Labs, research and incubation practices within large companies are growing in importance and influence. For this reason, I’m starting to pull together information on how innovation is being pursued by large technology and media companies, while raising some questions about these approaches in the process.

There’s no doubt the sourcing, development and scaling of innovation will become a way of life for the company of the future. Consider the following statistics which speak to the significance of the matter for large companies:

• A recent study revealed that 72% of corporate executives believe their primary source of competition in 5 years will not be the company which is currently the main competitor, according to Bain & Company and the Economist.
• The well-known author Chris Zook, also of Bain, published data predicting that 10 years from now only 1 out of 3 companies will resemble what it looks like today (one of three will be acquired/bankrupt and the other third will redefine the core business).
• By 2000, the average tenure of a firm in the S&P 500 had declined to 10 years from its historical level of 66 years.
  

Yes, the half-life of market leaders is headed in a clear direction and that’s downward.

Since the nineties, a lot of growth has been predicated on acquisition strategies, but even that is beginning to fade as the fail-safe vehicle for entering new markets. Zook studied the success rates of different strategies when the rules of the core business are in flux (business turbulence). Large/transformative mergers yielded a 5-10% success rate in contrast to a 30%-40% for initiatives where companies re-positioned around new platforms. These are defined as hidden, internal assets which are developed into market-facing platforms. That’s a humbling or encouraging comparison depending upon how you look at it.

We’re living in a time where traditional disruption has become more manageable through known and repeatable business processes. Today’s anxiety is being driven instead by the Black Swans, who lurk without prior knowledge, waiting to upset industrial economics before you know it.

So what the models for innovation and the trade-offs between them? I’m starting to look at some current examples and attempt to glean the best practices.

First, let’s start with the common denominator. All companies want to address blind-spots. These can occur when their people think about innovation exclusively under existing frames – like current product lines, markets, customers, etc. It’s no wonder that we see a resurgence of initiatives within large businesses which organize specialized resources to take long and lateral views of business. Freeing people from the day to day grind is certainly one way to position them to see broader developments occurring on the periphery of business and beyond.

For example, Yahoo has a very robust Research practice. In theory, clean separation from the grind of existing products can free up technologists to see a broader opportunities. This will have natural appeal for people who appreciate and are skilled at both the “R” and “D” in R&D. In other words, a developer, quasi-developer or scientist who is capable/interested in evaluating long-term, adjacent or “un-related” trends and developments. Historically, there has been a greater chasm between academic research in technical fields and commercial applications in these domains. There were not many places where someone with a very specialized education (e.g., an expert is machine learning) could straddle the research-development mandate. IBM and Xerox PARC are, of course, the typical exceptions. In any event, this segment of the workforce is expanding and Yahoo represents a prominent channel for such talent.

This model presents unique organizational issues. First off, how to measure the productivity of the research function? Is it the number of patents filed/obtained, the contribution of the research to new product development or something in between? The first option is important (long-view) but very disconnected from actual measurable contribution and hard to quantify in ways that tie to actual financial performance of the company (even over long periods of time). The second option introduces incentives that might work against the idea of autonomous research to begin with. I think a combination of the two and some gradients in the middle should be considered to come-up with an aggregate assessment. For example, the size of the patent portfolio is important. But this can be coupled with a look-back approach where patents are evaluated in retrospect (let’s say 3-5 years after the fact) to ask if they were meaningful. Did those patents focus on valuable areas irrespective of whether the company actually took advantage of them? Research people should get credit for putting their fingers on the right innovation vibes. The inverse process also makes sense. In a retrospective manner, the biggest innovations of the last 3-5 years could be compared to what was actually produced by research professionals to assess for missed opportunities. At the very least, this forces an organization to ask difficult questions like: why did we miss certain big ideas? Every company will miss big ideas, so I’m not suggesting people be held responsible for missing the next YouTube, Facebook, etc. But on the aggregate, this type of analysis will surface whether the missed opportunities are systematic. Systematic failure tells us that value is not being added.

Moving to the second option (direct correlation between research ideas and formal product initiatives) introduces another set of considerations. Here it is important to set expectations. Very few internal innovations will actually see daylight in terms of new products for new markets. But the few that do can have big impact and make the cost of all carrying the larger portfolio totally worth it. Also, not all useful research innovations need to come to fruition as products for end-users. In many cases, an innovation could be a piece of plumbing that makes several product lines or business units more capable of developing superior products within their focus areas. In other words, we’re referring to internal platforms. As you can see, there are many factors to roll-up. I suppose you could summarize these recommendations into something like a Balanced Scorecard approach to managing a research or innovation portfolio.

It’s difficult to speak about Yahoo, without looking at Google as well. Let’s start with Google Labs. Mainstream thinking might associate Labs with specialized efforts of scientists to cook-up innovation, which is true in substance but different in form at Google.

At Google, the meaning of Labs is primarily focused on the degree of product maturity. We’re all familiar with products that come out of Google Labs, which seems to stand for an experimental product that is in early release. I find this to be a cohesive use of the term. It implies a clear consumer proposition that sets expectations for a consumer who thinks “new product…may not be complete or ready for prime-time….but could be fun to try out.” Here the consumer also anticipates that a product may graduate from Labs at some point but is at least worthwhile enough for Google to promote.

The term does not, as we have come to know based on Google’s 20% time practice, indicate traditional sources for the innovation (in the form of specialized resources whose sole focus is coming-up with new technologies). Google differs because it does not seem to have as prominent a segmentation between “research” and “product” organizations. Whereas Google uses Labs to speak to product maturity, other organizations use it to describe where the innovation is rooted in the organization. At Google, its seems like innovation is a charter spread throughout the organization (again, 20% time for engineers). This is a generalized statement because the company seems to also have hired some well-known thinkers, futurists and researchers who are not directly connected to formal product development initiatives. But at the generalized level, Google has a wider sourcing footprint for innovation because of their widespread HR practice. A natural question is whether any boundaries are in place around the scope of innovation one can pursue. In other words, do people begin to step on each other’s toes? Possibly, but remember “managing chaos” is a self-espoused competency at Google to begin with. If chaos is a way of life for the business of the future, then Google’s approach is not an esoteric attempt to differentiate but, instead, a highly pragmatic strategy.

As web companies, Google and Yahoo benefit from certain advantages in the innovation arena. For more traditional companies (where launching a product means a lot more than just launching a site or where new technologies introduce cannibalization potential), the innovation process is possibly more complicated. This is where corporate level functions play an important role in the equation. Their responsibilities include traditional business case analysis and opportunity assessment, as well as driving the underlying organizational collaboration. This is where Corporate Strategy, Corporate Development and Business Development professionals have been traditionally focused, though we are now seeing standalone Incubation or Innovation groups emerge. BTW, I’m not suggesting that these roles are not vital at web companies, just that in the web there’s more risk in losing time to market and less risk to the existing product lines since it’s such a land grab. As a result, it makes more sense to reduce the barriers developers and scientists face in bringing their new ideas to market. Even within web companies, I believe corporate-level groups can add value to the process today and that this contribution will become essential in the coming years as organizational complexity grows. The main point is that most companies are not Google or Yahoo and, therefore, require more structure and collaboration in sourcing and assessing new ideas.

So what might be a way to synthesize all of this into a point-of-view?

I think a inverted pyramid model can be a powerful way of combining the best elements of these approaches.

This pyramid approach is built around certain principles. First, innovation is everyone’s business and corporate culture should encourage it to take root in any corner of the organization. This does not speak to ownership of the innovation process per se, because that may vary. Ownership depends on the nature of the innovation (core vs. extension vs. cross-BU vs. greenfield) and phases of maturity. Instead, we’re speaking here about idea generation. It shouldn’t matter which part of the company gets the ball rolling. In an inverted pyramid, this represents the very top layer which provides significant volume in idea flow, albeit at lower conversion rates to new products.

In some cases, depending upon the criteria specified below, the people sourcing the idea can take the initiative pretty far without lots of external involvement. For example, a product line group or business unit that owns certain customers and markets has great freedom to innovate on its core. Provided there are no cross-business dependencies, a business unit can assess an innovation using standard methods. But many innovations that hold potential to “move the needle” do not fit very neatly into existing cores. Often, they challenge or hold the potential to question what’s defined are core. When this type of uncertainty emerges, corporate level functions start to add value. We’ll come back to that in a minute.

Second, specialized technical resources in the organization should be leveraged (and in more than one way). Dedicated research practices make sense for technology segments with strategic value to the company. It makes sense to employ domain experts and afford them dedicated time away from tactical development issues. But a company can only afford to have so many of such people in place away from directly profitable activity. The idea generation from this group represents the second layer of the inverted pyramid where there is smaller pool of higher quality/impact ideas (on average) than across the remaining human capital of the business.

A separate point is the utilization of research staff for cross-over work. There could be ideas, for example, that are sourced in the product groups that require contribution (but not ownership) by of research staff. In this situation, research is a “services” organization that vets specialized issues and provides critical feedback for product groups. These “services” may be long or short duration projects. The reverse scenario also makes sense whereby product groups may bring initiatives to the table that are more appropriate to brew in the research organization (due to the research-centric, long-term, strategic, cross-BU implications of the area). In this case, transfer of ownership may be justified.

So how is a company supposed to manage these different scenarios and judge between them? This is where the corporate people come into the mix. The third principle of the pyramid is that innovation must work as a repeatable process and a corporate-level contribution is essential to this. In a traditional scenario, corporate-level resources (development and strategy functions) operate as shared services to business units (or research teams) to parse through analysis and interface with executive staff on some part of the dialogue (in addition to leading external conversations). Whether these corporate resources play a leadership or support role is dependent on the needs and capabilities of the business unit. It’s preferable for business units which will hold accountability for the new line of business to take as much ownership as possible for the definition and planning activities. But that’s not always possible. Some typical exceptions: cross-business unit initiatives where ownership is not clear, entirely new markets where existing expertise has modest or negative value, bandwidth constraint or lack of appropriate resources.

It’s just a fact of life that the greater the opportunity, the more the organizational complexity. For the biggest opportunities, it’s the role of corporate resources to liaise between different functional contributors and stakeholders to get the hard questions answered so that decisions can be made. But it’s also the role of these resources to help with opportunities that are much earlier in the lifecycle. In other words, to make smaller contributions here and there to product and research groups for early-stage initiatives. The approach is like managing a portfolio of initiatives, with time spent on the small and the big. Why? Because sometimes, the small grows into the big. This introduces the third/last layer of the pyramid which is very narrow and low-volume. It’s the idea flow that comes from corporate resources who are not principally idea-generators (that work is best left to people who know products and technology) but sometimes in a position to synthesize information to formulate big and worthwhile ideas. So we’d expect this layer of the pyramid to source only a few ideas but for them to be ones worth digging into.

In a nutshell, the role of the corporate resources is to ensure the contributions, ownership and collaboration between people in the company is unfolding based on the best interests. Sometimes, this can mean optimizing for the company as a whole (scope). In other cases, it means letting go and optimizing for specific interests (speed). That assessment is often situational though there may be a hidden structure which can be used to make it programmatic.

In the end, the organizational issues may be the bigger challenge here than conceiving and framing the innovation opportunities.

One thing is for sure, the company of the future will find a way to move much quicker on innovation opportunities while feeling comfortable with those decisions. This isn’t about reckless decisions made in the name of speed or press releases. But the trade-off between analytics and time has to be reigned in to compress cycles. Recently, Google acquired Grand Central Communications in a move that surprised some people and put the company in some new territory. A friend at a similarly large company recently remarked that he was planning to mention GCC as an acquisition opportunity to senior management only to find out a day or two later that Google had been pre-emptive. Why had Google been able to move quickly when this other company would have probably required several additional months to pull it off, despite the fact that GCC is closer to its core?

I think the one in three large companies that will, in Chris Zook’s estimation, remain independent companies five years from now are putting a lot of energy into this type of question right now.

• Yahoo Research Homepage
• Cisco Reinvents the Corporate Incubator
• Microsoft's adLabs
• Delivering Innovation at BT

Filed under: Google, Innovation, Traditional Media

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Tags: Labs, Incubation, Yahoo Research, 20 Percent Time, Chris Zook, Corporate Development, Innovation Pipeline,