The Other Side of Innovation

Vijay Govindarajan: I think a good example would be, say, Apple's iPod, was an innovation because it really brought digital music accessible to the individual, or if you go back to Apple's history, say, the personal computer itself, essentially it made computer accessible to every human being, because prior to that it was only large companies or big universities bought the mainframe computer. So you can think of any number of products that we have, in fact our quality of life today is so much better than 100 years ago, and that's all because of innovation, whether it is jet engines that created the whole industry, the whole airline industry. So that's what we mean by innovation, it really improves the quality of life.

Rachel Salaman: Is innovation more important or more prominent now than it has been before do you think?

Vijay Govindarajan: In a way, yes, because innovation is in response to change, and if one looks at the rate of change in the last 100 years and try to track the rate of change in every decade, one would quickly see that the rate of change is only accelerating, and if you take a look at the last 10 years compared to, say, 1990 to 2000 versus 2000 to 2010, one would agree the rate of change in the last 10 years is a lot more than the rate of change 10 years before that, and the rate of change in the next 10 years is going to be even faster. So to that extent I would say innovation is more important.

Rachel Salaman: So what, in broad terms, we'll talk about this in a bit more detail later, but in broad terms what are some of the execution challenges that organizations face around innovation?

Vijay Govindarajan: You see, the most fundamental execution challenge is a large organization has a core business, which is their current business, where you need to be efficient, where you focus on efficiency. Innovation is the opposite of efficiency, so therefore a fundamental challenge is you're trying to have two very different processes happen inside the same company; one process in the core business which is focused on efficiency, and then this new business which is innovative, and how do you manage this tension is at the core of the execution challenge.

Rachel Salaman: Can you elaborate a bit on that, perhaps use some examples?

Vijay Govindarajan: Take a look at a company like New York Times, which is one of the premier newspaper companies, and it has 150 year history, a very successful, dominant newspaper in the United States, and in the mid-90s they noticed something called the Internet and said "This is going to change the way people access information," and therefore they went on a journey to innovate on the Internet space, and that business was New York Times Digital.

Now if you go back to 1995, the New York Times Company had one core business, which was the New York Times printed newspaper. That business was a well established business, its 150 year old business, they know how to do that, they know how to collect data, they know how to do great stories, they know how to get the subscriptions, how to generate the ad revenue, that was a well-oiled machine which was really focused on efficiency, just to run that operation as efficiently as they can, but in 1995 they went on this innovation journey to create a new space on the web called the New York Times Digital.

Now in 1995, if someone asked them "What is the size of the market they will capture on the web?", they have to say "I don't know," because nobody knew, whereas if you asked them the question "What is the size of the market for the printed newspaper?" they had a pretty good idea. Similarly, on the web, they could not define their competitors, a company called Google. Yahoo had not even been born at that time, whereas their competitors were well defined in their core business, their customers were well defined, their technology was well defined in the core business, whereas on the web the technology was evolving, competitors were evolving, customers were evolving, everything was unknown. This is what we mean by the core business is an efficiency machine, whereas this new business is an innovation engine with very, very different dynamics. So the job at the Times company is to be able to manage these two inconsistencies inside the same organization.

Rachel Salaman: And how do they do that?

Vijay Govindarajan: I think there are three very important principles. These are simple principles which we go into great depth in the book, because these are simple principles it is easy to understand them, but it is extremely hard to do, that is why most companies struggle. The first principle is, if you want innovation you have to create a separate team. You cannot ask the core business to innovate because the core business is built not for innovation but for efficiency. So you have to create a separate team, and the team has to be created as though it was a start-up, therefore it has to have its own dynamics in terms of the people you recruit, in terms of the processes you have, the performance score card, the culture, everything has got to be different.

So in the New York Times Digital case, they brought someone from the outside to be a leader of that New York Times Digital. Incidentally, that is an unusual step for the New York Times Company because most of the employees at that company have worked for them for many, many years. In fact, if you work for New York Times for less than 20 years you are called a newcomer. That culture, you bring someone from the outside, and 75 percent of the staff in the New York Times Digital were recruited from the outside, and they had a completely different set of planning processes, they even moved out of the New York Times building into their own separate space to create a separate culture. So you need to build a dedicated team, that's the first principle.

The second principle is, while you create a separate team for innovation, it cannot be isolated from the core, because the main reason why a large company is pursuing this innovation is because they have some assets, some capabilities that can be leveraged in this innovation. So in the case of New York Times, what they could leverage was the brand and the content. So there has to be a connection between this dedicated team and the core, so that's the second principle. When you have that connection it creates a lot of conflicts, and we can come and talk about how we manage those conflicts.

The third principle is you have to evaluate the dedicated team not on short and financial metric, that's how you evaluate the core, but you've got to evaluate the dedicated team in a very, very different way, because innovation by definition is an experiment and experiments have unknown outcomes, so therefore you have to evaluate them on conducting disciplined experiments, therefore you have to evaluate them on learning, not on results. Too often companies make the mistake of evaluating innovation teams on results because they want results, therefore they evaluate them on results. If you evaluate them on results you are not going to get results. If you evaluate them on learning they will learn to make better decisions and those decisions will ultimately lead to better results. So those are the three key principles; create a separate team, but then the separate team has to work, principle number two, in partnership with the core, and principle number three is you have to evaluate the innovation team on disciplined experimentation.

Rachel Salaman: In your book you stress the importance of the supervising executive, the person who's managing this process that you described. What qualities do these managers need?

Vijay Govindarajan: I think the person who's supervising the innovation team, the most important requirement is they're very good in resolving conflicts, because there is going to be conflicts between the innovation team, the dedicated team, and the core. For instance, one of the companies we studied for this research is Infosys, which is a software company from India, and historically they developed custom software for American companies, and the reason why that was a good business to be in is a bank's operation is very different from the operation of a hospital, therefore the software that a bank needs has got to be very different than the software to run a hospital. Even a boat company's got a standard software, SAP or something like that, it has to be customized because the operations are different, and essentially this Infosys wrote the software codes and they created this global delivery model where 25 percent of the work was done close to the customer and 75 percent of the work was done in India where there were highly skilled low-cost labor; this was their main key to success. And they started in 1980, and by 2000 they just had one business, this custom software house, but then starting in 2000 they went on an innovation spree because part of the reason is their space, the custom software business space, got crowded, people like IBM, Accenture, also moved into that space. So in order to grow they had to innovate, and one way they innovated is to provide end-to-end solution for the customer. Earlier they were just giving software codes, now they said "Why don't we give them consulting?", so they got into the consulting business.

In the consulting business you give advice as to what strategy they should pursue, what processes they should have, whereas in the software business they were simply responding to a request for proposal, where the companies already decided what process they should have, they're just asking for somebody to write a program, whereas in the consulting business you decide what process you should have. So the consulting business is very, very different from the custom software business. In the consulting business you talk to the CEO, in the software business you are talking to the CTO. The software business is a technical business, whereas consulting is solving business problems.

So in order to do this they first created a dedicated team to do consulting. They recruited people from the outside, they had different compensation, different culture, etc., but the consulting business obviously has to leverage some assets from the custom software, and the asset that they leveraged was the customer relationships, because the consulting wanted to give consulting advice to the same customer that they had built for 20 years. So that was the link between this new business and the core, and that link creates a lot of tensions because if I am running the custom software business and I have a client for 20 years, I don't want to share that client with the new kid on the town, the consulting business; partly I am afraid they may do a lousy job, therefore my relationship with my client may get affected, or I may be afraid that the consulting business quickly will take over the relationship because they're talking to the CEO, whereas my relationship was with the CTO, soon I may lose that relationship permanently. So there is a lot of in-built tensions.

Both the teams reporting to the CEO, and the CEO in this case was the supervising executive. So job number one for the CEO is to make sure that these conflicts, which are inevitable, are understood and managed. If you cannot manage those conflicts, then the dedicated team cannot effectively borrow the assets and capabilities, and if they cannot get access to the customer then their chance of success goes down. So the most important quality of the supervising executive has to be an effective conflict resolver.

Rachel Salaman: Does this particular situation require any particular conflict resolution skills?

Vijay Govindarajan: I think there are certain things that the supervising executive can do in order to smooth the conflict. For instance, going back to Infosys, one thing that the CEO did was he created a board for the Infosys consulting, and the Infosys software business also had a board, and he made sure that there was a few members who were common in both the boards. By keeping common membership they were able to align the interests of these two groups. The second thing he did was he made sure that stock options were given for the person who was running the consulting business as well as for the person who was running the software business, and stock options, the value of your stock option goes up if the company as a whole does well because it's based on the stock price, so therefore both were interested in making sure Infosys as a company does well, that again makes sure that their differences are somehow resolved. The third thing he did was he made sure that if the custom software part of Infosys, if they gave access for their client to the consulting business and the consulting business therefore was able to generate revenues, that revenue was double counted, so therefore the credit for generating the consulting revenue went for the consulting business as well as for the software business, so therefore I had incentive to give access, my client access to the system business unit because I also got the benefit of their sales revenue. So these are some mechanisms that they did to be sure that the conflicts are reduced.

Rachel Salaman: Let's talk about developing this project team, what are the first things a manager should consider when putting a team in place?

Vijay Govindarajan: I think when you're creating a dedicated team to do the innovation, the most important principle is think of building the team as though you're building a start-up company. By that I mean, if you are creating a consulting business, if you're Infosys, create that consulting business as though it is a stand-alone start-up company. Therefore one question is, who would you recruit? Would you recruit people from Infosys software business, or would you recruit somebody from the outside? If you're a pure start-up you have the choice, so think of creating that company that way, because there is a tendency to transfer people from the inside to the dedicated team, because it is easy to do, sometimes you think you're giving a reward for people by transferring them. It could be a serious mistake, because the skills that are needed, say in the Infosys consulting, are very, very different than the skills that are needed to write software codes, so by transferring internally you may actually really kill that innovation. So the principle number one is imagine you're a start-up company, what would you do in terms of who you recruit, the processes you're going to put in place, the culture you're going to establish, the performance score card you're going to have, all of that will be very, very different, so that's the most important thing.

Rachel Salaman: You advise managers to divide the labor in the project team, what do you mean by that?

Vijay Govindarajan: Yeah, the key in dividing the labor is to understand that innovation need not have to happen completely 100 percent in the dedicated team, because there are some parts of the core business, we refer to the core business as the performance engine because that's what its focused on, efficiency, some parts of the performance engine can help in the innovation. So therefore, first, you step back and think about "Here is an innovation that I need to introduce, what part of this innovation can the performance engine do?" Sometimes it can sell the product, so in which case you don't have to create a sales organization separately for the innovation team. So in some sense, before you start the innovation, before you start building the dedicated team, first understand what are the tasks that can be done by the performance engine and what tasks for which you need to create the dedicated team, and that's the division of labor that's very important because the innovation is done as a partnership between some parts of the performance engine who can support the innovation and the dedicated team.

Rachel Salaman: So once the team is in place and being managed well, you need to plan the project. What's your key advice here?

Vijay Govindarajan: I think what we really need to recognize on the planning side is innovation is an experiment, an experiment with unknown outcomes, so therefore we need to prepare the plan with the premise that the plan that you come up with is wrong, because when you prepare a business plan for the performance engine, the business plan can be pretty accurate because it is a non-business. When you prepare a business plan for the innovation, because so much is unknown, the business plan tends to be a wild guess, that's what it is, so you know when you prepare a business plan it is wrong. Now you may ask the question "Why are you preparing a business plan knowing it is wrong?" You prepare a business plan, not because the numbers are right, you know the numbers are wrong, the reason you prepare a business plan is to understand the assumptions behind the numbers. What you're really interested in is what are the assumptions you are making, and if those assumptions are true, then you will realize a lot of profits.

So the number that you have for profit is not important, what is important is what are you assuming, the assumptions are what is important, and then you must have a disciplined process to test the assumptions, convert assumptions into knowledge before you implement the innovation. Therefore the whole implementation process in innovation is about testing assumptions, converting assumptions into knowledge. When you are converting assumptions into knowledge, the golden principle we talk about is spend a little and learn a lot. There are a lot of assumptions to test, you don't want to spend a lot of money, spend as little as possible to test assumptions, conduct a smaller experiment before you conduct a bigger experiment, because the bigger experiment now is benefiting from the knowledge from the smaller experiment, therefore you're not wasting resources. That's what we mean by the planning process has got to be different for innovation.

Another way I can say this is the whole of our focus in the part two of the book is about how do you amplify weak signals. If you want your innovation to succeed, you must be able to amplify weak signals. Now what I mean by weak signals is the assumptions, because the future is unknown, innovation has so many unknown parameters, so your ability to amplify weak signals is what gives you the ability to win in the innovation game.

Incidentally, when signals are weak, if you're a manager you can take actions in one of two ways. One way you can take action is to wait for the signals to be crystal clear before you invest. I wish we could do that. Unfortunately, in real life, by the time the signals are clear the game is over. So the other approach is to amplify weak signals yourself, and when you amplify weak signals you have to follow the golden rule of spend a little and learn a lot, because the signals are so weak that if you spend a lot of money you could be wasting resources. Sometimes the weak signals may actually indicate this project has no future, so you may shut down the project also. So my point is, the whole purpose of part two of the book is how do you meaningfully amplify weak signals.

Rachel Salaman: Now your book is mainly about how to execute innovation projects, but how do you get the innovative ideas in the first place?

Vijay Govindarajan: I think without innovative ideas there is no innovation, because the starting point for innovation is ideas, so ideas are very, very important. The reason we wrote this book is people tend to over-emphasize ideas and under-emphasize execution, for a lot of reasons, because ideas seem sexy and glamorous whereas execution looks long behind the scenes, boring things, so they ignore it. That's why we wrote this book, and Thomas Alva Edison, the greatest innovator of all time, put it nicely; "Innovation is one percent inspiration and 99 percent perspiration?, and the one percent inspiration is generating the ideas, 99 percent perspiration is scaling up the idea into a successful business, and we tend to ignore the 99 percent. That's why we wrote the book, but we thought the one percent/99 percent doesn't matter.

What I would advise companies to do in order to generate the ideas, which is very, very important, is really follow a democratic process. By that I mean you should empower everybody in the organization to come up with ideas for growth, because too often companies think that the CEO, the Chief Executive Officer, should be the person who should be thinking about ideas. That's wrong. Or create a small think tank somewhere and say "Let them think up the ideas." That is wrong. We should empower every employee to say, come up for ideas for growth, and the reason that's important is innovation and innovative ideas is about responding to change.

Imagine, suppose you're an automobile company, and you want to innovate a new automobile concept, say, in China. Now who understands the automotive market and its dynamics in China? How fast is the Chinese consumer evolving, how fast is local competitors building capabilities, what is happening in the technology front and distribution front in China? The so-called front-line employees in China are the CEO of an American car company sitting in Detroit. So we must really empower people close to the action, the so-called "doers" out on the field, encourage them to give up ideas for growth. So if you can do that, actually you can get a lot of creative ideas.

We talked a little bit about Infosys, one of the things Infosys does is they have something called Voice of the Youth program. What that is, is when they prepare their strategy, which is where they come up with innovative ideas, they pick a handful of young employees and ask them to work with the senior management team, and their job is to critique and come up with critical assessment of the innovation trajectory of the whole company, and by including these young people, who are connected to all the front-line employees, they want the ideas from there to come into their strategy. So if you want to get ideas, plug into each and every employee in your company.

Another source for good ideas is to connect with customers. Your customers, particularly not every one of them, but there are some really stretched customers, demanding customers who actually are able to see the future. By having a conversation with some select customers you can actually get your own idea pump priming.

So there are several sources to get the ideas, that's what I would say.

Rachel Salaman: Is innovation something that all companies should be doing?

Vijay Govindarajan: Without a question. If you don't innovate, you die, because when you think of a pure start-up company, you can only succeed as a start-up company if you innovate, you come up with something new, and when you come up with something new and are succeeding with it, if you don't come up with the next generation your company will die with the first innovation. So in order for you to remain as a strong, viable institution you have to constantly innovate because the world constantly changes. If you don't innovate your product life-cycle and company life-cycle will be one and the same, you introduce one great new product and that new product dies, your company will die. So if you want your company to live forever you have to come up with the next new product, next new product, because the world keeps changing. And therefore I would say innovation is not restricted to high-tech sector or any other sector, it is something which his the life blood for every organization and for every company.

Rachel Salaman: Vijay Govindarajan, talking to me in London. The name of his book again is "The Other Side of Innovation: Solving the Execution Challenge," co-authored with Chris Trimble. VG also has a blog, which you'll find at www.vijaygovindarajan.com.

I'll be back next week with another Expert Interview. Until then, goodbye.