What did Innovation Labs ever do for us?

A former colleague of mine used to say that ‘we’re all making it up as we go along.’ He didn’t mean that as consultants we deliberately set out to deceive, but that in a fast-changing business world where new technologies and possibilities are emerging all the time, there are very few precedents to follow or principles to abide by. Instead you have to be attentive to your environment, adaptable, willing to experiment and show the humility to recognise and learn from mistakes.

I remembered this when I read about an increasing trend amongst firms to close down innovation labs. For established firms wanting to experiment with new business models, autonomous innovation labs have been a popular strategy. They provide an environment where ideas can be developed, tried and tested rapidly within small teams, free from the restrictions and complexities of a large parent firm. They also have valuable PR cache and that’s no slight; for firms with a traditional, or even staid reputation, encouraging skilled experienced hires and talented graduates to resist the lure of glamourous digital firms to join their ranks can be challenging. The innovation lab can be a powerful symbol of a fresh, progressive culture promising freedom, opportunity and creativity. But making the innovation lab deliver value back to the business is a different challenge.

In my experience, the innovation labs created by established, national and multinational firms are run by experienced professionals with deep expertise in their chosen fields and the tolerance of risk necessary to explore ideas and stimulate a create environment. The particularly successful ones manage to combine a wide range of disciplines and skill sets to enrich their work. Much like their parent companies, they can claim to be experts in their domain. A bit cooler, edgier and maybe a touch flashier, but experts nonetheless.

Where I believe the innovation lab strategy struggles is not necessarily in the lab environment itself, but in the relationship with the parent firm. In particular, the way in which creative ideas emerging from the innovation lab are transitioned into the parent firm and transformed into innovations – ideas capable of providing value for customer and delivering value back to the firm in return. This transfer of innovation from one domain to the other – from the lab, which emphasises creativity and experimentation, to the firm environment, where revenue, profit and operational efficiency are more dominant concerns – is where the challenge lies. While the pools of expertise and experience in the innovation lab and parent firm are often deep, it is at the point of transfer between the two that many firms find themselves ‘making it up as they go along’.

And if firms do find themselves improvising the transfer of potential new product or business model from one domain to the other, it’s no surprise. Both organisations will necessarily want to focus resources and energy on their core business activities; for the innovation lab, stimulating fresh ideas and for the parent firm, delivering revenue and profits and scale while reducing costs. That’s a crude simplification of the goals of two types of organisations, but it serves to illustrate a contrast.

The challenge is that while both organisations concentrate on the priorities of their particular domains too little attention is given to the integration between the two. As a result, an innovation transfer problem occurs. The organisations fall into a pattern of innovation where ideas are developed independently in the lab environment, then transferred to the parent firm for implementation and scaling. However, without a keen understanding of the particular factors shaping the firm’s environment at that time, or the intricacies of operating processes, manufacturing, service delivery and other key areas, perfectly good ideas will struggle to achieve adoption and the innovation lab will appear to have failed. In reality it’s the linearity of the innovation process firms are following that’s the source of the problem, not the innovation lab itself.

Context is king. Innovation labs provide a valuable, independent, creative atmosphere in which ideas can flourish, but for those ideas to scale to the orders of magnitude necessary to be commercially viable, input from the parent firm is necessary throughout the innovation process. Equally, the parent firm itself must begin to anticipate how a new idea will disrupt its existing business models and begin the process of adapting if adoption of the innovation is to be successful.

Organisations must not fall into a linear innovation process – especially where external innovation is concerned. It must be handled synchronously, with several contexts of activity happening simultaneously. Work in the innovation lab, the parent firm, and in the all-important innovation space between the two are equally important for ideas to successfully graduate to innovations. But if the innovation lab appears to be struggling to deliver results, don’t jump to the conclusion that the lab itself is the problem. Widen the focus. Look to the innovation space and ask how the transfer of an innovation is being managed and how the lab and parent firm integrate through the innovation process. Although it rarely feels like it at the time, things going wrong offers the best opportunity to learn. So the answers to those questions may reveal more insights and opportunities than you first anticipate and lead you to take a second look at the potential of the lab.

UPDATE: This week Venturebeat published an article on the same theme. Thanks to @rolandharwood for sharing

Cut outs #9

Superhuman – Channel 4 releases new ad for Rio Paralympics

Net Neutrality – Tim Berners-Lee makes plea to European regulators

Wearable tech goes Underground – acrylic nails with embedded RFID Oyster card tech

Down the Tubes – Transport for London’s digital first strategy

Where it’s at – The Start-up Heatmap for Europe

 

Enhancing innovation through M&A and investments

Last week I gave a presentation at the 100% Open Innovation Union about how companies can enhance innovation through mergers, acquisitions and minority stake investments.

Summer Union 2016.PNG

M&A and investment is a central part of business life. Last year in the UK alone, acquisitions worth about £60 billion were completed. Based on a quick scan of the press release archives, IBM has made over 50 acquisitions over the past five years. As is the case for many large companies, it’s a core part of our reinvention strategy. The ‘injection’ of new technology, people and ideas enables us to move into new markets, adapt more readily to customer needs and gather the ingredients necessary to create our next wave of products and services. On a personal level, I’ve experienced four or five acquisitions, both on the acquired or acquiring side, and I expect many people have been through plenty more.

But what’s the relationship between M&A, investments and innovation?

As the graph in this presentation illustrates, M&A and investment activity tends to happen in waves, usually triggered by circumstances in the broader business environment. Traditionally, the objectives for M&A and investments tended to be either strategic (e.g. increasing market share), economic (e.g. creating economies of scale) or financial (e.g. gaining access to more cash to reduce leverage). An increasingly common objective driving the next wave of activity is boosting innovation. Established firms are facing growing challenges to compete in their core markets. Disruption by new market entrants to their business models, increased competition, market fragmentation and the rate of technology change all make it increasingly difficult to keep up. M&A and investment offers a swift way to get access to new resources and capabilities that can boost performance in the short-term and enhance innovation in the long-term. But this strategy for growth is not without its challenges.

Statistically-speaking, M&As and investments are fraught with difficulty and result in a very high rate of failure, in terms of the value delivered back to shareholders of the acquiring company (acquired companies tend to fare much better, any budding entrepreneurs out there might be happy to know). And that’s before we consider how they deliver on something as intangible and long-term as innovation.

Certainly, one consideration needs to be how the effect of M&A and investment on innovation is measured, as the majority of research tends to focus on how M&A performs against traditional strategic, economic and financial goals. However, my MBA research suggests there are a number of factors which do influence the level of innovation value companies can gain. To make judging the success of the deal easier, many companies switch from using long-term strategic measures of performance to short-term financial measures. For managers coping with the complexity and workload of integrating a new firm and team of people, financial measures are must simpler and clearer to comprehend and report to shareholders. However, their focus on short-term performance runs contrary to innovation which requires a longer term view, so the management activities the financial measures encourage simply serve to constrain innovation, despite the best intentions of the managers themselves. A further factor that affects innovation is the judgment of synergies between the companies. If the activities of the firms are too similar they will duplicate each other, leading to practical tensions between teams and the creation of little new value. If the companies are too different, they will struggle to find the points of integration where creative sparks can ignite innovation. To stimulate innovation, companies needs to have enough in common in terms of domain experience, processes, products and practice to give a basis for collaboration, but still be able to bring new ideas and methods to the relationship.

Certainly, if companies can overcome these hurdles and others that tend to occur, then there are significant benefits to be gained. Many companies report boosts in the quality and quantity of R&D inputs from successful M&A and investment activity. Outputs in terms of patents to fuel future innovation activity (a target IBM prizes highly) and of course new products and services taken to market can also increase significantly. As more established firms explore routes to innovation and face pressure to adapt more rapidly to market changes, I expect M&A, investment and other forms of alliance partnership will grow as priorities. No strategic initiative is without challenge though, and the key question companies must answer is how they navigate a way around the barriers to achieve the benefits.

Embracing complexity: an open approach to innovation

Before I joined IBM I worked on a project with a healthcare company to launch a new approach to drug development. The client had spent quite some time working on the new approach and had already devised their launch plan.

My team’s role was to do the market research that would prove it could work. A little bit ‘cart before horse’ you might say, but the launch plan was at least thorough and well-considered.

The trouble was, our research found some serious risks in how the industry and the public might react that the client simply hadn’t spotted. And, whichever way we looked at the results, we couldn’t find a way to mitigate the risks in the existing plan.

The plan needed to change, but the client wasn’t budging. They had their plan and they were sticking to it. There was no room for compromise.

As you can probably imagine, the meeting in which we presented back our results was a pretty uncomfortable affair and it was clear that even if we’d wanted to, we wouldn’t be asked to support the next stage of the programme.

This turned out to be no bad thing.

We found out later that the launch plan had been put into action without any changes and that the ‘risks’ we’d foreseen had indeed come to pass. The whole programme was put on hold within five days of the launch, ‘pending review’. That was a couple of years ago and nothing’s been heard of it since.

Listening to customers seems like the most obvious thing in the world.

According to IBM’s Global C-suite study, for CEOs, customer influence is second only to the C-suite in terms of strategic influence. So why do we still hear about companies tumbling into the same predicament as my healthcare client?

They want to innovate their products and services, but whether it’s due to time restraints, resource pressure, or just an overwhelming belief in their own convictions, they continue alone. I’m certainly not arguing against the value of gut instinct, but when it comes to the practice of innovation I do believe – and experience has shown – gaining multiple perspectives on a problem or an idea is vital to finding the best answer.

That’s why I also believe in value of open innovation and the tremendous potential of social media.

Social platforms and behaviours have a major role in enabling innovation. IBM’s study into how successful organisations innovate identifies three areas where leaders outperform the competition: organisation, culture and process.

Open-innovation-social-1

Source: More than magic: How the most successful organizations innovate, IBM Institute for Business Value, 2015.

Culture and Process are both important to my earlier point about time and resource constraints: by developing a culture that appreciates innovation and the conditions it requires, and has the processes in place to support innovation-generating activities, then you will be better-placed to act swiftly and confidently when the need arises.

Organisation and structure is the ‘glue’ that unites Culture and Process, ensuring the activities within both ‘spheres’ deliver value back to the business. It’s here where I want to focus for a moment.

By building robust structures to support ‘open’ forms of innovation it becomes possible to tap into the wealth of market intelligence and insight shared by your customers in social media. More significantly, it also becomes possible to connect with those customers directly, to formulate new ideas and concepts, and develop and prototype products in an inclusive way.

Lego Ideas is probably one of the most well-known and successful examples of open, social innovation. The platform not only helps customers build affinity with the brand, but for Lego promotes higher success rates for new initiatives, thanks to the early input from customers.

Many other organisations have experienced similar benefits:

GE has adopted an ecosystem approach to accelerate its innovation programme, ‘crowdsourcing’ ideas through Quirky, it is able to reduce risk and costs while sharing revenue with Quirky and the inventor community.

Xiaomi, the Chinese smartphone producer, uses open innovation to improve product and as a vehicle for marketing and sales. Xiaomi releases a new version of its MIUI software every week in response to user feedback. The releases and feedback system are, in effect, the marketing content and channel, while the software itself provides a platform to generate sales.

Open-innovation-social-3

LEGO Ideas

Across all industries, firms face a common challenge in the growing complexity of the business environment. Unlike my healthcare client which tried to shield itself from the uncertainty this creates by focussing inward, I believe the best way to deal with complexity is to become more complex yourself – opening up the innovation process and providing employees with the tools and environments (physical or virtual) in which to engage in collaboration.

Of course, systems of governance must be in place to protect the firm and the collaborators, but in an environment where customers have the means and the will to share their views and ideas, surely it would be foolish not to listen?

Also published at IBM iX Blog: http://bit.ly/1CLrTSW

Leadership and Open Innovation

Yesterday, Innovation Excellence published a forthright post by Paul Sloane about the factors impeding the growth of open innovation. IE lays the responsibility squarely on CEOs, who, the post argues, say all the right things about innovation, but aren’t following up with enough action.

The post made me think of this profile of Jack Welch, reflecting on his time as chairman and CEO of General Electric. Towards the end of the film he talks about how he saw his role as leader, as moving around the corporation “with a can of water in one hand and a can of fertilizer in the other”, using his knowledge, experience and expertise to help the companies and people who make GE to grow.

I’ve never worked for GE, so I’ve no idea how closely Jack Welch’s perception of his role matched the reality of what he did, but what is interesting is that of the few companies Paul Sloane names as making strides forward in open innovation, GE is on the list.

Cut outs #6

This one’s about doin’ it for the kids.

See, I even dropped my “g” to sound authentic.

Maybe.

First off we have possibly the best car rental scheme ever from Europcar and Mattel (PSFK). Personally, I’d hire a Hot Wheels over a Ford Focus any day, although I’d probably struggle for luggage space.

I’d like to give the new Lego Ideas platform a try too. Maybe there’s a Hot Wheels – Lego mash-up idea taking shape out there…

A little more seriously, kids are disappearing from social media (Cliff Watson, Medium). Or they’re not. They’re just finding their own spaces to play.

And when we grow up? It doesn’t get any less bewildering or scary. We can only open ourselves up to experience (David Weinberger, Medium).