Recently I started advising two very large foreign corporations on whether to open up Innovation Outposts in Silicon Valley. Both companies have already established innovation centers in their home countries where they are working with local startups. In both cases, these innovation efforts are led by the corporate R&D organizations. In the eyes of both CEOs, these efforts are not viewed as effective. So, while some members of their teams are advocating the opening of outposts in Silicon Valley, the CEOs are not yet sold on the idea. In fact, during one of our sessions the CEO stated that “we are losing ground in innovation rather than gaining. Maybe startup-driven innovation is not for us and a presence in Silicon Valley won’t change that.” Despite this CEO’s hesitation, corporations acknowledge Silicon Valley as the epicenter of startup innovation and are rushing to establish Innovation Outposts here. Today there may be over 500 corporate innovation outposts in Silicon Valley and more are announced on a weekly basis. Establishing an effective corporate innovation outpost, even a small one, requires the CEO along with the senior management team to make five important decisions. In this post, we consider these decisions.
The Redefined Role of Corporate R&D
But first, a little perspective. While the corporate innovation role by default is assigned to the R&D organization, as the CEOs in story have done, over the past 15-20 years the overall R&D model has been redefined. R&D organizations have been pushed to work more on D, or at best, advanced D, and less on R. Researchers are asked to address shorter-term problems rather than work on potentially disruptive ideas. As a result, corporate R&D organizations have been producing sustaining innovations that protect and prolong the life of existing products, revenue streams and business models. IBM’s mainframe computer business, one of the company’s important revenue and profit generators, provides an excellent example of this trend. Each new generation of mainframe computer released by IBM incorporates several technology innovations, many produced by IBM’s R&D organization, that have enabled the corporation to offer new solutions and enter new markets. In addition to being a back office transaction workhorse, the IBM mainframe has become an e-commerce server, a web application server, and a private cloud computing server. These additions have not only extended the mainframe’s life but have provided IBM with new and important revenues and profits. Due to this redefinition of R&D’s role, many researchers have left corporate research labs to join startups or to start companies themselves, further hampering corporate efforts on disruptive innovation. Now many corporations are realizing that while their R&D organizations have the innovation mission, they are not longer putting them in the position to disrupt or anticipate disruptions. At the same time, the general pace of innovation is accelerating.
This brain drain from the R&D labs is not the only problem corporations face with regards to their ability to disrupt or avoid being disrupted. Innovation is changing in a way that renders an R&D-centric model inadequate. Today’s disruptors are combining technology innovation with other types of innovation, e.g., business model. Consider Salesforce.com and Tesla Motors: by utilizing technology, business model and sales model innovations, they are disrupting the enterprise software and automotive industries respectively.
Because of these changes, the typical corporate R&D organization cannot:
- Keep up with technology innovations: Even corporations with high R&D spending are coming to the conclusion that the existing R&D model cannot keep pace with exponential technologies and the accelerating pace of information technologies, biotechnologies, and materials.
- Address the global creation of innovation: Disruptive innovation is now created around the world by companies of any size, many of them startups. These companies are funded by abundant capital from institutional venture investors, private investors, and other sources. Our hyperconnected world is amplifying the effects of these companies and causes them to have global impact, as seen with companies from Israel, India, China, and Brazil.
- Properly align technology with other types of innovation: Corporate R&D remains focused on technology innovation. Certainly these organizations have little, or no, ability to appreciate and create other forms of innovation.
Corporate Leadership’s Innovation Outpost Decision Process
Like the two CEOs I’m advising, most CEOs assign the management of their innovation centers and of the startup relations to their R&D organizations. While this avoids internal management conflict, it is the wrong decision. CEOs and their senior management teams should have a strategic conversation of whether their corporations should establish an Innovation Outpost, in Silicon Valley or some other innovation ecosystem. Because these are strategic decisions, the conversation should definitely include the Chief Digital Officer, the Chief Strategy Officer, the CFO, and the Head of R&D, and maybe even the board of directors.
There are five decisions needed to establish an Innovation Outpost.
First, is whether startup-driven innovation should be part of the corporate innovation portfolio. There may be several reasons for including this type of innovation in the corporate portfolio:
- The corporation is being disrupted now, as it is happening in many IT and telecommunications corporations.
- The corporation anticipates being disrupted in the near future, as is the case in the automotive and chemical industries.
- The corporation cannot keep up with the pace of innovation in their industry, as is happening in the pharmaceutical, financial services and consumer packaged goods industries.
- The corporation wants to start promoting intrapreneurship, as corporations such as Google, Amazon, and Facebook do.
Second, agree on the timeline to ROI and the amount of risk the corporation is willing to assume. Ensure that an Innovation Outpost can provide results at the speed the corporation needs them. The sense and respond model of Innovation Outposts is appropriate when:
- A disruption has not already happened or is not imminent. In other words, the disruption is only expected to happen within 5+ years.
- A disruption does not present an existential threat to the corporation, i.e., it can be addressed with a relatively modest investment required for the establishment and expansion of the outpost, rather than the large investments required for corporate moonshots, e.g., IBM’s Watson. I will cover corporate moonshots in a subsequent piece.
- Startups are developing IP relevant to the disruption.
Otherwise, the corporation may need a different approach to addressing the disruption such as making a large scale acquisition, e.g., VMWare’s acquisition of Nicira, or outright selling itself, e.g., EMC’s sale to Dell.
At this point, the CEO and the senior management team need to visit startup ecosystems to explore and validate whether the reality matches the goals of addressing the corporation’s innovation challenges. These visits must be led by the CEO, and maybe even the corporation’s board of directors, along with the executives that are expected to be innovation change agents. It may be necessary to visit a particular startup ecosystem multiple times.
Third, identify 1-2 big strategic problems that will be addressed through the presence in the selected startup ecosystem, e.g., developing autonomous connected vehicles. The selecting of these problems defines the charter for the Innovation Outpost. For this discussion, the participation of the senior management team is particularly important. Identifying these strategic problems enables the corporation to decide on the location of the Innovation Outpost, define success, and the KPIs that will be used to measure progress.
Fourth, determine the Innovation Outpost’s success strategy. In the process, the corporation must recognize that an Innovation Outpost most often fails as it may come up with innovations no operating division wants and/or the corporation refuses to fund. As part of this decision, the corporation must decide what happens if the Innovation Outpost develops disruptive solutions that do not fit the existing business model(s). Does it create a new business unit, does it spin out the disruptive solution organization? Xerox’s failure to adopt PARC’s innovations (their Innovation Outpost) that became the Apple Macintosh still challenges all new Innovation Outposts.
Fifth, establish the Innovation Outpost and staff the innovation enabling group(s) that will be part of the Stage 1 Outpost. Establishing an Outpost enables innovation but does not constitute innovation. As part of this decision, the corporation establishes the approaches to leveraging startup innovation (invest, partner, acquire, incubate, invent) and the timelines to ROI.
The complete five-decision process is shown in Figure 1.
Decision 1: Should startup innovation be part of the corporate innovation portfolio?
Decision 2: Will the sense and respond model of the Innovation Outpost provide results at the speed the corporation needs them?
Decision 3: Can you identify 1-2 strategic problems the Stage 1 Innovation Outpost will pursue?
Decision 4: What will constitute success for the Innovation Outpost? Through what KPIs will the corporation measure the Innovation Outpost’s progress?
Decision 5: What Innovation Enablers will the Stage 1 Innovation Outpost include in order to pursue the areas selected through Decision 3?
Figure 1: The decision process to establishing a Corporation Innovation Outpost
I have reached the following conclusions from my work with corporations on their startup-driven innovation initiatives and particularly on the decision process around establishing Innovation Outposts:
- Innovation Outposts are not appropriate for every company. Corporations must go through a structured decision process to determine the specific role the Innovation Outpost will play to address their innovation needs.
- The decision to establish and later expand an Innovation Outpost must be taken by the CEO working together with members of the senior management team because it has big implications to the corporation’s innovation model and ability to disrupt or avoid being disrupted.
- Establishing an Innovation Outpost doesn’t mean that the corporation is innovating. The corporate management must understand that the groups staffing the Outpost are enabling organizations.
- Establishing and maintaining the Innovation Outpost requires hands-on management by the CEO and the senior executive team. Mere so-called executive support doesn’t suffice because of the strategic implications the Innovation Outpost’s work can have on the corporation’s innovation-related decisions.
(Cross-posted @ Re-Imagining Corporate Innovation with a Silicon Valley Perspective)