Toughest Challenge Series: Episode 2
GUEST POST from Geoffrey A. Moore
Inspired by the HP Incubations Team
Here’s the challenge. Everyone gets that you need to ring-fence funding for incubating Horizon 3 initiatives. At the corporate level, with the CEO’s direct sponsorship, this can be managed as a separate operating unit with its own budget. The challenge is when the incubation is nested. That means it is being funded out of the operating budget of a Performance Zone business unit, not from some special set-aside allocation.
Nested incubation represents the majority of internally funded Horizon 3 investments. (M&A is a different vehicle, funded out of capex not opex, and is not subject to the challenges we will discuss here). The reason there is a strong preference for nested incubations is that, if successful, they are of immediate interest to the business unit’s current customer base as well as its partner ecosystem. That is, while there can be high technical risk, there is little to no market risk. That said, it is still early days, the technology is not proven, product-market fit still needs to be determined, so it is in no position to generate ROI in the current fiscal year.
The challenge comes to the fore in a tough year where the corporation has to cut back on its operating expenses. Everybody is expected to take a haircut, tighten their belts, suck it up, and carry on. The problem is, when it comes to managing incubations, this simply does not work. Incubation is all about getting and maintaining momentum. If at any point you take your foot off the accelerator, you will lose momentum, and you will never get it back. Instead, you will salvage what you can from the R&D and write the whole thing off to bad timing. But let’s be clear: this is not management, this is mismanagement.
So, what’s the fix? It starts with the business unit surfacing its incubation opportunity during the annual budgeting process. It proposes to set aside a portion of its next year’s budget dedicated to funding the incubation, with funding released on a VC-model based on milestone attainment. This is documented and agreed to at the Executive Leadership Team level. If bad times hit, the choice is never to take a haircut; it is either to carry on or cancel things altogether, and it is made in dialog with the ELT since either way it could have a material impact on the enterprise’s market valuation.
Once the nested incubation has been agreed to, then the business unit leader is responsible for ensuring its funding stays ring-fenced. In particular, this means that resources assigned to the incubation effort cannot be “borrowed” by the current product lines to temporarily address an urgent need. Again, this is all about maintaining momentum.
To ensure this works as planned, here is a tip from a long-time friend and colleague who is the CFO at a major enterprise:
All ring-fenced items are documented and agreed upon at the ELT level. The way it works is the finance team who work with the budget holder is the guardian of all ring-fenced spend. When changes need to be made, they can’t touch ring-fenced spend. Of course, you have to limit the number of ring-fenced items to give freedom of execution to the leaders, but it’s an effective mechanism.
That’s what he thinks. And that’s what I think too. What do you think?
Image Credit: Google Gemini
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