radical Briefing 0031: The Core/Edge KPI Conundrum
Much has been said and written about the necessity for organizations to establish a core/edge strategy. The argument typically goes something like this: As an organization embarks on its journey into the unchartered (and often choppy) waters of disruptive change, it can’t do this in the core of its operations but rather needs to establish an “edge” unit, which sole task it is to “disrupt”.
The core of most incumbent organizations is a finely tuned machine which is highly efficient, effective and optimized to churn out as many widgets at a determined level of quality with the least amount of resources and thus the highest profit margin. The core is thus the lifeblood of an organization, as it creates the cashflow (and profits) to keep the organization alive and well.
When organizations sense a state change in their respective markets (hopefully early enough to catch the early signals of the impending change), and innovation (in Clayton Christensen’s sense of “sustaining innovation”) isn’t enough anymore, leaders realize that the essential properties of their cash-generating machinery (efficient / effective / optimized) doesn’t allow them to leap into new, often not-yet-invented, markets, products, and services. Innovation units are spun up, the stories of disrupted organizations such as Blockbuster, Kodak or Nokia are being ushered in the board room and across hallways to create the strong urgency of a burning platform, and fresh talent is being brought on. All with the best intentions and lots of fanfare.
Sadly most of these efforts don’t end well.
There are numerous reasons why a core/edge strategy, as much sense as it makes, is hard to implement. One of the key stumbling blocks is often established early on in the process: KPIs.
KPIs (Key Performance Indicators) are the gauges used to get the heartbeat of an organization, and serve a vital role in directing resources. Organizations typically have a finely tuned set of KPIs which ensure that all systems run at optimal capacity and therefore create the trifecta of efficiency, effectiveness and optimization, making the core hum. But — edge initiatives are neither efficient, effective or optimized. On the contrary, they are explicitly designed to be in the question and exploration space and thus optimize for learning. Which creates an important design decision and often challenge for the leadership in incumbent organizations: Which KPIs do you apply to your edge initiatives?
We suggest (and have seen this done very successfully) to create KPIs for your edge initiatives, which measure and thus steer toward the number of experiments and insights generated. Maximizing the number of experiments pushes an organization to increase their rate of learning, run experiments with the least amount of resources and in the shortest amount of time, and therefore adopt a “rapid prototyping” mindset. Adding “insights generated” to the equation ensures teams use the scientific method of formulating a testable hypothesis before embarking on an experiment and therefore maximize the value gained from those efforts.
Using traditional KPIs (often anchored in financial performance) have a strong adverse effect on disruptive innovation as they steer edge initiatives toward risk-minimization and incremental innovation at best.
I think bonusses of CEOs should be paid upon the amount of experiments, they run. Nothing wrong with traditional KPIs, they just should be part of a set of KPIs upon which #amountofexperiments should be one important measurement of success.