FedEx's Innovation Machine

By Brian P. Watson  |  Posted 05-19-2008

How to Get Your IT Org to Innovate

Corporate executives are paid to think big.

CEOs and business-unit leaders charged with plotting the strategic direction of their business typically call on a massive toolbox of tactics to improve customer relations, boost operating efficiency and grow the bottom line. Ask those executives how they can do all three, and many will point to a single source: innovation.

And that makes perfect sense. IT-centered breakthroughs have changed industries and operating practices for centuries. Product-centric innovations have created new markets and opened new revenue streams. Process innovations have often led to significant cost savings and operational efficiency gains.

Still, innovation is a tricky concept. Businesses must promote a culture of exploration and creativity, recruit and retain workers devoted to finding new ideas, and build processes that enable business and technology pros to collaborate on potential breakthroughs.

Before any of that can happen, those business executives must match their records with their rhetoric. And so far, a dichotomy exists.

Research and analysis from McKinsey & Co., Accenture and other research and consulting firms paint a frightening portrait of the state of IT innovation: Business executives tout their innovation ambitions, and CIOs champ at the bit to make it happen, but little activity takes place. At times--particularly when the economic outlook is bright--innovation moves to the forefront of corporate strategy.

However, when the outlook becomes cloudy, controlling costs takes priority, forcing executives to direct funds away from exploratory ventures, essentially usurping innovation's urgency. All the while, companies fail to push through disruptive ways to deliver value for customers and partners, and CIOs are left to imagine what could have been.

Not even a third of the 474 IT chiefs surveyed in CIO Insight's April report on the CIO role cited boosting innovation as one of their top priorities. Looking deeper--and highlighting the CIO's role in creating new products--almost four in 10 said they were not involved in choosing which product or service lines to enter, expand or exit. (CIOs are influential in improving internal processes, according to the survey.)

To be sure, it's hard to find a CIO who isn't interested in pioneering innovative ways to develop new products or services, interact with customers and partners, or improve efficiency within the company. Throughout the debate on whether IT leaders are truly strategic or merely tactical, CIOs clearly prefer to be the former. And they want to innovate.

But until they walk the walk, their businesses will remain with the legions of those that have failed to meet the innovation challenge.

FedEx's Innovation Machine


FedEx's Innovation Machine

At FedEx, big ideas can come from anywhere.

The company's innovative culture emanates directly from founder and CEO Fred Smith, who has always put innovation--and, consequently, the IT function--at the center of the firm's agenda. The Memphis, Tenn., shipping giant promotes a culture aimed at continuing to innovate how it ships, tracks and manages packages, as well as how it interacts with customers and partners.

Leading that charge today is CIO Rob Carter. He views his role in much the same way that many IT leaders do, but few actually have the direct relationship with top business executives that Carter has. CIOs, in his view, should be full-blown members of the executive team. Sure, a lot of the CIO's role comes down to increasing operational efficiency and boosting productivity, but that's not how Carter--or his business associates at FedEx--see his job.

"We have a different view," he says. "We obviously believe productivity is important and we work on a lot of productivity applications, but we put our primary emphasis on taking care of customers, profitably growing the business, and creatively generating new channels that help customers integrate with FedEx and use it more effectively in their businesses." To do so, Carter and his IT department are constantly looking to create new applications and tools.

That attitude is shared by David Zanca, FedEx's senior vice president of e-commerce technologies and Carter's go-to guy for Internet and emerging technology developments. Zanca focuses on everything from, the company's main Internet hub, to Web services that let customers integrate with FedEx software.

Lately, Zanca's team has zeroed in on the explosion of social networking and mobility to dictate where FedEx makes it digital moves. The company invested in building a service-oriented architecture and Web services years ago and is now using those investments as back-ends for new customer-facing methods of communication.

A recent example came about when some of the company's front-line workers figured out how to give customers an easier way to interact with FedEx. As Zanca recounts it, a team of technical advisers--who work hands-on with customers to identify opportunities to boost efficiency and hear concerns--pitched the idea of coupling existing back-end Web services with the Microsoft Outlook e-mail client, which customers could use at their desktops to set up and track a shipment or request a pickup.

At first glance, the idea had promise, but it had to be run through the innovation machine. So Zanca and his team of developers, technologists and business strategists looked at what it would take to implement this, in terms of staff hours, resources, investment, etc.

Evaluating the Technical Feasibility

Next, they evaluated the technical feasibility: How easily could they integrate their back-end Web services with Outlook? Then they considered the business implications, which included defining the target customer base and market potential. Once Zanca's team identified the opportunity, they turned the project over to a development team to build a prototype.

That team then developed a concept for QuickShip, which Zanca and his business counterparts evaluated. They looked for a few key elements: Does it work technically? Check. Is there market value? Check. Does it truly innovate? Check.

At that point, the project moved to a full-fledged product team, which transformed the prototype into a marketable product.

In February, Zanca unveiled QuickShip at the 2008 Microsoft Office System Developer Conference. FedEx sells the technology to customers, particularly small and midsize businesses. The innovation team took the product a step further, creating a similar application--Mobi--that works on mobile devices like the iPhone and BlackBerry.

Another source of innovation is the FedEx Labs. The facility, which opened in October 2006 in Memphis' warehouse district, houses entrepreneurs from the area and serves as an incubator for pioneering ideas.

Employees from various divisions within the company work in rotation at the Labs, where they've developed products such as laser "dimensioners," three-dimensional printing and high-speed scanning capabilities.

Carter says the company has seen hundreds of millions of dollars in benefits from their innovations, but adds that there is a balancing act between the two ends of FedEx's innovation spectrum. For Zanca's team, there are more clearly defined rules about what they can do in terms of experimentation than there are in the Labs. Zanca's team plays with Internet technologies--which have certain limitations around things like security, scalability and reliability-- while the Lab workers often start from scratch, building new tools with fewer technical boundaries.

Carter uses an old sports metaphor to describe how the teams move forward. "Anyone who would say that football isn't an innovative space doesn't follow the sport," he says. "There are all kinds of innovations that don't break the rules or extend the sidelines. They're just different ways of more effectively beating your competitors."

You won't find FedEx's innovation-driven culture at most companies. McKinsey's research points to one obstacle to innovation: While a vast majority of corporate executives say innovation is one of their top three priorities for boosting growth, the lack of coherent governance practices tends to curtail their efforts.

When surveyed last fall about the ways in which their company oversees innovation practices, more executives (36 percent) pointed to an ad hoc approach than to any other. Still, 34 percent said governing innovation is part of their regular agenda, but only one in 10 said there's a corporate innovation group or leadership team devoted to overseeing their practices.

Along the same lines, an Accenture study released in April found that just over one-fifth of 601 global senior business executives said their organizations have a defined person overseeing innovation. About half that number said that a C-level executive oversees the function.

Innovation Needs to Be Governed

Many of the governance processes needed for innovation haven't caught up to the enthusiasm voiced by business leaders. "Just having a CEO with passion isn't enough" says Marla Capozzi, an associate consultant with McKinsey and co-author of the firm's report. "Innovation needs to be governed more broadly."

In a February research report, Forrester principal analyst Bobby Cameron likened innovation to a "near-meaningless cliché," as business executives say they want to do more of it, but don't know exactly what they hope to achieve. "You get a lot of interest in innovation and a lot of noise about it, but in reality, it's not there," Cameron says. "A lot of executives say innovation is important to them, but they don't try to make their internal organization produce--or don't expect it to produce. CIOs say innovation is at the top of their list, but when you look at where they're focusing, it's not on innovation."

Forrester's report offers a roadmap for CIOs to influence and drive innovation in five steps that are similar to those FedEx uses to solicit, evaluate and implement new ideas. When asked which companies tend to get innovation right, Cameron cited FedEx.

"They're the result of the merger of four companies, so they have four companies' worth of back office," he says. "They're driving this integrated front end. Fred Smith made the choice to have this integrated front-end approach to the channel, maintaining standalone P&Ls. Carter and his guys have been able to innovate some of the best technology anywhere."

To overcome obstacles that hinder innovation, FedEx CIO Carter urges IT executives to use their unique perch to push ideas that help the larger business. Technology tends to be a "lens" into the business, he says, which gives CIOs an opportunity--perhaps a greater one than other executives have--to peer deep into the business to spot areas that need improvement.

However, inherent pitfalls remain. Without strong CEO support and advocacy for innovation, the creative forces inside a company can quickly be silenced. Even if the CEO plays the role of evangelist, the CIO must partner with the boss to create and drive the innovation machine.

These executives also have to staff up, bringing in the best creative minds possible and exposing employees to the pressing needs of the business. The CEO and CIO have to justify the overall investment and show solid returns. Above all, they need to make the innovative spirit a core component of the corporate culture.

FedEx does this through its Purple Pipeline Program. Each year, 40 to 50 workers are selected for a six-month management course, based on their performance and leadership potential. After that, they're rotated through a series of positions and departments to give them a broader view of the company's operations and needs.

Sherry Aaholm, FedEx's executive vice president of IT and overseer of the program, says it's common for a software development manager to shift to network operations, and vice versa. The two teams work to compensate for the swapped worker and to train the new one. (Click here more on the Purple Pipeline Program.)

Despite the obstacles to innovation, there is a reason for optimism. Since the most successful innovation programs emanate from the top of the corporate ladder, there is more hope today than ever before, says Eric Sigurdson, who leads the information officer practice at executive search firm Russell Reynolds Associates. That's because today's CEOs, as well as their successors, have experienced a number of technological innovations in the workplace, so they understand the positive effects technology can have on business.

"CEOs have been around disruptive technology and they get it, so it's no surprise that they're challenging their CIOs to get the company to [innovate]," says Sigurdson. "It's the right time."

Also see:

Rob Carter on Getting Executive Buy-In

Building the Innovation Process

How FedEx Trains Workers to Innovate

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