October 24, 2017
How to keep innovation from driving off course
by Paul Carroll
For me, one of the great moments in innovation history came in the mid-1990s as General Motors was considering rolling out OnStar across its product line. The CEO, Rick Wagoner, was understandly nervous about installing the electronics for the novel communications system in the factory. As an after-market choice for customers at far-higher cost, OnStar would have little chance of achieving critical mass, but Wagoner dreaded the thought of increasing the base price of vehicles, even for those who wouldn’t want OnStar. He asked his senior VP of strategy, Vince Barabba, what sort of return to expect from OnStar subscriptions and related services. Barabba replied, “I could give you a model, but we both know I’d be making up the numbers, right?”
Of course, he’d be making up the numbers. You can’t quantify with any precision something as novel as OnStar was. Yet companies routinely insist on such models and pretend they mean something. As a result, companies kill innovations whose mythical numbers don’t clear a hurdle (one that is often set by traditional parts of a business, which are threatened by the innovators).
To Wagoner’s credit, he merely grumbled about the lack of specificity and asked how quickly Barabba and his colleague Nick Pudar could tell him whether OnStar was badly off-track. Told that he could know within months, Wagoner authorized the $100 million bet on OnStar (which Barabba had artfully pitched to him as about the cost of changing a fender on a line of cars). OnStar soon became a major success. Six years ago, with the S&P 500 about half of what it is now, Fortune estimated that OnStar would command at least a $7 billion valuation if spun off as a standalone business.
The OnStar story springs to mind because Barabba, who has been a friend and colleague for going on 20 years, just published a book called “Wise Decision Making” that explores the many valuable lessons about innovation that he earned in a long and distinguished career. Those lessons run the gamut from OnStar’s multibillion-dollar success to an iconic failure: Kodak.
Barabba was the director of market research there when the topic of digital photography first surfaced, in the early 1980s. He did a study that said Kodak was safe for a time but that warned about milestones that digital photography would reach (cost, resolution, printability, etc.) and that would usher it into the mainstream. The study was remarkably accurate, but Barabba could only watch as Kodak’s top executives heard the “safe” part of his message and buried the rest in a file drawer.
Along the way, Barabba was twice director of the U.S. Census Bureau, where he was the defendant in a landmark case (Seymour vs. Barabba) that reached the Supreme Court in 1977 and settled a key issue about the role of the bureau. Barabba argued that the Census Bureau should just count; anyone who wanted to try to extrapolate to find missing people or otherwise adjust the count could do so on their own. Barabba won.
It’s hard to summarize “Wise Decision Making,” but here are two lessons that strike me as important now that innovation is finally coming to insurance and risk management:
• Don’t try to model everything. You’re just making up numbers. Instead, think about buying an option on an innovation. Make an investment, as GM did with OnStar, that is as small as possible but that gives you a real option on a big payday. Then decide as quickly as possible whether to exercise that option or to let it lapse.
• Keep “decision records.” These lay out all the assumptions that go into a major decision—about competitors, technology, the economy, etc. If you track the assumptions, you will be able to learn your fate far sooner than if you wait to see the effects on revenue and profits. Kodak would have saved itself years of misspending to support its traditional business if it had noticed that its assumptions on digital photography’s limitations were being rapidly invalidated. GM benefited from decision records because it saw the original assumption about OnStar go away—that GM would have to install cell towers across the entire country. Once OnStar could use existing satellites, the initial “no” became a “yes.”
There is much more, but I should leave that to the book. I hope you’ll pick up a copy and will get as much out of it as I have from sitting at Vince’s elbow for many years now.