Do you need an innovation lab or just a shift in mindset?

Despite up to 96% of all innovation projects failing to make any return on investment and 97% of large businesses believing digital innovation to be critical to their future success, how do organisations find the balance between challenging the status quo and creating innovative products and services time and time again?

Generally speaking, organisations have 3 options when starting out on their innovation journey - build, partner or buy.

There are trade-offs associated with each option;

• Partnership - offers the shortest time to market, limited impact on internal resources and provides the lowest switching cost. However, this comes at a price - quite literally. Partnerships offer the least control, increased integration costs and are likely to offer the lowest margins as any profits are usually shared.
• Buy - Buying a competitor (or innovative start-up) allows a relatively short time to market and any intellectual property (IP) becomes their own. However, this usually comes with significant acquisition costs and a non-trivial integration headache.
• Build - Generally the most favoured approach (and focus for this blog). Enables internal capability, IP is proprietary and offers the most profitable option. However, it comes with high set up & switching costs and usually results in longer time to market timeframes.

However, organisations often fail to build successful internal innovation functions. They usually have neither the depth of in-house expertise, or understanding of how to set one up, or are not structured appropriately to facilitate repeatable innovation.

Innovation Labs are just one example of how companies have sought to build internal innovation capability. Often touted as the silver bullet to the innovation dilemma; Labs are internal (but independent), free from the bureaucracy and constraints of the legacy business.

However, in reality, Labs also fail to deliver innovative products and services businesses are so desperately seeking. They can become siloed, lack alignment with the organisation's strategic goals, or lack the appropriate funding models.

Vast amounts of money can be sunk into ‘innovation’ programs which result in limited numbers of successful innovations ever seeing the light of day.  It’s often hard to demonstrate return on investment and Labs often get shut down entirely being regarded as a failure.  

Many suffer from an even worse fate; a term Steve Blank calls ‘innovation theatre’ - where a company shows people that ‘innovation’ is happening, but none of which results in tangible outcomes.  

So, whether you're searching for the next £100m business idea, you want to dodge disruptors, develop new products and services or are simply trying to progressively transform a legacy platform, the reality is that if you’ve set up an Innovation Lab, in may not be the right approach.

You don’t need a Lab

Innovating successfully within a corporate environment requires a laser sharp focus and a significant shift in mindset - something that doesn’t necessarily come easily in traditional corporate environments. 

A culture of innovation needs to permeate throughout the organisation and needs to be driven from the top down. The C-Suite needs to create a framework that embraces and encourages innovation, no matter where it comes from. They are responsible for ensuring strategic alignment between the business and innovation, but they also need to be prepared to invest in propositions that may cannibalise the core of the company’s business model. 

The following outlines some key factors to consider when planning a successful innovation function.

Territory definition and its proximity to core

It’s critical to understand your organisation’s innovation objectives. Are they looking for new products & services to maintain/defend an existing business model? Are they looking to build new value propositions in adjacent markets? Or do they want to build completely new businesses?

Understanding this will help to align business outcomes with the strategic goals of your organisation. It will also help you shape what metrics you should track - more on that later.

Innovating in the open with small cross functional teams 

Much has been written about Open Innovation, but the concept of decentralising innovation makes the process collaborative and far more likely to succeed. Labs can’t innovate effectively within a silo. Innovating in the open drives collaboration throughout the business.

Embed small teams of 2-3 people throughout the organisation whose sole job is to focus on experimentation to validate new ideas. Small teams with access to subject matter experts will help keep the team focused and nimble. As they work closely with the business, ideas are likely to be grounded in reality and far more likely to succeed.

Traditionally, there are teams/departments that inadvertently stifle innovation (marketing, brand, and legal to name just a few). Part of their job is to be risk averse - protecting brand reputation, minimising legal litigation etc. By engaging, such teams from the outset will significantly increase the likelihood of success. They may even be encouraged to innovate, get out of the building and talk to customers themselves, which can only be a good thing.

Industrialised experimentation and proof of life

It’s essential to establish customer desirability early (and cheaply). Most innovation labs will be well accustomed to experimenting, but such experiment efforts need to be supersized. By industrialising the experimentation process it’s far more likely you will uncover successful value propositions.

Industrialised experimentation should be an ‘always on’ process. Week in, week out continually experimenting in order to validate hypotheses.

As part of your territory identification, user research (user journeys, ethnography, proto-personas etc) and competitor landscape, you should be able to create hundreds of hypotheses. The key to this is the specificity of the hypothesis.

The more specific the hypothesis, the easier it will be to build an experiment to validate whether it is true or not.

Due to the volume of experiments being run (1-2 per week per team), you must ensure you’re validating hypotheses in the lightest possible way. Sign-ups from simple smoke tests or ghost features should provide data to establish any signals of intent from real customers. Building out technology should not be a concern at this stage - why waste time/money on building something if nobody wants it?

Use smoke tests to identify signals of intent

At this point, you have to be brutal, no matter how much you like an idea. If there is no evidence to support your hypothesis, kill it immediately and move on to the next experiment. Don’t be distracted by confirmation bias - i.e. the ability to embrace evidence that confirms our beliefs, while ignoring/rejecting evidence that casts doubt on it.

Only when you have indisputable data supporting your hypothesis should you look to progress an idea. Only use technology when absolutely necessary to build out the proposition. Manually run processes that at a later point you may automate (aka concierge MVP’s). Throughout building out ideas, maintain a learning mindset and be ruthless about killing the ideas when data doesn’t support the hypothesis   

Metrics

Many teams struggle when it comes to measuring innovation. Some will default to measuring revenue, but this is the wrong metric to focus on. Revenue is a lagging indicator and tells you what has happened in the past. It is also affected by external factors that may have nothing to do with your innovation efforts.

Product success relies on measuring meaningful metrics - a North Star so to speak. To determine your North Star metric you must look at how your product delivers value to your customers. North Star metrics are usually linked to your customer's engagement with your product, and the direction it provides will likely be the single largest driver of growth. Your North Star metric is never revenue.

Once you have arrived at your North Star metric break it into actionable input metrics:

• Breadth - How many active/returning users are taking this action?
• Depth - What’s the depth of their engagement?
• Frequency - How often does each user engage?
• Efficiency - How fast do they succeed?

Mapping these will help you understand your customer interactions and what they truly value. It also helps align your priorities and provide focus for your teams. All efforts should go into moving the needle for this single metric.

By making this metric clear and transparent will ensure those around you also know exactly what success looks like. 

Metered funding

Innovation requires a different funding model from traditional budgetary practices. Metered funding is a tried and tested practice commonplace in the world of startups. Essentially, funds are allocated over a series of rounds, initially based on learnings and latterly on growth.

Metered funding works hand in hand with industrialised experimentation. Small amounts of funds are readily available to experiment encouraging teams to innovate. This process mitigates the risk of running up hundreds of thousands of pounds of investment into projects that will, in all probability, amount to nothing. 

Further, (and potentially larger) funding is allocated only when learnings have been made (i.e. initial hypotheses have been validated). This ensures only propositions that show real potential can progress.

Learn by doing

Expensive training courses that promise to ‘teach innovation’ are just that: Expensive training courses. In my experience, spending hours or even days in workshops won’t radically change your day to day activities. 

“I hope you’ve enjoyed the workshop, now get back to your day job”. 

Such courses usually don’t stick. With an understanding of the basics, it’s far better to just get your hands dirty and give it a go. You will learn far more from your own mistakes than you ever will in a classroom. 

It will be challenging and there will be bumps in the road, but the best way to learn is by doing. Just do it!

In summary

Creating a culture of innovation is hard and you will struggle to do this alone. Building a successful, repeatable, innovation process requires senior leadership buy-in (ideally they will drive it).  

Avoid innovating in silos by creating small and nimble teams that are embedded throughout the organisation.  These team's sole role is to focus on experimenting to validate new opportunities/ideas.

Understand the goals of your organisation. Aligning innovation efforts to these goals will be a crucial factor in the success of any new product or service - winning support for innovations that potentially cannibalise existing products/services will be very difficult unless your organisation is truly looking to disrupt themselves.

Industrialise experimentation. Make hypotheses really specific and continuously run lightweight experiments to validate your assumptions.

Measure only the metrics that matter. Be transparent and define what metrics add real value to customers. Chase these instead of revenue.

Work with your finance teams and set up a metered funding model that encourages innovation with small, readily available, funds to experiment.  As desirable products emerge, release further funds to validate the feasibility and viability of ideas.

You don’t need an innovation lab. You (and your organisation) may just need a shift in mindset.