Performing InnovationUnder Governance

© 2014 Malcolm Ryder / archestra research

How to use this notebook

The following series of notes goes overthe relationship of governance and innovation

as affected by performance management.

All statements made are from direct experienceand are descriptions with no intent of warranty.

No external citations are included or necessary in this notebook. This notebook may be updated

at any time without prior notice.

All text and images in the notebook are copyrighted.

©2014 Malcolm Ryder / archestra research

Identifying business value

What gets done

Practice under management

Task of the practice

Contribution of the practice to capability

Value to business competency

Measured Deliverable

Effectiveness for business

Innovation Invent Create Solution Option Opportunity

Production Execute Operate Provision Fulfillment Impact

Performance Refine Optimize Reliability Availability ROI

Governance Constrain Align Assurance Compliance Propriety

Internalized Externalized

Problem: Innovation changes Production, which introduces risk. Does performance management use governance to decrease risk,

but thereby inhibit innovation?

© 2014 Malcolm Ryder / archestra research

Investment and Values

Multiple stakeholders are affected by a business situation.

Each type of stakeholder recognizes implications of the situation that pertain to their own type.

Beneficial implications are seen as desirable distinctions that will occur in the situation or because of it. Stakeholders invest in producing them.

Those distinctions are values. One situation can generate multiple values for multiple stakeholders.

Overall, “business value” indicates that there is a net benefit, of lesser or greater worth, obtained from the group of respective stakeholder values.

The primary situations of business value are Need and Demand.

The goal of Performance

About half of the time, we use the term “Performance” as the name of something described with a fixed measurement. Because of that fixed aspect we think of performance as a state.

While performance management normally declares a desired future state, it is mainly used to fortify the consistency of activity expected to produce the state.

Said differently, “production control” is a more-than-fair description of the purpose of performance management, and that purpose is more important to the distinction of performance management than is any particular future state.

But the idea that we can systematically create that state generates some anxiety about disruptions to the system. Change presents risks to the stability of the system underlying the imagined state of performance.

Performance Pressure

Production control accounts for the compatibility of performance management and governance.

Governance adds to control by bringing an intent to authorize and prioritize permitted behaviors.

However, performance management can easily assume that its own distinctive priorities are what governance should be concerned about.

That is, Performance’s view of “effective” governance is governance as a form of security for performance’s production intent.

In effect, where performance is defending a predetermined output, performance management encourages governance to resist change.

Competition for investment

During periods in which current outcomes are acceptable, Performance management already has a political advantage over Governance.

Performance is specially charged with delivering the results that “cause” the growth of profit and/or leverage from the current business position.

The investment in that “cause” hinges on the success of performance management as a mechanism for driving desired results.

Said differently, the actual business goal of performance management is Return On Investment (ROI) – management’s favorite subject.

Risks to ROI

In some periods, current outcomes may be unacceptable despite the effort of performance management.

A problem analysis of the deficiency can identify inhibitors in at least three areas reflecting insufficient control:

• Counterproductive behavior (versus intentions)

• Inconsistent procedure (versus standards)

• Violations (versus permissions)

That is, the correctness, method, and authority of activity can all be compromised during production, frustrating ROI.

Counting what matters

In contrast to the notion of “causing ROI”, the primary charge of governanceis to establish prerequisites that describe an environment of activity, and that align behavior for compatibility with that environment. Compatibility means that the business activity uses the environment without damaging the environment for other activities.

The investment in the environment counts on the success of governance as a mechanism for preserving that compatibility.

Said differently, the intended influence of governance is cultural and ecological, with a goal of compliance. Correctness, method and authority are all defensible aspects of compliance, and compliance offers security.

But the business view of compliance is opportunity cost.

Cost of Opportunity

Opportunity cost represents a condition more familiar as trade-offs and risks.

A decision or action taken now, at whatever execution cost and benefit, also changes the ability or likelihood for something else to occur or be obtained.

That impact on alternatives or future options may be negative or positive.

For example, as a consequence of something done now, it may be more costly to keep any alternative or future option available or feasible.

Controlling business risk

Current versus “Other “ Opportunity

Typically, performance management has an intent to get what it currentlywants from production at minimum necessary risk to the probability of getting it.

What performance wants from governance is protection against that risk by preventing unnecessary detriments to the current opportunity in its focus.

Performance expects governance to work against the risks. Deterrents to the current opportunity – stemming from issues of correctness, method and authority – are to be pre-empted.

Necessary but Insufficient

But collapsing the span of governance to within the scope of the performance effort is a management mistake.

The effect is to replace the natural perspective of governance (which is broader than a designated production) with production optimization.

Meanwhile, reward and compensation mechanisms are usually attuned to this production optimization.

As a result, there is relatively little incentive to work outside of it, even when necessary.

Production optimization

The artificial restriction of governance by performance management has at least two other important consequences.

• One is a relative dearth of proper scope-of-governance between and across production efforts.

• Another is significant resistance to changes that pose a risk to the optimization already funded and held responsible for ROI.

For many organizations, this surfaces as a segmentation of production into management silos.

Risks of Silos and Rogues

The “silo effect” gets staying power from what looks like successes, yet leaves exposure to after-effects not well governed. The scale of the silo effect can be small or truly huge.

• Products sped to market might get away with hidden production shortcuts while slower but better products get shelved.

• A big bank might successfully acquire a smaller bank that brings little in common with the bigger bank’s tracking and recognition methods, causing legal liabilities.

• In being a brand leader, a company may develop performance myopia that prevents it from acknowledging a small, different, industrially disruptive competitor.

Numerous “high-performance” perspectives make it easy to designate non-conforming efforts as low-value, complicating or threatening. Those other efforts can get quarantined regardless of whether they are good or bad.

The innovation dilemma

Production Optimization can turn conformity into an apparent virtue.

In responding to performance management, economies of scale and best practices can spread a production methodology as a requirement across most opportunities taken seriously for investment.

Departures from those norms, such as innovations, may get held back or screened out where they appear to be incompatible with the production approach credited for current “successes”.

But where current opportunities are not yielding desired levels of ROI, departures may be the strategic solution to obtain better results. They may specifically need to avoid the widespread conformity of performance management for production optimization .

Governance for innovation

Innovation as production

A governance model for innovation encourages methodology that allows innovation to have its own logically appropriate effect.

As a production effort, innovation intends to emphasize the acquisition of new concepts and proofs of those concepts in the form of viable deliverable resources for creating opportunity.

Governance that supports reaching the logical outcomes of an innovation effort means that innovation is actually more likely to “perform” – to be productive of its intended deliverables. The intended outcomes of innovation are the targets of innovation’s production.

Where governance belongs

Governance is operationally positioned to prepare and authorize circumstances that permit a production the room to succeed without damaging the prospects of other important productions, and without creating unnecessary risks or threats to effective production results.

Innovation is itself a type of production. The production is a transformation.

© 2014 Malcolm Ryder / archestra research

A climate for innovation

Adequate commitment to innovation has two critical success factors.

One: governance needs to constrain production, not vice versa. Constraint is not restraint.

Two: management support must go beyond protecting production optimization targets from interference, and beyond rewarding personnel for that protection.

A model is a form of constraint that provides guidance; adherence to the model channels efforts towards an expected effectiveness. Effectiveness logically drives benefits. Support aims for the effectiveness.

Innovation targets are not conventional optimization targets; instead, they are transformation targets.

© 2014 Malcolm Ryder / archestra research

Support for investment

In supporting innovation, it is important to prevent the artificial restriction of governance to an inappropriate performance model. A key tactic for that prevention is the development and use of a portfolio.

A portfolio allows highly differentiated production efforts to be independently organized while held together as a group under a common governance overview.

In effect, there can be multiple performance models accommodated under a consistent system of constraints.

Innovation is a transformation. “Transformation” can be modeled and performed as a type of production.

example

© 2014 Malcolm Ryder / archestra research

Supplying innovation

Inside or outside of a portfolio, innovators are a certain type of producer: they are Suppliers.

In innovation, production follows values and targets that distinguish a supplier perspective from other roles such as Provider, or Client.

Governing SupplyGovernance has a different intent for suppliers than it does for providers.

For suppliers, “Need” drives strategy, giving the value to strategy while justifying production (the resourced operation).

Protecting production’s performance (meeting need) means maintaining the relevance of production. This aims for low risk from changes to value.

For suppliers, a change to value creates a risk to relevance.

Governance is requested to constrain production by assuring that execution responds to risks appropriately.

Value: needsPerformance: relevance to needsRisk: inhibitors to relevanceExecution: methods of productionStrategy goal: Invention, Introduction

INNOVATORS/SUPPLIERS ADDRESS “NEED”

© 2014 Malcolm Ryder / archestra research

Governing ProvisionGovernance has a different intent for providers than it does for suppliers.

For providers, “Demand” drives strategy, giving the value to strategy while justifying production (the resourced operation).

Protecting production’s performance (meeting demand) means maintaining the delivery of production. This aims for low risk from changes to execution.

For providers, a change to execution creates a risk to delivery.

Governance is requested to constrain production by assuring that risks are evaluated in terms of value.

Value: demandPerformance: delivery to demandRisk: inhibitors to deliveryExecution: methods of productionStrategy goal: Iteration, Availability

PROVIDERS ADDRESS “DEMAND”

© 2014 Malcolm Ryder / archestra research

Governance of Suppliers and Providers

A companion key tactic for transformative production is sourcing.

Producers should be strategically selected for their ability to offer appropriate deliverables that already have the necessary attributes.

Deliverables may be services.

Qualified producers must have already made a sufficient commitment to any innovation of their production.

According to their role, their commitment may create, offer or implement innovation.

Selection criteria focus on their compatibility to strategy goals and to the policies of the portfolio of productions.

Summary

Governing versus Performing

A business is a producer.

To keep execution aligned with business purpose, production should be managed for performance. But an appropriate model for performance management should be used.

To keep execution aligned with business values, production should be under governance. Business values intend to preserve current and future opportunity for the diversity of business stakeholders.

Governing Supplier Performance

A performance management system for Providers often predisposes governance to efforts for securing purpose -- production’s optimization for delivery versus demand.

But the basis of “performance” for a Supplier is the relevance of its production to the user need, including Providers as its business customer. A provider model of performance management is not the appropriate model for a supplier.

The Supplier has business values, supported by its governance, intended to help maintain relevance for its current and potential future production.

Innovation as production

Suppliers generate products that meet needs.

Innovation is a type of Supplier production, primarily intended to create and sustain new kinds of opportunity.

Suppliers serve Providers.

The Provider does not manage Supplier performance; the Supplier manages the Supplier’s performance.

The Supplier’s governance constrains the supplier production that can fall under performance management.

A Provider has governance that aligns the Supplier’s performance to the business values of the Provider’s stakeholders.

Recap

• Governance establishes a cultural environment for production

• Governance sustains a managed production environment for a diversity of productions.

• “Production” has two goals: net worth, and product.

• Innovation is a type of “production”.

• “Value” has a particular meaning in innovation.

• Business focuses Innovation on creating new product to enhance net worth.

• For a business, a “service” is a type of product.

© 2014 Malcolm Ryder / archestra research

mryder@malcolmryder.com