Innovation still more art than science

In a recently published survey from the Boston Consulting Group on Innovation (Innovation 2006), the survey's editor concludes that innovation is one of the top strategic priorities for many companies, with 72% of executives surveyed ranking it as a top 3 priority for 2006. The same percentage said they pland to increase spending on innovation in 2006. Yet almost 50% of the executives surveyed were unsatisfied with the financial returned on the investments made so far in innovation. Why does innovation hold so much promise, yet seem to underperform on results?

You can read the entire report. As usual, BCG has done a great job collecting and analyzing a lot of information about innovation. The consultants at BCG seem convinced that innovation is an exceptionally important strategic initiative that all firms must embrace. And, as the survey notes, that message is filtering down to the senior executives of many corporations. Across all industries, senior executives expect to increase spending on innovation. Yet most of these executives can't put their fingers on real substantial metrics and returns from the innovation investment. The survey provided several reasons, which should be familiar to anyone trying to improve innovation: inability to track returns from innovation, cultural issues and process issues.

The editors raise a great question, and one that could be easily missed without careful reading: "What steps can, and should, companies be taking to optimize their innovation spending to ensure that little, if any, of the money is wasted?" Later in the survey the authors point to common problems in organizations which are trying to improve innovation. "The most frequently cited hurdles were development times which are too long, a lack of coordination within the company, not enough insight into customers and a risk adverse corporate culture. Difficulty in selecting the right ideas and a shortage of great ideas were also common laments."

Most of these failures are due to a lack of strategic direction, culture or process within the firm. Long development times and a lack of coordination seem to be mutually reinforcing. Also, poor requirements for new products and services will increase development times, since we can't be sure what customers want or need. A common complaint with many firms is that innovation involves risk, and we've been trained to remove and eliminate risk where ever possible. Introducing risk taking into the organization flies in the face of accepted wisdom. The difficulty in selecting ideas springs from the fact that there's no clear strategic direction and no clear customer requirements. How does one choose a feature or attribute in the absence of good strategic direction and the lack of customer demands?

The issue around a "shortage of great ideas" is one that really puzzles me. In a knowledge based economy, when the majority of our workers in pharmaceutical and high tech and consumer packaged goods have advanced degrees and are highly compensated, how can it be that we lack for great ideas? I suspect the real issue is not a lack of ideas, but the absence of a system to allow people to generate and submit good ideas that are then acted on by the organization. If there's no place to submit ideas, and if those ideas aren't acted on, then there will be a shortage of ideas. It's not the ideas, it's the process and the system that's missing.

Finally, the authors point out that most firms do a miserable job managing the metrics around innovation. Less than one quarter of the firms surveyed admit to using consistent metrics to measure the results of innovation, and even those firms aren't quite sure they are using the "right" metrics. So, if your organization isn't measuring the results, how can it say that innovation is a good investment or a poor investment? Clearly there are resources flowing to generate ideas and bring new products to market. What are the measurements and return on investment?

What's clear from the survey is that the senior management teams are getting the innovation religion. Now they need to provide the strategic direction, cultural change and processes that are necessary to implement innovation as a consistent, repeatable process within the business, and set specific and clear goals to measure the outcomes. Product life cycles are shrinking and competition is fierce. Firms that differentiate themselves with a consistent stream of new products and services will be successful. The study shows that firms with a differentiated innovation strategy consistent outstrip their peers in terms of profit and market share.

Innovation is moving from a "nice to have" to a "must have". As it makes that transition, innovation must move from a serendipitous art to a more mundane science. Our organizations need to be able to plan and execute innovation strategies and processes much like we execute other project plans and measure the results.

Take it to the bank

I was speaking recently with a new contact and potential partner who alerted me to a great series of articles about innovation in the banking sector. I have not had much experience in the financial services and banking arena, so I was interested to read more about what's possible in the world of financial services from an innovation perspective.

The articles can be found here. The editor's note for the July/August issue seems a little dire: "What constitutes "working different" in an industry whose executives are bound by the rules and can't afford to ignore the status quo". The editor quotes a consultant from the financial services sector who says "The last major product innovation we've seen in banking was the introduction of free checking" almost 10 years ago. Ouch. So they dug deeper and found innovation the financial services area, but the interesting work is being done by firms that are not traditional banks but are encroaching on the banking and financial services industries.

In the credit card industry, for example, most IT dollars have been invested in driving costs down (sound familiar?) but now more money is being spent on management of the credit card portfolio to better understand customer preferences as a way to build new revenue streams.

Here's one that has been lying around out in the open for years. Why are banks the only "service" oriented organizations with few or no hours on Saturday and almost none on Sunday? Just now, some banks in New Jersey are beginning to open on Sundays. Commerce Bancopr has a motto of being the "most convenient bank". That would put them well past my current bank, which is never open on Saturdays or Sundays. Really, this isn't much of an innovation though.

Another interesting firm to watch is Prosper Marketplace. Prosper was formed by the original management team that started and sold E-Loan. Prosper provides an internet-based loan origination program, eliminating the middleman. Any person can request a loan, and any person or organization can offer the borrower money. This is a revival of one of the original promises of the internet - a frictionless trading exchange. Of course this type of innovation is being offered by a non-bank organization.

Innovation in financial services is clearly happening outside the US, however. In different regions there are different pressures on the financial and banking community which forces them to be more competitive and original in their offerings. In areas with high inflation, such as Brazil and Argentina, there have been processes implemented to speed transactions and reduce float. In Singapore, according to the articles at www.bai.org, a person can conduct over 37 different transactions on an ATM, even purchasing stock.

In the final article, written with consultants from IBM, the consultants note that traditional innovation in the financial services industry has been focused on PSM (products, services and markets) but the emphasis is changing to business model and operations innovation. What's driving the new innovation focus in financial services? "Commoditization and the similarity of products and lack of pricing power are strong indicators that the current approach isn't working".

In this massive industry, change has always come slowly, however globalization and the internet have brought new services and new competitors to our doorsteps. The US financial services industry needs to innovate in order to differentiate itself and offer customers the services we expect, otherwise more and more firms that are not traditional banks will enter and fill the gaps.

To Boldly Go ...

OK so it's an over-used, quite possibly over-parodied split infinitive, but "To boldly go where no man has gone before" is probably one of the best known statements from television. It's also an imperative in many businesses that are trying to become more innovative.

Because the final part of the statement is "where no man (person) has gone before". That is, we've got to do some things in our business (define and sustain innovation) that few people if any have done before. In many cases there are no roadmaps that others have left behind, and a confusing, ever shifting set of "experts" who offer their approach for innovation. How does your team create a sustainable innovation process and method when there are (admittedly) few good role models and guides?

First, decide what it is you want to accomplish. Captain Kirk and the Federation wanted to seek out new life forms. Your goals may be a bit more modest, but still fraught with risk. You'll probably have a goal of creating a method for your teams and the ones that follow you to become more successful at innovation, bringing new products and services to market faster and more effectively.

Second, ensure what you are doing is in line with the corporate direction. Kirk and his crew had some specific instructions about their work, and usually remained within those boundaries. Innovation is not a free pass token - your work needs to align and support the strategies of the business. It is helpful to have a strong senior leader on board as well, for connection to the management team and to indicate the buy-in of the management team.

Third, go boldly. Recognize that your team won't always know the answers and sometimes even the questions. If there were recipes for this stuff, every company would be a great innovator. In fact, many stories about innovation you'll read about were the result of many attempts and failures, and sometimes dumb luck. If you don't try something, you'll probably never fail, but you won't change anything.

Fourth, take along a crew with a range of experiences. Star Trek had a subtle message for us just based on the makeup of the crew. Where else on television could you see an alien, a Russian, a man of Japanese descent, a Scot and whatever Kirk was, working together? How about Uhuru as a member of the management team? Clearly, Kirk could call on a wide range of capabilities and experiences. He had what we'd call today a "cross-functional" team, with a range of insights and viewpoints. Too often we load up with a lot of people from one perspective or one business function.

Fifth, adapt on the fly. Kirk's instructions were rather vague. Explore new worlds. Seek out new life and new civilizations. Within that, I guess, he was rather free to adapt to the situations he and his crew found himself in. If you think about it, that makes sense. Adaptability is very important when there's no clear roadsigns or processes. For innovators in businesses where there's no existing process, learn to adapt.

Sixth, work on something that will have short term benefits and long term value. Kirk's mission was to seek out new worlds. I don't know the rest of his defined tasks, but the Federation was probably seeking out inhabitable planets, planets with resources that could be used, civilizations with knowledge that can be shared. Just the first discovery of any of these kinds would prove some benefits of the voyage. But his longer term goal was an interconnected, peaceful galaxy, as much as possible. For innovators, the best approach is to define a relatively quick "win" but build your processes and methods to deliver long term value.

Seventh, leave some breadcrumbs or a roadmap. Kirk was constantly talking to the computer to create his ship's log. Frankly, if I'd been on the bridge I think I would have asked him to use a microphone, rather than just bellow it out. However, Kirk was capturing the things his team learned and passing it to others to leave a legacy. Innovators within businesses need to define their methods, successes and failures so the next team doesn't have to go where no one has gone before, but can more quickly gain success based on previous experiences.

Who said you can't learn anything from watching TV?

New Software - Win a License

As many of you know, OVO is a software development firm building applications to improve idea management, idea generation and to help organize the innovation process. As a shameless plug, you can see our products and vision at our website: www.ovoinnovation.com. While you are there, check out our latest product: Shuffle, at www.ovoinnovation.com/shuffle.

Shuffle is just being released as a trial version, which we want to share with others and gain some insights and feedback. Shuffle is based on an index card or post-it note metaphor. Basically speaking, anyone can capture an idea, a trend, a data point, a competitive move or other information on an "index" card in Shuffle. These cards are tagged and placed in the database. Other individuals can create "topic" boards which look like bulletin boards to allow users to aggregate what's known about a particular issue or area of interest. A topic board could be about a competitor, a market, could capture trends in a market, or could even be a storyboard about a presentation or event.

We're interested in your thoughts and feedback. If you are interested, see the freely available instance at www.ovoinnovation.com/shuffle. This site is a freely available sandbox - no login is required. If you like what you see and would like your own instance, email me (jphillips@ovoinnovation.com) or click the request feature in the upper right hand corner of the Shuffle software and we'll set up an instance for you or for your team. This is freely available - all we ask is for your thoughts and feedback. You can provide feedback via email or by clicking on Feedback at the top right of the screen in Shuffle. There is a help guide available for Shuffle - I can't find the method to add documents to Blogger, so you can see this post cross-linked at Thinking Faster with the help guide attached.

The name Shuffle is a tentative name. If you try out the software and suggest a name we choose, your team or organization will win 10 licenses to Shuffle for a year.

Come on you innovators, now's your chance to try something new and influence the development of some new software as well.

Deep and Wide

Innovation, like other business initiatives and functions, requires support and direction from senior management. To be sustainable, any business function needs a cross-organizational process. Innovation requires both deep and wide support.

Deep support means that innovation is sponsored and organized and encouraged from the top of the organization to the lowest levels. The CEO needs to be out in front, helping people understand the direction and rationale for innovation. This does NOT mean, however, that the CEO or his or her immediate subordinates should dictate "what" the innovations should be, only that they should provide the direction and encouragement for innovation, and ensure that people are appropriately encouraged, motivated and compensated for their efforts.

Innovation, as we've seen recently, can mean changing the corporate culture, introducing more risk taking and the potential for failure. If the CEO or other senior sponsors don't get involved, then there's little chance of a sustainable innovation culture taking root. Innovation needs support from the top down, and that support needs to be deep and sustaining.

Wide support means that the organization needs to understand and implement processes and procedures across the organization to enable innovation and innovative ideas. Rather than a "skunk works" in the corner, innovation should be treated as a sustainable business process and become part of everyone's focus. There should be broad understanding and involvement in innovation and idea management across the organization.

Right now, most firms have shallow and thin innovation. Senior managers are talking about the importance of innovation, but get quickly distracted by other important aspects of the business. The people in the trenches understand that innovation is not important if the CEO cannot retain his or her focus on it for any length of time. Innovation has thin support throughout the organization in most companies. Little pockets wrestle with innovation without broad support, and there are too few consistent processes and systems to support innovation.

Yet, I am told constantly that CEOs consider organic growth important, and innovation as a key factor for organic growth. There's an inconsistency somewhere. If innovation is important, it should be treated as such, with broad mandates and strategic involvement. Occassional support and disparate attempts at innovation will definitely lead to disappointment, and in our quarter-driven business environment, will quickly lead back to cost-cutting and outsourcing.

Failure is an option

In a previous life, oh, just a few years ago, I worked with a hard charging startup focused on bringing data mining technologies and conjoint analysis into the telecommunications world. The CEO used to sign every email with the notation "FINO" - stood for Failure is NOT an option. For a startup, funded on external capital, that thinking is probably OK. However, for most businesses seeking to become more innovative, that thinking is probably all wrong.

Turns out that failure is a necessary option when your firm is trying to innovate. For starters, it is simply not possible to create new things and have all of them succeed in the marketplace. As my friends who ski like to say - if you're not falling, you're not pushing yourself. If every product your firm releases is a success, you either have the golden touch or you're not exploring the opportunities as deeply as you should.

Another reason to expect failures is that the market often is uncertain of its needs and exceptionally fickle. To use the aforementioned startup as an example, our product team had been given specific requirements (which we met) by several cellular firms which had needs to better understand customer behavior. We built that functionality and more, but the market changed as we were developing the software, and we didn't change with it. The needs and requirements were changing, and new technologies and capabilities were coming online faster than we could understand them. New product development works the same way. Sometimes good ideas will miss their window of opportunity, or the market will change dramatically. Or a good idea, like low-carb Coke, will simply not take off even though it appeared that it would.

Third, failure provides a learning experience and opens up new opportunities that would not have been considered previously. Many failures are unexpected - I've heard the most commonly used word among Wall Street analysts is "surprise". If a team of people whose job is to monitor and anticipate the financial results of publicly traded firms is constantly surprised that their predictions are wrong, why should we expect perfection in our product development? The real question we should be asking is: what can we learn from the failure? What will we incorporate in our thinking and processes that will be different from before? Also, what new insights or opportunities arise? The old story is that the adhesive for Post-It notes was considered a failure - not sticky enough - until someone realized that a "somewhat" sticky substance had usefulness in other areas. Often in a failure we can relax our assumptions and see how the constraints we imposed may have blinded us to other opportunities or insights.

OK, so let's say failure is a necessary option in business for innovation's sake. That leads us to the conclusion that for the most part our cultures are in opposition to acceptable failure. As a recent BusinessWeek article points out (How Failure Breeds Success, July 3) "..for a generation of managers weaned on the rigors of Six Sigma error-elimination programs, embracing failure - gasp!- is close to blasphemy". The article points out that Neville Isdell, the CEO of Coke, used the annual company meeting to describe some recent failures as an exercise to put employees, customers and shareholders on notice that he will tolerate the failures that come with innovation, changing a traditionally risk adverse culture.

He's got it right. If failure is to be an option, the way people think about failure and success, how people are rewarded and compensated, how what they learn from success and failure has to change. Corporate culture in most firms rewards success and ignores or isolates failure. Failure is often seen as a career limiting move. To become more innovative, firms have to take more chances, and identify individuals willing to accept the opportunities, risks and responsibilities for failure which will lead to greater insight and new products. This will require a signicant change in corporate culture, starting, as Isdell recognizes, from the top.

The value of an idea

As an optimist, I believe that ideas have value, but when I put on my management hat I realize that ideas have value only once they are implemented. So to answer the question, "what's the value of an idea?" I'd have to answer: zero. Unfortunately, ideas are a dime a dozen. Ideas that are implemented and become new products and services are very valuable.

I guess ideas, like fine wines and cheeses, just get better with age. At least some of them.

This calls into question how an organization or team can justify (financially) trying to improve innovation and idea management. In fact, it's almost a catch-22. On one hand, some ideas get converted to products and services fairly well without a significant investment in processes and systems. On the other hand, can you predict the return on investment for processes and systems to improve idea generation and evaluation? Well, as we've already discussed, that's a problematic issue until the idea has been generated and evaluated. In fact, the more likely the idea is to disrupt the market and bring big rewards, the harder it will be to determine its value.

How does one justify the expense of improving innovation, idea management, brainstorming and the "fuzzy front end"? If ideas are by their very nature hard to quantify, and we know that some ideas will not come to fruition as new products and services, on what grounds do we justify any expense invested in making innovation work "better"?

There are probably many answers to this question, but here are few more likely ones:

- Build it and they will come. Since we can't quantify the value of the ideas and measure with any predictability the value they'll generate, let's focus on building the system and generating more ideas - the value will take care of itself. This argument will work well in the innovative side of the business, but will not carry the day with the financial team or accounting team.

- We can't justify it so we should not invest. I think that many people will circle around this argument, especially those who are in a more quantitative bent. There's simply no good way to "prove" the return on investment, since most ROI metrics I've seen are based on reducing cost. So far I haven't seen many strong financial rationales for innovation, but that hasn't stopped firms from moving forward with innovation initiatives.

These two arguments are at the far ends of the spectrum - build without justifying and don't build since we can't justify. Yet so far these are the predominant rationales. Another rationale is coming though. That one is the "if we don't do it, we'll be left behind" rationale. As firms focus attention on this issue, they'll find some reasonable approach to quantifying the value of the systems and processes. They are implementing idea management processes and systems. Sooner or later the result will be that other firms will begin projects simply because others in their industry have done so. There will be an idea management gap that must be filled. These firms will move the right way for probably the wrong reasons.

Two or three years from now, let's say by 2009 at the latest, we'll have a much better understanding of the value of innovation and methods to justify investment. We'll have several years of experience under our belts, and will look at these projects with the same weathered eye that now stares down ERP or CRM implementations, or Six Sigma projects. Right now, we simply don't have that base of experience, so all these projects seem to be unique, from scratch implementations.

The question you'll need to ask yourself is: what's the value of getting some of our great ideas to market more quickly, more efficiently and with more due process?

Your Innovation Footprint

Recently there's been a great series of advertisements encouraging people to think about their "Carbon" footprint. That is, how much carbon do you consume and release into the atmosphere? Where is that carbon going and what impact does it have on the planet? Interestingly, the ads are run by BP, a firm with a huge vested interest in releasing carbon and other problem particles and pollutants into the environment. I think they are working to bring up the consciousness of the problem and for all of us to recognize our participation in the problem and the solution.

Well, that got me thinking about innovation and the "innovation footprint". If together we can think about pollution and how we, each of us, can contribute to reducing our carbon footprint through simple actions, then certainly each of us can think about our "innovation footprint" at work. What actions or projects are you working on that could have an "innovation footprint"?

In this regard, it seems to me that the "carbon footprint" concept works because each of us has a stake in maintaining and improving the environment. The goal behind the program is that if each of us recognizes our involvement in the problem and takes small steps to reduce our carbon emissions, we'll take a large step towards improving the problem. This means that there is some shared goals across a large number of people to improve the living conditions on the planet.

That sounds a lot like a corporate culture to me. A large number of people with shared goals who seek to improve the conditions within a structure - just in this case, improving the margins or profits or services of a business. I think a great new program in many businesses should be to encourage the "innovation footprint" thinking within the teams and business functions within organizations. What can you personally do to help our organization become more innovative? What can your working team do? Do you have ideas that can improve our margins or cut our costs? How can those ideas get implemented?

In the "Carbon footprint" example, there are inherent rewards. Each of us gets to breathe cleaner air or enjoy a more pristine Earth. Participating in the activity brings rewards to yourself, your family and to all mankind. Likewise, an "innovation footprint" program needs to have rewards. How do the people within your organization enjoy the rewards of increased innovation? Increased profit-sharing? Larger bonuses? The knowledge that the firm they work for is considered an industry thought leader? As the carbon footprint example points out, all rewards don't have to be monetary.

The BP example is simply counting on the power and engagement of a large number of people who will take action on their own. No organizing power is needed. Likewise, as we create a culture of innovation within an organization, little "top down" structure will be required if the management team does a good job pointing out the strategy and capability of the firm. In fact, it might be better for the management team to get out of the way and see what happens.

What's your innovation footprint in your business? Do you contribute more innovation and ideas than you take from the business?