By Sarah Nicastro, Creator, Future of Field Service
This is part two of a two-part article discussing some of the reasons that service innovation fails. No, it isn’t meant to be depressing – but to give some food for thought on common missteps and roadblocks so you can avoid them. If you haven’t yet read part one, do so here.
(If you refuse to read part one first, just know that the insights featured in this article are from innovation thought leaders Frank Mattes, author, advisor & founder and CEO of Lean Scaleup and Dan Toma, award-winning author of the Corporate Startup and Innovation Accounting, and co-founder of innovation advisory firm OUTCOME.)
#6: Companies Believe Innovation Will Detract from the Core Business
There’s no denying the fact that juggling the demands of today’s business while planning for the business of the future is complex. But in today’s competitive landscape, it is also necessary. What companies sometimes overlook is that, if structured well, it is possible to focus on innovation without detracting from the performance of the core business. “If you look at the broad scale, companies are investing 70% in keeping their existing products and services relevant. Modernizing them, integrating speech interfaces and touch screens. Adding in one more functionality,” explains Mattes. “That’s perfectly fine, right? But the point is that it still locks the company inside the box. If the box changes, then it becomes hard. Therefore, we need to think wisely about where and how to spend the 10% innovation budget. That’s the average for innovation that is aiming at changing the order of things.”
These metrics clarify that innovation doesn’t have to detract from the core business in terms of budget, but it also doesn’t have to detract from the core business in terms of talent. In fact, Mattes has found with many of the organizations he worked with in writing the Lean Scaleup that for a company to innovate well, it only needs a small percentage of its workforce that are geared toward innovation. “Three of my clients said, ‘Well, Frank, we don’t need 100% of our staff to be really innovative. It’s only 4%, 6%, and 12%.,’” he says. “That’s what those three companies said. Four percent was an automotive company, six percent was a bank and 12 percent was a telecommunications company. You only need a fraction of people who understand innovative ideas and how they could be translated into the machine of the day-to-day business.”
Finally, we’ve seen in companies we’ve interviewed for the Future of Field Service podcast that even when more innovative offerings are introduced – say As-a-Service – you don’t have to rush in moving away from how you serve customers with your core business. In Kaer’s story, for instance, Dave Mackerness discusses the slow transition from core business to the As-a-Service concept to transitioning entirely to Cooling-as-a-Service.
#7: Companies Fail to Scale Innovation
“It turns out, it’s quite easy to drum out ideas and do some small-scale experiments,” says Mattes. “But, when it comes to really making it big, this is where seven out of eight of big ambitions fail.” What Mattes has centered his focus on is helping companies to scale innovation because he’s found that the majority of the challenge isn’t in developing innovative ideas, but in making them work at scale within a traditional business.
“These companies have built their organization as a machine, executing the same processes over and over again. Over the years, they have fine-tuned what they need to do, doing that flawlessly and most efficiently. There’s a lot of expertise in there, creating, delivering value at scale, and earning the margins,” he describes. “The problem is, when these companies set up their innovation ambitions, they found an innovation center or a digital lab, or an incubator, accelerator, or a corporate venture builder – there are several concepts and terminologies out there. But, for the sake of simplicity, let’s say there’s a little garden where smart people can think about the future. Then you have two systems. On the one side you have your day-to-day operations. Where customers log in their orders, which are then processed. The supply chain does its work, and the stuff is being shipped and serviced out in the field, et cetera. That’s a day-to-day business. And on the other side, you get those crazy ideas. There’s no problem in that. The problem arises when you try to make those bold ideas that should change the order of things big.”
When I talk with our audience in manufacturing who see the potential in Servitization, I think many would agree with the feeling of fighting against a “machine.” And this barrier to innovation isn’t anyone’s fault – that machine is what has led the company to its success thus far. However, staying stuck within the machine can also be what keeps a company too deeply rooted in its legacy to see what’s needed to continue its success into the future.
The changes that need to be made to allow for Servitization to grow from concept to reality often fight against the nature of a proven business, which is typically very short-term numbers driven. “The management system that you have, that you need for that day-to-day business is about efficiency, productivity, short term views and no risk. Risk is not a good thing if you want to have those processes,” says Mattes. “Now the people who have been playing out in that innovation playground come and say, ‘Let’s make this big. Let’s build a factory. Let’s build processes. Let’s recruit new people to sell that new stuff.’ This really conflicts with the management system that you have for the day-to-day business.”
Hope is not lost, however. Many companies are determining how to take those innovative ideas and integrate them in a way that they can scale – and mindset can’t be underemphasized. “When you want to achieve scale, you need to have a different thinking. The thinking rooted towards the running day-to-day businesses with a monthly, quarterly, annual horizon needs to shift to look at how you leverage all the good things that you’ve built up in the last 30, 40, 100 years of your corporate history. If you look at it, there’s so much there of corporate assets and corporate capabilities that could be the foundation of that future. With new value pools and new revenue streams,” says Mattes. “Innovation isn’t a conflict about people, but a conflict about systems. You need to establish a collaboration model. You need to define what is to be done in that transitional phase. It is a phase, when the ‘blue shirt’ innovators gradually hand over the responsibility for scaling up, and then actually running it at scale to the ‘red shirts.’
#8: Leaders Lack Courage
If you think about the layers of change that adopting not only a new mindset but a shift in systems and collaborative processes means for an organization to become adept at true innovation, you begin to understand the critical role leadership plays. To lead a company through innovation, especially if it is a company that has is working to modernize beyond its legacy business, takes courage. And not only courage, but tenacity. Not every leader is willing to take on what is necessary to succeed at innovation and this is another reason we see companies lag.
“Apart from the right thinking, tools, culture, and management systems, it takes courage to leave a little sheet of ice where the company lived comfortably over the last 30, 40, 50, maybe even 100 years, and venture out into the wild. Into the unknown, because some leaders recognize that the little sheet of ice is based is getting smaller and smaller by the year,” says Mattes.
But today’s leaders have a choice. “If you don’t take your future into your own hands and future-proof the company, the forces of the market will determine your future. In many cases this will not be the better option,” cautions Mattes. “Leadership plays an essential role in here. You can have the best process with all the jumps in between, all the validation, all the technology, you might even have a set up a collaboration model. But once leadership doesn’t support it, it all cracks. If you look on our website, leanscaleup.com, there’s a visual where we say out of the many cog wheels that run in the day-to-day business, leadership is that cog wheel that takes it out and creates that environment for the unfair advantage. It’s a leadership task, and in my view, it’s THE leadership task, to answer the question, how can we win today? How can we win the now? While at the same time, future-proofing the company, creating the NEW. Everything else delineates from there.”
In my conversation with Howard Bowland of Schneider Electric, we talked a lot about the traits leaders need to spark and sustain innovation as well as the traits of those who make for a strong team to spearhead innovation in a legacy business.
#9: Short Sightedness is Fueled by Unrealistic Expectations
We discussed that the core business is structured to focus largely on the short-term. In his latest book, Innovation Accounting, Dan Toma discusses why innovation and standard accounting don’t go well together. “In innovation, we are essentially trying to build things that are not that heavy on assets and financial accounting, looking at the value of a company or value of an idea through the number of assets it employs. With innovation, we’re doing the exact opposite,” he says. And this can be a hurdle that is hard for companies to overcome, because when they seek to measure the success or failure of innovation based on their standard accounting practices, they aren’t allowing the room companies need for innovation to develop from idea to concept to value.
Toma, who has led numerous start-ups, relays what businesses looking to innovate must learn from the start-up mentality. “We sought to build a complimentary system to financial accounting, that’s able to account for early-stage innovation. If we started a startup tomorrow, we are probably not going to be profitable for the next quarter or for the next two years,” he explains. “So, we need to have a system that allows us to say, ‘Yes, this idea is going to be successful, but in the future, not now, let’s not discontinue it.’”
A measurement system for innovation that takes these points into consideration helps leaders who are supporters of innovation protect the company’s investment of time, money, and resources into seeing the process through. “Otherwise, we might fall into the classical corporate trap where we value everything through the lens of financial accounting, and guess what we’re going to do?” asks Toma. “We’re always going to prioritize the core business and investment in the core business. And we are going to do that by always putting on the back burner innovation until we actually need them. And when we need them, we’re going to be sitting there and looking at our ourselves and say, ‘Okay, so where’s the innovation that should have saved us now?’ Well, it’s nowhere to be found. Why? Because we just used the wrong metrics whenever we had to take investment decisions.”
I am not an accounting expert by any far stretch of the imagination, so I expected Toma’s book to be a struggle for me to read. However, I was pleasantly surprised by the book’s readability, due in part to the analogies and anecdotes used. “I always give this simple example: if we take our kids to a swimming competition, they have their own benchmarks for their age bracket. We are never going to evaluate a 10-year-old swimmer or a 15-year-old swimmer for the performance of somebody that just won a medal in the Olympics, because it’s just impossible for a 10-year-old to compete with a 20-year-old and be able to hit the same benchmark,” Toma describes. “So, if we do that in sports, why don’t we do it with businesses, with innovation? Why do we compare an idea that was essentially founded three months ago or three weeks ago, or three days ago with a core business that we’ve had for a hundred years? We should never do that because we’re going to be super disappointed by what we have in front of us, what we’ve learned. And because of that, we’re just going to invest in the core business.”
#10: Companies Ignore the Reality that Innovation is Iterative
Finally, we need to fight the urge toward complacency and learn to never rest on our laurels. In the digital age everything moves faster, including the need to innovate – which means companies need to build an innovative mindset, culture, and system that can work iteratively over the long term. Not every innovation will be of the disruptive sort but focusing on creating a machine that fosters creativity versus nurtures the legacy is an investment in your future.