Technology is transforming our world at an unprecedented rate. New technologies like virtual assistants and augmented reality are changing consumer expectations faster than ever. The impact of cybersecurity breaches is intensifying. And digital enablers are allowing upstarts to steal market share from incumbents in a matter of months or years, rather than decades.
While it is tempting to believe that these disruptive times will eventually stabilize, our analysis suggests that the rate of technological progress will only accelerate. If this year indeed represents both the fastest rate of change we ever have experienced, and the slowest rate of change we ever will experience—as many experts have posited—then this raises a critical question for executives in all industries:
How do I understand the consequences of accelerating technological change, and position my company to capitalize on the opportunities presented by emerging paradigms?
To accomplish this, companies can develop innovation systems that consist of a variety of methods and processes, ranging from strategic foresight to a portfolio of corporate innovation programs. One such program — innovation labs — is gaining steam in corporate America, with some of the biggest and best-known companies opening new outposts focused on developing and scaling breakthrough technologies, processes, and business models.
Through Metis Strategy’s work with Fortune 500 companies and rapidly growing businesses alike, we have identified seven critical factors to consider when creating such a corporate innovation lab.
1. Define the charter
The charter is a concise description of the innovation lab’s objectives and its method for achieving them. But a charter is not just lofty PR: many of the best innovation labs use their charter as a guiding light that provides a deeper sense of purpose and direction. Subsequently, the charter should also clarify what the lab is not focused on.
Consider the differences between the charters of Lowe’s Innovation Lab and of Bayer’s U.S. Innovation Center and Science Hub:
- Lowe’s Innovation Lab: Understand how new technology may play a role in the future lives of customers and employees by thinking about potential applications for disruptive technologies to build an innovation roadmap and rapidly prototype new ideas.
- Bayer Innovation Center & Science Hub: Enable our scientists to reach out to academic institutions and life-science firms to forge new drug-discovery collaborations.
While Lowe’s focuses on identifying and utilizing new technologies to enhance the retail experience, Bayer’s priority is forming partnerships to accelerate drug discovery. Given their differences, it should be no surprise that these innovation labs utilize different metrics, governance models, funding sources, and innovation ecosystems to accomplish their objectives.
2. Identify innovation metrics
Large companies thrive when business conditions are certain and their targets are clear. While execution metrics can measure the performance of existing business models, they are less capable of accurately quantifying progress at innovation labs, where the work is sometimes less precise, longer term, or more conceptual. Kyle Nel, Executive Director of Lowe’s Innovation Lab, has noted that “it does not make sense to apply mature metrics to something in its nascent form.”
Innovation labs can develop a portfolio of innovation metrics to measure not only the results of the innovation effort, but also the preconditions and innovation process itself.
With this focus on measuring both process and progress, innovation metrics help labs assess their innovation maturity, but may also bolster the support of their executive sponsors, especially in the early days. For example, Harvard Business Review notes that “revenue generated by new products,” an output metric, is the metric most commonly used by senior innovation executives. By establishing a portfolio of innovation metrics that also includes input and development metrics, the conversation can shift from focusing solely on results to focusing also on the maturing evolution of the innovation capability. This ability to develop unique innovation metrics has helped Nel push back when Lowe’s executives expect significant revenue growth from new and disruptive products.
3. Employ a process for innovation
Innovation is as much a cultural attitude as it is a business process. A generic approach to innovation may begin by defining the customer and uncovering their unmet need, formulating a hypothesis on what product or service the company can offer to meet that need, and validating the hypothesis by using customer feedback to rapidly experiment and iterate. Further, to foster the right mindset, innovation labs should:
- embrace customer centricity
- experiment relentlessly, with the desire to learn from failures
- leverage new technologies and business models
- accelerate the build/measure/learn cycles; and
- utilize the customer development method and lean methodologies.
That said, many of the best labs develop unique processes influenced by their charter. Consider Lowe’s Innovation Lab (LIL), which uses a narrative-driven approach to identify and articulate opportunities. First, LIL conducts market research, compiles trend data, and collects customer feedback on unmet needs and pain points. Next, LIL shares this information with science fiction writers who create strategic documents in the form of comic books, which follow characters through a narrative arc that illustrates a new solution to the character’s problem. Then Lowe’s executives use the comic books to make prioritization decisions, and, finally, LIL works with its partners to create the solutions introduced in the comics.
Another example of an organization employing a unique process is X, Alphabet’s “moonshot factory,” which is charged with creating world-changing companies that could eventually become the next Google. X adheres to a three-part formula for identifying opportunities: (1) it must address a huge problem, (2) it must propose a radical solution, and (3) it must employ a relatively feasible technology.
Using this formula, X has spun out numerous subsidiaries under the Alphabet umbrella. One of those companies is Waymo, the autonomous vehicle pioneer that Morgan Stanley recently suggested could be worth $70 billion.
4. Who and how to recruit
If companies believe an innovation lab will help them more effectively navigate the waters of disruption, it is essential that they recruit for passion and cognitive diversity, rather than just skill. Labs often include a wide range of technical and non-technical roles, from data scientists and designers to experts in anthropology and psychology. Breadth and depth of both skill set and mindset are essential components of a successful innovation lab that creatively explores new technologies and business models.
Ideal job candidates should be innate risk-seekers, strong questioners and connectors, and comfortable with failure and restarts. Deloitte Center for the Edge Co-Chair John Hagel described people who have these traits as personifying the “passion of the explorer.”
Organizations searching for these passionate explorers will find advantages and disadvantages in looking both internally and externally. Internal employees may more deeply understand the customer, but they also may have difficulty looking at problems from a different perspective. External hires may bring new viewpoints and skills, but recruitment may prove challenging.
Companies can use several tactics to attract talent. Buzzfeed’s Open Lab for Journalism, Technology and the Arts, for example, targets specific individuals and groups based on their past projects. Recruitment efforts have been successful, in part, because Buzzfeed offers company resources that support their creative freedoms. Alternatively, companies can be deliberate in how they share their innovation initiatives with the public. For example, Airbus has a blog that reports news from the company’s A3 innovation lab, Airbus Ventures, and from other teams across its innovation ecosystem. This type of focused communication both targets and attracts an audience of individuals who are the most knowledgeable and interested in innovation currently taking place within the industry, and, in so doing, Airbus can create an informal pool of potential new hires.
5. Establish a funding source and budget
The process for establishing a funding source will differ depending on the company. For example, Allstate CIO Suren Gupta has described how a formal Innovation Council evaluates ideas and allocates funding. At other companies, if the innovation ties closely to a particular business unit, then funding may come from that group’s budget.
Though the specifics will vary, a generic process for establishing funding may include
- identifying and articulating the need for an innovation lab,
- hiring a small, diverse, highly talented team,
- minimizing initial long-term commitments, such as major capital expenditure for office space
- demonstrating the effectiveness of the innovation process by delivering against the charter,
- requesting more funding and resources for dedicated teams that are mapped to value streams, and
- evaluating ROI based on leverageable output, not detailed initial business cases or realized commercial value within a short window (scalable value may take time).
The actual size of the budget depends on whether a lab is building the technology itself, partnering with other organizations, or acquiring a company, product or talent. Amazon and Google have spent millions of dollars developing parcel delivery drones. Meanwhile, companies like UPS and Daimler AG have opted to partner with—and make strategic investments in—established drone makers. This lowers both the risk and the cost of innovation while still allowing the company to develop new capabilities.
Regardless of how funding is established—or the size of the budget itself—it is critical to measure how much money was spent at each stage of the process: preparation (i.e. percentage of capital budget allocated to innovation projects), development (i.e. R&D spending at each phase of development the innovation process), and results (i.e. percentage of sales from innovation projects). As with the portfolio approach to general innovation metrics, the use of financial metrics across the innovation lifecycle reduces the focus on ROI, which can cripple innovative projects in the early stages.
6. Where to locate the lab
Silicon Valley is the quintessential innovation ecosystem. The region’s unique characteristics undoubtedly make Silicon Valley the right innovation ecosystem for many labs—particularly those charged with discovering and/or acquiring startups, or gaining business and technical intelligence about emerging technologies.
Other locations should not be overlooked, however. Cities such as New York City, Austin, and Chicago in the U.S.; London, Paris and Berlin in Europe; Tel Aviv in the Middle East; and Singapore, Shanghai and Tokyo in Asia all offer rapidly maturing innovation ecosystems, each with their own unique advantages and disadvantages.
To determine the ideal location for an innovation lab, consider which ecosystem characteristics (such as those highlighted in the adjacent visual) best support the objectives defined in the charter.
For example, former ADP CTO Keith Fulton (now CIO of Bank Systems with Fiserv) has described how ADP’s innovation lab is focused on creating “best-in-class user experiences.” Accordingly, ADP opened its second lab in Midtown Manhattan, since the proximity to top visual design and creative firms provide high concentrations of the right skill sets.
7. Develop a strategy for successfully integrating innovation
There is one final challenge, even for innovation labs that successfully deliver results in accordance with their charter: integrating the innovation with the core organization. From Kodak’s invention of the digital camera to Xerox pioneering the GUI, there is no shortage of companies that failed to capitalize on their innovations.
To be sure, innovation integration is the culmination of an innovation lab successfully delivering on its charter, so the way in which the company captures the value of the innovation very much depends on decisions that were made along the way. We recommend that executive sponsors and innovation leaders discuss early and often what successful innovation integration looks like. Here are a few key questions to consider:
- Will the innovation become a foundational component of the core organization (i.e. Google Brain)?
- Will the innovation become a separate business unit or wholly owned subsidiary (i.e. Waymo)?
- Will the innovation be spun off as an independent, venture-backed company (i.e. Illumina’s spinoff, Grail)?
- Will the innovation be rolled out in a controlled manner to the core organization’s customers (i.e. Lowe’s Innovation Lab)?
While there is no set template for innovation integration, a definable, well-articulated vision of what the desired success will look like should be a primary priority, not an afterthought.
More than ever before, established companies are struggling to keep up with both the deployment of new technology by their competitors and consumers’ rapidly changing expectations. Careful consideration of these seven factors can empower companies to build an innovation lab that fosters energetic challenges to preconceived notions, creative experimentation with new technologies and business models, and thorough exploration of potential products and services that will enable it to survive—and thrive—amidst the accelerating forces of disruption.