Wednesday, October 06, 2021

The cost of innovation

 For many years, in writing this blog, and in leading innovation projects for my clients, I tried to advocate for the benefits of innovation.  After all, as the saying goes, sell the sizzle, not the steak.  Benefits that could be achieved from innovation seemed the right way to convince business executives and government officials that they should commit to innovation projects, and eventually to innovation capacity.

The companies that do make the bet, and that do focus on innovation, often show the benefits in terms of higher profits, greater market share and higher stock prices.  But those benefits are often realized in the future.  This means it can take a visionary leader to establish an innovation project or program, who may not be in place when the benefits are realized.

Rather than discuss the benefits from innovating, I've also written about the costs of not innovating.  We don't have to look far in the corporate scrap heap to find firms that were leaders (Nokia, Kodak) but became obsolete due to a failure to notice changes in the market.  Worse, some of these, Kodak in particular, were potential leaders in innovative technologies or business models but "stuck to their knitting" and lost market share and profits.  But the cost of not innovating is a lot like the cost of not maintaining your streets.  Eventually, there will be problems like potholes, but that will be the responsibility of the next generation of leaders.  No one gets elected promising more dollars for maintenance.

But what about the costs of innovating?

What few people talk about are the costs of actually doing innovation, that is, if a company can decide to innovate, either in a one-off project or more particularly to build and sustain an innovation capability, what are the costs of doing innovation?  And, are these costs significant?

I believe there are at least three types of costs associated with doing innovation, and they rise or fall based on the type (project or building capability) and expected outcome (incremental or disruptive).  These costs are cultural or psychological (the psychic cost of doing innovation), trade-off costs (doing one project rather than another), and the actual hard dollar spending that can be associated with an innovation project.  Let's examine each in turn.

Cultural or Psychological costs of innovation

Innovation is often such a new idea (once we get beyond the concept of incremental innovation, or adding a new feature to an existing product or service) that planning and conducting an innovation project can be psychologically difficult or better, culturally challenging, to many organizations.  And the more the innovation work is aimed at building a capacity rather than a one-off project, or the more the innovation work could disrupt or transform an existing market or current product, the more resistance will build.

Why is innovation so expensive culturally or psychologically?  Because anything beyond incremental innovation threatens the status quo of the industry, or another product or revenue stream in the business.  These ideas may indicate significant changes are required in the existing business model.  They may point out blind spots in how the company is structured or goes to market.

In the end, everyone wants the new revenue a new product will generate, but few people want the cultural change that could be required.  Note that this cost is relatively "high" but not based on dollars - this cost is calculated by the amount of time and energy senior executives need to commit to changing perspectives and culture.

Alternatives or Trade-off costs

In any business, executives make choices across a range of project opportunities.  When, or if, an executive chooses to fund an innovation project, or better to build an innovation capacity, they are choosing NOT to do something else.  One definition of strategy holds that strategy is illustrated by what executives say "no" to.  When making a choice, one project or activity gets funded and another one or more than one does not.  This is a trade-off cost.

What always strikes me is how low most of the trade-off costs for innovation projects are.  That is, when executives are presented with several projects and one is a promising innovation project and others are routine existing product extensions or other activities, the times executives select something other than the innovation project, the costs and benefits seem so low.

The reason for that is that even those exceptionally small potential benefits from known projects are easier to obtain than larger benefits from a risky innovation project.  We've educated generations of managers and executives to make safe, small bets. In a climate where change was incremental and most organizations moved slowly, that logic was solid.  I'm not so sure that logic holds any more.

There is always a cost for any project, both in hard dollars and in resource allocation, so making a choice for innovation projects or capabilities is not easy, but we should always examine the alternatives and ask, just how high or low is the hurdle for the alternative?

We need to find ways in our organizations to make not pursuing an innovation project the risky bet or the lower cost alternative.

Actual Spending

What isn't always appreciated by most companies is that actually conducting an innovation project is relatively inexpensive from a spending perspective.  I've run dozens of "front end" projects ranging from a few months to over a year and a half, and I can say that we've never had a project cost more than about $1M.  For larger firms, I've seen so many competing projects produce far less outcome with much larger budgets.

The actual hard dollar cost of innovation - the actual outlay on consultants (if they are required), training, tools, market research, and so on - is not high.  Getting good ideas, and even evaluating them, prototyping them and getting market feedback is simply not that expensive.  To be fair, costs generally rise as the goals (disruptive innovation) become more challenging, but even in longer term disruptive or transformative innovation work, these projects are still relatively low cost in comparison to other projects that businesses consider.

What can be expensive is new product development - that is, taking a new idea and running it through a product development process and then launching it in the market.  The "front end" of innovation - what many firms aren't that good at - is not that expensive.  The "back end" or product or service development and launch - which most corporations should excel at - can be more expensive, but this should be where the company's expertise lies.

So it is strange to me that while innovation has a high upside (with some failure risk clearly involved) and a relatively low cost (at least in monetary terms) that companies don't do more innovation, more consistently.  The issue cannot be financial.  Other projects are far more expensive to conduct.

Structural and Cultural Problems

The problem has to be both structural and cultural.

Structural in that our budgets and team structures are designed in annual time slots and for business siloes, when innovation doesn't acknowledge either.  Most organizations aren't organized or structured for this type or work, and we don't budget this way.

The problem is cultural because managers and executives are educated to make small, safe bets rather than support larger or more interesting innovation projects.  The problem is also cultural because most interesting innovation work challenges or threatens existing structures, hierarchies, business models or existing products.  Interesting innovation will always create change, and few organizations are nimble enough or open to change in order to embrace innovation.

The cost of innovation, low and high

The data is in.  Innovation has a fairly low monetary or financial cost, but often has a very high cultural cost.  Until we 1) lower the cultural or structural costs and 2) demonstrate that innovation is the low cost, low risk alternative, innovation will most often be the project on the back burner.

For anyone who is interested in doing innovation in a corporation, recognize that the actual monetary cost of doing an innovation project is low, but the psychic cost can be much higher.  Therefore, work on the psychic costs early and broadly across the organization, before worrying too much about the monetary costs.  I've rarely seen an innovation project curtailed for lack of funds, but often seen them curtailed or ended by lack of commitment or concerns about risk.

AddThis Social Bookmark Button
posted by Jeffrey Phillips at 6:05 AM


Post a Comment

<< Home