Leaders house a new venture in its own unit with a protected budget, so the annual reallocation that favors the established business cannot starve it before it proves itself.
An example
Print advertising at a regional newspaper group was falling, and its chief executive believed podcasts could replace some of the lost revenue. Two earlier digital projects had been funded inside the newsrooms and then cut in the next budget cycle, when print needed the money. This time the chief executive set up a separate audio unit with its own head, its own staff, and a three-year budget approved by the board, outside the newsrooms' allocation process. The unit's head reported to the chief executive directly. In the second year print advertising fell faster than forecast, and the publishers asked for the audio budget to cover their gap. The chief executive pointed to the board's approval and declined. By the third year the audio unit was profitable and carried a fifth of the group's digital advertising.
Why it works
Annual resource allocation favors the established business, whose returns are known and whose managers are powerful, so a new venture funded inside that process gets cut whenever the established business needs money. Housing the venture in its own unit with a protected budget makes survival easier: the venture sits outside the reallocation and cannot be starved before it proves itself. Leaders need the authority to set up the unit, the budget commitment has to hold under pressure, and the venture has to be able to prove itself within the protected period. It fails if the protection is withdrawn at the first squeeze.
The thinking behind it
Clayton M. Christensen Christensen's The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (1997) argues that well-run incumbents fail against disruptive technologies partly because current customers drive how they allocate resources, and small new markets cannot meet a large company's growth needs. Incumbents succeed, he argues, when they place the new business in an autonomous organization sized to be rewarded by small wins. The audio unit and its protected budget follow that prescription.
When it fits
New ventures that compete with or differ from the established business need it, in companies where the established business dominates the budget. A leader with the authority to set up a separate unit and to protect its money is required, usually the chief executive, often with the board behind them.
How to use it well
Set up the venture as its own unit, with its own head and a budget committed for a set period, approved at the highest level available.
- Have the venture's head report to someone above the established business.
- Agree the milestones that will decide whether the venture continues.
- Protect the budget when the established business asks for it.
- Review the venture against its milestones, honestly, on the dates agreed.
Tell the established business why the venture is protected and when it will be reviewed. Its managers push back less when they know the reasons and the dates, and they will be watching the milestones too.
What it costs and where it backfires
Separate units can breed resentment in the established business, especially when budgets are tight. A protected budget can make the venture complacent. If the venture fails, the leader who protected it takes the blame. Milestones have to be honest. Protecting a venture past the point where it has failed to prove itself is a sunk-cost mistake, however principled it looks from inside.
When it is used on you
Hold a venture shielded from the budget process you live in to its milestones and review dates, and ask for both in writing. If you believe the protection is starving your unit, make the case with numbers to whoever approved it.