As companies pursue digital transformation initiatives, one of the strategic questions that often arises relates to the organizational model for programmatically managing these initiatives from strategy to execution.
While it’s well recognized that digital transformation initiatives have to be a team sport, with sponsorship, involvement and collaboration of many key stakeholders from the CEO to the chief marketing officer, chief digital officer and chief technology officer, another key consideration is the role of corporate innovation programs.
In one form or another, most organizations have had a corporate innovation program for many years now. Today’s innovation objectives, however, are all gravitating towards digital transformation. So how should an existing corporate innovation program change or be fine-tuned to most effectively support digital transformation both now and in the years to come?
Here’s five key points which I hope will provide some useful considerations and guidance:
1 – Firstly, regardless of how it’s organized, the innovation program should deliver the transformative outcomes required of digital business
In some companies, such as many startups and well-recognized high-tech “innovators,” innovation is a core part of their corporate DNA and is simply embedded in the business. It’s viral across the organization and a part of “business as usual.”
Other organizations, particularly larger enterprises, often accelerate innovation by way of a structured program. The various options include 1) specialized departments (e.g. traditional R&D departments, incubators and corporate venture groups); 2) the formation of dedicated business units around distinct growth horizons (e.g. the three horizons framework featured in The Alchemy of Growth); or 3) creating hybrid models where innovation is collaboratively managed by multiple departments.
According to Steve Hill, vice chairman of strategic investments at KPMG, there are two key areas to organize around innovation: one is embedded in the business and the other is distinct and protected from the business. In the first area, incremental innovation should occur within the business and support the kind of viral innovation that does not need heavy top-down involvement. In the second area, disruptive innovation should be distinct from the business and have the protection and centralized funding it needs to succeed.
The general idea is to carve out distinct business units or departments to focus on more disruptive opportunities and investments and to avoid the innovator’s dilemma. Basically, “successful companies can put too much emphasis on customers’ current needs, and fail to adopt new technology or business models that will meet customers’ unstated or future needs.”
For both of these models, it’s important that the programs deliver on the business outcomes they aim to realize. It’s therefore worth re-visiting the measurements and metrics around your innovation program, and adjusting where necessary. A common approach to innovation metrics, based on extensive analysis by the Corporate Executive Board, is the pipeline model where you look at the pipeline mix (in terms of the sources, categories, quality and quantity of ideas flowing into the pipeline), the pipeline productivity and health (the flow rate in terms of duration from initial idea to commercialization, and the amount of funding provided) and the business outcomes (in terms of increased revenues, reduced costs, increased customer satisfaction and so on).
In the era of digital business, you may want to accelerate (i.e. shorten) your average cycle time for commercialization or operationalization and also change the relative mix of what goes into the pipeline, what gets commercialized and how you measure it. According to Steve Hill, the cycles of innovation are very different today and organizations can’t buy time at the expense of their long-term sustainability.
2 – The innovation program should adjust for the scope of digital transformation initiatives
The corporate innovation program should contribute to delivering the desired business outcomes related to digital transformation. This means its focus may need to be adjusted in terms of the degree of innovation (i.e. disruptive vs. incremental) and the type of innovation (i.e. business model, process, products, services and so on).
It’s likely your innovation program already takes a holistic view across all these areas, so the change needed may just be in terms of relative priorities. For example, if your existing program places equal emphasis on identifying and incubating highly disruptive ideas as well as more incremental ideas that can benefit your business, then you may just need to amplify the focus on the former.
So, precisely what’s the right mix of disruptive versus incremental innovation to support digital transformation initiatives? According to Steve Hill, there’s no ideal mix since it will vary considerably from company to company and where they are in the “invest,” “sustain” and “harvest” cycle within their business strategy. However, this is an interesting area for board member discussions since it takes the innovation strategy of a company beyond the typical “innovate/maintain” investment mix discussion into specifics related to their more disruptive and transformative investments.
3 – The innovation program should be driven by what’s important to customers
Since the majority of digital transformation initiatives are focused on re-thinking and re-inventing business models and processes to improve the digital customer experience, it’s important that the innovation program is driven by what’s impactful to customers.
There are many ways to accomplish this alignment ranging all the way from customer-facing innovation workshops for collaborative innovation with your customers and prospects, to how you score and prioritize your innovation initiatives, to how you continually adjust your program based on customer feedback.
What I’ve found in conducting hundreds of innovation workshops over the years is that customers are typically interested in two fundamental areas of innovation. The first is innovation within the current scope of your companies’ products and services, and the second is in helping them with innovation above and beyond the current scope of your relationship.
They’re often interested in how your company can help them outside your current scope of work. What additional innovative ideas can you bring to the table to help them in their business? If your company is a B2C operation, then the equivalent question your customers may be asking is what else can you bring to them beyond your current product or service offerings? Going back to the innovator’s dilemma, they’re basically asking you about their unstated and future needs and providing a green light for you to collaborate with them.
4 – Ensure strong connections and innovation leadership within the business
Growth horizons for an organization are usually described as horizon 1 (core products and services typically comprising 70% of the company’s annual investment), horizon 2 (emerging businesses and adjacencies typically comprising 20% of the company’s annual investment) and horizon 3 (new, transformational initiatives and “viable options” typically comprising 10% of the company’s annual investment).
As your latest product or service innovations gain traction in the market and mature over time, they often move from horizon 3 where they’re initially incubated, to horizon 2, and then horizon 1 where they become a mainstream source of revenue for the organization. This may well involve a transition of these innovations from your innovation centers or “skunkworks” into the core parts of the business.
According to Steve Hill, as you transition these innovations to the business, it’s important to know your innovation leaders. You need to know who’s in the business, whether or not they’re pre-disposed to be innovative and if it’s in their job description and performance objectives. If all the above are in place, you can then measure the business, and its leaders, in terms of their ability to drive innovation.
A recent study from the Corporate Executive Board, confirms Mr. Hill’s position. It found that leadership quality impacts innovation potential. In fact, they found that staff of effective managers had a 34% higher “innovation potential” score on average, and that most companies performance management systems did not identify or reward the competencies that had the largest impact on innovation potential: namely “risk taker,” “customer empathizer,” “idea integrator,” “influencer” and “results seeker.”
5 – Innovation program itself should be digitally transformed
Finally, the innovation program itself should be digitally transformed. Just like any long-term initiative within an organization, it needs to continually evolve and adapt to meet the needs of the business at any specific time. Elements of your innovation program may come and go year-over-year based on their level of adoption and benefits realized by the corporation. Some examples are elements such as innovation portals, databases, communities, scouts and brokers and so on. You can expect these to constantly evolve and adapt.
The elements that have the best longevity are typically those that are designed to allow for intrinsic customization. As an example, innovation workshops that have a methodology and toolset designed to allow for a high degree of customization in terms of the key focus areas for each workshop can easily support a wide range of workshop topics and objectives over time.
While the content of the innovation ideas that flow through each workshop may be very different, the design principle should be such that the structured approach and tool set within the workshop methodology can be consistent and provide the necessary levels of quality, consistency and repeatability.
To digitally transform your innovation program, you can apply the same thinking that you apply to your externally focused innovation activities. For example, think about how the SMAC stack can enable stronger social collaboration, mobile access, improved analytics and cost-effective and agile cloud delivery. Think about how innovation processes can be re-designed to be more customer-facing and produce results within faster cycle times.
Taken as a whole, you’ll see that the innovation program should be re-visited in light of your digital transformation objectives in terms of how it’s measured, what types of innovation you focus on and their relative priorities, where and when you create key touch-points with your customers, which business unit leaders you collaborate with to drive innovation and finally how you apply technology to transform your program’s capabilities. By assessing and then fine-tuning all these variables, you’ll be able to maximize your digital business outcomes in the years ahead.