I saw a couple of things online about innovation management that got me thinking about managing innovation and managing the cost of things that don't work.
First, James Gardner's post on how to select an innovation consultant. And then a discussion in LinkedIn about benchmarks for tolerable levels of failure in innovation.
Even venture capitalists don't like to fail
If we looked at the world of venture capital, the ratio of invested-to-success is quite low - perhaps one in 20 to 25 becomes a real commercial success -- another five are "living dead" operations that have little potential for high returns, and the rest do not return the capital invested. This is one reason VCs seek opportunities that have potential for massive returns -- because the winners have to make it big to make the whole portfolio successful.
Key idea: Only VCs are in the venture capital business. The real risk tolerance of executives in operating companies is much lower than this. And the returns possible from successful innovations in many businesses can't cover this level of loss.
Even poker players don't go all-in right away
However, even Venture Capitalists and poker players phase their investments.
In innovation, this is often done using a stage gate model. (Here's a nice overview of stage gate)
As James and others advocate, it's better to manage innovation as a portfolio of ideas at various stages of development. I have found Rita Gunther McGrath's ideas about real options reasoning very helpful in this respect -- even as a guiding principle.
Even without all the academic language, it just makes sense to say you have ideas at various stages of development, and you limit your investment accordingly.
Key idea: Good managers naturally limit their exposure to risky undertakings. A good innovation process puts some structure around this idea.
Goals and scope are crucial
No organization wants innovation in every area of their business all the time. No one has the people and resources to sustain this, for one thing. For another, you may have just launched a business model, and want to give it time to run in the marketplace, not be changing it every quarter.
The organizations that are the best innovators are clear about where they want innovation: they don't just say "go forth and innovate."
For example: advertising agencies want innovative thinking in the work, but not necessarily in the process that produces the work. Investment banks want innovative thinking in the creation of deals, but not necessarily in how the deals are documented.
Key idea: Leaders need to be clear about where they want innovation, and what kind of innovation they are looking for. Do you want innovation in internal processes, such as expense handling? Or in customer-focused areas, such as new products or creative marketing?
Process is also pretty important
An innovation process doesn't have to be a bureaucracy. It just means people know what to do with an idea, and that is some method for determining how good it is, and how to go forward with it.
Without some kind of process, you will lose many of the ideas created. And all the cross-functional teams that gave up time to help in the creation will wonder what the point was.
Key idea: Organizations have processes for everything: hiring, firing, payroll, capital expenses, marketing campaigns. If you have no process for innovation, you either have no innovation, or it's chaotic.
What's your alternative?
The alternative to having a managed innovation process is to just hope for the best. If an organization does not have some approach to becoming better, it has decided that the status quo is acceptable. When you put it that way, you realize that every organization DOES have an innovation philosophy, whether it's explicit or not.
In business school, I learned to call this option, and evaluate this option, as the "do nothing" option.
Key idea: A non-choice is always a choice, and this is true of innovation,too.
Rome wasn't built in a day, and neither is your innovation process
- Develop a process for capturing and managing ideas
- Develop some guiding principles for evaluating ideas that are in your idea pipeline
- Use risk and cost-containment measures for testing new ideas, including marketing research, prototyping, pilot tests, and good project management practices
- Keep the scope within the grasp of the resources you can devote to managing it
I found this book very useful, and the ideas don't quickly date. Meatier than most business books.
McGrath, R. G. & MacMillan, I. C. The entrepreneurial mindset : strategies for continuously creating opportunity in an age of uncertainty. Harvard Business School Press, 2000.
I see there is a new one out that looks interesting and covers similar ground, although I have not read it yet.
McGrath, R.G. & MacMillan, I.C. Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity . Harvard Business School Press, 2009.