It’s The End of Innovation as We Know It

theEndisNearFor years there has been grumbling about the demise of corporate innovation in the US. Recent announcements bring to light the extent that corporations have abandoned innovation. More and more companies, many whose identity is grounded in innovation, increasingly rely on cost cutting for profitability, and acquisitions for growing their product lines. We’ve found that these two business activities, cost cutting and M&A, have replaced the purpose innovation traditionally held in business.

Over the last 10 years there has been a steady drip of warnings of the demise of innovation in the US and it’s repercussions. Many of these arguments have been focused on the macro trends and the big-picture. They implied the need for or called outright for government intervention in the way of tax incentives, new innovation initiatives, supporting education and other programs. Others lamented the loss of the ‘corporate backbone’ to invest in long term innovation. Demonizing Wall-Street and categorizing it a focus for only on the short-term. They think investors’ interests are too simplistic and because they don’t understand how innovation happens, they don’t’ understand its importance..

Unfortunately, I believe the real answer is easier to understand and a far more difficult problem to address; innovation has lost its competitive advantage vs. other business tools used to increase profits and acheive growth.

Part of the fault lies with the the innovation industry itself; designers and engineers. As designers and innovation teams wanted more autonomy, they increasingly adopted the language of business. Designers wanted to break out of the stereotype of the artist, or the ‘black box’ that nobody understands, nor trusts with decision making.

Designers increasingly framed their contributions in common business terms such as return on investment (ROI), growth and margins. What designers did not understand was, by using those terms they were inviting financial measurement of their contributions in new ways. No longer was innovation satisfied with a budget based on a percentage of revenue (a very traditional metric from the 1950’s to 1990’s). Instead they believed their contribution, if measured on it’s own merits, would receive greater respect and resources. This flawed philosophy was based on data from only a handful of award-winning, break-out products. The industry never took a cross sectional measurement of the return on innovation investments. Further, their world-view dictated that the next big thing was just around the corner, and never fully grasped that businesses would base projections of their future performance on what they had done in the past.

In the CEO’s office the most important decisions are those about budget allocations. For most companies budget items can be classified in two ways. The first classification is fixed expenses. Fixed expenses are the costs of running the business, maintaining operations, most salaries and overhead operations. The other is ‘variable expense, which, as it’s name implies, are discretionary budgets for new projects, marketing initiatives, acquisitions, etc. Fixed budgets are do not generally change much year over year and are often measured as a percentage of revenue. It is only after all the fixed expenses are paid for, does a company begin to make decisions about which ‘variable’ expenses they are going to approve.

What innovation managed to do over the last 10-15 years, was move how CEO’s view their contributions from the first category of budgets to the later. Instead of being considered a necessary expense and something we must do at a level of 3-5% of revenues. Innovation asked to compete against marketing, mergers, and equipment purchases for resources. And they lost.

Even if design and innovation didn’t embrace ROI, I’m sure not much would have changed and innovation would be seen as a variable expense on about the same schedule. Instead it would have been driven by changes in business technology and analytics. This trend probably started with Jack Welsh’s focus on six-sigma at GE. It has been further pioneered by analytics-based companies such as 3G Partners and In-Bev. As business analytics have become increasingly accessible, lower cost and more encompassing, it’s made it easy for companies of any size to scrutinize their operations. Now medium-sized organizations have the tools to objectively evaluate innovation’s contribution, instead of relying on anecdotes. Measuring innovation under the harsh light of business performance would be the end of innovation as we know it.

It’s no surprise that it is CEOs who are ending innovation by cutting its budget. During the budgeting process corporate executives make decisions about which business tools are best able to achieve their financial goals. They rely on a number of metrics, but the most widely referenced is projected ROI. Business analytics tool enable ROI to be tracked and evaluated a number of way. From the late 80’s to early 2000’s innovation budgets had been generally increasing. We believe it was based on the promise, broadly published in the business press, that innovation required nurturing, and innovative companies could achieve an inflection point where innovation efforts would deliver exponential growth and profits.

The fact is, innovation as practiced since the 1990’s has never been able to deliver a positive ROI, neither on a consistent basis, nor through occasional breakthrough hits.

We are now in a period where innovation organizations are experiencing the ramifications of having been measured by their contribution, or lack there of, to business success. The most visible results are dramatically smaller innovation organizations and less participation by senior executives.

The changes have more insidious ramifications as well. We’re seeing the average experience level of innovation organizations dramatically reduced. Companies are replacing their innovation organization headcount, losing knowhow and internal capabilities. Marketing has become the innovation leader, using their discretionary budget to fund innovation development. Those suppliers who continue to innovate have gained stature and pricing flexibility. Startups and crowd-funded companies are commanding higher valuations and their leadership are being given significant roles within their new parent companies.

The question VPs and directors of innovation, R&D and new product development teams are asking themselves is; what is the future of my innovation organizations?

Looking at companies leading the change in innovation organization we can have a good understanding of what innovation organizations are going to look like in five years. They are not going to be large teams staffed with experienced subject matter experts. Their work is going to be closely tied to marketing and brands. In five years innovation organizations are not going to be measured by their patent portfolio. They will only be responsible for a narrow range of NPD functions, and as often as possible rely on materials suppliers for everything from invention and product development.

But that description contains challenging conflicts. For example, if innovation does not conduct short-term NPD because that is a supplier capability, how can they conduct long-term development without subject matter expertise?

We are seeing the companies who have reorganized aggressively able to adapt quickly, deliver higher ROI than they had before, and begin the process of growing again. These leaders have implemented two strategic changes and put in place new tools to support them.

The first strategic change new-style innovation organizations have put in place is a revamped NPD process. These new processes, many of which Newlogic has helped construct, have phases and workflows borrowed from other business functions including purchasing and operations to support the new role of innovation. Although each NPD process is unique, they all have a common element we call an “Inno Engine”. An Inno Engine is the process of continually collecting new ideas regardless of their short-term applicability. The purpose is to build an extensive library of concepts, prototypes, competitive products, technologies etc. that can be used to kick-start any innovation program. Inno Engine is also a good example of the ways innovation organizations are adopting new technologies. Many of these companies rely on an web-based platform, also called InnoEngines, to capture, manage and access their innovation catalog.

Another change we see in new-style innovation organizations is their realignment into service and strategic functions. Their service function is focused on identifying and implementing production ready innovations as a support function to marketing. The strategic function is focused on working with outside companies, under the heading of open-innovation, and to white-label products from smaller companies and startups. Doing this well requires dynamically balancing competing requirements, adjusting headcount and identifying gaps in the innovation pipeline. Innovation organizations are relying on innovation portfolio management tools, such as Newlogic POPS, to gain a better understanding of their organizational performance and evaluate how the various options available to them will affect their ROI.

Innovation has gone through a dramatic shift, going from the darling of US competitiveness to being perceived as a cost-center that slows down new product introductions and drags on profits. Innovation organizations which have quickly adapted to this new reality have thrived and grown by delivering value and ROI. However, they have not done it with business as usual, successful innovation organizations have created new processes, most all of which include an inno engine phase. They have also embraced business analytics tools such as innovation portfolio management to provide greater insights to support their management and strategy.

photo credit: LuvataciousSkull via photopin cc

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