Why customer experience is the ultimate innovation

In Maslow's hierarchy of needs, food, shelter and clothing are much more important and fundamental than self-actualization.  That is, it's hard to reach nirvana if you lack the basic essentials.  But is the opposite true?  If you reach self-actualization, do the basic essentials remain as important?  There are certainly a number of deep thinkers in several religions or belief systems who will stress the importance of self-actualization over the basic necessities.

Is there a corollary in innovation?  The simplest innovation to pursue, the most basic, is product innovation.  Almost anyone can dream up a new widget or a new feature for a widget.   This means that product innovation is the most well-understood, the easiest to understand and implement.  And the easiest to copy.  Meaning it is rarely sustaining or fulfilling.  A company that focuses only on product innovation steps on to a treadmill that never ends, and in fact only accelerates over time.  Any good innovator must climb the innovation Maslow's hierarchy, moving from product innovation to service innovation to business model innovation, and then to the ultimate self-actualizing innovation, customer experience innovation.  Why is customer experience innovation so profound?

Products, services, even business models can be copied and reproduced, but a company that truly understands customers and creates experiences that matter to those customers becomes a virtual extension of those customers.  The company that creates meaningful and valuable customer experiences gains trust and acceptance, they move from being a "vendor" of replaceable products to a partner of valuable experiences.  They gain trust and acceptance. 

Further, truly engaged customer experience is exceptionally difficult to copy.  It has to be part of the DNA of an organization, sustained over time.  It isn't cheap and may require the firm to do things on occasion that don't make sense to the short term bottom line.  Look around at how few firms have a truly unique, valuable and differentiated customer experience, and the value proposition it drives.  Compare for example my recent experience with Windows 8, with the new "tiled" experience.  While I'm not crazy about the "look and feel" the issue that really disappointed me is that Microsoft expects me to create a Microsoft Account for every app that I want to run on my device.  This is a truly negative experience, and it causes confusion and frustration rather than trust and delight.  Add to that the fact that my device, while expensive, still requires me to acquire a word processor or office suite for a princely sum, and fight to add my favorite applications.  Why would you make it difficult for an experienced user to acquire and use your new products?

Compare that with Nordstrom's, perhaps the king of customer experience.  Nordstrom's, and other customer experience innovators understand that customers vote with their feet, and that firms need to win the right to call a customer a partner or consumer.  Far too many companies take customer needs for granted, much less trying to understand the experiences customers crave.  How many processes and internal frameworks does your organization have that are focused on efficiency?  How many of those processes or decision frameworks are focused on customer experience and delight?  I'll venture to wager the ratio approaches 99:1.

Everyone wants to be unique and different, yet they all pursue product innovation, the simplest form of innovation and the easiest to copy, when what they need to do is win customers.  And while customers are fickle and want the latest products, many are just as interested in experience and may even sacrifice some product delivery for a better experience.  I know I will.  I'm currently delayed at an airport waiting for Delta to take me to a client site.  And tomorrow I'll receive an email from Delta's customer satisfaction system.  They don't ask about my customer experience, don't want complaints or feedback, just want me to complete the form.  Check the box and move along.

If you want to be really different, really unique and have an unassailable differentiator, focus on delighting your customers through their interaction and experience.  Yes, you still have to get the products right, but you need to do that anyway.  That's table stakes anymore.  What many firms can't see and don't understand is that products aren't the top of the value solution.  Customer experience is.

You can't impose a culture of innovation

Lately it seems that everyone is talking about how to create a "culture of innovation" in their company.  The good news is that after many years of one-off innovation attempts, people are starting to grasp two important concepts.  The first is that for innovation to be valuable it must be sustained.  The second is that to sustain anything in a large organization, the culture must embrace it.  And here's the hard lesson.  Most corporate cultures are built for efficiency, not innovation.  So when people blithely talk about "building a culture of innovation" they forget the old saying that "Rome wasn't built in a day".  Rome was built over centuries, one brick at a time, and was constantly in flux.  Your culture has been built and honed over 20, 30 or 40 years, honed to efficiency.  You can't quickly change it, and can't impose innovation on top of it.

How does a corporate culture become innovative?

So here's the interesting question:  is innovation emergent, constructed, coerced or otherwise imposed on an organizational culture?  Clearly, almost every firm was "innovative" at one time, when it was a scrappy newcomer and had to out-innovate the competition to win.  Over time, however, once a customer base was locked in and overheads and administration demanded more careful husbandry of resources and risks, many firms settled for a culture of productivity and efficiency, which slowly edged out innovation, until innovation seems like a strange interloper rather than a familiar friend.

If your organization has achieved ultimate efficiency and is now grasping for innovation, how does it become more innovative?  More importantly, can you "create" a culture of innovation in an organization where the culture is conservative, risk averse and focused on predictability and stability?  It's not very easy, and it certainly isn't a quick transition.  There are three methods you could attempt:

1. Impose innovation on an existing culture of efficiency.  Most organizations, if they give culture a second thought, will acknowledge the importance of innovation culture but will simply try to impose a "culture of innovation" on top of an existing culture of efficiency.  This is, like Keats said, writing your name in water.  You cannot create a "culture" on top of another more powerful culture.  A house divided will not stand.  The prevailing, original culture of efficiency will win, and you'll be reduced to sporadic, discrete innovation activities in which you constantly commit the same mistakes and face the same hurdles and barriers.
2. Create a "skunkworks" that isolates innovation from the prevailing efficiency culture.  Many organizations that are smart enough to understand the investment in culture and the effort to change it will attempt this approach.  They'll separate small teams of innovators and place them in a cultural bubble, isolated from the prevailing culture, like an experiment in a Petri dish.  In that isolated environment ideas can thrive, not bound by existing culture.  But when the ideas make the transition from Petri dish back into the product or service development stream, they are frequently rejected by corporate culture anti-bodies.  Isolation accelerates innovation but it doesn't increase acceptance.
3. Invest in long term change.  If you want to sustain innovation and increase your odds of success, you'll understand the ancient saying that a journey of a thousand miles begins with a single step.  Changing a culture isn't easy and it certainly isn't quick.  There are several factors you can influence that will make the change more acceptable and more fluid:
1. Focus on evaluation, compensation and rewards.  If people are evaluated on the time they spend innovating, and that evaluation leads to increased compensation and job progression, some people are more likely to spend more time doing innovation work.
2. Remove hazards and uncertainty.  Focus on what people attempt, rather than what they achieve, when they innovate.  Failures are going to happen, and the learning should be collected and recognized.  Public beheading is rarely an inducement for more innovation.
3. Define a method that people can use, learn and become experts in.  Rather than every man for himself, using any tool or framework, define and reinforce a small set of tools and workflow so that people can increase their knowledge and expertise.  
4. Training.  Train them on the process, tools and workflow defined above.  Nuff said.
5. Identify your best innovators and recruit more of them, both new graduates and experienced hires.  Infect the organization with optimism, purpose and excitement.  Inoculate it from pessimism and "the way we do it here".

If you do all the things I've suggested in alternative three, and you do them well, you may begin to change your culture within two or three years.  Yes, I said two or three years.  And that's with a consistent focus, investments in training and changes to how people are evaluated and compensated.  You want a culture of innovation.  In fact you NEED a culture of innovation, but you can't "build" it.  You can't impose it.  You can influence the existing culture, but understand that anything that informal, that powerful and that slow to change steers and maneuvers like a battleship.

And, by the way, stop talking about a culture of innovation.  Everyone knows you need it, but words without actions just creates cynicism.  Actions like those defined in item 3 above will speak with far more command, and will gain far more attention, than constantly talking about the need for an innovation culture.  Further, when you are talking about a culture of innovation, the existing culture and its keepers feel under attack.  What's wrong, they ask, with our existing culture?  It's served us well so far.  Create change by making actual change, rather than talking about change.  Talking about change just raises the stakes and increases the effort.

The Problems measuring Innovation

There are tasks we want to do that are reasonable to do and are practical to do.  There are activities we want to do that are sensible but difficult to accomplish.  Measuring innovation, which sounds important and reasonable, often falls in the second category.  It sounds reasonable and important to measure innovation, but is often very difficult to do well.  Sort of like measuring sand with a ruler, we may have the wrong tools, or the tools may not exist, or, quite possibly, there are some things we simply don't know how to measure.  As Einstein said, not every thing that counts is countable, and not everything that can be counted counts.  Let's look at some of the challenges in measuring innovation.

The tools we have

Let's start with our trusted and familiar measurement tools.  For most projects, we measure factors like cost, time to completion, the results created by implementation (dollars saved, profits created) and measure against the cost to develop, which gives us the almighty ROI.  The tools we use to measure activities and projects are tuned to the projects and activities we do regularly and that we deeply understand.  However, those measurement tools are often confounded by innovation.

Note that we anticipate being able to measure factors like time to completion.  In an innovation setting, where divergence is as important as convergence, it's difficult to say how long it will take to create a viable new idea, or when that idea will be fully vetted.  With little history, it's difficult to establish parameters about "typical" innovation projects.

Further, we've become so enamored with measuring efficiency, productivity and profitability that we neglect to measure things we can impact, like customer engagement and delight, so we tend to ignore or discount innovation that may not be able to deliver immediate profitability, even when those innovations could be valued by consumers.  We simply don't have the tools or understanding to measure or to understand how valuable those solutions are.  Like the proverbial drunk looking for his keys under the light post, we limit our investigation only to where we have the best understanding - where the light is best.


The difficulty in measuring innovation

There are several difficulties when measuring innovation.  The first is in the definition of innovation.  After all, innovation is a relatively generic umbrella term that contains a lot of different activities and outcomes.  Incremental product innovation is more definable and predictable than disruptive business model innovation, more familiar and probably easier to measure.  Given the range of activities, processes, definitions and outcomes, talking about measuring innovation is a bit difficult, especially when the range of outcomes is so broad.

Second, we lack consistent models and frameworks.  Most organizations don't have a deep history with innovation and can't compare projects to previous exercises.  There are few "knowns" and many unknowns, and many of those unknowns are unfamiliar or unknown.  Without existing rules of thumb or easy comparisons, it's hard to say if innovation is "on track" or "off track", and in the absence of innovation examples we tend to evaluate innovation in comparison with other familiar projects that are well-defined and well-understood.  In that light innovation often looks haphazard and unlikely to return any value.

Finally, most businesses are so focused on ROI - return on investment - and getting a "fast" ROI that true innovation is difficult.  Increasingly good innovation looks more like a reckless gamble.  The odds aren't great for a big return, but when the idea is right the returns are enormous.  Most would rather follow a safe, predictable model, limiting risk and uncertainty.  Therefore, they aren't really measuring innovation at all, but simply measuring predictable projects.

Measurements in Innovation Phases

Rather than a one size fits all, some measures and milestones need to apply to innovation phases.  For example:

1. Can we identify and scope an interesting unmet need or problem that customers have?  If we solve that problem do we shift significant business our way?
2. In the "discovery" phase of innovation - customer insights and trend investigation - are we learning about new needs?  Do we believe we have the "lead" in understanding those needs?
3. In the idea generation phase - are we generating interesting, valuable ideas that could disrupt a market or set a new standard for solutions or services?
4. In the validation phase - do customers indicate that our ideas solve important, relevant needs and that their satisfaction with the existing solutions is very low?

I could go on, but I'll stop there.  Note that as with many other facets of innovation, much of the measurements in the "front end" are qualitative rather than quantitative.  I can certainly measure the number of ideas generated - quantitative - but what really matters is the insight and value of ideas - qualitative.  This is another reason so many organizations struggle to measure innovation.  Not everything that counts is countable.  Sometimes a wise assessment is far more important than an accurate counting.

People are our most important asset

Mark Twain once wrote that there are lies, damn lies, and statistics.  I think to that list we can add mindless platitudes, like the one that headlines this post.  I've never worked in or for a business that didn't suggest that people were important to its success.  Many I've worked with or for have some variation of the statement that people are the most important asset they have.  And, to a great extent it's true.  As businesses migrate to become "knowledge" businesses, the assets of the business to a great extent exist between their employees' ears.  This means that many of the assets of the organization get up every day at 5pm and go home.  Machines, computers and buildings are replaceable and fungible; good people aren't.

But while the aspirations that people are important are true, the reality is quite different.  If we managed the assessment, allocation and assignment of people the way we did other assets that are important - manufacturing equipment for example - we'd understand who is good at what, who is "loaded" with which projects, who needs some downtime and so forth.  While businesses have created incredible ability to manage physical and financial assets, they've never done a good job of managing people assets.  And this becomes ever more apparent as businesses get "lean" and mean.

Even as businesses have become more adept, the Pareto rule still holds:  20% of the people do 80% of the work.  If people truly were our most valuable and useful asset, we'd find more people like the 20% who do most of the valuable work, and reduce the 80% who don't add much.  Further, we'd understand that by overloading the really productive and capable people, we make them less satisfied and more anxious and time constrained.  Rather than tapping into all of their capability, we are really tapping into their efficiency and production skills.  The people who we most desperately need on innovation work are tied down in productivity and efficiency concerns.  Gradually, their insights, creativity and risk taking are being diluted.

So, you are wondering, I agree that people are poorly managed and allocated but what's this got to do with innovation?  Glad you asked.

Innovation is vitally, critically dependent on good people who are passionate about innovation and fully engaged and committed.  Note the adjectives:  passionate, engaged, committed.  It can be difficult to find passionate, engaged and committed people for any activity, much less one that is unusual, fraught with risk and unlikely to be repeated.  Further, if all the really good people are absorbed in keeping the business running day to day, how can they be freed up to work on innovation?  Even if they are "freed up", will they be passionate and engaged?

If people were our best and most important assets, we'd go about this very differently.  We'd understand what each person's strengths were and assign them to roles that capitalize on those strengths while working to shore up weaknesses.  We'd balance mundane, efficiency work with challenging innovation work.  We'd understand "loading", balancing workloads across teams rather than on the shoulders of a few individuals.  We'd realize that assigning a person to a role at 10% of their time is the same as not assigning anyone at all.  We'd be honest that slicing a person into tiny increments of time and concentration doesn't work well.  We'd create enough strategic clarity to help people understand corporate goals.  We'd reward long-term investments and risk-taking over short-term solutions.  What signals do we send to our "most important assets" about innovation?

So, if people are our most important asset, and people are important for innovation success, but we are failing at managing, prioritizing and developing people, what's likely to happen?  The best people focus on efficiency and getting things done.  There's no time for innovation, no bandwidth and worst of all, the best people can't be bothered to work on innovation.  It's time for a people management revolution.  Let's treat people like the vital resource they are.  Let's manage them effectively, develop them more capably and assign them to the roles that accelerate their growth and the growth of the company.  Doing that will also have the wonderful side effect of creating a lot more capacity for innovation.  Once we realize that people are the most vital ingredient for innovation success, we'll rethink how we plan innovation projects, how we staff them and how we motivate people to participate.  But these factors matter only if innovation is to become a sustaining capability, rather than a one time event.

If your company states that innovation is important, and that people are its most vital assets, the logical conclusion is that the best people should be engaged on the most vital corporate activities.  This shouldn't be difficult to ascertain.  Does the executive team place its best people on innovation, which is supposed to be vital for growth and differentiation?  Does it prepare the people who participate on innovation activities?  Are they introduced to new methods and techniques?  Are they assessed to discover their strengths and interests?  Is their work rewarded, regardless of the outcome?

If you can't answer yes to most of the question in the previous paragraph, then the titular statement is a platitude, and innovation will be a struggle.

When your history holds you back

There's an old joke in the banking world, one that many modern bankers to my surprise aren't familiar with.  The joke asserts that there's a rule in banking, the 3/6/3 rule.  This stands for borrow at 3%, lend at 6% (thus assuring yourself of a 3% return) and hit the golf course at 3pm.  Of course this rule reflected the times when the banking industry could count on low competition and predictable regulatory change.  Today few banks make much money on demand accounts, and they certainly aren't paying 3% interest on passbook savings accounts.  Yet, strangely, many of the historical practices and perspectives of banks, and by extension other firms in other industries, have remained the same.  For example, banks often close at 5pm most weekdays, and it was common for many of them to be closed Saturday and Sunday in an era where most retail establishments are open later and on the weekends.

The unfortunate fact that many firms who attempt to become more innovate face is that their history, past success and existing structures become barriers for innovation, because they can't imagine working in a different context.  Why do banks close at 5pm and remain closed on the weekends?  Why does the stock market close at 4pm eastern?  I'm sure there's a historical reason, but I doubt it has much validity today, yet many continue these practices today.

I'm picking on banks today but their foibles are reflected in many other industries.  Here's another historical factor that will become a barrier to innovation:  narrow slices of business built around segments and products.  The average firm is a virtual matrix organization, divided by products (checking, savings, mortgage) and by segments (younger, older, wealthy, etc).  These are divisions the firm imposes to make it easier to deliver valuable and meaningful products, and these segments and product lines were probably a reason for success in the past.  Now, however, they are often a physical and psychological barrier to change and innovation. 

Look for example at the advent of the tablet.  Many firms will say they have a "digital" strategy, but each segment team and each product team are developing "solutions" for mobile or digital devices.  This means there's a solution for checking, and for savings, and for auto lending and for mortgages, and those solutions may look and feel different based on an individual's assets or ability to borrow.  But soon almost everyone will use mobile devices or tablets - what segment they are in or what products they use won't matter.  Rather than focus the delivery on the channel, the old way of dividing up customers and products remains paramount.

What if we completely rethought how we approach customers, more by the channels they use or the needs they have, rather than by our internal requirements and structures.  What if older, wealthier customers actually have some of the same psychological and service needs as younger, less affluent customers?  Couldn't we serve both of these "segments" with some of the same facilities and services? 

Instead, we divide and conquer, and then use the old divide and conquer infrastructure to attempt to do new "innovation".  In many cases what we need to do is think about throwing out the old structures and completely rethinking how customers of all stripes want, and need, to be served, and then build solutions and structures that align to those needs, and are flexible enough to change as needs change.

This is especially true when an individual may be young, a small business owner, affluent and a consumer of many different banking services.  It's often the case that many individuals cross our artificial "lines" or constructs.  Should we serve the individual as a small-business owner, a head of household, a "wealthy" individual, as a younger customer, or all of the above?  More importantly, does that individual think of themselves in all of those ways and expect services to be aligned to those "hats", or does he or she want unified service depending on the situation at the moment in time?

Older, narrow and rigid structures are becoming barriers to innovation.  What's more, they are internally derived and don't add value to the customer - in fact when they become obvious is when they become barriers for customers.  It's often difficult to do innovation "on top of" or within the context of these structures or perspectives, but they are hard to dismantle.  In many cases the best innovation would be to create a completely new structure, then decide what products or services to offer, and how to offer them to the customers you have, and want to have.  Ultimately, innovation is about being nimble and able to change as circumstances warrant.  While many businesses have deep investments and organizational history about these lines of business, product groups and segments, they may create more barriers than value when you need to innovate.

Innovation is rarely a gap filler

I had a call from a potential client last week.  It was a new client but an old story.  For months, maybe years some executives had expounded on the need for more innovation and the potential value it could deliver.  Everyone nodded and went back to business as usual, because it was safe and comfortable.  A few weeks ago, the government issued new regulations in their business, and suddenly millions in revenue is at risk because existing products and services don't align to the new regulations.  So what does the management team decide?  It's time for that innovation magic you've been talking about.  How quickly can we "innovate" a new product that can fill that gap?  By the way, it would be nice if we can recoup that lost revenue this fiscal year...

There are several issues I'd like to discuss in this (not) apocryphal story.  The first is the concept that far too many businesses are resting safely in their comfortable business models, never realizing how fragile those models are, how susceptible to small changes.  The second is the idea of the "burning platform".  The burning platform is what is required to get people to move from existing comfort to an unknown position that seems risky and uncertain.  After all, it may be better to jump from a burning platform than to wait to burn to a crisp.  But last, and most important, I want to discuss the fact that innovation is rarely adequate as a "gap filler", and it's almost impossible to kick off an innovation project with the goal of replacing $X amount of revenue within one year.

Live by the regulation, die by the regulation

I remember just a few years ago working with health insurers, who were confident that the Affordable Care Act would never pass or impact their businesses.  Needless to say, regulations that define your business can change, and when they change can impact a business dramatically.  Too many times businesses and industries act as if regulations are permanent and unchangeable, and build business models that assume a permanence to regulations and customer expectations that are unrealistic.  In a classic David vs Goliath move, many innovators use these fixed positions to attack the incumbents.  Sure, form you business model to conform and profit from existing regulations and expectations, but ensure that your model is flexible and nimble enough to change when the regulations or expectations change.

Burning Platform

Why, oh why, does the platform always have to be set on fire by external entities or forces?  A burning platform is the reason to move, but those reasons are too often external rather than internal.  This means that most businesses change only when forced to by external agencies, forces or actors.  If that's the case, what role do executives and their strategies play?  If all change is thrust upon a business, then build a business that is like tumbleweed - able to nimbly move as the winds of change push it.  For many reasons, businesses seem to change more rapidly and more effectively when the impetus is external rather than internal, but whatever causes the recognition and need to change, act quickly.

Innovation isn't a gap filler

There's one statement as an innovation professional I never want to hear.  That statement is:  we need to replace $50M in revenue this year with an innovation project.  In this case, innovation is being used as a gap filler to achieve current year revenue.  There are several problems with this:

• First, innovation is being used in an emergency setting to recover planned revenue
• Second, we aren't innovating to solve a customer need or challenge but an internal revenue gap
• Third, we are placing a very high return bar on a very short term activity
• Fourth, there are very few innovations that can be imagined, developed as a product or service, launched in the market and achieve significant revenue in six months or less

One of the first activities we undertake with our clients is to understand their typical development cycle.  That is, how long does it usually take to move a product concept from early design to launch? This cycle is typically anywhere from several months to several years, and that assumes the organization has a really compelling new idea just waiting for development cycles.  When there are no strong ideas in the queue, the development time for ideas can be several months or more.  The reason we focus on this seemingly mundane activity is to ensure that everyone understands what innovation can deliver, and the time frame in which it can deliver.

While innovation is often implemented in an emergency situation, it is not a tool or method well-adapted to emergency operations.   Innovation requires careful assessment of the situation, examination of trends, gathering customer needs and identifying unmet needs or expectations and generating and development viable concepts.  In a corporation where these skills are well-tuned, these actions can take several months.  In a setting where these skills are new, and every warning light in the building is flashing because a huge chunk of revenue just went missing, trying to get people to focus on the actions necessary for good innovation is virtually impossible.