Where delegation fails: Five things only the enterprise CEO can do to build new businesses

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This may be the most challenging time in more than a generation to be a CEO. Global uncertainty, a concussive series of tech-driven disruptions, and an ever-broadening set of risks have piled onto an already daunting set of pressures in running a business.

Those pressures likely go a long way toward explaining the increasing importance of new-business building. More than half of CEOs and business leaders count new-business building as a top three priority, and for 21 percent of them, it’s number one.12021 global report: The state of new-business building,” McKinsey, December 6, 2021. More telling, business leaders expect 50 percent of total revenues to come from new products, services, and businesses in five years’ time.22021 global report: The state of new-business building,” McKinsey, December 6, 2021. And, as leaders eye the increasingly fraught economic outlook, new-business building is also an important pillar in establishing resilience. During the COVID-19 pandemic, we saw that organizations whose top organic growth strategy was new-business building were more resilient, reporting either smaller decreases or greater increases in their growth rates than their peers.3Why business building is the new priority for growth,” McKinsey Quarterly, December 10, 2020.

Those new-business aspirations are simply impossible without an active and fully engaged CEO. In fact, if a CEO isn’t ready to commit, it’s probably better for the company not to pursue a new business.

Competing priorities mean that CEOs need to be conscious of the unique aspects of their role as chief executive that allow them to have the greatest impact on building new businesses (see sidebar, “CEO traits and behaviors that support a new business”). Of course, an important function of the CEO is to delegate various tasks to teams and empower leaders across the business. But our research, combined with our experience building more than 300 new businesses, reveals a cluster of activities for which the CEO’s involvement has an outsize impact—from continually raising aspirations to systematically building and sustaining support for the new business to resolving natural organizational tensions and barriers.4

In digging into this set of activities, we found that there are five tasks that can’t be delegated—tasks that only CEOs with their overarching strategic focus and decision-making authority can do. When CEOs adopt these measures as part of a clear playbook, they can succeed in building new businesses.

1. Set the bar high: Look to launch unicorns

If companies expect 50 percent of their new revenues to come from new businesses, products, and services, they need to aim high.

Too often, however, new businesses fail to lead to transformational value, with about four-fifths generating less than $50 million in revenues, according to our research.52021 global report," December 6, 2021. The CEO has a challenging role to play to ensure that the time and resources that go into a new business are worth it. The CEO’s laser focus on value is crucial in keeping the organization from being distracted by the latest hot idea that might sound good but that doesn’t have the market potential to be transformative.

Orienting the entire company toward this level of value starts with identifying a clear aspiration, ambitious goals, and specific targets. For example, the CEO of one insurance company was explicit in wanting to quadruple the size of its B2C business within only five years by building a new digital customer-centric B2C offering. From the beginning, targets included ambitious concrete milestones, such as the launch of a minimal viable product within five months and go-lives in two additional countries within one year, as well as operational key performance indicators (KPIs), such as one million website visitors within the first nine months.

Another example is Patrick Hylton, president and CEO of NCB Financial Group, the largest and oldest bank in Jamaica. Hylton oversaw the launch of Lynk, the bank’s digital payments business. He set targets for the new business to reach the 35–40 percent market share of individuals without bank accounts. “I have huge ambitions for Lynk, the digital payments business we’ve launched,” he said. “I want it to rival and even surpass the incumbent.”6One CEO's journey to becoming a business builder," McKinsey, August 9, 2022. This mindset aligns with broader patterns we have seen of successful CEOs being uniquely bold in their ambitions.7

Bold ambitions are particularly important when there is directional clarity in a business-building thesis and its value but there is not enough conviction in some parts of the business to invest in hiring a significant number of people or building out the technology assets needed to capture the opportunity. If the CEO does not step forward in these moments to act as a bridge by pushing forward decisions, actively building support, or driving toward specific deadlines, the initiative grinds to a halt or reverts to business as usual. An important part of a CEO’s role, as we have learned in business transformations and other contexts, is to help organizations avoid these collective-action problems.

Inevitably, some new businesses will fail. CEOs must not get too attached to a single business but instead focus their energy on where the real value is: developing a serial business-building capability. Serial business builders generate an average of 40 percent greater revenue for each new business they build when compared with first-time new-business builders. For this reason, CEOs need to focus their energy on managing a portfolio of new businesses (for example, recalibrating strategies and reallocating resources) and strengthening the organization’s institutional business-building muscle.

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2. Protect the new business from business as usual

Our analysis makes it clear that allocating protected funding for the new business is one of the most important things a CEO can do. CEOs must invest sufficiently and then protect that money from the inevitable attempts from incumbent parts of the enterprise to take it back as issues arise.

In practice, securing promises of investment is often easier than securing and distributing the investment itself, because funding tends to follow a traditional (and inflexible) P&L-driven process that relies on annual budgeting cycles. The result is that funding can’t be released when needed or funds are taken from other initiatives, which creates resentment in the existing business. To secure the new business’s financial independence, the CEO needs to establish a dedicated and protected funding source as well as an agile budgeting approach based on venture-capital-style stage gates whereby funding tranches are unlocked when the new business hits certain milestones.

The CEO has to extend that protective posture to preserve the new business’s broader independence. While it’s tempting to use established tools and processes in IT, HR, and marketing, for example, hard lessons have shown that these come with significant bureaucratic strings attached that lead to cost overruns and significant delays.

In fact, business-as-usual protocols and processes can pose a significant danger to the new business and require the CEO’s active intervention. The new entity needs new mechanisms for funding and expectations that don’t tie to the quarterly P&L cycle of a company. The markers of success are different; it’s crucial to provide clarity on KPIs that are meaningful to a new business—such as revenue growth, accomplishment of milestones, and customer experience—and to get leadership alignment on those KPIs. Existing compensation structures and hiring processes are often less appropriate when it comes to attracting talent, and they are hard to change because they require the CEO to work closely with the head of HR.

At a large regional bank, existing practices for onboarding new vendors were often time-consuming because of the risk-evaluation process. The CEO accepted the need for the checks but approached the head of procurement to make sure someone was dedicated to support the new business. As a result, onboarding a vendor for the new business went from three and a half months to three and a half weeks.

To ensure this operating model is practical and effective, the CEO needs to put in place a clear governance process. An ingoing precept is that more separation between the new business and the incumbent (except when it comes to strategic direction) is most effective. With that grounding, the CEO should work to mold a governance model that incorporates focused oversight aimed at enabling the new business, providing explicit authority for the new entity to make decisions (often through a venture board), and installing a funding mechanism in which the budget is released based on meeting specific KPIs.

3. Identify a leader who could one day be CEO and create the right talent blend

The success of a new business relies on finding the right balance between the independence of a start-up and the relevant advantages of the existing business. Where the CEO can have the greatest impact is in striking that balance, starting with hiring the leader for the new business. The CEO needs to find someone with not only the entrepreneurial and operational capabilities to run the business but also the softer influencing and collaboration skills to be able to work well with those in the incumbent business—whether that means working with various functional leaders to access talent and assets or aligning strategies with the board.

Understanding the importance of working with the incumbent was one reason why Øyvind Eriksen, president and CEO of Norwegian-based energy company Aker ASA, had the CEO of Aker’s new business spend extensive time learning about the parent business and its capabilities as soon as he was hired.8Know where you are going,” McKinsey, February 18, 2020.

Part of finding someone who can work with the incumbent is seeking a leader with stature. One leader told us that the new-business leader should be someone who could be CEO of the entire company someday. Putting the new-business leadership in a position to work as equals with leadership in the incumbent led the CEO of a consumer services company to assign two acknowledged top performers in the organization to lead its new business. This move demonstrated the importance of the new business to employees and ensured the new-business leaders had the credibility to work with incumbent executives.

Ensuring a productive relationship between the new business and the incumbent extends to ensuring the new business has a blend of new hires and strong performers from the existing company. Finding the optimal internal-external talent mix isn’t an exact science, and it requires persistence from the CEO to understand where the blockers are and break through them when needed—convincing functional leaders to commit their best people to the new business, for example, or working with the chief human resources officer (CHRO) to put streamlined rotational and transfer policies in place.

In charting a path to the optimal internal-external blend of talent, CEOs should consider pursuing an acquisition, but only when it’s measured and focused on scaling. Our research has shown that new businesses that made two acquisitions early in the scaling process were 25 percent more likely to significantly exceed expectations than those that made no acquisitions or made three or more of them.92021 global report,” December 6, 2021.

photo of Patrick Hylton

One CEO’s journey to becoming a business builder

4. Give leaders in the incumbent a stake in the new business’s success

Inevitably, there will be conflicts between the new business and the established one. For example, the needs of the new business might appear small to an IT function that has huge projects under way, so the chief information officer (CIO) may not be as responsive to the new business’s needs. Or, as the new business grows and operates in different ways, the existing business can start to perceive it as a threat, leading to counterproductive dynamics and lost value.

In these cases, the CEO must be ready to personally work with the corresponding functional or business leaders to resolve the issue. One CEO told us he would sit down with a resistant business unit head and detail how the new business helped improve his P&L. Clear expectations and explicit agreements with deadlines and metrics are instrumental in providing objective reference points that the CEO can use to exert appropriate influence on incumbent leaders to follow through on commitments.

In navigating these organizational tensions, the CEO should structure a governance model that directly incorporates incentives for parent business leaders. One way to do that is to identify the senior gatekeepers of a needed asset or capability, such as data or intellectual property, and provide them with a leadership role in the new business. The role may be to participate on a venture board that helps direct the new business or to be part of a task force to help the new business meet a specific need. In this role, these executives would have accountability for the new business’s success. Tying compensation and bonuses to specific KPIs for the new business has also proved to be effective in many contexts.

In providing these incentives, CEOs must remember to achieve a fine balance between involving incumbent leaders and protecting the new business’s autonomy. That means limiting the incumbent leaders’ ability to stall progress, for instance, by reducing their approval powers and keeping existing reporting structures from taking hold.

5. Communicate, and when you feel you’ve done enough, do some more

CEOs understand the importance of communication—much of their success is based on how well they do it. But in the context of supporting a new business, CEOs often underestimate how systematic and persistent communications need to be and how much they can affect the outcome of the new business. By communicating that a new business is part of a broader shift to become more of a digital, software, or tech-enabled company, for example, a CEO can help support new multiples for his or her public companies.

The art behind successful communications is being systematic and intentional in tailoring the message to the audience. Focusing on how the new business can help drive growth and build skills for the incumbent, for instance, can help convince those in the company who might be resistant to the new business. When speaking to a skeptical board, the CEO should highlight growth opportunities and potential disruptions based on marketplace dynamics.

Patrick Hylton has adopted a “sources of meaning” approach to his communications in building support for Lynk. He systematically identified the stakeholders and determined how to align the new business’s activities with their interests. “With regulators, for example, I explained how our new digital payments business would be more inclusive by being able to reach more people from different socioeconomic backgrounds, would help reduce any exposure to pandemics, and would aid labor productivity. I showed through our analysis that customers really wanted digital financial services,” he said.10One CEO's journey to becoming a business builder," August 9, 2022.

Building support is just the start. Communications is a continuous effort. One example of this is how the CEO and the CFO of Moody’s announced to the Street that they would be investing in creating several new businesses to aid clients with their integrated risk-assessment and decision-making needs—for instance, in third-party risk management. They made clear that these were part of the overall strategy of the business and communicated why the investments would benefit the core business, for example, sharing “the goal here . . . is to have more comprehensive offerings, to be able to deepen customer penetration and to add new customers that allow us to grow faster.” In every quarter during earnings calls, the CEO talked about the new businesses and focused on progress and linkages to the overall strategy.

This near-constant drumbeat of communication serves to reinforce conviction and goals. In our experience, the hallmarks of effective communications include reaffirming vision and rationale, highlighting meaningful external validation, setting ambitious but realistic expectations, being authentic (including when there are setbacks), celebrating progress, understanding the salient facts (such as progress against KPIs), and maintaining a cohesive message. This last point warrants emphasis. This communications program is best thought of as a CEO narrative, in which business building figures prominently and continuously in the overall strategy.

As CEOs drive their communications strategy, they should guard against communications stagnation over time. What they say needs to evolve as the new business changes—it is a story rather than a static set of talking points. Building excitement is important at the beginning, for example, but the message needs to shift and focus on operational progress as the new business matures.

Building new businesses cannot be a side project or an unguided experiment if companies want to grow their revenues, extend their market position, and stay ahead of industry disruptions. New-business building needs to become a core institutional and management capability to drive growth and boost resilience. That can only happen, however, when CEOs focus on tasks in which they have unique authority and leverage and when they commit their time, energy, and courage to them.

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