The CIO’s Role in Innovation

Innovation in big companies has always been treated like gold—hidden deep inside secret vaultlike labs and protected from everyone except the researchers in lab coats. When products or services emerge from the labs after years of development—and just one in a hundred does—they fail most of the time.

Faced with this lack of productivity, along with increased competition and shrinking product lifecycles, CEOs are no longer willing to rely exclusively on their internal labs. Asked in a recent IBM survey to rank their most important sources of innovation, CEOs placed internal R&D labs eighth out of nine, far behind the general employee population, business partners and customers. But only half felt that their organizations were collaborating beyond a moderate level. Worse, in another survey by The Boston Consulting Group, nearly half of executives said they are dissatisfied with their companies’ investments in innovation.

Out of all this dissatisfaction emerges a tremendous opportunity for CIOs: to use IT as the glue for a new, more distributed innovation process. The CEO wants to invite customers, suppliers, independent innovation mercenaries, even competitors into the innovation process. But if these groups can’t effectively communicate, collaborate and share information, this new process will be less productive than the old one. Integration—of data, of people, of internal and external organizations—is critical, according to nearly 80 percent of the CEOs surveyed by IBM. Yet fewer than half say their organizations have adequate technology integration to support innovation.

There’s a job here for the CIO beyond providing the glue gun of integration support. With a process that is becoming IT-intensive, why shouldn’t IT design and own the process itself? So far, however, there is little evidence that CIOs are driving the innovation train. “CIOs are the caboose,” says Jeff DeGraff, associate professor of management education at the University of Michigan’s Ross School of Business. “The COO and chief R&D officer have a vision, they appeal to the CEO and they all craft the innovation strategy in an offsite. Then they appeal to the CIO and say, ’How do we support this?’”

Yet with their reliance on IT to enable a broader, more global innovation process, companies may not be able to develop and maintain a long-term competitive advantage in innovation unless the CIO plays a bigger part in developing the strategy as well as executing it. “Innovation more often expresses itself on the revenue side of the income statement, and CIOs have a historical bias toward the cost side,” says Robert Austin, associate professor of business administration at Harvard Business School. “That has to change.”

The increased emphasis on collaboration, process standardization and integration will test CIOs’ ability to lead process change in an area of R&D where they have had little, if any, involvement: the “R” part of early idea exploration and more free-form experimentation. First, they need to figure out how IT can enable many groups to communicate and collaborate without creating a management nightmare. In doing this, CIOs need to create and support standard processes for innovation so that this newly expanded and connected network doesn’t crush productivity. In a recent survey by research company Aberdeen Group, more than 80 percent of business executives identified process definition and standardization as an important strategy for improving their product development performance.

In companies where innovation is a critical part of success, the need for greater IT involvement will give the CIO more knowledge of the innovation process than any other C-level executive. Whether that translates into a strategic voice in the market direction of the company will depend on CIOs’ leadership skills, their personal relationships with their CEOs and these CEOs’ own views of the strategic value of technology.

How the Innovation Process Is Changing

It’s clear why companies are opening up their innovation processes to just about everyone: financial risk. “Today, it’s not uncommon for a competitor to put your product in a lab, reverse engineer it and have a competing product on the shelves in six to nine months,” says Dan Staresinic, global marketing director for consumer products with software vendor UGS and a former product supply manager at Procter & Gamble (read how Procter & Gamble revamped its innovation process). Opening up the innovation process to outside collaborators hedges the risk of shorter product lifecycles by putting more ideas for products into the pipeline. “You want to lower your competitive exposure by having many little investments rather than a few big ones,” says DeGraff. “By doing that, you also maximize your opportunities for new breakthroughs because you’re speculating in many different areas.”

But by expanding the pipeline, companies expose themselves to a different kind of risk: management complexity. For example, inviting customers into the product innovation process means a potential avalanche of data that needs proper distribution and analysis. According to research company Forrester, 95 percent of grocery shoppers said they’d be willing to test new products and provide feedback to consumer packaged goods companies. When hundreds of millions of consumers push the “contact us” button on your website, you need mechanisms for sifting through the data and routing it to people who can interpret it and respond. And response time is critical: Almost all respondents said they would be more likely to buy from companies that reply to their queries quickly.

The stakes are even higher for IT when you invite contractors into the process. They don’t just need to connect and pass data, they need to collaborate with internal employees and each other to avoid duplicating work and to contribute to projects that they are jointly assigned to. “The level of complexity is increasing immensely because you now have to vet all these different ideas and share information with people around the world,” says Robert Cooper, professor of marketing at the DeGroote School of Business at McMaster University.

If not managed well, all these ideas can bog down the R&D process. DeGraff observes that companies can easily become paralyzed by all this creativity and remain mired in early-stage experimentation that leads nowhere.

Addressing this issue requires CIOs to take enterprise integration to a new level. In a study of 1,000 companies, the consultancy Booz Allen Hamilton found that only 94 were consistently more profitable than their competitors while spending less on R&D as a percentage of sales than the industry average. Those 94 have one thing in common, according to Kevin Dehoff, a vice president at the consultancy: high levels of cross-functional integration and collaboration—especially among groups that deal with customers such as sales, marketing and customer service. “R&D could come up with the greatest mousetrap, but if they don’t understand customer requirements then the best mousetrap won’t translate into better business performance,” says Dehoff.

A hint of the advantage for highly integrated companies is evident in the returns from standardizing and automating the “D” part of R&D—product development—on which vendors and CIOs have been working for years. Aberdeen has found that automating product development reduced product costs by 17.5 percent, cut design cycle time by 25 percent to 30 percent and reduced product defects 12-fold.

Of course, product development is focused on speeding a known quantity—a product design—to market. Experimentation is harder to standardize and automate. And IT tools that support research are less well-developed, observes Mike Burkett, a vice president at AMR Research. Yet with better records of past experiments, researchers can avoid dead ends that have already been explored, as well as find information they can leverage and reuse. IT can also reduce experimentation costs by replacing tests such as chemical explosions or car crashes with virtual versions. “IT can drive down the cost of trying things, which speeds up the process and lets you iterate more than before,” says Harvard Business School’s Austin.

A New Role for CIOs

A bigger issue for CIOs than the deployment of technology that supports innovation is the role they will play in improving and managing the innovation process. Innovation has been the province of R&D, with IT in “an optimization role,” says DeGraff. “[CIOs] have been trained to eliminate waste, and that’s become their natural focus.”

But incremental efficiencies aren’t enough in the age of outsourcing and offshoring. When CEOs can pack up a process and its IT and ship them to lower-cost destinations, they are less likely to view process improvement as a route to success. The gulf in thinking between CIOs and CEOs shows up in a recent survey by consultancy McKinsey, in which 43 percent of technology executives said that automating processes is the best route to improving operational efficiency, while the leading response among business executives was improving economies of scale.

CIOs need to shift their emphasis toward breakthrough innovation, especially in processes that increase revenue, like those directly linked to customers. “If you can improve the customer experience, that’s good,” says Austin. “If you can contribute to that improvement in ways that customers are willing to pay for, then that gets you and the company farther.” (Read about how MasterCard’s IT department collaborates on product development.)

The advantage CIOs have of being able to see across all the major processes of the business should enable them to become innovation leaders—if they can learn to think big. “CIOs have to come to the boardroom with a sense of destiny and sell their knowledge and their vision,” says DeGraff. He recalls a recent strategy meeting with a client, during which the CIO demonstrated an expert knowledge of the business and had unique insights on the direction of the company. The problem, says DeGraff, was his focus on making operational improvements and cutting costs instead of how IT could be used to capture these growth opportunities for the business. “The data to identify new markets existed and the CIO was fluent in it. He just had never seen his job as helping people [interpret] trends about where the markets were going to be. He didn’t have a story with a sense of destiny and a point of view about those new markets.”

It’s time for CIOs to get a sense of destiny.