Today, the viability of most businesses now depends on digital strategy. Technology is now a primary competitive advantage within most industries and will determine the long-term success or failure of a firm.
This reality (and perception) has not always been the case. Historically, information technology has been viewed as both a commodity and a cost center. One must only go back to 2003 when Harvard Business Review published articles with titles like, “IT Doesn’t Matter,” arguing that information technology would become a ubiquitous shared service like electricity, dissuading companies from making technology central to competitive strategy. And in some ways, that prediction has proven true. The base infrastructure of corporate information systems, for example, cloud computing and SaaS services, looks a lot like a utility. However, the opposite trend has happened within software engineering more generally. The software applications and products currently being developed on top of cloud platforms are where the real action is happening. If you want to understand the trajectory of companies poised to grow, look at the intersection of business strategy and digital innovation.
The good news is that we clearly understand where we need to make investments. The bad news is that we are facing some headwinds. Currently, for companies based in North America, 70% of IT budgets are allocated towards the maintenance of existing infrastructure and operations, leaving only 30% available for innovation and other activities focused on new revenue streams. Yet from the same report, 88% of CIOs say their focus is increasingly becoming more digital and innovation-focused. One way to depart from a keep-the-lights-on budget approach is to establish an innovation lab. Doing so sends a message to various stakeholders like employees, investors, and potential recruits that growth through technology is a priority. Beyond signaling, innovation labs enforce discipline around new product development.
How to create a successful innovation lab:
Many believe that digital innovation only happens in an environment where processes and measurements are suspended, therefore freeing up individual creativity. Experience from the field proves otherwise. Innovation is a discipline that works best through a method. However, the execution model of an innovation lab is entirely different from that of ongoing operations. Innovation labs need a clear blueprint, yet one that is noticeably different from the home office.
As a guiding principle, innovation labs should primarily focus on new product development. A lot is packed into that phrase. It includes, at a minimum, idea generation, implementation, and validation—though not necessarily in that order. The approach is both iterative and collaborative. It is not unusual for one phase to feed into another. In fact, each can be viewed as a potential input and an output for other phases. For example, a finding from validation testing might inform future engineering decisions (implementation) or even kick off an entirely new hypothesis about customer behavior (idea generation). In this model, teams are comprised of members across disciplines and organized around a product. In contrast to the corporate model: where departments are grouped according to job function under an innovation model, cross-disciplined teams are centered around a product. These teams work collaboratively. They leverage the unique expertise of each member along the life-cycle to refine a product. Usage of the word “lab” is intentional. The team-based discovery process resembles the pragmatic approach of the scientific method.
The most successful innovation labs have a healthy tension between themselves and their parent entity. On the one extreme, those that have too much autonomy risk having output disconnected from the mission. Clever product innovations serve little use if they do not fit into a company’s overall business model. On the other hand, an innovation lab tightly coupled to its parent can begin to look a lot like an expensive satellite office. A smart balance is needed to be effective. Some aspects must be unquestionably universal. Company management should be uncompromising around everything we typically associate with the “why” behind a company. Vision, purpose, and strategy should remain consistent. All product decisions, from inception to completion, should be scrutinized under this template. However, the “how” and the “what” can have a great deal of flexibility. The physical environment, people, team dynamics, methodologies, and really anything related to execution, can and should be different to serve the unique goals around innovation. When traveling between the two entities, the feeling of culture shock should be evident.
Lastly, any discussion on innovation labs would be incomplete without a note on accountability. Entrepreneurial activity requires feedback to thrive. Two metrics stand out as practical yardsticks: new product sales as a percent of revenue and gross margins on those sales. The first ratio measures quantity, while the second determines quality. If we are going to make sizeable investments in innovation, we should expect revenue streams to diversify in a meaningful way. Additionally, if a product does not generate higher margins, either through increased pricing or decreased costs, then how is it inventive in a competitive sense? Long-term, if both of those metrics are not moving in a positive direction, it is a sign that innovation is likely not happening.
Companies are increasingly realizing that IT does matter as a competitive advantage. Today’s technology leaders face the dual mandate of maintaining existing operational infrastructure while investing in strategic growth initiatives. The innovation lab model can help organizations rebalance portfolios in a way that is likely to outperform in the new economic landscape. However, like all initiatives, companies must be intentional about the rollout. The above recommendations can help those firms planning to make digital innovation central to an overall growth plan.
Improving has helped build multiple innovation labs for our clients, and if you are currently working in that space, we can help. I encourage you to reach out.