The End of Innovation (as we know it)

If there is one buzzword that is getting a lot attention in the circles I operate in, it is INNOVATION. As I spent another week on the road spending time with different companies, I realized that I probably haven’t had a meeting at a single company over the last year or more where the “I” word was not used. Almost every company I meet has some innovation initiative, an innovation garage, a lighthouse project, some special team working on something disruptive, a co-creation initiative, some open innovation activity, etc. There are too many initiatives to shake a stick at!

Unfortunately, when I ask about the results of these initiatives, there often is a lot of fluff and very little in terms of real and tangible results that materially drive the bottom line for the company. Instead, these innovation initiatives seem to be more directed towards the needs to the C-suite team and their desire to show the board that they’re doing everything they can to secure a future for the company. I guess most of the C-suite executives like their jobs and spending some company resources on creating the right impression with the board as well as the customer base may well be the right decision. But you don’t build new revenue streams this way.

Cynicism aside, the fact remains that driving successful innovation activities that lead to material outcomes is hard, as many startups can attest to. And in many ways it’s even harder, and in my experience very ineffective, in large companies. When I reflected on why this is the case, I identified five reasons that, in my experience, are at the root of this challenge.

First, most companies are organized functionally. This means that the people who meet and understand the customer (product management, sales and marketing) may have all kinds of novel insights and innovative ideas. However, because of their background and skill-set, they are unable to build anything like a prototype or mock-up. Similarly, the folks that would be able to build prototypes and innovative solutions, such as the staff in the R&D department, are typically shielded from the customer. So, they don’t get these novel and innovative insights and consequently don’t understand the customer. Even in the cases where the Kiplingesque divide between “business” and “R&D” is crossed, as the two sides typically don’t form a single innovation team, the result is very long feedback loops that kill innovation.

The second main challenge is that affects innovation is that many companies pride themselves on predictability and reliable return on investment. For sustaining innovations, such as the constant flow of new features and products in already established business areas of the company, the return on investment is calculated beforehand and the results typically follow a Gaussian bell curve in terms of predictable outcome. However, for innovations that are intended to build new business opportunities and revenue sources for the company, the outcome tends to follow a power curve. This means that most innovations fail and are waste, but the few that are successful make up for all the failed ones. I once heard a VC explain that his most successful investment had returned more than all his other investments combined. And his second most successful investment had returned more than all others except the first one. And so on. The power curve of return, however, meshes very poorly with almost every process in companies as these are all based on predictability and high likelihood of successful outcomes. Failing to meet a successful outcome is inherently considered a failure and everyone shies away from that. Hence we see that innovative ideas that could be disruptive are scaled back and the energy is focused on the initiatives that have the highest likelihood of success, and consequently the lowest risk and limited returns.

Third, because of the aforementioned, companies seek to kill off innovative ideas as early as possible to minimize wasteful investments and typically before an idea has had a chance to prove itself. And in many companies, decisions concerning innovative ideas are taken by senior leaders based on their opinions, rather than based on actual data from customers. As innovations are by definition breaking the rules that are established in a specific industry and senior leaders have typically grown up in that industry and implicitly believe that those rules are the only ones that could possibly exist, decisions concerning innovative ideas are made by the worst possible individuals.

Fourth, in many organizations, different units, functions and teams have established a certain turf for which they, and they only, have responsibility and the right to operate in. Unfortunately, innovative ideas tend to have a lack of respect for organizational boundaries. I have experienced several cases where innovation initiatives were slowed down or killed altogether because of the organizational structures that existed in the company. The structure of the organization can easily become the very thing that makes you fail.

Finally, as I shared in earlier blog posts (such as here), in a typical company, 80-90% of all staff in R&D (including product management and other functions related to R&D) work on commodity functionality. However, for a variety of reasons, these people believe that the functionality that they work on is differentiating or even innovative. Consequently, many companies tend to innovate in areas that customers don’t care about, but that are considered very important within the company. These shadow beliefs tend to lead to a lot of waste in innovation efforts.

These are five reasons why innovation at large companies almost always fails. People don’t talk about it and only sing the praises of the few things that do work out, but the fact is that innovation processes at most large companies that I meet are very ineffective and wasteful. Rather than claiming that I have the silver bullet, I do want to share what I have found to be the five characteristics of successful innovation systems at companies.

First, innovation needs unstructured time. Employees need time not managed by bosses or other individuals, but unstructured and entirely up to the individual on how to spend it. Google famously gives their employees 20% of their time, but during my time at Intuit (a great, great company to work for, BTW), every employee could spend 10% of his or her time on innovation initiatives. If your people spend all their time on the day-to-day priorities, you can’t expect innovation.

Second, innovation needs teams. Very few individuals can take an innovative idea and go through the entire lifecycle of the idea without help from others. Consequently, the organization needs to establish tools and mechanisms to help employees build teams across functions and sites. In that way, individuals passionate about the same innovation idea can band together, evolve the original idea, build mock-ups and prototypes, collect feedback from customers and build the case for a larger investment from the company.

Third, innovation needs customer feedback. Most companies are extremely careful about who gets to interact with customers. However, innovation requires almost constant customer feedback and teams need to be able to connect with customers throughout the innovation lifecycle to learn, collect feedback and test alternatives and potential solutions.

Fourth, innovation needs funding. Once an innovation team, using their unstructured time, has developed a promising concept, has collected positive feedback from customers and has tested as many of the prerequisites required for the innovation to scale, the company should have mechanisms to provide the funding needed to allow all or part of the team to work full time on their innovation.

Fifth, and finally, innovation needs scale. As I discussed earlier, innovation follows a power function in terms of success, meaning that most ideas fail but the few that succeed can materially move the company. This means that we should aim for dozens or even hundreds of ideas to move through the innovation funnel in order to get to the very few that knock the ball out of the park.

Concluding, innovation as it is practiced at most companies is very inefficient at best and often counterproductive. We need new innovation systems and in this post, I highlight the five characteristics, i.e. unstructured time, teams, customer feedback, funding and scale, that I consider to be necessary ingredients. Please share your experiences and insights in the comments!