Why your firm can't innovate

Recently there's been a debate about why larger firms can't innovate. Perhaps they are too comfortable. Perhaps they are too afraid to cannibalize their markets. Perhaps they are afraid of risk and uncertainty. Perhaps, Perhaps.

Or maybe they operate under a management model that rewards compliance and punishes creativity. Now I think we are getting to the crux of the problem.

I've had the opportunity recently to hear Gary Hamel speak and see Dan Pink's new Ted Talk. Both are compelling, and somewhere between Hamel's discussion about management innovation and Pink's thoughts about compensation and incentives lies the real issue that challenges many larger, and especially entrenched, firms. We structure our organizations (Hamel) and reward structures (Pink) to reward consistency and compliance, when what we really need is experimentalism and creativity.

Think about it. Most of the management practices we follow are based on management models put in place by Taylor or others modelled after GM in the 30s and 40s. Many of the employees at that time were uneducated or undereducated and their value proposition was in labor. The goal of the organization was to send down management's goals and break them down into work units for simple tasks. The goal of the organization was top down, consistency and compliance to orders and tasks. As Pink points out, the compensation models that accompanied that structure made sense as long as the tasks were simple and clear and can be executed following a very specific process.

Now, most of the work we do is knowledge work. It is difficult to place specific outlines or processes around the work, and can be difficult even to define the end products. If I can outsource a steel factory and make semiconductors overseas, the premium on labor and compliance is gone. What differentiates a firm in this environment is not compliance and control, but creativity and engagement. I need an organizational structure that attracts people to work on products or services they believe in, and are engaged in, and I need different compensation models. Pink talks about Autonomy (choice), Mastery and Purpose (engagement), the words in parenthesis being my interpretation.

So, many firms, especially older firms are built on hierarchical models that are top down and organized for compliance, not creativity. As I blogged earlier, they are well designed to meet the operating needs and realities of the mid 20th century, just as labor and compliance were becoming less of an issue as a management consideration. We have entered a completely different environment, which calls on organizations to be nimble, able to adjust rapidly, call on the best insights of all employees and create a meaningful relationship and experience with customers. Virtually none of those attributes are prevalent in older organizational models.

Many firms can't innovate because their structures, processes and compensation models are rigidly organized for the work world of the 1950s and 1960s and haven't shifted the organizational structures, processes and compensation models to reflect what's necessary today. When a firm like P&G is heralded for taking ideas from its customers as if that is a novel concept or something no one else could foresee, or when WL Gore is held up constantly as a management icon because of its "Lord of the Flies" organizational and management approach, you can see that many theorists in academia and many executives in larger organizations can't quite grasp the changes that are necessary for many businesses to innovate successfully.

It's not the people, it's not the "culture", it's not the compensation, it's not the management hierarchy, it's not the fear of risk or uncertainty that holds back most larger firms. It's all of the above, and being willing to make a clean break with the past.