Tuesday, July 28, 2009

Designing An Innovation Incubator To Prevail Over Innovator's Dilemma

The large scale software companies often deal with the tension between incremental and revolutionary innovation. They know that if they only keep listening to their customers' requests the very same customers will put them out of the business. Clayton Christensen has captured this phenomenon in The Innovator's Dilemma. Over a period of time these companies have managed to execute the incremental innovation really well to deliver the same software release after release and occasionally introduce new products. However most of these companies struggle to incubate revolutionary innovation inside the company since it is fundamentally a different beast. The executives are often torn between funding the revolutionary initiatives to ride the next big wave and funding the incremental innovation that the current customers and the market expects. It is absolutely imperative for the executive management to differentiate between these two equally important but very different types of innovation opportunities. Many companies have set up in-house incubators to bring revolutionary innovation to the market but in most cases the incubators are set up as yet another department inside the company that shares the same legacy and bureaucracy. Following are some suggestions on setting up and running an incubator to avoid the innovation disappear down the rat hole:

6x6 cubicle in Iowa won't cut it: There is nothing wrong with Iowa but I won't build an incubator there. Pick a location that emanates entrepreneurial spirit, attracts talent, and is surrounded by good colleges. Scout for a location that has good work-life characteristics where people feel the energy and have social outlets - pubs, hiking trails, good restaurants etc. San Francisco and Palo Alto in the Silicon Valley are a couple of examples of such locations.

I cannot overemphasize the impact of an inspirational physical space that fosters innovation and drives people with insane urge to be creative and build something disruptive. Ditch Steelcase and shop at IKEA. Have a loft-like set-up with open seating, project rooms instead of conference rooms, and have all the furniture on the wheels. Can you write on all the walls? Have alternate comfortable seating all over the places - bean bags, red couches, chairs and coffee tables with tall bar stools. Innovation does not happen in a cubicle. Have an entire team paint the loft with bright colors as a team-building exercise. Pay a mandatory visit to IDEO and d.school in Palo Alto if you haven't already been there.

No process is the new process: The incubator should not inherit your organization's legacy processes. You cannot expect your employees to behave differently to solve a problem if they are restricted by the same process overhead. Throw your application policing process out of the window and let people experiment with whatever works well for them. One of the main reasons why incubators fail because they rely on the organization's product roadmap and capabilities. Don't pick up any dependencies instead simply consider your organization's capabilities as one more source that you can evaluate for your needs. Use open source as much as you can, build your own partner relationships, and OEM whatever you can.

Pizza-size multidisciplinary teams: Can your entire product team be fed on two large pizzas? Smaller and tighter teams reduce the communication overhead, churn, and produce amazing results. Don't follow your corporate headcount calculations. Go for smaller teams. Hire I-shaped and T-shaped people to form a multidisciplinary team. Have a good mix of internal people who understand the business that you are into and the external people that are entrepreneurs or have worked in incubators. Get help from the external recruiters to find the right people since the internal recruiters may or may not have expertise to find and hire the kind of people that you are looking for.

Be agile and design think everything: Design thinking and agile methodology empower the teams to apply an ambidextrous and iterative approach to take on the revolutionary ideas in highly ambiguous environment. Encourage wild ideas, defer judgment, and be iterative. Be visual in storytelling, stay close to your customers and end-users, and have persuasive, catalysts, and performance design. Focus on useful over usable. Have a good-enough mindset and ship often to get continuous feedback to keep improving. Iterate as fast as you can and keep your sprint cycles small.

Seed, Round A, and Round B: This is where many organizations get hung up on an upfront $200M business case to qualify the business opportunity as incubation-worthy. If all the start-ups required to have a detailed upfront business model we would not have had Twitter, Facebook, Google, Craigslist etc. The same incremental business case mindset simply won't work for revolutionary innovation. The disruptive innovation has characteristics that many people haven't seen their in their lifetimes. The organization need to adopt the VC model and embrace the high risk high reward business environment. There will be plenty of failures before you hit a jackpot but that's the fundamental premise of VC funding. Have a separate budget and an investment decision process that provides autonomy to an incubator to make their own decisions without going through a long chain of command. Have multiple rounds of funding to ensure that you are tracking the potential of the innovation right from the seed to the maturity.

Explore all exit strategies: Don't expect to go-to-market with everything that comes out of an incubator. The mainstream product teams in your organization may or may not embrace and support the innovation citing the reasons "not invented here" or "too radical". Focus on your customers and success stories. If you are successful people will come to you instead of you selling the outcome to the organization. Be courageous and kill the products that are not working out and experiment with other exit strategies such as spin-offs, outright sale etc. Try to keep the product portfolio moving. High volume and turnover is a good thing for an incubator. Financial success is not the only success that counts; happy customers, re-invigorated organization, and global visibility as an innovation player are equally important KPI.

Reward high risk behavior: People work for uncertain and highly ambiguous projects for two reasons - higher reward for higher risk and passion to build something new. Design your compensation structure that is fundamentally different than your corporate title-driven compensation and includes a generous equity option. The titles don't mean much when it comes to an incubator. What really matters is the skills, attitude, and the knowledge that people bring to the table. The career path in an incubator is very different than a conventional corporate ladder. Make sure that all the people that are part of an incubator truly understand what they are signing up for and are passionate for the work rather than simply waiting to be a "Chief Innovation Officer".

5 comments:

dsm said...

Very well written blog/article.

Mike said...

I would add that you must have a BHAG that everyone on the team believes in (the what) all the way from the innovation owner to the individual team members.

Mark Ridgwell said...

Comprehensive article, thanks. SaaS / on demand models are a necessary shift from protracted and expensive field sales models which have been on the decline for some time - well, since the advent of the internet actually.

Best regard,
Mark

Chaz said...

Would you claim that SAP has an effective Innovation Incubator? If you are talking about the GBI, I would say most definitely NOT.

Chirag Mehta said...

Hi Chaz,
As I have already mentioned in the disclaimer - this is my personal blog and the views expressed are my personal views and not of my current or past employers'. I have no comments on SAP's incubator and the post does not claim anything about SAP's incubator. However being an SAP employee I can put you in touch with the people who run the SAP incubator and perhaps you can get more information and discuss your views with them.