June 12, 2007

News & Opinion: (3 of 7) Cash, Cash Traps and the Cash Curve by Rebecca

By: 800-CEO-READ @ 5:12 PM – Filed under: Management & Workplace Culture

(from James Andrew, author of Payback)

It’s all about the cash. And the only role of innovation, ultimately, is to generate cash.

The problem with many innovation projects is that they quickly become cash traps. You know how it works. Someone – a leader or a staffer or a division – gets all caught up in an idea. The idea gets a green light. Before anyone knows it, it’s sucking in resources – money, staff time and attention. And many ideas become “cash traps”. Whether they get to market or not, they consume more cash than they generate—forever. And they tie up all those scarce human (and other) resources that would be better used elsewhere.

Cash traps need to be shut down. And that’s where the discipline of Payback comes in. In the book we describe the cash curve – a tool for analysis of, and decision-making about, innovation projects. The cash curve forces manager to think about, and ask key questions about, the dynamics of cash generation at critical points in the lifecycle of an innovation project. It focuses on four variables – “levers” – that we call the Four S’s – that managers can use to take control of the innovation process.

The Four S’s are:
  • Start-up costs – how much of a pre-launch investment does the project require?

  • Speed – how long will it take the project to get to market?

  • Scale – how long will it take to get to volume?

  • Support costs – how much will have to be re-invested – for example, in marketing, pricing actions and product improvements – to manage the project after launch?

The Four S’s seem simple but the implications are serious. By tracking those variables before, and throughout, the project, you can make a host of decisions – from re-allocating resources, to changing schedules, to shutting down the project altogether. And portfolios are actually collections of the cash curves of many projects.

Companies that manage the cash curve effectively become innovation success stories – like Apple with its iPod. Innovation projects that aren’t managed via the cash curve run the risk of becoming the next Concorde – the classic example of an exciting idea that became a business failure because it never managed to generate cash payback.