It is a general principle that all attempts to avoid risk reduce the ability to innovate. Risk and innovation must be managed, but don’t make the mistake of over-managing risk and its lesser forms: budgets and lawyers. As industries mature and companies get larger, innovation often declines. Look closely inside these organizations and you will see the problem is that they are overly budgeted and overly lawyered (TSMC refers to the latter as their Business Prevention Department). Neither generate revenues, they only generate friction.
The budgeting process is a huge drag on innovation and I see it working well in many of the major organizations in our business today. Jack Welch claims one of his most important advances at GE came when he committed the corporate heresy of eliminating budgets. The result was far more innovation, growth, and profits. The reason is that budgets shift your organization’s focus from the customer to internal gaming and from innovation to meeting numbers. The budgies (my term for the people who are under a budget) puff up their needs, high-balling all their numbers, expecting to get 10% less. Then all their effort goes into justifying their claimed needs. The corporate cats seek to undercut the baseline by 10%. Both expect to wind up back at the baseline. So what’s the baseline? Most often it’s last year’s number. Then a huge cat and bird fight ensues as they comeback somewhere near the baseline. Once over, since no consideration was made for where the growth would come from, the budgies shift to cost cutting. Moreover, the larger groups get the most money. The small groups with the innovations that will drive future growth get under-funded. The fundamental problem with budgets is that it tells your people the most important thing is to meet their numbers, not add value — hence . . . no innovation.
If you think back to the days when today’s giants were small, the focus was not on budgets, but on growth through innovation. When Jim Morgan sought to bring Dan Maydan in, who would take Applied Materials through its greatest growth period, Bob Graham sought to derail the deal to negotiate a better deal. It turns out to be one of the darkest periods in Bob’s career and one of the brightest in Jim’s. Bob saw Dan as a PR move to sell etchers. Jim realized Dan would add a new dimension to Applied; that he would add the development experience to make it all happen. Dan was virtually given a blank check and the rest is history, as they say, very lawyered organizations are weighed down because lawyers are bred to be risk avoidance machines. It’s like getting a pit bull and expecting it to be a great family dog. Lawyers serve an important need, but realize that they need to be held back. Ironically, lawyers avoid risk most for themselves. If you look at Sarbanes-Oxley, executives were hung with a tremendous responsibility to meet complex legal and accounting procedures that cannot be met without extensive use of lawyers and accountants. Yet the law makers put the entire burden on the executives and pulled it from the lawyers and accountants that are paid to make sure everything is on the up and up. Never forget that lawyers only provide recommendations and never make decisions. They control decisions by brightening or darkening down images of risk. In the end you are responsible, as many executives are finding out with options backdating.