Part of our work in the Domain Consulting team is to advise Cyara customers on their Agile/DevOps journeys. Something we've seen among many Cyara customers, and more broadly, is the constant pressure to innovate. Technological innovation continues, but that doesn't mean organizations are equipped to handle it. In fact, quite a lot needs to change before they can truly innovate at the speed of technological advancement. Two main areas where we need to see change are funding structures and outsourcing models.
In this first of two posts, I'll outline some of the barriers to innovation in terms of funding models, and suggest some ways to overcome them. In the second post, I will examine the barriers presented by outsourcing models.
The Drawbacks of Traditional Funding Models
Many organizations fund IT projects using a traditional entitlement-based model. In this model, which usually follows a yearly cycle, significant resources are spent on preparing the business case and agreeing to the business requirements. Sometimes, this can severely affect timelines for the delivery of the actual project. One example I’ve encountered is a large data warehouse project. Approval of the business case had taken three years. Getting the business requirements agreed and documented had taken one year. This left six months to develop and three months to test — not exactly an ideal situation in terms of its impact of the end product.
The entitlement funding model also leaves projects vulnerable to politics — sometimes it’s not about the merits of the project being proposed, but about how good someone is at arguing their business case, or about who they know within the organization.
Finally, entitlement funding can lead to a situation where good money is being thrown after bad. When the funding is awarded up front, the project delivery team needs to keep going with the idea even if they’re not seeing a return.
An Alternative Funding Model
As I’ve said in a previous post, to match the pace of technological innovation, organizations need to take a new approach to funding. In The Startup Way, Eric Ries goes as far as to say that a different funding model is essential: "Believe me, if it was possible to accomplish the goal of creating an engine of continuous innovation without accounting reform, I’d be all for it. But, based on my experience, that is impossible." But what does accounting reform mean? Ries and many other DevOps thought leaders advocate a model called Innovation Accounting.
The main benefits of this Innovation Accounting model over the traditional Entitlement Funding model are flexibility, lower risk, and less waste. In essence, this model involves securing seed funding for an idea from an investment committee within your organization — essentially an internal VC group, sometimes known as a growth board — then securing further funding based on whether you’re achieving your goals for the product. If you are able to demonstrate a positive return, whether in terms of learnings or revenue, you can secure more investment and continue developing. For example, you could start by asking for a sum of $10,000 that allows you to do research, have conversations with customers, and develop a mock-up. If you get a positive response from customers, then you can secure more funding to develop a better minimum viable product or speak to more customers to validate your idea further. The more you demonstrate that your product solves a need, the more funding you can get to scale it.
Levels of Innovation Accounting
Since this is a complex framework, Ries breaks Innovation Accounting down into three levels.
This level shows a collection of metrics, usually around revenue, that are acknowledged to be important. For example, imagine a cell provider who had the objective of routing callers who want to recharge their prepaid cell credit to a channel with a lower cost to serve. Their suggested solution might be to send an SMS to that caller that redirects them to a website where they can recharge their credit. In this instance, the dashboard would track the number of callers, the number that would go to the website, the number that would recharge successfully, and so on over time. But it would also track how many of those customers changed their behavior the next time they wanted to top up their credit. These metrics could help the cell provider understand whether they should change the wording in the SMS or on the site to achieve their goal of customers topping up online rather than on the phone.
2. Business Case
In this level, metrics such as costs and retention become more important, and contribute to building a business case. In the cell provider scenario, they might consider whether the increased number of customers using the website to top up credit is actually cheaper. For example, how much are they spending on advertising to change the behavior? Asking these questions builds the business case for continuing to develop the solution.
3. Net Present Value
As Ries states, at this level, the goal is to translate learning into dollars by rerunning the full business case after each new data point. The cell provider would look at the net present value of every change they made while developing their solution. For example, if the previous week saw a 3.5% behavior conversion rate and this week saw a 3.7% rate, what would that mean in terms of additional value in today’s terms if they left the solution operating for three years? This is a more concrete way to validate the solutions than making assumptions on ROI, which is often the approach in Entitlement-Based funding.
Is your funding model a barrier to innovation in your organization?
To learn more about how Domain Consulting can help you, contact us, or get in touch with your Account Executive.