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Over the last one year I have been fortunate enough to consult CEOs /CxOs of Fortune Global 1000 companies across different industries. My clients include a F500 retailer, a major transportation company, a retail bank, one of the largest health insurers and a very well-known media company. All of them had a common underlying problem — they are scared of the next “Uber” or “AirBnB” or “Netflix” disrupting their respective industries and their own businesses. Almost all of them think they need to “innovate” but they are struggling.
Some of them don’t even know where to start. Some have made some progress, but a little directionless in the way. Some have done well but unsure what good looks like! Working with these seriously talented Chief Officers of these fantastic companies made me wonder what are they doing wrong and why. I will try to summarize my findings in this blog. Please note I won’t be using any consulting jargon and won’t present you any stats/charts. This is purely based on my first-hand experience.
To me, there are 6 key barriers to Corporate Innovation.
- Lack of Speed
Yes, the first reason is speed. Most of these big companies are terribly slow in doing new things in new way. What does “slow” mean? It means time to respond to an email, it also means time to sign an NDA. It means time to deliver a new product from ideation to launch. It also means time to recruit a talented candidate. Some companies take 2-3 months to recruit a candidate! In this day and age, that’s unpardonable.
A friend of mine, who is a co-founder of a start-up, was invited to partner with a F1000 company. The company took 3 months to sign a simple NDA and by that time, my friend lost interest and most importantly, confidence in the potential partnership. Talk about product launch — most big companies have heard of Agile, Scrum and Lean Start-up etc. But how many of them actually follow those methodologies and launch product at a break-neck speed. Very few.
The reason is their convoluted process and most importantly, their fear of getting stuff wrong! They want perfection, they want to save their jobs and bonuses and promotions and their is little margin for errors in most of these big companies. Imagine Zuckerberg or Bezos worrying about launching something imperfect! They built their businesses by launching imperfect stuff fast, took user feedback and improved it even faster and then again and again and again ….
Corporates do not operate like that. They are scared of mistakes. And that’s what makes them slow. By the time they launch a new business, they are 24 months late! We hosted a F500 CEO to Bay Area to meet some “digital disruptors” for potential partnership. After one week in the Valley and seeing these disruptors in action, the CEO admitted that there are two main things killing his business — Speed and Culture.
2. Lack of CEO support
You will notice that in the first line of the blog I mentioned CEOs/CxOs in bold italics. I did it for a purpose. I just wanted to differentiate CEOs from all other CxOs of the organization. Every time we tried to advise a Chief Innovation Officer or Chief Strategy Officer or Chief Customer Officer or Chief Digital Officer of a F1000 company without clear mandate from the CEO, it did not end well. Either the project stopped because their budgets shrank, or they lost their jobs (seriously!) or they couldn’t prove to the Board the value created by innovation or they just delivered some kind of mobile app which no one cared about or nobody in the Business Units (BUs) understood what they did!
In contrast, all our successful innovation projects share one common theme — we got CEO’s buy-in first before any other CxO! The (harsh) fact is most of the “other” CxOs responsible for innovation do not own a billion-dollar P+L. They don’t have thousands of people working for them and they don’t have hundreds of millions of budget. In fact it’s the opposite. These poor execs are either transferred from highly-performing business units or recruited from outside to do “new stuff”. They are not empowered financially, resource-wise, responsibility-wise. No one takes them seriously until they deliver something mind-blowing. They are under tremendous pressure of delivering “new stuff”, “new money”, “new growth” without the proper support from top-down. It doesn’t work. Never will.
3. The CFO and the ROI problem
This is possibly the toughest problem to overcome in my opinion. In many projects, we got all the necessary support, we answered the “WHY” question (i.e. why do we need to innovate?), we answered the “WHAT” question (i.e. what do we innovate?), we answered the “HOW” question (i.e. how do we execute this innovation?) — but we always stumbled on the “HOW MUCH and WHEN” question (i.e. how much do I need to invest and when can I see a nice return on my investment?).
The big company CFOs are financially trained, for all good reasons, to care about ROI. That’s their job. They have to care about the Goldman Sachs analysts, the quarterly figures, the EBITDA, the ROIC, the P/E ratio, the shareholders and all that. And we respect them for that. But it works in a different way in the new digital era. Here you invest to get traffic, engagement, MAU, DAU, session time etc. etc. before you even start thinking of a viable monetization model. Imagine a seed investor asking Pinterest’s or Facebook’s founder in its early days about a 5-year EBIT forecast — that could have killed the business in the early days.
In other words, ROI mindset “nips innovation in the bud”! After getting the support from the CEO, the second most important thing to execute corporate innovation is to get your CFO believe in with a new set of metrics and manage his/her expectation. In one of our projects, we took a reluctant CFO to Silicon Valley to meet some VCs. Before flying, we gave him Eric Reiss’s The Lean Start-Up and requested him to read the “Innovation Accounting” chapter with special attention. In few days, we got the CFO in to a “valuation mindset” by showing what could the valuation of the new innovative venture be in next 2–3 years even if it doesn’t earn a single penny of revenue! We showed the CFO examples from the industry where start-ups coming from nowhere increased their valuation by 7x time in 15 months!
4. Lack of understanding that managing innovation is more of an art than science
Many incumbents care a lot about “innovating”. They have Chief Innovation Officer, they mention “innovation” /”innovative” all these kind of words 20–30 times in their annual report. However, if we take a step back, we might see that the founders of the most innovative start-ups could not care less about innovation! In fact, “innovation” was the last word in their mind when they started their journey. They rather got very passionate about solving a particular customer pain point. And “innovation” just happened as a by-product.
Elon Musk did not invent SpaceX because he wanted to “innovate”. He got rather passionate about making humans a “multi-planet species” and reduce the chances of our extinction. He genuinely believed in the threat that human beings are facing from a potential nuclear war or a comet-strike or a genetically engineered virus or catastrophic climate change — and he acted on it by finding extremely talented people who believed in his “crazy” vision! So for big corporates, they need to
- “stop innovating!”
- start obsessing about “customer journeys and experiences”
- find some customer pain points they are desperate to solve and delight their customers
- connect this “innovation intention” with the company’s mission and vision and then articulate the vision clearly and passionately to employees (and potential employees)
If you look at the charter /mission statement of different corporate innovation arms, you will find different goals. One company says “Within X years, Y% of our revenue will come from new innovative products that do not even exist today”. Although this mission statement sounds quite rational, it does not have a motivational or inspirational appeal that will bind employees in a shared common vision of solving a problem they all passionately believe in.
I personally think true innovation only take place when a company can identify few “hot spots” or “pain points” or “gaps in the market” or “big ideas”, then recruit some extremely talented people internally/externally who believe in those ideas as if those were their own and ready to work hard to solve those problems, empower them, give them the right incentives and let them go do it. Do not tie them down with a lot of processes and frameworks and weekly reports and milestones and checkpoints and KPIs. Innovation is a process of creative destruction — it’s chaos, it’s unstructured by nature. Imagine throwing process on Picasso!
5. Failure to identify and adopt the right structure
One of our clients created an internal incubator for corporate innovation. These incubator crowdsources ideas from employees, filters them, short lists 2–3 ideas and then incubates those ideas to develop new digital ventures. They resourced the teams with internal people. These people are smart, they are driven, they have deep industry knowledge.
However, most of them did not have any prior experience in venture development, customer experience design, Agile DevOps, Go-to-market strategy or monetization in digital. In addition, they had their day jobs to do — so effectively they were executing innovation part-time! Inspite of all the right intentions and funding, the teams did not progress far.
So the question comes, given you do not have capabilities and experience to develop new digital ventures, should you rather select a different model more appropriate for you? To me, there are 5 major structural options for executing corporate innovation:
- BUILD internal ventures i.e. Corporate Incubators like Google X
- BUY early-stage / growth-stage start-ups or even established companies i.e. corporate development /M&A like HP
- INVEST in early-stage /growth-stage start-ups i.e. Corporate VC like Unilever Ventures
- PARTNER with start-ups, big firms, Universities, research labs, consulting companies, venture development firms. Sometimes you partner to source specific skills /expertise, sometimes you partner to get access to distribution, sometimes you partner to get hold of amazing products /services that augment your business, sometimes you partner to capture new market, sometimes you partner to scale a start-up by giving your own distribution etc.
- INTERNAL R&D
Each one of the options above require very different kinds of skills and capabilities. You need to ask yourself which one works for you the best (could be a combination). For an example, if you do not have any experience in acquisitions and successful post-M&A integration, think twice before buying a start-up!
6. Inability to attract and retain the right talent
I remember being a meeting with an well-known investor and a retail CFO in San Francisco. The CFO was concerned about the fact it is very hard for her company to find right talent to execute innovation. He asked how can I convince a smart digital-savvy talented individual to join a traditional retailer? Why wont they join a cool start-up or a tech firm or something like that? Well there are two parts of the argument — finding talent internally and externally.
- Internal talent — Many large companies underestimate their biggest asset — the employees! Most of these companies do not have the right structure to identify, empower and mobilize the potential “rockstars” or intrapreneurs. These people either get frustrated with the norm and leave to execute their own big ideas or keep working in a mundane job for the rest of the lives. This is waste of human potential /waste of tremendous opportunities. Before scouting outside for talent, companies should take time to unleash the internal Kalanicks /Cheskys — and trust me, you will be surprised to find many of them getting wasted on shelves and crying out loud to be “found”. If it’s not you, it would be somebody else!
- External talent — It’s true that large traditional incumbents look comparatively unattractive to cool tech firms /start-ups when it comes to attracting talent. However, not every person is obsessed with working for a big brand. In fact, many of them are looking for a job where they can make a real “impact”. If you join AirBnB or Uber or Palantir today, the chances of you making an “impact” could be much less than what you could have achieved in a corporate innovation role in a boring old bank or retailer or healthcare company. Problem is that not many big companies have articulated this impact issue passionately and truthfully to their potential employees ! Companies should not also underestimate the power of “Sharing Economy” and attract great external talent (voluntary or paid) by passionately sharing their idea in these platforms and asking for help.
Most of my VC friends agree that while making investment decision, they care more about the skills, experience, education, attitude and motivation of the founding team members than the business itself. Hence, big corporates need to think of the right incentives to attract, motivate and retain right talent — whether they are external or internal. It could be financial incentives (e.g. stocks, options, cash bonus, promotion, equity, pre-defined “exit” etc.) or even non-financial incentives (e.g. recognition by the CEO).
Good news is that big incumbents have lot of assets and capabilities which start-ups will “kill to have” such as established brand, customer data, employees with strong customer and market knowledge, cashflow, strong balance sheet etc. One of my global media clients has hundreds of millions of MAU (monthly active users) and they are keen to come up with innovative business models around that.
Just imagine how time-consuming and how costly (and what are the odds?) it is for a start-up to reach ~100m MAU. If this client of mine takes appropriate steps to remove the above mentioned barriers and moves fast to capitalize on it’s amazing asset of ~100m+ MAU and a strong brand, we will soon get to know about a fine example of successful execution of Corporate Innovation.
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