Managing Innovation Through OKRs and Adaptive Portfolio Management  

I recently joined Daniel Montgomery on his podcast, Agile Strategies, to chat about innovation, OKRs, and strategic agility, particularly the need for resource fluidity (people, money, machines) and how it plays out in an enterprise portfolio management process. I’ve recapped the essence of the episode below, but you can listen to the entire conversation on Spotify.  

Strategy Expressed in OKRs  

Most organizations define their strategy by starting with their vision and mission statements, which I collectively refer to as the “North Star.” While this is a great starting point (though we’ve all seen good and bad examples), these statements often represent very high-level, long-term goals spanning several years. Unfortunately, this makes them too vague and open to interpretation, hindering our ability to deploy the strategy efficiently and effectively. As a result, they fail to provide clarity and focus to meet every employee’s needs. 

The next step to defining a strategy that can be effectively decomposed and communicated throughout the organization is to answer the questions: “Where do we play?” and “How do we win?” (thanks to Roger Martin). By clearly identifying the arenas in which we compete—such as geographical regions, market segments, and product categories—and understanding how we outperform competitors in each of these areas, we bring the time horizon closer and become much more specific about what we’re optimizing the organization for and how we measure progress toward success. 

OKRs provide a structured way to assign value to and prioritize initiatives based on their strategic impact rather than just simplistic financial measures like ROI.  

This increased precision is where OKRs, or Objectives and Key Results, come into play. OKRs help you deploy your strategy with clarity and track execution transparently. They enable your teams to focus on value and align their efforts to strategic objectives, ensuring everyone is rowing in the same direction. OKRs bridge the gap between high-level strategy and daily execution. They also provide a structured way to assign value to and prioritize initiatives based on their strategic impact rather than just simplistic financial measures like ROI.  

Understanding Resource Fluidity  

Think of resource fluidity as the ability to shift capacity quickly and effectively. Whether you manage a fleet of trucks, development teams, or factory production lines, your goal is to allocate or reallocate this capacity to initiatives with the highest potential impact and financial return. Achieving this requires more than just tactical adjustments—it demands the awareness to recognize threats and opportunities and the agility to respond faster and more precisely than your competitors. By mastering this ability, your organization can turn change into a competitive advantage. This is what we mean by strategic agility. 

Prioritizing for Innovation  

Organizations often underfund crucial strategic initiatives like innovation because their results are highly variable and may not deliver measurable short-term financial benefits according to traditional measures like ROI. Still, successful strategic initiatives can redefine your company’s future. Effective portfolio management assigns value to and prioritizes initiatives that realize strategic objectives to ensure the enterprise remains competitive over longer time horizons. It is essential to reserve investment and human capacity for these high-risk, high-reward initiatives.  

One effective technique to establish appropriate value assignment rules for each type of initiative is to define investment sectors for candidates within your portfolio demand queues. Assigning candidate initiatives to sectors allows you to compare and prioritize similar items “like to like” to ensure you’re not pitting a groundbreaking innovation initiative against a simple cost-take-out project. Investment sectors also allow you to set target investment levels for each category or type of investment to ensure you are not under or over-invested in any type of initiative in our portfolio.   

Using investment sectors can improve resource allocation decisions by allowing you to prioritize each initiative within its sector before comparing it to those in other sectors.

In addition to setting valuation and prioritization rules and targets, sectors should identify the tolerance for variance permitted in initiative performance as tracked in the portfolio governance process. In venture capital, investors might look at 100 proposals, fund 10, and hope that one or two produce a 10x or higher return on their investment. This high-risk, high-reward scenario illustrates a tolerance for variance appropriate for the innovation investment sector but NOT for the regulatory compliance or cost take-out investment sectors; they should have 90% or higher success rates.   

Using investment sectors can improve resource allocation decisions by allowing you to prioritize each initiative within its sector before comparing it to those in other sectors. This approach can substantially speed up the portfolio prioritization and capacity allocation process. 

Incremental Value Delivery  

Most initiatives or projects follow the Pareto rule, where 80% of the value comes from 20% of the work or cost. IT projects, in particular, are notorious for accumulating a lot of cruft alongside the true value drivers, making this issue even more problematic. Instead of bundling features into massive projects, break them down and prioritize various projects’ features or functions against each other. Assign a value to individual components, interleave them (acknowledging what groupings represent minimally valuable feature sets), and prioritize them. Fund them conditionally and release value early and often to accelerate time to value, measure performance empirically, and minimize the risk of unrealized sunk investment. Allocate additional tranches of investment as initiatives demonstrate performance, as a VC would  

Properly prioritized and sequenced projects and initiatives demonstrate a consistent decline in value delivered each month or quarter they proceed. Suppose you measure the value delivered every quarter from a project and make data-driven decisions about whether to continue, abandon, or pivot like a VC would. In that case, you can “trim the tail” and stop investing in low-value features when each month’s net value delivered declines below that of alternative investment candidates.   

The Difference Between OKRs and KPIs  

In a large organization, OKRs do not drive all activity and expenditure. For instance, ongoing “keep the lights on” activities like facilities management or routine support operations are budgeted to run continuously based on a projected level of demand. They typically leverage Key Performance Indicators (KPIs) to track the health and efficiency of their operations – an operational control and compliance regime to identify “out of spec” conditions that threaten performance, BUT OKRs still have a role in these types of operations when they seek improvement or change.  

Every part of your organization should embrace a culture of continuous improvement. Even routine operations can benefit from OKRs to drive improvement. Here’s a practical example: Imagine you manage a fleet of buses. Ensuring they run on schedule is a KPI – a leading indicator for customer satisfaction with your service. If your organization aimed to increase customer satisfaction, which involved boosting the fleet’s on-time departure rate by 25%, you would express that as an OKR. This OKR might involve initiatives like optimizing routes, improving maintenance schedules, or upgrading to higher-performing models, which could also be expressed as OKRs.Once you meet the one-time target, you can revert it to a KPI to monitor sustained performance. 

Final Thoughts  

Adaptive strategy is about more than just moving resources around. It’s about having the clarity and flexibility to respond to change proactively so that your organization remains resilient and competitive in an ever-changing landscape. OKRs play a vital role in this process by aligning your efforts with your strategic objectives and enabling you to prioritize initiatives based on their potential impact. It’s not just about keeping the lights on; it’s about lighting the way forward.  

If you enjoyed this post, I encourage you to take a deeper dive into strategy, OKRs, and portfolio management in our series found here: https://www.adaptivitygroup.com/category/insights/