Leaping the growth gap – Why companies are externalizing breakthrough innovation
Open innovation is well-established, but how many companies are prepared to outsource the whole innovation effort? Some companies are already paving the way and reaping the benefits.
By now all companies have got the message that effective innovation needs an “ecosystem” of partners. A good innovation ecosystem for a large company might include suppliers, specialist service providers, universities, start-ups, research institutes, funders, customers and, in certain cases, peers or competitors.
But in most cases, companies use their ecosystem partners merely as contributors to their innovation processes – co-innovators, maybe, but the overall process remains firmly under the control of the company.
There are some understandable reasons for this: firstly, product and service innovation is usually seen as being key for competitive advantage, and so needs to be governed and managed in-house even if there are multiple partners involved in its delivery. Secondly, innovation is inherently risky, and anything risky is difficult to contract out to a third party. And thirdly, turkeys generally don’t vote for Christmas – open innovation is one thing, but outsourcing innovation altogether feels pretty threatening for in-house innovation managers.
Why some companies are now taking the plunge
The combined pressures of low or stagnant growth in mature markets (such as consumer goods markets), disruption from rapidly scaling start-ups, and convergence between sectors, often with a digital component, are creating an actual or potential growth gap. To meet the gap, companies are being driven either towards expensive and risky acquisitions, or else towards increased emphasis on breakthrough innovation to create new step-out growth beyond the core. If you can make it work, creating a new business through breakthrough innovation costs a small fraction of that of an acquisition.
The pitfalls of managing breakthrough innovation at scale
However, managing effective breakthrough innovation on this bigger scale is not easy. Leveraging the innovation ecosystem is certainly a big part of the solution, but there are still some difficulties. In many large companies brand is king, so many great breakthrough concepts get strangled at birth or else severely watered down because they don’t fit within the straightjacket of existing brands. Many companies create internal breakthrough teams which are in some way insulated from normal restrictive corporate practices. However, these teams often focus on the front end of the innovation cycle, especially trend forecasting, idea generation, concept creation and prototype development. When the time comes for scale-up and commercialization, breakthroughs often flounder because the corporate “antibodies” from the receiving functions, departments and business units start to attack the business before it’s been de-risked. Breakthroughs may also fail because there is no suitable “home” in the current organizational structure.
Relying on incubating and accelerating start-ups for all your breakthroughs is also risky – they have their own interests, and they may not be as attractive in reality as they first appeared to be. Internal groups are often not so good at being truly agile, with a tendency to adopt the frills without the real philosophy. And finally, signaling your potential breakthroughs to your competitors long before they are launched can be hugely value-destroying. In a survey we conducted a few years ago, nearly 90 percent of companies were unhappy with their current approaches for systematic breakthrough innovation.
The case for externalizing
Externalizing the whole breakthrough innovation process can overcome many of these problems. In practice this means appointing an external partner organization to run the entire end-to-end innovation process, including market testing and even scale-up and launch. By doing this you can create a genuine step-out business without any adverse interference from the body corporate. You can work in a completely brand-agnostic way. You can keep the new business anonymous, both internally and externally, until it’s ready. You can test and de-risk the business before involving the company at large. And an external partner can be truly agile, working multi-functionally with a small team, integrating technology, strategy, commercial and operational issues, as well as working towards MVPs and early testing. We’ve seen cost and time-to-market reductions of up to 30 percent, as well as greatly enhanced insight and analytical underpinning.
Of course, as a company you still need to monitor closely what your partner is doing, and you need to be involved in key decision-making – so close day-to-day interaction through one or two trusted individuals is essential, and there needs to be a senior steering group. You need to be very clear with the partner at the outset what the objective is, and you need to ensure that there is a comprehensive transitioning process to integrate the new business back into the company in the latter stages. And, of course, you need to be sure that the partner has the right capabilities and skills in the first place.
As a company you might still think it’s risky to externalize innovation. But for companies looking for rapid step-out growth, when you compare the risks of externalizing to the alternatives, such as a major acquisition or trying to manage the whole thing internally, you might conclude that, actually, it’s the least risky option of all.
This article is part of a series of articles co-authored by Partners and Principals of Arthur D. Little in promotion of the new “breakthrough incubator” model. Contact analysts at Arthur D. Little: Rick Eagar, Max Senechal, Mitch Beaumont, Tim Barder, Kurt Baes, Phil Webster, and Simon Clark.
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