Tuesday, July 23, 2013

Over- and Under- estimating Innovation

I wanted to write today about the opportunities and barriers that exist based on time.  Some of the barriers and opportunities are real.  As has been suggested by those familiar with Fred Brooks'  Mythical Man Month, nine men can't make a baby in a month.  Some projects and products have a logical, determined incubation time that is difficult or impossible to change.  Other barriers are conceptual or cultural.  We simply tell ourselves that processes or decisions can't be accelerated, and inevitably we prove ourselves correct.

Time is one of the most interesting innovation barriers and opportunities in corporations today.  Time, we believe, is a fixed commodity, and for most managers there is never enough time.  Not enough management time, thinking time, contemplative time.  Time itself seems to be increasingly compressed, as weeks and quarters accelerate.  Managers face extreme pressure based on time increments - 3 months to the next reporting cycle, and fewer resources to achieve goals.  Time itself becomes a constraint and a barrier, when we should consider it simply an ingredient in decision making.

Add to this fact the natural optimism that we have in the short run, and the risks we associate with issues in the long run.  Oh, we are happy to "kick the can" down the road when it involves investments that may not pay off.  Look at any major government entity.  Pension payments and long term investments are shortchanged, while short term needs are fully financed.  We've constructed and now serve the short term monster, while ignoring the larger, longer term issues.

Amara's Law

All of this is in service to what I want to focus on today:  Amara's Law.  Roy Amara was a futurist, who worked for the Stanford Research Institute and the Institute for the Future.  Amara is probably most famous for his statement that "We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run". I'd submit that you can easily substitute the words "change", "management decision" and most importantly "innovation" for technology and still be correct.  Our short term focus creates bias for ideas and innovations that will "pay off" now, and tends to discount anything that may "pay off" in the long run.  This is demonstrated by the many, many organizations that want to pursue the proverbial "low hanging" fruit.  By this they mean the simple but financially profitable ideas that will magically appear when they start innovating.

There are several problems with short term, low hanging fruit.  The first is that by definition we overestimate its value.  Just by the concept's nature, if we can implement it quickly we assign a higher value to it, which is often incorrect.  The second issue with this approach is competition.  Too many firms believe that they are the "only" ones with the insight to identify and harvest low-hanging fruit.  They forget or ignore the fact that in any industry, there are many smart people pursuing the same lines of inquiry.  It's almost inevitable that firms will be disappointed with the "sure thing" of short term, low hanging fruit.  Either it doesn't offer the upside anticipated (the overestimating part) or another firm beats you to the punch (the many competitors issue).

Note the second half of the "law"

If we agree that we place inordinate value on the short term, and that many competitors are fighting in the "red" oceans of the near term, low hanging fruit, perhaps we should pay more attention to the second half of Amara's "law".  That is:  we..underestimate the effect (of a technology or innovation) in the long run.  Since we've become so driven by quarterly results and so fearful of the risks of long term projects, we tend to assign greater risks to technologies, projects or innovations that take longer to come to fruition.  But, since this is a widely shared risk strategy, this means that few companies are exploring longer term innovation, and the law notes that we tend to underestimate the value of new technologies or innovations that will emerge in the long run.  These are two good reasons to ensure a balanced focus between short term innovation activities and longer term innovation activities.  Short term demonstrates consistency and quick results.  Long term creates innovations and ideas that are more likely to be "blue oceans", more unique and have potentially much higher value.

Three Horizons

Paul Hobcraft has written previously about the Three Horizons model, which we use as a planning tool and an assessment tool.  The idea behind three horizons is to first plan how many innovation activities or projects you'd like to initiate in each of three horizons:  short term, medium term and long term.  Planning these activities is easy - sticking to the plan is more difficult, as time pressures and resources pressures will demand that all activities revert to short term results.  That's why the Three Horizons is both a planning exercise in the beginning of a planning cycle and an assessment at the end of the planning cycle.  At the end of the cycle, your innovation team should review the results of the innovation investments.  Of the activities you planned to accomplish in the medium term and long term horizons, how many did you actually implement?  What impact did cultural and time constraints have on your commitment to long term innovation success?

Overestimating and Underestimating Innovation

Much like any new technology or social phenomenon, the benefits of a new technology or innovation are overestimated early in its life, and unappreciated or underestimated later in its life.  Gartner, the analyst firm, created what it calls a "hype cycle" about new technologies, demonstrating that the hype and anticipation for a new technology rarely is matched by its capability or delivery, but in the outer years the technology or innovation proves its worth and more.  The risks associated with overestimating innovation in the short run are significant.  If short term, low hanging fruit style innovation is overestimated, and by definition can't deliver a lot of value, then innovation itself seems unlikely to deliver value in any timecycle, short or long.  When you add on top of that the lack of faith in future benefits, and our tendency to underestimate the value of ideas in the long run, innovation seems like a financial loser over both time horizons.

For innovation to take root in any organization, it must focus on the medium term and long term opportunities where the unique ideas and value propositions lie.  This is a time scale change.  Additionally, managers and executives must balance their optimism about ideas in the short run and pessimism about ideas in the long run.  This is a risk and estimating change.  Only when these two changes are made can a firm expect to find real value from innovation.
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posted by Jeffrey Phillips at 6:21 AM


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