation within their functional organizations. This requires top-down support and visibility for the members of the FIT team. We believe that utilizing the “Get to Yes” memos, as described in “Removing the Roadblocks to Government/Corporate Innovation – When Theory Meets Practice,” describes a series of executive memos that is an excellent way to kick off the FIT Team with the right high-level support.
Once the right FIT Team members are selected, they can help identify and facilitate creative solutions for many Company Fit-related issues early in the new business lifecycle. When the FIT Team and the innovation team, working together, cannot find an appropriate solution for a show-stopper RPP mismatch, they may have the ability to recommend stopping the project, freeing up resources early, and applying them to more fruitful opportunities with a better Company Fit. To further support this process, BRI developed a business-company Fit analysis tool – (see Appendix 2); the tool utilizes a series of questions to uncover potential RPP mismatches.
Summary
Company Fit or Resource, Process, and Priority (RPP) mismatch is the key failure mechanism for transformational new business growth in mature companies. Ambidextrous leaders recognize the differences in the RPP requirements between Exploration work and core business Sustaining work. Implementing custom governance for Exploration work makes the RPP requirements for Exploration work explicit. It differentiates them from the implicit RPPs of the core business sustaining work and enables an Ambidextrous Organization. This facilitates more successful new business ideation and incubation, but when successfully incubated new businesses start scaling and leveraging synergies with assets or operational capabilities from the core business, they often fail because there’s a big gap in the RPPs and governance between the incubation and the core business operations.
Scaling requires a carefully selected blending of the RPPs from the new business and the core business functional operations and a third and explicitly different governance model we call “Mezzanine” stage governance. In this model, stakeholders from both the exploration and core business sustaining parts of the company should be accountable for the results. Explicit criteria and metrics should be defined and agreed upon upfront for entry, exit, and key transition points to, from, and during the Mezzanine stage.
A critical capability for effectively implementing the Mezzanine governance model is implementing and empowering a Functional Interface Team (FIT team) with the explicit role of facilitating the interface between a small and more vertically integrated new business venture team and the many large functional organizations that likely support the core business. The FIT team is like a connector and translator between the big & small, risk-tolerant & risk-averse, and clear vs. ambiguous requirements of the new business and the functional organizations supporting the core business.
