Forget Return on Investment … focus on Return on Innovation

I stumbled across this clip the other day of Jeff Bezos on The Tonight Show twenty-five years ago.

https://www.youtube.com/watch?v=Pj8CthSn2tI

Jay Leno asks him how the company can be worth billions when it consistently makes losses. Jeff Bezos laughs along but then says: “we are a famously unprofitable company, but we are investing in the future”.

We all know what happened after that (for more Bezos commentary in 1999, check this out).

It’s funny as LinkedIn asked me the other day:

You’re juggling new ideas and current operations in your strategy. How do you decide what takes precedence?

And my reply was

Unfortunately most decision makers only ever focus on return on investment. I don't. The focus should be return on innovation. As the late, great Steve Jobs said: innovate out of a crisis. You will never get anywhere by just doing business as usual, at lowest risk and a pure focus on cost with zero focus on (probable) income.

And then I thought back to my interview with Tom Blomfield, co-founder of Monzo, three years ago:

When you’re struggling as a company, there’s the temptation to cut salaries, to make redundancies, perhaps to cut back on your purpose-driven expenditure. These are short-term measures companies use to try to restore profitability in a crisis. Sometimes they’re necessary. But I don’t think they’re sustainable for the long-term.

Which prompted me at the time to refer to Steve Jobs’s view* that you must innovate out of crisis, rather than cost-cut.

“The cure for Apple is not cost-cutting. The cure for Apple is to innovate its way out of its current predicament.”

Back then in 1997, everyone predicted Apple would die. It was haemorrhaging cash, profit, customers and looked like a dead beast. Michael Dell famously said that he would have “shut it down and give the money back to the shareholders”

Times change.

The thing is that what is driving the likes of Jeff Bezos, Steve Jobs and now Satya Nadella and Elon Musk is Return on Innovation. They are running the most innovative companies in the world. The same with Jack Ma and Pony Ma in China, Tom Blomfield and David Vélez at NuBank. It’s all about Return on Innovation.

I’m not saying you can forget traditional RoI. As one comment on my LinkedIn post stated:

You're right. However, ROI is a fundamental factor we need to consider, as it indicates the sustainability of the business. Any CEO should focus on innovation, but it must be tied to ROI or at least have a clear calculation of the impact of innovation on ROI. Any action should come with a calculated risk.

True. It’s a balance. However, having been in several companies during a downturn of the business, it really gets me that the focus is to shrink the firm rather than grow it. The best example is one company I worked in that had regular lay-offs every quarter. It disheartened the people and I ended up likening that company to an anorexic. The most weight it lost, the better it felt about the future until it died.

When working in any company – especially if you are in a decision-making role – the focus must be the light at the end of the tunnel and how you will grow the business out of the crisis. Where is the Return on Innovation? If you only focus on Return on Investment, you will drive the firm into anorexia.

 

Postscript:

One of my favourite memories related to this is a Citigroup CxO who stood up at a conference and said: “we run the numbers for any investment and look for great cost-benefit analysis for any business case proposal. The thing is that we do that in depth but no one ever goes back after the investment to check the numbers”. #micdrop

 

* more good Steve Jobs quotes here https://realbusiness.co.uk/steve-jobs-10-best-quotes-on-business