First, Forget What Works

NewCo's managers need the flexibility to improve their predictions as they learn more, and thus should be held accountable to a learning process, not a number. "You want people to be ambitious and bold rather than conservative," says Govindarajan. Evaluating NewCo's managers is a largely subjective exercise, he says, wherein they are judged "by the quality of their thinking."

New Blood
Should NewCo's general manager be recruited from outside CoreCo? Probably. Insiders, says Govindarajan, "have a natural tendency to reinforce the status quo," whereas outsiders are willing to challenge the status quo. The new unit's workforce should include plenty of outsiders as well, "not only to build new competencies but to erase the memory" of CoreCo.

Govindarajan also says that it's a mistake for CoreCo's head of human resources to oversee that function for NewCo as well. Doing so "invariably leads to problems," he says. CoreCo's HR chief will tend to recruit the same sort of people that the core business has, and pay them in the same way. Yet the new business may require people with different skills and a more entrepreneurial mind-set, along with a suitable compensation scheme.

NewCo should hire its own CFO, too. "However brilliant [CoreCo's] CFO may be, it's very difficult for the same person to move from one planning process to the other," comments Govindarajan. "The processes are different, because the uncertainties inherent in these businesses are vastly different. It's best to have planning meetings done separately — to not have general managers and CFOs from both NewCo and CoreCo in the same room at the same time."

Out of sight, out of mind. Or another familiar saying may be appropriate, with one change: Those who remember the past are condemned to repeat it.

Edward Teach is articles editor of CFO.

10 Rules for Innovators

1. In all great innovation stories, the great idea is only Chapter 1.
2. Sources of organizational memory are powerful.
3. Large, established companies can beat start-ups.
4. Strategic experiments face critical unknowns.
5. The NewCo organization must be built from scratch.
6. Managing tensions is job one for senior management.
7. NewCo needs its own planning process.
8. Interest, influence, internal competition, and politics disrupt learning.
9. Hold NewCo accountable for learning and not results.
10. Companies can build a capacity for breakthrough growth through strategic innovation.

Source: Ten Rules for Strategic Innovators, Vijay Govindarajan and Chris Trimble (Harvard Business School Press)

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