How dim bulbs get brighter! Humility, soft skills and delivery focused intense experimentation.
Only one theory is consistent with observed innovation, namely that there is no fixed theory. This mirrors the Socratic idea of knowledge, “I know that I know not”. This statement is rooted in humility. A view that did not stop Socrates from showing up every day to investigate and debate with all comers.
Several important and influential texts have come out on innovation including the most important “The Innovator’s Dilemma” (TID) by Clayton Christiansen. In a New York Times article from 2014, Jill Lepore takes apart the case studies that are used in TID and exposes them as driven by hindsight or just plain wrong, revealing the hollow heart at the center of the theory of disruptive innovation.
TID also spurred the creation of innovation departments and chief innovation officers in existing companies who are tasked with creating disruptive innovation across the enterprise. The problem with “disruptive” innovation is that it aims to disrupt existing and profitable business lines in incumbents; and the people in those business lines fight back vigorously. They often have more power than the innovation departments.
In this article, we examine “Innovation Theory” and the phenomenon of Innowashing. We also take a look at a road to innovation in big Enterprises, especially banks. I had started this article before the announcement of Clay Christensen’ s recent passing. I bow my head to him.
“Doing the right thing is the wrong thing”
“Doing the right thing is the wrong thing”, is the Innovator’s Dilemma. The message of TID is, work on improving existing products and services is fruitless. Do not bother with making incremental changes or sustaining innovation, because your industry is going to be taken over by disruptive innovation. Disruptive innovation will wipe away incumbents and create new behemoths. Careful examination of the case studies in ID do not really support this view. As Jill Lepore says “Companies that were quick to release a new product but not skilled at tinkering have tended to flame out.”
There seems to be a continuous spectrum between sustaining and disruptive innovation. Take a look at light-bulbs, the very symbol of innovation. It is true that with sustaining innovation alone, candles would never have become light-bulbs. An inventor who created light through the flow of electricity was Sir Humphry Davy around 1805 with the arc lamp; the light bulb went through major evolution over the course of 90 years. When the light-bulb first appeared, no one would have predicted its victory. An unstable arc-lamp, then a dim incandescent glow in a carbon filament. It took over twenty years and intense tinkering by Edison to make it sustainable. The light bulb did not appear fully formed in a thunderclap of disruptive innovation. It was through successive, more nuanced sustaining innovations that the light-bulb achieved wide-spread adoption. These changes are happening even now. A change in the material of the filament, the atmosphere in which the filament burns, replacement of the filament with LEDs etc. Edison made this happen in his innovation factory, where he experimented on an industrial scale.
A change in perspective of what the enterprise has been actually doing all along, is key. Execution is also extremely crucial- a combination of new ideas and incremental improvements with a focus on delivery is what seems to matter in most cases. Making subtle changes based on data or behavioral choice architecture also helps. Let us look at the familiar case of Amazon.
Amazon is the poster child for Innovation. There have been no more prosaic beginnings, a digital bookseller. A very familiar physical concept taken digital. Rather than limit their offerings as a digital bookstore, they looked at what they had developed to implement that mission. A storefront, a payment front-end, a recommendation system, a logistics driven fulfillment service. Books are standard products, one new copy of the “Innovator’s Dilemma” is the same as another. Selling simple, standard, familiar products helped Amazon work out the kinks in the evolving model of the digital market.
First, they could sell any physical product using similar technology, then they offered their scale and reach to others. They expanded to digital goods, e-books. Kindle for reading books with a compelling lock-in, free wireless for downloads. The platform Amazon developed to support all this, a distributed system engineered for growth was unbundled and sold as Amazon Web Services, the Platform as a Service was born. From the outside it looks like a series of dazzling moves. These transformations can be seen as incremental and logical in the context of re-framing Amazon. All coupled with engineering and operational execution, customer focus, ruthlessness and efficiency.
Even while losing money, or because they were losing money, investing in the future; they won. They won customer share and loyalty, invented new platforms. Scale and network effects were sought at the cost of profits, dividends. This is in the DNA of the company, put there by Bezos himself. They are playing the long game. Then they came back to the physical, to brick and mortar, when they had perfected logistics. They bought Whole Foods.
This is not the only way. Look at Microsoft, they built a hugely successful franchise on personal computers triumphing over mainframes. After the DOS operating system, they bought or acquired many products and made sustaining improvements on them; like the core of SQL Server DB which they bought from Sybase and improved on with sustaining innovation. Then they went into the doldrums, they were thrashing around for years; stuck in a rut. Led there by hubris and bad leadership. It was a mental rut of the corporate mind. They pulled themselves out with a new leader; they reexamined their core competencies; engineering and software talent, an organization around this and oodles of free cash. Microsoft embraced open source, made some key acquisitions, a subscription model for software, coupled with free but very functional frameworks and platforms to attract the right crowd. Distributed systems, then the cloud. Again it took a leader with different eyes. Now they are cool again, vying for the crown of the most valuable company in the world with Amazon and Apple.
What is the “right thing”?
Refine the idea of the “right” thing. Look at the engine that was built for the enterprise and constantly repurpose it, tinkering with it. This needs leadership who believe and support that strategy; of course there will be blind alleys, roads that will be blocked, people who will be fired. There are many digital bookstores, some even started the same time as Amazon. Most of them remain digital bookstores. Because they saw themselves only as digital bookstores. Abebooks is cool too.
Positive change and success happen in myriad ways. There is no formula. Looking at these cases, one sees no formula. Move fast and break things may be good for Facebook; but not for Boeing; not even for Facebook at this stage in their evolution. There some constants; a culture of humility to recognize new ideas either from outside or inside, continuous improvement, reliance on the right kind of data, a multi-disciplinary team for execution and operational excellence.
“Innowashing” is the practice of incumbents and new entrants projecting their innovation credentials through window dressing. This plays well with shareholders and the media, burnishing the image of the company or allow many new companies to raise money from gulls.
Some investment banks decided to spend huge amounts to the tune of billions for digital transformation, the people in charge of digital transformation also insist on a three or a five year plan for proposals to request budgets. The only projects that pass muster under these regimes were existing initiatives that had many “stakeholders” and very detailed budgets and estimates; not new initiatives that did not proclaim “business value”, which were experimental. This resulted in many BAU projects getting funded in the name of Digital Transformation. Innovation in name only.
The Innovation Team
Who are in charge of the majority of innovation teams in banks, governments, regulatory agencies? Marketers, business people, attorneys, MBAs. They have titles like the head of innovation, head of emerging products, director of cross-product innovation. They often have a separate budget and a team. They operate in different ways depending on the culture of the enveloping organization. The most effective ones are supported by the business and IT leaders of the organization and have dotted lines to the various silos. The most important of these being, the lines of business, information technology (developers), information technology (operations), compliance, legal, third party risk office, information technology (security). These members need to be full fledged members of their respective teams with 20% or more of their time budgeted to innovation; with more time allocated during intense periods of work on innovation.
The innovation department should be predominantly intrapreneurs; not just timeservers who want “Innovation” on their resume. The members should do a workshop a month in their respective mother teams, backed by some of their innovation compatriots. Part of that work needs to surface recurring problems. Every quarter there should be a review of these problems to gather themes and areas to tackle in a whole-scale manner, across departments. Real money and teams have to be assigned to the work of change, picked from these quarterly workshops; with constant reviews.
The other area is external engagement; members should work with industry bodies, open meetups, conferences to get information on rising trends to see whether the solutions can be applied in any of the problems surfaced during internal workshops. Learning by doing is very important. Hence sandboxes should be created as soon as possible with processes to setup and break-down experiments. Some of the processes with the most friction in any large organization are the provisioning and setup of resources, materiel and personnel. Since the sandbox could also question processes and procedures that are blindly applied to protect the firm, like avoidance of cloud (external compute), data sharing with external entities, firewalls etc. these sandboxes should be in an isolated environment; with data protection and other standards applied for anonymization and differential privacy.
Of the projects recommended and supported by the innovation department 20% should be moon shots; 20% safe and incremental advances. The others should fall somewhere in between. This portfolio management is extremely important, whilst it is necessary to demonstrate some early wins, without an admixture of totally risky projects; the results will never truly transform the enterprise. Examination of the results of innovation departments have come to the conclusion, based on success rates that they are not supporting enough moon shots, the recommendation is to take more risks. The great thing about moon shots are the extremely asymmetric ROI.
The culture should be about playing the long game with measurable advances and operations. Skeptics usually fall back on the usual tropes; “this has not worked before”, or “I have been doing this for x(very long) years and this will never work”, “we have tried innovation before and it does not work” and my favorite “where is the immediate business value”? In addition to seeking more detail and reasoning behind the objections and addressing them, it might also be necessary to look at the motives of your interlocutors. For example, the enterprises who withdrew from Libra in the initial instance are payment companies; who stand to lose the most. Not that Libra will not be compromised for other reasons. Why did they join in the first place? Was it a market intelligence exercise?
Innovation departments need to involve technologists in the leadership. For example, I hear the refrain, “Regulators need to know what they are regulating”. However, I do not see any active hiring or promotion of technologists in most regulatory agencies. In banks there is asymmetry in power; technologists are second class citizens. They fall under the liability or cost column in ledgers. Banks are really technology companies, with a little reconciliation on the side. Without technology they could not function even for a second. Some banks with enlightened leadership have recognized this fact.
Among technologists is another sub-hierarchy. The IT leaders of banks are operations folks, they are at the top. Their focus is on turf, getting budget to keep the status quo. The creators of new solutions and developers are second class citizens among second class citizens. New ideas, those that challenge the status quo are relegated to the bottom of the pile. Especially if they threaten existing Business as usual (BAU) budgets. Turf is defended with vigor. Innovation departments are given limited remits with the wrong personnel, fenced in and trumpeted in annual reports. Innowashing reigns supreme.
This is not to say that technologists are perfect. In pure technology companies, where they are in charge; untrammeled by regulation, by ethics, they built huge surveillance empires; through the monetization of the commons, regulatory arbitrage and powering through gray areas never encountered before. Pure approaches are sub-optimal, there has to be a balance of power between soft skills and hard skills. Neither should predominate.
Innovation happens. Theory focused on discovering and fostering the next big thing is not something that can be taken from textbooks. Innovation is too important to be left to innovation departments. It needs a culture change.
Reframing of the enterprise’s existing capabilities and resources to discover products where none existed; customer focus; a culture of inclusion; leadership that listens and backs innovation, a certain amount of tolerance for failure, a scouting party bringing in external ideas. Continuous improvement, emphasis on execution, a broad footprint. Incremental change, coupled with occasional major challenges to existing products; logical expansion of the existing franchises at lower cost. As it is an emergent property of the organization, formulaic approaches do not succeed. Playing the long game, a vision that transcends quarters and cost-cutters, these seem to be the recipe for innovation in incumbents.