JESSE NIEMINEN

JESSE NIEMINEN | March 12, 2020

As I’m writing this, the last couple of weeks have been quite eventful around the world. There’s a lot of uncertainty and even panic regarding the coronavirus, its current and potential impact on our economy, and of course, its effects on people all around the world. As a result, we’re seeing more and more action being taken to mitigate the spread of the virus. Businesses are preparing for the tough times that might be ahead, should the disease continue spreading and actions to mitigate it become even more common. While it’s obviously smart to prepare for a potential downturn by setting priorities, focusing on the essentials and then cutting back on the rest, we’re also unfortunately seeing a number of organizations ramp down innovation until a "better time" emerges in the future. That is, however, quite shortsighted. Regardless of how dire the situation might be, innovation really shouldn’t be one of the things that gets cut when you spot trouble on the horizon. Let’s look at why that is the case. If you’re one of the innovators who’ve had to start defending your work, hopefully this post can provide you with ammunition for the fight. Downturns are prime territory for disruption No matter how bad the economy, there are always companies that thrive during tough times. But who are these companies? In essence, it’s primarily the companies that offer more value for less. That of course means that businesses like discount retailers are likely to triumph over department stores. But, more importantly for us, economic downturns are always a great time for disruptive innovation. Disruptive innovation usually starts from the low-end of the of market, which means that these innovators are uniquely positioned for tough times. It’s much easier for these disruptors to gain business since both consumers and businesses are actively looking for ways to meet their needs with new, more affordable solutions. They’re also willing to be more flexible regarding some of the other aspects of the product or service, which would’ve previously tipped the scales in favor of the incumbent. For example, during the 2008-09 financial crisis, most companies cut their technology budgets by 20-30%. That obviously meant quite a bit of trouble for most technology companies. However, during the same timeframe even the worst quarter of revenue growth for Salesforce.com was above 20%, thanks to their then uniquely flexible Software as a Service (SaaS) business model with very limited up-front costs. Smart entrepreneurs and business leaders know the opportunity these situations represent for them, which means that we’re going to see many new, smarter low-cost alternatives that will use new technology and business models to undercut and disrupt the incumbents in a wide range of markets. What makes the situation worse for the incumbents is that they often reduce or cut their investments in improving their own products and services to try to cope with the situation, which allows the entrants to actually catch up even faster than they would’ve otherwise done. Innovation is a great tool for cutting costs – the right way When companies spot trouble in the horizon, they naturally try to prepare for it, as they rightly should, which typically means building up cash reserves, cutting operational costs and reducing future investments in areas like increasing production capacity. However, what you don’t want to do is to cut down on costs in a way that actually ends up hurting you in the long-term. In Finland, this kind of shortsighted behavior is often referred to as “peeing in your pants to keep warm in the winter”, and that’s exactly what dropping innovation during tough times is. You might feel cozy for a couple of quarters but if the downturn lasts longer, you’ll just end up getting into more trouble. Even if you survive until the end of the downturn, you have nothing left to build your future growth upon and you’re going to be left standing there with the competition soaring past you from all sides as you try to scramble together your response to the new products, services and business models that the competitors have been perfecting for quite some time. Having said that, there are many ways to cut down on costs that make sense both in the short and long term. Let’s use a simple matrix to look at what these kinds of cost cuts are like. Quick wins Quick wins can serve as the first-aid kit for your business. These are areas where you can see results right away. These are usually the things everyone knows are costly and not really delivering results, but that have been kept around for one reason or the other – often sunk cost fallacy. Maybe it’s an agency partner that hasn’t been able to deliver on their promises, or an advertising campaign that hasn't really seemed to work. In general, offloading significant unnecessary or unproductive expenditures and moving future purchases to business models with less up-front expenses and more flexibility, such as SaaS, are examples of moves you can make here to increase cash flow and minimize risks. Unnecessary frivolities Frivolities are basically the things that are plain unnecessary, or just nice to have things that no one’s really bothered to think about during the good times. Individually these don’t really have much of an effect, but when you combine hundreds or thousands of them, these can actually end up making a difference financially. Frivolities can be anything from unnecessary travel to an extravagant assortment of snacks, or overly expensive company events. I recently heard of a large organization that managed to save huge amounts of money simply by switching to a less expensive brand of toilet paper in all of their hundreds of locations. However, some of these seemingly unnecessary frivolities might still be beloved by employees, so ask around before you proceed to cut all of them. Restructuring Even though restructuring is always painful, the sooner you do it, the better off you’ll generally be. For example, if a business unit hasn’t grown in years and still continues to bleed red, you might want to consider selling such a business off in preparation of tough times that might be ahead for the business. Even if it’s not the best time to sell such assets, divesting could still be a good idea since this would both save capital going forward and provide an immediately noticeable increase in cash reserves. You’d also do well to remember that great businesses come out of a recession strong, and the bad ones are simply likely to die. Thus, time likely won’t help make these assets more valuable. Productivity improvements Productivity improvements help you do more with less, which means that they obviously should be at the heart of every cost cutting program. Productivity improvements often take some time to implement, which means that if the situation is dire, you might need to take some of the above measures to increase cash reserves before the impact of increased productivity starts to really kick in. However, the beauty of productivity improvements is that their effects aren’t limited to just a short-term impact on the bottom line. Their effects will stick around for a long time and can even become a clear competitive advantage for the business going forward. The interesting thing is that, by definition, you need innovation to achieve improvements in productivity. Process automation and innovation are probably the most obvious examples of these kinds of improvements. As you can see, these four areas cover a lot of ground and provide you with plenty of options for cutting costs. At least in my experience, it’s very rare for a healthy business to actually get to a position where they have no option but to cut down on innovation investments to stay in business, even when times are tough. Tough times provide new opportunities for innovation So, now that we’ve established that there are plenty of ways to improve your cash position and cash flow going forward without decreasing investments in innovation, let’s look at why you might actually want to invest more in it during a downturn! As I’m sure most people who read this already understand, without innovation the future will be exactly the same as today, and that simply won’t be enough to be competitive in the future. Investing in innovation is not a nice-to-have, it’s a necessity to just stay in the game. If the situation is dire, you should, of course, focus your innovation efforts on improving productivity and efficiency first to find ways to survive and make your core business more competitive going forward. However, as mentioned, a downturn is a great time to introduce new low-end innovations to the market since even though there’s less demand overall, there will likely be more demand and willingness to try new services and products that offer more for less. The positive here is that when demand for your more expensive offerings is nonexistent or significantly down, there’s naturally less downside from cannibalization. It's also much easier to uncover new problems that people weren’t previously aware of, or at least didn’t consider to be a priority. Together these factors provide you with many, likely untapped, opportunities that consumers and businesses would be willing to pay for. These innovations can be the drivers of your future growth. In addition, a downturn is a great time to invest in innovation largely because many of your competitors likely aren’t doing so! This means that by focusing your efforts in innovation, you can build a solid head start over the competition that is just looking to survive and come out strong once demand picks up again. What’s more, talent is always a key driver of innovation and if others aren’t investing in acquiring fresh talent, it will be much easier and more affordable for you to do so. Last but not least, tough times can help you create a strong sense of urgency, which is usually needed to make change happen in large organizations, and that’s certainly true for innovation as well. Thus, take advantage of the crisis and try to get people across the organization to stand behind innovation to help you build a better tomorrow together. Action points So, to sum up, when tough times are ahead, don’t cut back on innovation. Double down on it! Here's a quick overview of the steps you might want to consider taking when you see trouble on the horizon:   Use the crisis to create a sense of urgency If needed, find ways to use innovation to cut down on costs to provide the cash flow needed for future investments Proceed to take advantage of the opportunities provided by the rapidly changing landscape, typically with adjacent or breakthrough innovation focused on the low-end of the market. And remember that speed is of the essence. To get started, you can run an idea challenge for all of your employees. This can help you kickstart the process and focus the cuts on where it hurts the least. Idea challenges are a great way to build a sense of community and urgency so that everyone in your organization can help do their part to turn things around. The themes of this challenge could, for example, be either one of the topics below. Productivity improvements From the top-down, it's often hard to know which processes are efficient and which aren’t, but the employees that face it day-to-day, know that without a doubt. Employees often also have very good ideas on how to actually fix these processes as well. A well-organized pool of ideas also helps you to better evaluate the opportunities and choose which areas to focus on. Thus, asking your employees for ideas on how to improve productivity certainly makes sense! Cost savings When it comes to making cost cuts from above, there are two fundamental challenges: There are often plenty of opportunities for saving on costs that are impossible to spot from the top down There are many areas where cost cuts can face a lot of resistance from employees and damage morale and culture By making the process of choosing targets for cost savings transparent and bidirectional, you’ll address both of these issues. You can spot areas that you otherwise wouldn’t have, and you’ll also be able to see beforehand which cuts will face the most resistance from employees. Often the ideas of front-line employees have actually ended up saving the company much more than management initially thought possible. And, in general, when you communicate that you “need to prepare for the tough times ahead so that you can behave responsibly and keep as many employees as possible, but that to do that, you need to work together to find ways to do this”, you’ll have a great opportunity to get the team to stand together and put up a fight as opposed to everyone just covering their own bases. You'd do well to remember that no recession has ever lasted for more than a few years, so keep investing in innovation to build the future of your organization and you can come out of any possible recession stronger than before.

JESSE NIEMINEN | November 01, 2019

With 80% of executives considering their businesses to be at risk for being disrupted in the near future, they are under tremendous pressure to transform their organizations towards becoming more innovative. However, any organizational change, let alone a major transformation, is always very difficult to implement successfully. In this post, we’ll look into some of the lessons we’ve learned from helping our customers with these efforts, as well as explain how to use an innovation maturity matrix, a tool we've designed for this specific purpose. Why do an innovation transformation? To begin with, we first need to explore why a transformation is necessary. Why couldn’t an organization just make minor changes, or add a new innovation team to the mix and expect solid results from innovation? The answer is quite simple: innovation isn’t something you can simply add to the mix, it needs to be a core part of the way the organization works. There are two main reasons for this: The traditional R&D style of innovation is broken Innovation activities that don’t integrate with the core business don’t lead to anything Traditional R&D isn’t working anymore What we mean by the traditional R&D style of innovation being broken is that even though companies are pouring in millions or even billions into R&D investments, that doesn’t mean they would get a solid return for those investments. It’s been shown that there is no real relationship between R&D spend and innovation. There are a couple of reasons for this. The first is that the R&D departments of most large organizations are typically quite technology-oriented and tend to take very long to introduce their new products and services to the market. With the rapid rate of change and intense competition we see across industries, these make success against nimbler and more customer-focused competitors challenging. What’s more, their focus on just a few projects at a time is also a big challenge, especially when combined with those long development cycles. That means that for the organization to reach their goals, virtually every single one of those projects needs to succeed big time. However, if you’ve ever worked in innovation, you know that that will be highly unlikely, given that most innovations fail. There are obviously still great companies that invest heavily into R&D and manage to turn those investments into successful innovations with staggering success rates, however, there seem to be fewer and fewer of those as time has gone by. Innovation theater The other issue, just adding innovation activities, such as idea challenges, hackathons, design thinking workshops etc., to an existing organization is referred to as innovation theater. These activities usually bring with them a lot of excitement and people feel great about the organization finally starting to emphasize innovation. After the activities end, the organization ends up having plenty of ideas, and maybe even a few prototypes. However, the problem is that everyone in your industry usually has more or less the same ideas. It’s the execution that makes the difference. And if those activities are just an add-on, there won’t be people and resources to actually pilot those ideas, choose the most promising ones, and then commit to executing them brilliantly. Thus, while idea challenges and hackathons can be great tools, they need to be used in the right way. Without them being integrated in the core activities of the business, everyone involved will see that these activities won’t lead anywhere, and they’ll become disillusioned about innovation in general. That’s when you’ll hear things like “innovation isn’t for us”. In essence, you can’t just add a new R&D team or innovation lab, or start arranging all kinds of innovation activities, and expect successful innovations. Thus, for most organizations, a pretty big transformation is often required. A transformation is, of course, much easier said than done. So, let’s move our focus on that. A brief primer on innovation maturity models An innovation maturity model is a tool and a framework that can help a company identify where they currently are in terms of their innovation capabilities. It can also be used to create a roadmap for future improvement. In the last decade or so, it seems like every other consulting company has launched their own Innovation Maturity Model. Almost all of them are very close to one another in terms of being derivatives of the CMMI (Capability Maturity Model Integration). They start from a level where innovation activities are non-existent, then proceed from reactive to proactive and finally to a place where there are clear, well-structured innovation processes in place all around the organization. At this point, changes to the processes are mostly incremental by nature. As you might be able guess by now, most of those approaches were built with the traditional R&D style of innovation in mind. Those models are a great starting point and can help you improve the innovation capabilities and processes in your organization. However, while those things are certainly important, there’s more to consistently high innovation performance than just the maturity of the processes the organization has in place. The way we like to look at it, virtually every top innovator seems to have the same four key elements in place: scale, balance, clear focus, and the right structures. I explained these concepts in more detail in my previous article, so if you’re looking to understand these factors in more detail, I’d recommend you read that. The Innovation Maturity Matrix As we’ve seen quite a few organizations struggle in figuring out the right way to build their innovation maturity, and many of them falling into either the R&D trap or the innovation theater trap, we knew that a different, more practical maturity model was needed to help with the transformation. After researching and thinking about the topic, we’ve come up with a framework we call the Innovation Maturity Matrix. It’s a simple framework designed to illustrate the difference between those who succeed in innovation, and those who don’t. We realized that the two variables that innovation performance ultimately boils down are maturity, and scale. All of the best innovators we’ve seen, have managed to combine both of these factors in their approach to innovation. Let’s look into these factors in a bit more detail. First, maturity is basically an aggregate level concept that encompasses things like the innovation processes, decision-making and organizational structures, as well as the skills and resources required to succeed. Second, scale refers to how widespread innovation is within the organization, and how deeply embedded it is in the culture. For innovation to lead to meaningful results, scale is a must. Let’s take Google’s 70-20-10 rule as an example. The basic idea is that 70% of your innovation investment should go into core, 20% into adjacent and 10% into transformational initiatives. Even though it’s just a rule of thumb, it’s still a very useful baseline for most large organizations. With that model, it’s quite easy to see that 90% of the innovation efforts should happen around existing products, services and processes. A standalone innovation unit simply won’t be able to work on them effectively. Thus, the vast majority of innovation needs to happen in multiple fronts all over the organization, instead of an “innovation silo”. However, those silos might come in handy for working on the transformational initiatives, since they, by definition, shouldn’t be constrained by the existing processes and ways of working within the organization. Without either maturity or scale, or both, would-be innovators are bound to run into a number of challenges. Classifying the innovators Using the innovation maturity matrix, we can divide innovators into four distinct groups: beginners, traditionalists, scalers, as well as the advanced innovators. Let’s look into each of these in a bit more detail. Beginner The first group is beginners. I’m sure we’re all familiar with beginners. It’s those organizations who aren’t even interested in innovation, or who might have a vague idea that it could be useful, but don’t have any clue on where to start. Given the background, it’s quite evident that there’s very little to no innovation in these organizations. There are often heroic individuals that are innovating and working really hard to turn these organizations around, but without top management support to scale their work, these efforts don't usually result in much impact to speak of. If you’re in one of these organizations, your first step should be to get management to understand the importance of innovation, and convince them to start hiring talent who understand innovation and then give them plenty of responsibility for getting things off the ground. Traditional Next we have the traditional organizations. These are usually large and mature organizations that have long traditions in their industry and often also have strong R&D heritages. They typically invest significant resources into R&D and have clear processes in place for developing new products and services, as well as for managing their overall portfolio. Some of these organizations may be past their best days, but there are also highly successful ones. These traditional innovators have, however, typically come across the limitations of the traditional R&D process. They have a hard time keeping up with the rapid change we see everywhere, which often renders products obsolete by the time they are launched. In addition, innovators who rely purely on their R&D or innovation units miss out on a huge proportion of incremental and adjacent innovation opportunities within the core operations of the organization that we referred to earlier. For these organizations, the best approach is typically to start introducing incremental innovation initiatives one-by-one across the organization, as well as setting up a new independent unit responsible for advancing those transformational innovation opportunities that could help shape the future of these organizations. Even though the end-goal is a decentralized approach, it often makes sense to have a temporary centralized party responsible for developing the right capabilities and drive change within the organization. Scaling Premature scaling is by far the most common reason for startup deaths, and the same challenge also applies for innovation efforts within larger organizations. Scalers are organizations that know they need to innovate, but don’t have the patience to properly build their capabilities step-by-step. The end result is innovation theater that falls apart as soon as the curtain closes at the end of each act. Scalers simply copy the visible tactics that many of the top innovators are using and then deploy them across the organization without building the right capabilities and structures for capitalizing on the opportunities for innovation they discover. Let’s illustrate this with a story we’ve seen happen over and over again: A company has seen their profits and market share start to shrink. There are more and more entrants to their market every year. They have little competitive advantage against these new entrants and have realized the need for more innovation. As a result, they set up a new innovation lab or team. The new team is put in a difficult position. They have limited resources and authority within the firm, yet they are still supposed to be responsible for turning the organization more innovative. They are typically given quite free hands but rarely have strategic objectives more specific than “please innovate” or “think about the future of our business”, as top management doesn’t usually have experience from leading innovation and have also heard that innovation requires quite a bit of freedom. What then happens is that these teams might run some lightweight pilots for new digital and digital-enabled products and services, which they then try to hand off to existing business units as they don’t have the resources to commercialize these products. These business units, however, don’t have the capabilities to develop or roll them out and often don’t even have interest in doing so since focusing on these new services would mean not being able to reach their own short-term goals. Having realized that they can’t innovate alone, they start to work on transforming the company culture to be more innovative, and to try to get the business units excited about innovation, which typically means holding “Dragon’s Den” events, hackathons, creativity workshops and sending people off into seminars etc. These actions might generate good vibes and positive feedback, but once people get back into their old roles and incentives, they inevitably fall right back into their old habits. As a result, no real change happens and the organization, especially management, gradually becomes more and more skeptical of innovation. That’s obviously a very tough situation to come back from, and thus something you should try to avoid. If you find yourself on this path, the answer is to take a step back, look at the big picture and figure out the role innovation could play in their specific business, then break that vision down into smaller, highly concrete initiatives and gradually start chipping away at them. They key is making sure that these initiatives generate measurable results and contribute towards the strategic goals of the organization. Advanced The top innovators can all be found from this group. They are constantly thinking about the long-term future of their organization and have projects in place for exploring these opportunities, but they also keep improving their existing business one innovation at a time, be they big or small. For these organizations, innovation is business as usual. These organizations have people whose job involves innovation virtually across the organization. Most of these people won’t even have “innovation” in their job titles, they could be project managers, designers, engineers, analysts, you name it. Innovation isn’t just the job of people in brightly colored hoodies at a hip co-working space, innovation is about systematically and gradually building the future of the organization, and all of the top innovators know that. The journey towards becoming a top innovator Depending on where you’re starting from, there’s obviously more than one way to get to the top right corner, and we already touched upon some of the actions you might want to take in the previous chapter. However, what is important to understand is that when you are an established organization, transformations like these won’t happen overnight, and even when successful, they rarely are projects with clean start and end dates. Strong leadership and decisive actions are required to get the process started, and clear communication is a must to ensure that everyone understands where the organization is headed. A great starting point is always to illustrate the big picture of where you want to go, and then break it down into smaller, more easily achievable and practical goals that will get you closer to that vision. Still, the single most important thing to understand is that it’s an iterative process. Without taking action, you can’t make change happen. Yet, many of those actions will likely fail because the company isn’t yet ready for them. Maybe you’ll realize that you don’t have a very innovative culture, or maybe you don’t have nearly enough capabilities for implementing some of the ideas you’ve come up with. Some of these challenges you might have been able to foresee and avoid with careful planning, but there are always just as many you won’t be able to. So, do your homework and start with a solid plan, but don’t spend too much time and effort in perfecting it. It will fail regardless. We’ve never heard of a large-scale organizational transformation that has gone exactly as planned. So, be prepared for the obstacles you will inevitably meet, learn from them and get over or around them one by one. The bad news is that there won’t be any shortcuts. The good news is that when you start making practical changes around things that matter, you’ll start to see measurable progress very soon. This will allow you to build momentum by improving your skills, capabilities, processes and even shift the culture, all of which naturally helps build conviction in the transformation since you can communicate these wins within the organization. What’s more, you don’t have to invest hundreds of millions of dollars into the transformation right away. You can start small and increase investments gradually once you’ve proven the approach to work and generate positive results. With that track record, it’s usually quite easy to convince management and owners of the organization to double down on innovation. It won’t likely be the quick turnaround you might’ve hoped for, but once you’ve continued down that road for a couple of years, you’ll be able to look back at the stagnated competition and see just far you’ve come. If you’d like to learn what your current maturity level is, or figure out what next steps you should take to get to the next level, feel free to take our Innovation Maturity Test!