EXECUTIVE FORUM
LEADING IN THE INNOVATION ZONE
Talk about innovation is everywhere today. In many ways it reminds me of an atheist undergoing a deathbed conversion and finding religion. It’s all just a bit over the top and too late to save many companies that have ignored the imperative to innovate until a crisis forces them to.
Although innovation often takes center stage during the extremes of an economy—the tough times when it is ignored most, and times of great prosperity when it seems to be in abundance—it needs to be a systematic behavior of an organization, supported throughout the valleys and peaks in the economic cycle. Otherwise an organization may stave off economic bankruptcy during a downturn just to face technological bankruptcy when the economy cycles back.
In one of my last discussions with Peter Drucker, I asked him if he felt that uncertainty and innovation were connected and cyclical phenomena, increasing together over time. His response—which was classic Drucker, and the way he would often tell me in polite terms that I was off the mark—was that I was perhaps asking the wrong question. There are times, he told me, of high certainty during which we know our enemies and our markets’ needs. And then there are times of high uncertainty during which we struggle to understand the market and our place in the world. Drucker felt we were entering just such a period of prolonged uncertainty.
I’ve kept those words in mind as I’ve observed dozens of organizations that practice innovation as a discipline. What I’ve learned from these organizations is that innovation is a behavior and a process that comes from the core of an organization’s values and philosophy. It is acknowledged, touted, and rewarded by leadership. Most important, it is unapologetically mechanical—it’s not mystical and out of the reach of mere mortals. What companies lack is not innovative people but rather innovative processes that can surface, nurture, and sustain innovation. Here’s how the successful ones do it.
Creating an Innovation Zone
An innovation zone is a protected space within an organization where ideas can be brought for evaluation and commercialization. Simply put, an innovation zone provides an institutionalized space where ideas can take root in fertile soil, protected from the elements and from organizational antibodies just long enough to demonstrate their value. Companies such as Apple, Hewlett-Packard, Cisco, Xerox, and Bank of America have institutionalized forms of this innovation zone model to great effect, and 3M consistently gains more than a third of its revenues from newly invented products.
An innovation zone also helps overcome one of the most basic challenges for companies trying to encourage innovation. Namely, once you open the floodgates, how do you handle the sheer volume of new ideas, especially when many of them may be ideas that are indeed off the wall or that have little relevance to an existing way of doing business?
Shutting these ideas off too early and too often will just discourage people from submitting ideas at all. Yet trying to pursue all of them will quickly overwhelm any organization.
How do you create an innovation zone? Don’t confuse an innovation zone with a suggestion box—it is much more than that. Suggestion boxes are notorious for being black holes for ideas. But don’t make things too complex, either. Think about the idea of an innovation zone in very simple terms. If anybody in your organization comes up with an idea that applies to any aspect of the organization, where do they go with it to ensure that it gets a fair hearing and evaluation?
Think before you answer, because the obvious choices are often not going to get that idea very far.
First, consider that I asked about “anybody”—not just senior managers, but any employee. Second, consider that I asked about an idea that may apply to “any aspect” of the organization, not just the discipline or department of the idea’s originator or the current products and services of the organization. The problem is that while many ideas can take root in the local workgroup or department in which they originate, many more have no place to go because of the organizational structure that isolates them and the lack of resources, time, and budget needed to evaluate and nurture them.
Microsoft’s internal Idea Exchange allows any employee to submit an idea, which is then voted on by other employees. Ideas that get enough attention are evaluated and move forward. Those that aren’t are archived for future reference. Microsoft also holds two yearly Think Weeks during which any employee or group of employees can write a white paper on a new idea for a product, service, or business that is reviewed by Microsoft Fellows and Microsoft Distinguished Scientists. The white papers are discussed and evaluated openly. Executives can also post challenges on an internal Web site and solicit ideas for solutions from any employee. All these mechanisms represent a basic effort at putting in place an innovation zone where ideas can flourish.
IBM has a similar initiative called ThinkPlace, which acts as an electronic sandbox, according to IBM CIO Mark Hennessey. ThinkPlace is an online innovation zone where any IBM employee can submit ideas and build an online dialog around them, which can develop the idea over time. Some ideas flourish and turn into innovations; others may not make it that far. But the ideation process is open to anybody who wants to participate.
At Cisco the “izone program” provides a similar forum by using a wiki to share and discuss ideas openly as they evolve.
Other organizations I’ve worked with have pursued this concept in depth. For example, Partners HealthCare—one of the largest health care providers in the Northeast—has grown an innovation zone over the past seven years that today accounts for over $300 million annually in revenues from new ideas. This innovation zone houses lawyers, accountants, domain experts, and even venture capitalists—all of whom can work on new ideas while their inventors carry on with their day jobs. For a view of this innovation zone in action, see the sidebar, “An Innovation Zone at Work.”
AN INNOVATION ZONE AT WORK
Partners HealthCare, which runs a group of very large hospitals in the greater Boston area, has an interesting slant on the innovation zone concept. It has established the Research and Ventures Licensing group (RVL), which is dedicated to identifying, nurturing, investing in, measuring, and tracking all new ideas. There is a process for assessing ideas in a transparent and open manner, then developing the ideas with their creators in order to pick the best paths for commercialization, and finally channeling any value derived from the idea back into the organization, with a specific amount flowing directly back to the inventor. These are all missing links in most organizations that try to go from invention to innovation. By the way, the RVL reports directly to Partners’ chief executive.
The result has been enormous value creation along with the institutionalization of innovation as a core part of the company’s organizational landscape. The RVL has resulted in a 30 percent year-over-year increase in new inventions, a dozen new start-ups, and $327 million in revenues from the innovation of these ideas. While some of the innovations are blockbusters in the pharmaceutical sense—the arthritis drug Enbrel, for example—the vast majority of the ideas that the RVL commercializes are incremental changes. Small though they are, they still add measurable value. That’s a crucial point: If you can’t measure the value of incremental innovations, you end up depending on blockbusters to prove that you’re innovative. That’s a huge mistake—one that will have a corrosive effect on how your company functions as an innovator.
The institutionalization of innovation means that Partners’ inventors are provided with what the RVL calls an “internal exit”—a way to take their ideas to market without ever leaving the company. The idea of an internal exit is not new. Many organizations, such as Xerox PARC, Bell Labs, and numerous academic partnerships, have attempted to create similar environments to encourage employees to develop their ideas in-house. The difference at the RVL is that the internal group is not the creator or developer of the idea—it is the facilitator. The RVL is not a lab or an R&D function in any sense of the word. Instead it is an orchestrator between the idea’s creator and the many forces and parties that must participate if the idea is to be put into practice or commercialized. Of course, mutual economic incentives and rewards are the essence of any business partnership. This is no different at the RVL, where scientists generally receive 25 percent of royalties for their discoveries. However, recognition can come in many forms, not just monetary. In an era marked by speed to innovation as well as sheer volume of innovation, the internal exit is a critical mechanism for retaining human capital and for leveraging the power of innovative thinking. The real benefit of giving employees internal exits is the long-term one: creating a group of in-house inventors who, over time, provide myriad valuable new ideas.
Innovation 2.0: Sorting Your Ideas’ Ambitions
A critical part of putting in place an innovation zone is creating an Innovation 2.0 portfolio.
The idea behind the Innovation 2.0 portfolio took shape when I was executive director at the Center for Business Innovation at Babson College. As I spoke with dozens of large organizations that were trying to increase their ability to innovate, they would invariably express concern over the fact that innovation was often considered to be an undifferentiated task. There was no distinction between tactical and radical innovation, or component and systemic innovations. All were just thrown into a big bucket of new ideas competing against one another for the same resources. This would be akin to asking a fighter aircraft mechanic to sit in for the pilot. Both play a critical role, but they are not interchangeable!
While some companies are better equipped to deal with one type of innovation than another, we all tend to compare ourselves to the benchmark of radical innovation. That might work for Apple, but it does not work for Bank of America, which encounters and depends on many more incremental innovations to improve its services.
An innovation portfolio helps to illustrate how innovation can occur along both dimensions, from tactical to radical and from component to systemic. For example, an innovation such as the invention of the radio may well be in the upper right extreme of this framework. However, the portable radio could be a radical/component innovation and the transistor on which it is based could be considered a tactical/component innovation.
To use the innovation portfolio, start by asking, “What kind of innovation is our organization best at?” If your core competency lies in being a component innovator, you’re probably ill equipped to take on innovations intended to alter market behavior. On the other hand, companies that can influence significant shifts in market behavior should consider putting resources into partnering with or perhaps acquiring component innovators rather than trying to build component innovations themselves.
What is especially interesting about an innovation portfolio approach is what it reveals—that not only do tactical and component innovations feed upstream innovations, but systemic and radical innovations provide downstream inputs for lesser innovations.
But what if the radical and systemic innovation flops? Does the same principle hold? Perhaps the most famous example is the Ford Edsel, which, although a failure of epic proportions, was loaded with component innovations that found their way into future Ford automobiles and manufacturing processes. The failure taught Ford that manufacturing needed to be a separate activity across all divisions rather than being division-specific. Ford also learned to be more outward-facing in understanding market trends. In the case of the Edsel, the car’s size and cost were both contrary to the economic downturn in the U.S. economy—lessons that Ford used well in the launch of the Mustang just a few years later. In this respect, the failures of the Edsel were as valuable to the process of innovation as any success. Table 1 provides a worksheet for assessing an innovation portfolio.
FIGURE 1. INNOVATION CAN TAKE MANY FORMS, WHICH REFLECT A PORTFOLIO OF INVESTMENTS IN INNOVATION.
TABLE 1. THE INNOVATION 2.0 PORTFOLIO.
The Innovation 2.0 portfolio chart in Table 1 has two uses. The first is to describe your organization’s current innovation portfolio. Use Table 1 to fill in your innovation portfolio including innovations big and small over the past several years. Once you’ve completed it, think about how each level of innovation from the lower left to upper right feeds off the others. Are there areas where your innovation portfolio is especially strong? Can you leverage these somehow to build new value and to move toward opportunities that might have greater payback? Are there areas where you are particularly weak, such as combinations of existing components and tactics? All of this creates a rich discussion that you can use to establish a common understanding of your organization’s innovation capability and focus. In many organizations this portfolio is as essential in navigating how, where, and why innovation occurs as an organization chart is in identifying responsibilities and capabilities.
The second use for the Innovation 2.0 portfolio chart is to begin the process of assessing newly suggested innovations. When ideas are submitted to your innovation zone, the first thing to do is to place each one within the Innovation 2.0 model and determine which metrics apply to how you will evaluate it, based on the resources, capability, and risk associated with that type of innovation in your organization.
For example, if the idea is a tactical- and component-based innovation, you may have a budget set aside to evaluate, prototype, and market test the idea. On the other hand, a radical and systemic idea will require far greater analysis and evaluation. This does not mean that the idea should be dismissed because it implies greater risk. If that were the case Apple would never have brought to market the iPod, which was completely outside the company’s then-current product line. Keep in mind, however, that Apple’s core competency and sweet spot in the Innovation 2.0 portfolio had always been in the radical and systemic area.
The simplicity of the Innovation 2.0 approach is powerful since everyone in the organization can easily understand it. Using the portfolio to describe areas where the organization has core innovation competency, communicating the metrics for the evaluation of ideas in each of the segments of the portfolio, and identifying the risks and returns of each segment create a transparent and consistent innovation evaluation process.
Taking Ideas from Concept to Reality
Innovation is always a risky proposition. Untested ideas can easily disrupt the status quo and increase costs without a known return. Organizations are littered with great ideas that wither and die before they ever get close to the market because the process for evaluating these ideas is absent. Putting in place an innovation zone and an Innovation 2.0 portfolio provides a bridge to get these ideas from concept to commercial reality.
With the pace of innovation increasing exponentially—new consumer product launches alone doubled between 2004 and 2006—it only makes sense to tap into every mind in the organization for original thinking, and then quickly pursue the best ideas. This is more than a growth mandate; it is no less than a mandate for survival.
Building an innovation zone is a way of keeping out in front of this explosion of newness, dealing with the mounting context of uncertainty and providing ways for all employees to participate in the innovation process.
But the bottom line is that innovation is not optional, and it cannot be put off until a crisis looms. To paraphrase Drucker, asking “When is the right time to innovate?” is the wrong question. Innovation must be a constant. You need to put in place a systemic and disciplined process for innovation that will always be at the ready to cultivate and nurture new ideas.
Manage that process well and your customers will reward you, your employees will have another reason to stay, and you will have given your competitors one more reason to worry. The truth is that innovation in a free market economy is always relative. There are no absolutes; you need only innovate faster than your competitors. What has changed is that your biggest and most innovative competitors now come from the places you least expect them to. As you look to the left they will pass rapidly to the right, with your former best employee behind the wheel.
Ideas flow much more freely than they ever have. The last thing you can afford is to let good ideas, no matter how small or different, bleed out of your organization because you have, however inadvertently, alienated or frustrated their owners. Building and maintaining an innovation zone is the way to capture those ideas and keep their owners engaged.
Tom Koulopoulos is president and founder of The Delphi Group, a Boston-based management think tank. He has also served as executive director of the Center for Business Innovation at Babson College and managing director of one the service industry’s first global innovation labs. He is the author of eight books, including his most recent, “The Innovation Zone,” which looks at how successful organizations build and sustain a culture of innovation.