Innovation is an organizational sport

posted by Ravi Arora July 13, 2016

Some organizations adopt innovation as an initiative and do whatever they could to make their employees participate in it. In my view, one of the best ways for established organizations to promote and manage innovation is to position it as a sport and encourage employees to engage with it. For an activity to be given a status of sport, it needs to fulfill some basic requirements.  Below is my point-of-view on why I see Innovation as an organizational sport, which has failed to attract many managers because of some issues.

Like any other sport, there are winners and losers in innovation. Typically, when one starts to invest in an idea, there are likely to be several others who would have thought a similar idea and had begun to invest in it. The one who completes the journey from idea to a successfully completed innovation is the winner and the remaining are losers!

How does it begin?

Innovation starts with an idea, which needs creativity. Once we have lots of ideas, we need to decide the ones that we are interested to invest in. As compared to improvements, innovations have a higher dependence on luck, and hence I call the chosen ideas as ‘Innovation bets’. Ability to make the prediction about future is an important skill to decide innovation bets. People like consultants and future guru claim to be experts making predictions and giving advice – but they do not contribute anything in accomplishing the predictions. For me, they are like palmists who predict the future of individuals but are neither involved in making the predictions true nor do they take any guarantee for their predictions. If the palmists were confident about that their predictions, I am sure they would have found a way of buying stakes in the future fortunes of select people. Innovators not only have to predict the future to decide their innovation bets but also make efforts to realize those bets.

The contribution of luck in realizing the innovation bets is not as high as a winning a lottery ticket. Lottery is 100% chance, although some people believe in numerology and buy the ticket with a particular number. There are other bets like a sports-bet (eg horse racing or F1) in which the bettor is not the player (jockey) but a spectator. To make their choices, bettors analyze the information about the past winners and assess the current situation. There are some sports where one can change positions (modify the bet) while the game is being played. But even in these bets, like lottery, there is no role of bettors in the outcome (let us ignore match-fixing for this discussion!).  This involvement of bettors in making choices and then modifying the bets creates a lot more excitement and engagement for bettors.

Innovation is the only sport where the bettor is not a meek spectator but is intensely involved in winning bets.  The fact that the bettor is on the steering wheel to accomplish the innovations and win the bets makes this sport unique. This uniqueness of the sport makes the bettor (innovator) more responsible and accountable. Winning innovation bets is not easy, it needs a strong ‘resolution’ unlike the new-year resolutions, which have a very low success rate. Unfortunately, my observation on people’s resolution to achieve their innovation bets is similar – either managers do not make a resolution or those who make, rarely accomplish them. The innovation sport suffers at the very start! As innovation practitioners, how do we give innovation a better beginning?

Once a resolution has been made by team to work hard on their innovations bet, they have three choices (a) Share the resolution openly with the relevant/interested people. This is like Promissory-Note (b) Don’t share the resolution immediately with others but decide a date or a milestone to share – similar to Death-will, which is read only after a specific milestone (death of the person). (c) Never share the resolution with anyone. Resolutions made in Promissory notes and Death-will  are almost always fulfilled and hence we need to find a method through which the innovation bets and the resolution of all relevant managers to do their best to win their bets is shared with others.

Why people do not directly engage with this sport?

Most impactful innovations have a much longer gestation time. To ensure that the innovation projects are resourced over a longer time, companies need to give long-term plan more importance – as much as they give it to annual plan. In today’s world, the focus of the organization is on the next quarter and the year, which drives improvement projects. This impatience for immediate results discourages leaders to engage their managers on long-term plan. The annual plan has predominantly numbers in it and is translated into a score-card and goals for the teams and individuals. The variable pay, annual raise and promotions are based on achievement of goals.

Long-term Strategy/Plan is either not made or if made, is not referred after it is printed/circulated. The numbers in LT plan are exponential as that is the expectation from the board. Unfortunately, the LT-plan is not used while making Annual-plan, which is more linear and incremental as compared to previous year. Unlike the annual plan, which is used to derive team/individual goals and drives improvement, Long-term plan, which can drive innovations, is overlooked.

Gurus of Strategic management have advised that the most effective way to focus on LT plans/goals is to break the LT plan into shorter journeys/segments with appropriate milestones and measures. These journeys and measures should then be embedded into short term or annual plans. Can we do the same for innovation bets that should be listed in the LT Plan? Typical measures for Short term plan are Revenue, cost, customer satisfaction, new customer acquisition, market share, employee satisfaction etc. In order to bring Innovation into annual plan, I suggest a new measure called ‘Share of future innovations’ into the short term or the annual plan.  This metric represents the share of future innovations that the company will deliver (innovation bets) as per the Long-term Plan. This could serve as one of the lead measures for ‘future market share’ and ‘profitability’.

Is this sport rewarding?

For individuals: Unfortunately, organizations do not have a system to reward people for placing innovation bets and winning them. Organizations thrive on having defect free operations and take linear targets year after year and meet the expectations of shareholders. Senior leaders and managers are rewarded for achieving predicted outcomes with zero deviation. Rewards in the form of bonuses are given for successfully achieving the annual results.

If organizations do not reward people to play and win this risky sport, why would people engage with this sport especially when they can happily play other safer games.  A few people who enjoy taking risks and are passionate about innovation are exceptions – they always try to innovate. We need a reward system that has a high upside for successfully accomplishing the innovation bets. The longer duration (multi-year) of these bets makes it difficult for organizations to track and decide the rewards. We need to redesign our compensation that encourages innovations as much as it rewards annual performance.

For organizations: Breakthrough innovations help companies catapult into the list of Most Innovative Companies. Have you figured out a fallacy in the methods used to draw the list of most innovative companies and most profitable companies are made? The list of most profitable companies is drawn from the real numbers reported in Profit loss statements. On the other hand, the list of most innovative companies is made using either the perceptions of shareholders or a few individuals. Product innovations have the most influence on this perception. Unfortunately, process innovations, which is one of the hallmarks of established companies and contributes greatly in sustaining and improving the profits, have almost no impact on this perception. This is because the ERP systems are able to capture and report the impact of new product innovations using metrics like ‘Revenue/Profit from new products’. The same systems fail to capture the impact of process innovations that most often reduce the cost. Hence most companies that appear in the list of most profitable companies fail to see their names in the most innovative companies. ERP companies and accounting professionals should get-together to find a solution.

Factors that are important to win innovation bets

As explained earlier, managers hesitate to play this sport because of its inherent risk as compared to other corporate sports. The risk in innovation is in the execution or implementation, which is most difficult part of Innovation. It needs perseverance, focus and sustained resources over a longer time. From the organizations’ point of view, since the resources are always limited there is always a reluctance to overspend resources on any particular innovation… especially if is a dead wood. It is extremely difficult to differentiate between perseverance and over-perseverance, which I call obstinacy. Organizations need to keep a close watch on the team’s transition from Perseverance to Obstinacy.

Obstinacy kicks in because failures are not accepted, and the measurement system penalizes all types of failures. As we want managers to willingly play the Innovation sport, companies need to create a mechanism of identifying potential failures in innovation-bets before obstinacy creeps in and provide the right dose of painkillers to the innovators (bettors).

Most companies think that they are innovating because of laser-sharp focus on innovation but…

Despite the rewards, innovation sport rarely engages people mainly due to the risk and fear of failure. Many companies and managers feel that in quest of stretch targets of the annual plan, their people actively pursue innovations, which unfortunately is not true. Companies use the SII (Standardization, Improvement and Innovation) model to sustain and improve their competitive position. The problem is in considering SII as a serial process. The results from improvements are immediately visible and this makes it a virtuous circle – Business leaders and management demand even more improvements. This results in simultaneous rotation of two contradictory circles – virtuous and vicious. The improvements fuel more standardization and more improvements but unfortunately makes it difficult for innovation to begin. There will never be a time when a company would say that we have done enough (finished) of Standardization and Improvements and hence now let us focus on Innovation. Standardization and Improvements have no limits. One can always aspire for lower defect levels and higher levels of sigma which may not always be beneficial as people may end up spending lots of energy in areas where improvements are not necessary (considering law of diminishing returns and cost-benefit analysis). To address this problem, established companies need to change SII model to IIS. This change (The first ‘I’) will ensure that regardless of the situation, innovation gets some attention.

Many companies who follow TQM, use PDCA to identify and execute improvement projects. PDCA supports the SII model discussed above and is used to drive Improvements. Unfortunately, PDCA hasn’t been effective for delivering innovations. The main reasons are (a) The race to ‘rotate the PDCA cycle’ fast drivers managers to identify projects that have shorter cycle-time thereby making the rotation fast and visible. Innovation projects have longer lead times and cannot rotate the PDCA cycle as fast. (b) The first step of PDCA i.e. ‘P’ decides if the project will lead to innovation or not. Unfortunately, there is no ‘Check’ that evaluates the Plan to ascertain if the organization will deliver sufficient number of innovations. I propose to change PDCA to PCDCA.  The Check after Plan gives an opportunity to change the Plan.

Changing SII to IIS and PDCA to PCDCA will happen only if there is an explicit demand from business leaders to innovate. How do senior leaders manifest this demand? The only way for them is to take some risks! The demand to innovate can be best manifested in the Long term (LT) plans of the company. Unfortunately, companies focus only on annual plans but never prepare long-term plans that clearly spell out the innovation bets.

I will present many other details of this sport (Creativity, Patents, Leadership role, Culture, Performance Appraisal, Role of CFO etc. ) after a year.