Column: John Parkinson on How to Manage Corporate Innovation
"Every idea has its timeand when the time comes, just about everyone has the idea."
I've been thinking a lot about innovation over the past few weeks. Interest in the topic has seemed to come and go ever since Clay Christensen's The Innovator's Dilemma hit the bookstands in 1997. And a recent study by IBM's Business Consulting Services unit indicates that I'm not the only one doing the thinking. CEOs put "ability to innovate" at the top of their list of their organization's competitive capabilities. And there are articles about innovation all over the business press recently.
So if innovation is so important, why is it so hard? Back in 1999, I got to actually run a large-scale innovation program for Ernst & Young (where I was a partner at the time). As a part of the Office of the Chairman I was asked to design and implement a program for all of North America to "engage everyone in the firm in the innovation process," which was the conventional wisdom of the day. After all, if you have more than 25,000 smart people at least partly engaged in innovating, something good is bound to happen, right?
Well, maybe. We had some strategic imperatives for the program. Five years into the Internet boom we were losing talent to the wealth virus and struggling to adapt the business to declining core margins and growing regulatory pressure. Globalization (or at least Internationalization) was on the horizon. A major change in the senior leadership team was coming. There was a perceived need to do something to energize everyone around "The Firm of the Future" and re-ignite growth in both the top and bottom line.
A quick research of the literature showed that it was very hard to predict where innovation actually comes from. It's as often generated by people buried in the minutiae of day-to-day operations as it is by the anointed innovators in corporate think tanks. And the intent was to "embed innovation in our DNA" not to just run a "once-and-done" program to fix some temporary concerns. I was also fortunate in that I came across Chris Zook of Bain and Co.'s work on adjacencies (Profit from the Core) and Larry Keeley of the Doblin Group's excellent research on a taxonomy for innovation. I also did a lot of thinking about how I wanted the program's performance to be measured. Out of these inputs my small core team fashioned a broad-based program that gave everyone the opportunity (but not the requirement) to participate.
With some modest seed funding and resources in place, we launched the program in late 1999 and ran it for about two years (until I retired from E&Y in late 2001). Here's what we discovered.
There was mixed news in this outcome. It was relatively easy to respond to the quality of life issues.. We could generally "empower" the people who identified the problems to fix them. Doing that generated a lot of buzz and grassroots goodwill for the programalthough it's reasonable to ask why it took such a program to trigger often trivial remedial actions. The operational improvements were generally easy too: By the end of two years we had leveraged about 100 of the ideas in this category into over $400 million a year in operational cost savings. This got us a lot of positive attention from our sponsors and more than paid back their investment.
But neither of these results were the real reason we launched the program. And the 15% of ideas for "growth" were a very mixed bag. Quite a lot were actually illegal for a big public accounting firm (although not for other kinds of business organization). Quite a lot more were good (in the sense that they had a viable business case associated with them) but weren't even slightly "adjacent" to E&Y's core businesses. Zook's Profit from the Core told us that we would not be able to launch these successfully unless we were willing to become venture capitalists and incubate the ideas until we could spin them offfar from a core competency.
And there were plenty of ideas for which there was just no viable business casefor anyone. I was surprised at how little understanding there was amongst highly educated, numerate people about what goes into a business case, even though we supplied a template and a comprehensive guide as a part of the innovation program. I must have looked at hundreds of plans that basically said: "There is a huge market for idea x. We should be able to get 10% of this marketwhich is still a huge number. So let's go do it!" No thought of working capital requirements, IRR hurdles, route to market, channel strategy, customer acquisition and service, and on and on.
From the 1,200 or so growth-related ideas, we actually found less than 20 that were assessed (by an internal investment advisory board) as viable for the firm, and picked just eight to actually fund. In fact, I had more investment capacity than ideas to spend the money on. Even this very focused agenda raised some new and unanticipated issues.
First, what should we do with the "discards"? As noted above, some of these were actually good ideasjust not for us or not for now. We wrestled with this for a long time and in the end struck a deal with an outside "incubator" to have access to the discard pile and pay a royalty for any idea they adopted as an investment. Good idea, but bad timing. By the time we had the arrangement in place the, boom was about over and none of the ideas ever got funded.
Second, how should we reward the innovators whose ideas generated a lot of new revenue (or significant savings)? This topic generated a lot of heat and remarkably little light. It was universally agreed that there should be a reward system, but any simple formula runs the risk of making a few people rich, even as their ideas improve things for everyone. No one (at least no one amongst the senior management of the firm) was willing to establish a precedent that was out of line with the principal of "collective" successa core tenet of the partnership structure. This issue strained the limits of entrepreneurialism pretty hard. In the end, it triggered the third main issue we encounteredhow the corporate immune system responded to too much change.
Before we look at this, let's look at how the program was measured. When I started out on the road to innovation, I negotiated three measures for success:
Coverage. Because we wanted as many people as possible to participate, it seemed reasonable to measure success by how many people we managed to get involved. My target was 40% in the first year and 60% by the end of the second.
Contribution. There had to be some financial measure, so we measured how much each dollar invested in the program returned to the firm. My target was $4 back for every $1 invested. That's better than the internal hurdle rate we usually used, but less than the typical VC benchmark.
Buzz. Because this was really a major corporate change effort ("make innovation a part of our corporate DNA"), we wanted to be measured on the extent to which the program actually took root in the way people thought about their jobs.