The Promise and Pitfalls of Innovation Labs
Labs offer significant advantages for an organization, spurring digital innovation across its activities. But challenges lie in wait.
Editor’s Note: Rich Turrin is a former manager at an IBM innovation lab and has worked with many labs over the years as a consultant. He compiled observations and advice in his recent book Innovation Lab Excellence: Digital Transformation from Within, meant to help lab managers and employees understand the conditions in which innovation will flourish, and how to avoid trouble spots. We asked Mr. Turrin to give our readers an overview of the phenomenon of innovation labs and how they can be most effective.
Innovation is upon us. It seems that nearly every day a new laboratory, studio, or center opens –
complete with espresso machines, open plan seating and exotic murals. Fill it with twenty-somethings dressed in jeans and t-shirts who are all pictures of digital mastery, bake for about six months, and innovation will flow like a fountain.
If only it were so easy.
In fact, most of the labs I’ve visited are underperforming, despite the investment in espresso machines and modern architecture. It’s not that they are going to go bust (thanks to someone’s deep pockets), but the innovations emerging from these facilities fail to meet the expectations of senior management, or the young innovators are dispirited and feel they are capable of more. In many cases no one is truly happy and the labs themselves are taking a hit.
What emerges from my experience consulting for these facilities and talking with employees and managers is a consistent picture. The main problem is how these innovation labs are — or more accurately, aren’t — integrated into their parent. Addressing these integration problems effectively can enable the true potential of innovation at a company. This will separate winners from losers in innovation wars.
Every company needs innovation; the question of course is: How do you get there? Until recently most industrial sectors did not have a codified plan for innovation at their organizations.
There were three exceptions. The first is consumer-products labs, actual laboratories to test new product ideas, where they devise new flavors or other selling points.
The second exception would be the dedicated and highly-funded research division, typically in technology companies, where long-term and possibly blue-sky research is carried out and patiently shepherded into products that might be launched into the market ten years later. While these research labs are innovative and responsible for countless breakthroughs, they are distinct from today’s digital innovation labs. Both the time scale and the objectives are different.
The third exception — “skunkworks” — are operations that arose from manufacturing during the exigencies of war and the need to speed the adoption of new technologies.
In a recent survey, 57% of respondents said their companies do not follow formal innovation processes. –CB Insights, “State of Innovation” Survey
There are two more “non-plans” for developing innovation that are in use by many companies. The first is to simply wait patiently to copy the innovation of others. While it does not guarantee industry preeminence, it does ensure that all things being equal the company does not fall too far behind. Large, well-established companies may use this strategy to keep ahead of a scrappier and more innovative competitor. In the digital era however, upstarts can topple incumbents with surprising speed.
Second, there is the lone wolf manager (who comes along very rarely) who really likes innovation and creates something new and surprises everyone with its success. While these self-directed initiatives are welcome, they are certainly not innovation that you can count on or plan for.
Enter our new digital world. Regardless of what business sector you’re in, the concept of innovation and the subsequent production pipeline has changed. The old-school, tried-and-true approach to bringing new products to consumers — whether they were new soft drinks or new investment products — no longer works because digital innovation has fundamentally altered baseline expectations of speed to market. Advances in digital technology have changed how we reach our clients, what they expect from us, and the methodology we use to innovate. The new digital world has rendered our traditional innovation approaches incompatible with our new ultra-fast-to-market digital world.
Basic research is somewhat removed from this cycle — it usually can’t be rushed, and there will always be a need for long-term investigation to create something new and lasting. But there’s a new intermediary, one that sits between basic research and the demand for lightning response. This is the innovation lab, which seeks to create a digital advantage for a company via innovation across its activities.
Digital disruption is upon us and has turned traditional business models on their head. It throws a proverbial spanner/wrench in the works of many traditional industry sectors that have yet to adopt because it changes the product delivery mechanism, fundamentally alters the business model, or exposes the company to more nimble competition.
Digital is a new world to many senior executives in these companies. How best to harness a paradigm-changing technology is very much a mystery to many. This is particularly true of executives who spent a lifetime honing skills on business-building, only to see it thrashed by digital competitors.
As a result, many sectors, financial services being one of them, are now plunging headlong into digitization. Like it or not, executives are going digital as fast as possible, while simultaneously trying to solve the problem of how best to introduce digital into their business. Their superficially rational solution is to bring as many digitally enabled people on board as possible, and get them to work.
Eureka, we have the digital innovation laboratory, populated by a group purposefully assembled to transform a given business through their digital expertise. The lab is bolted on to the existing non-digital company just like training wheels on a child’s bicycle. Like them, the lab is to be used for a fixed period, then taken off once the company learns how to manage digital innovation on its own.
Or at least that’s the theory. No one can provide a confident estimate of how long it takes to graft digital sophistication into a company. It’s probably never been done — so anyone suggesting that this process will take two years or ten is just guessing.
Conceiving these labs as a discrete unit makes sense since it’s impossible to hire enough digital people to put them everywhere in the company. A centralized resource is what’s practical. This also serves a second motive: A company can show off its lab to shareholders, analysts or rating agencies, to demonstrate how innovative the company is and how this will translate to future earnings. It ticks off the innovation box, neatly, cleanly, and with certainty. One tour of an innovation lab with its dancing robots will dispel any concern that the main business — products and delivery channels — are obsolete.
At this point it’s important to clarify that the concept of a dedicated innovation lab has undeniable benefits. For one, it is practical. Digital expertise is so expensive, and in such short supply, it is challenging to pay for and disperse these people within the company. In addition, diluting digital competence in this way can be counterproductive, because there are invariably solutions that require a team pulling together in hard work. Concentrating tech skills under one roof solves multiple problems.
By focusing resources a company can, in theory, create a center of excellence that serves the entire institution and moreover enforces continuity in digital adoption and innovation throughout the organization. In addition this concentrates the “disruptive” elements in a single spot, making it easier to monitor the outcome. At least this is the theory — the pitfalls lie in how this is practiced.
Digital labs created more recently outside of the tech sector are relatively young; the oldest has been active for barely a decade. Evidence of their success is both highly variable and shrouded in corporate secrecy. It’s often public knowledge, for example, when an innovation lab throws a hackathon, but we don’t know whether the AI-backed product recently introduced by your competitor came from their lab, or elsewhere. There is no doubt that some labs have launched significant products and services. Others seem to languish in the background, never quite attaining the promised extent of digital transformation within the parent.
Innovation labs are like rock-n-roll bands. With many of the early labs, management seemed undecided on whether they wanted a monster number-one hit, or a string of songs that hang lower on the charts year after year. As time and experience running labs accrues, it’s becoming clear that labs are most effective when part of a longer-term strategy, meaning that staying power on the pop charts is critical. It’s increasingly evident that the metrics of laboratory success are less likely tied to the number of hackathons sponsored per year (the innovation equivalent of a number-one hit), but instead the depth of digital adoption by the parent company.
This is changing our perceptions of the labs’ ultimate role, and more significantly, how we run them to fulfill this role. This matters because the labs that were initiated early on may need to undergo significant changes in policy and operations as management better understands how to maximize benefits.
It’s important to point out that no one has done anything wrong here. New solutions require time and experience to settle into best practice. And it seems clear that while there are multiple measures of lab effectiveness, fostering digital adoption that reaches deep into the corporate parent is paramount. Why? Because it creates a profound long-term effect on the psyche of fellow employees that in aggregate is preferable – and healthier to a company’s prospects – than a one-hit wonder.
Whether you are the CEO who funds an innovation lab, the Chief Innovation Officer (CINO) who oversees it, or the CIO that fumes about the lab wrecking his systems, all need to understand the practical realities of the innovation business, as there’s a good chance it’s a new experience.
Simply put, managing an innovation team is different. The objectives for this team are special and need attention. Think of your new lab as a seedling needing constant attention to environmental conditions or it simply won’t grow. Your existing businesses run by seasoned veterans thrive on benign neglect. But with innovation labs, managers need to recognize and head off problems that they’ll run into before they compromise the lab’s mission or efficiency. They need clear thinking to help them make their expensive new lab more effective and produce the innovation they desperately desire more quickly.
Finally, the business unit leaders who may have never heard of an innovation lab before and are now being asked to work with one – they are the ones being asked to make the biggest cultural leap. They have to take products or services that they’ve invested a lifetime in perfecting and use technology to disrupt them. In many cases this will be relatively painless and yield results that show big wins for everyone. In other cases it won’t be so clear or end in smiles.
The review of a process or procedure showing that a life’s work can now be automated may be humbling to the core. Even with the best of project outcomes, a manager can expect the innovation process to be uncomfortable. Every preconceived notion of how you conduct business will be examined and you can fully expect that someone much younger than you will inevitably say something along the lines of “oh that’s stupid.”
The rules are changing and you need to understand how the game of innovation is played to get the best results possible out of your efforts. Just as the lab manager can benefit from an independent point of reference, so can you.
I’ll give it to you straight: Innovation labs are necessary to promote digital adoption in your company. Yes, I criticize them now and again, but that is solely intended to temper — to moderate — the attitude toward them. I am not a proponent of the over-hyped claims of digital nirvana that some consultants shill with a lab’s start-up. But I am even more skeptical of companies that cower from the digital challenges that lie in wait and as a consequence do nothing.
Let there be no confusion. Innovation labs present an opportunity to promote digital within your organization and are fundamentally a positive, if run correctly. My caveat lies in how we run these labs. This is critical to getting anything of value out of them. Too many companies have made tremendous investments and received very little demonstrable payout. These enclaves are not a panacea or cure-all for your digital ailments. It is best to temper your expectations at the outset. The lab itself is merely a component of your digital program, albeit an important one. Without cultural and managerial changes pressed from all directions, the lab is doomed to fail.
It may be helpful to take one big step back, and address how a company might address digital disruption without instituting a dedicated lab. The facile approach would be to task one or several business-unit leaders to adopt digital processes within their business lines and simply rely on the IT department to make it all happen.
The results should be obvious in about a year. It’s reliant on pre-existing resources, and indeed may work to modernize a product line, or refresh a service. Good over the short term, but there’s a problem with this strategy. It’s a patch: It doesn’t acknowledge the sweeping changes that digital adoption will force — yes, force — upon your company. This really isn’t about a single product line or digital fix. Instead, the oncoming climate will upend, and demand a renegotiation of, your entire company’s use of technology. Sound big? It is. That’s why assigning a few trusted lieutenants to work their magic isn’t a digital strategy.
This is one flaw in trying to implement change from within. But there’s a bigger one, which is much more pernicious: the assumption that your staff want to make the transition to digital. In many cases, if not most, your existing business managers are innately reluctant. Unless they are particularly digitally minded, this is being pushed upon them and represents a major distraction from their “normal” job.
People who started their career more than ten years ago did not have technical innovation in their sightlines. They wanted to be a great salesman, accountant, manager or other professional. Digital anything was not part of the big plan. Unless they are truly exceptional forward-thinkers, at a fundamental level digital represents an inconvenience. For this reason their ability to make transformative changes to their business will be limited. Even worse, your organization may harbor managers who willingly try to delay, postpone or even torpedo efforts aimed at digitizing their work or departments.
Let’s not be shocked at this behavior. They are, after all, only human. These managers have spent a significant portion of their lives building the very structures that digital seeks to tear down. I witnessed this first hand at IBM as cloud-based services were launched, services that fundamentally changed the role of their iconic sales force. With the advent of cloud services, the IBM sales force, those of the sober ties and “any color of shirt as long as it is white,” were relegated to telling customers to go on-line and purchase software from the IBM website, rather than closing the sale themselves.
If ever there was a fabulous example of disruption, this would be it, since cloud services made the salesman redundant. Clients could sample the software under a free trial, see if it met their needs, and then purchase the software based on actual usage rather than the number of seats. It was a revolution in how software is sold. So which of your management team will make the recommendation to go digital, and thereby force the retirement of the sales force he or she has spent years fine tuning? It’s too tough a call for most mortals and the need for third party intervention is obvious.
So if home-grown innovation is typically subject to internal biases, the alternative step would be hiring a third-party management consultant, who would present a roadmap to help you sort this out. Of course your preferred Big Four consultant would be delighted to produce a report on how digital transformation will eventually lead you to an El Dorado of profitability. Except there’s a problem. As with my example of IBM, most senior partners at the Big Four or other non-digital-specific consultancies have also been disrupted. Most are experiencing substantial challenges in retraining themselves and, critically, attracting a younger generation of digital specialists able to blaze the optimal trail through these woods. There are clear exceptions, but digital talent within the larger consultancies is spread very thin.
In the best of circumstances, even if a consultancy provides a decent road map, they can’t help you get there. Most practices have limited system-integration skills, and only recently have some actually built teams capable of effecting tech solutions. This further limits their advice because while it’s correct for consultants to say “use big data,” very few can recommend a specific technology that will work given your unique circumstances.
If you are unable to rely on your current management pool or your trusted consultants, you may note that your options for acquiring innovation expertise are rapidly dwindling. A third way is to go back to your IT department and charge them with bringing innovation to your company. After all, they’ve been the trusted gatekeepers to your systems for years, and computers lie at the heart of the challenge.
But there are several problems here as well. One, already touched upon, is that the relation between tech and innovation relies on the insights and experience of the business unit managers. Your IT department is certainly capable of buying a system and implementing it, but they don’t have the overview on how it will be used in the context of your greater digital business strategy. Hence the wave of new “Chief Innovation Officer” or CINO positions created at many large companies.
In the new digital model, business unit leaders are directed to work in conjunction with tech providers to understand how best to use technology to reach their clients. This is something that your IT department — as skilled as it may be — would struggle mightily to achieve on its own.
Digital Nirvana and the Future of Innovation Labs
Where does this all end? Not in the immediate future for sure. None of your organizations are likely to become so digitally enlightened within the next five to ten years that they can afford to push digital to a lower priority. More likely, over this period incumbents will be putting out fires across their business lines as nimble digital upstarts and dominant tech players like Amazon and Alibaba challenge their business model. As long as this is the case, most companies will be playing a game of digital catch-up and using labs to do it. Labs are no passing fad. In fact, I would go as far as to call them the “new normal.”
The trajectory of lab growth will not be entirely vertical. More likely, it will plateau as organizations better understand how much innovation they can digest and the ideal staffing levels they need to support it. Three dominant themes give rise to the need for labs: the shortage of digital skills in the business units, the pressing need to catch up and stay current with the competition, and the potential efficiencies offered by concentrating digital talent and tasks within your organization.
The shortage of digital skills will easily be around for another decade, as it takes around seven years to push students through the university system to attain advanced degrees in digital. Compounding this problem is the trend for top students to pursue careers with the top tech companies. This furthers their technological lead against non-digital industries. This trend ensures that the game of digital catch-up will become more difficult and persistent. While there will certainly be greater numbers of digitally enabled students coming through the system in coming years, an additional lag ensues in training them to be effective in your line of business. This is clearly where the labs will shine, but it takes a few more years on the timeline before your company will have the optimized skills it needs.
“Legacy management is more dangerous than legacy systems.”
One of the most important jobs your lab will do is to push digital capability deeper into the business units. Even when the migration of talent is successful, the lab’s role will not abruptly end. This will be a lengthy process, and business units will have to gain digital resources one-by-one.
Today’s lab project leaders will become tomorrow’s business leaders, embedded in the business. Even under the best of circumstances there will be only a rare few from the lab ready to make this leap annually, if that. Divide the number of your business units by this small number and you’ll see that it will be a long transition. Compound this with the constraints on talent and the development of new technology and it is easy to see how this is a long-term endeavor. Further attenuating this cycle is the generation of non-digital managers who won’t willingly give up their jobs to upstart managers from your lab anytime soon. There is an internet meme in the fintech community that is both apropos and fair warning: “Legacy management is more dangerous than legacy systems.”
The final and possibly most intractable problem is that the gap between the large tech companies and tech wannabes is growing at an exponential rate. Let’s use AI as an example. This technology is being developed predominantly by large tech companies that are pouring money into their research programs and hiring the best tech talent in the world with a “money is no object” approach. The rest of the business world is left to adopt this technology only after it has been put to work by the tech giants. In hiring terms, the best we can do is to pick off an opportune hire one at a time from one of their teams, and then invest both time and effort to match their state of development in a year or two. Thereafter, the team from which your AI guru left is already on to the next big thing.
For AI in particular, growth is predicted to be exponential for at least another decade. On the brighter side, it’s clear that most companies do not need to be on the “bleeding edge” of technology to be digitally competitive. But the ability to stay abreast and beat your competitors to implementing a transformational feature to your business is critical. This is what your lab is designed to do, and why it won’t be going away any time soon.
Another trend that will keep your lab in the fore is that new product development will be closely tied to digital. Every new product, including the most conservative, will have a digital facet in some aspect of its sales and marketing (whether by design or not). This factor alone will require a tremendous amount of re-evaluation of product intent, sales channels, and client journeys. Your lab will be happy to provide these fresh perspectives. The notion that this will occur naturally within the product teams, even if they have some digital proficiency, is wishful thinking. As an independent entity your lab is much better positioned to give a hard and sometimes harsh evaluation of what needs to be done.
In discussions with lab managers and senior management, they’ve talked candidly about how long they believe they will need laboratories. One lab manager in particular comes to mind; he worked for a large and wealthy financial services company. He was young, aggressive and rose through the ranks of his company to attain his position as lab head. He had a good foundation in the business, a lesser grasp of the tech and a fatally optimistic view of the speed of digital adoption. He was certain of the span of time it would take for digital to make its mark at his company. He boldly proclaimed that within two years, the lab should “go out of business” because sufficient digital skill will have taken root in the departments it served. I respectfully disagreed, using most of the arguments just presented. I also asked him to imagine a digitally unfriendly business manager who, rather than innovate, simply awaits the lab’s scheduled demise in two years.
The belief that your lab will become extinct in the short term shows a fundamental misunderstanding of the profound changes in management and process that digital will bring. It’s easy to say that digital can be understood by your senior management and business unit heads in, say, six months. This may actually be true. Mandatory focused training courses can bring an awareness of what digital is and can illustrate the changes coming. What it cannot do is bring the change itself, which will take time and require a concerted, organized effort to achieve a meaningful goal.
How long, you ask? Think of this along the timeframe of a decade. Humans take a share of the blame for not wanting to change, and for slowing the rate of adoption, but it goes well beyond that. Take a look at the rate of tech evolution. It is changing at such a blinding pace that we’re easily looking at another decade of profound assimilation and re-assimilation simply to keep up to speed. Thinking that you’re into the lab business for the short term ignores the magnitude of upheaval and undermines your future rather than buttressing it.
This is why innovation labs aren’t just the latest management fad. They are an integral part of all businesses aspiring to be part of the digital revolution. If indeed this were a fad, one might easily discover the “innovation lab guru” that promises attainment of digital nirvana if you just adopt his or her prescriptive, one-size-fits-all program. The sad news is, these gurus, if they do exist, are charlatans. There aren’t any easy paths to success or transformation.
Even with the best of labs, the journey to digital transformation is fraught with difficulty. The profound changes that digital brings will impact every corner of your company and no one, especially senior management, will be excluded from potential disruption. Rather than seek a guru, use your innovation lab as sherpas, and view digital transformation as your mountain to climb. You have to make the climb yourself, but the right guides can provide knowledge of the digital terrain, find the best route, do most of the heavy lifting, and provide the companionship essential for a successful summit.