How to define business innovation

how to make business model innovation happen and how to measure business model innovation
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Dr.ThorasRyder,Hong Kong,Researcher
Published Date:07-07-2017
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The Innovation Game: Why and How Businesses are Investing in Innovation CentersWhy Should Companies Launch Innovation Centers? We live in an era of digital Darwinism. This is a signifi cant concern given the Enter the Innovation Center As technology and society evolves, it intensity of today’s competitive environment. becomes imperative that organizations In recent years, tech startups are threatening The weaknesses of traditional innovation also evolve their business models. or disrupting the fabric of many established approaches have led a number of Companies that don’t invest in counter- industries: ambitious organizations to explore different disruptive measures will learn that avenues and seek new inspiration. These  Markets are becoming increasingly evolution doesn’t wait. Fifty-two percent organizations have launched innovation digital and mobile is becoming the of the Fortune 500 have merged, been initiatives or full-blown innovation centers preferred channel. acquired or have gone bankrupt since in major technology hubs with the explicit 1  Digital customers and employees are 2000 . The threat of startups upending mandate to accelerate digital innovations. changing the game. Their behaviors, established sectors is greater than it These innovation centers, comprising expectations and values no longer align has ever been. The Wall Street Journal teams of people and often physical sites, with tried and true processes, systems now tracks over 100 startups globally are established in a global tech hub. The and technologies in place now. valued at US1 billion or more, over ten goal is to leverage the ecosystem of of which are valued at more than US10 startups, venture capitalists, accelerators, 2 To excel in these times requires innovation, billion . These high-value companies are, vendors, and academic institutions that to protect against external threats and in many cases, not creating entirely new these hubs provide (see “The Anatomy of create new competitive advantage. But, markets, but rapidly eating into traditional Innovation Centers”). many R&D teams at large and traditional sectors using a combination of superior corporations seem ill-equipped to technology and a compelling customer respond. They can be constrained by experience. legacy organizational models, risk-averse cultures, and a rigid approach. A recent Over the last ten years, there are myriad 52% of the Fortune study revealed that only 5% of R&D staff examples of established corporates 5 feel highly motivated to innovate . This is that have fallen on diffi cult times. Nokia, 500 have been merged, a worrying tendency given the urgency to Blackberry and Kodak are just a handful acquired, or have gone innovate. of the many companies that have been disrupted, decimated or reduced to bankrupt since 2000. a shadow of their former selves, after having once dominated their industries. How can companies avoid this fate? The answer is: innovation. Innovation Has Never Been More Important...Or So Diffi cult In today’s highly competitive economy, innovation is more critical than ever. A recent survey of large corporations found that 65% of senior executives face increased pressure 3 to innovate . However, the challenges of innovation continue to defeat many. In 2014, around US1.6 trillion was spent on R&D globally. Despite this signifi cant investment, the results are falling short. In consumer goods, for example, research shows that more than 4 85% of new products fail . 2Organizations increasingly want to Over the last year, we interviewed leaders understand rapidly evolving consumer of innovation centers and also conducted behavior. The ubiquity of smartphones and extensive web-based research of the Innovation centers connectivity has created new behaviors. 200 largest companies in the world by are physical spaces Purchase cycles that customers had revenue. The research probed a number followed without change for many years of key issues: and/or teams set up are now being redrawn completely. This by organizations in a  What kind of companies are investing in focus on customer-driven innovation is innovation centers? global tech hub, with echoed by Mark Brodeur, Global Head  Where are the preferred locations for of Digital Marketing Innovation at Nestlé, the goal of leveraging setting up these centers? who observes that “We really needed the startup, industry to better understand how consumer  What are their mission and purpose? behavior was changing as a result of and academic ecosystem  What operating models are used? technology, so that our brands were able that these hubs provide.  What are the challenges and critical to stay ahead of the curve versus playing success factors? catch-up.”  How are outputs and results measured? Debbie Brackeen, Citi Ventures, says that The research methodology at the end of the mission of their innovation centers is to this paper provides further detail on our “pioneer and test new disruptive solutions approach. for our customers, testing new business models and technologies that advance our position in the market... We’re looking at making signifi cant impact to the overall business and not just incremental The mission of our changes.” A leading European fi nancial innovation centers is services group has a team with an explicit mandate to disrupt their own businesses. to pioneer and test new The executive says, “We have a group that disruptive solutions for is a set of centrally-funded startups with our customers, testing the exclusive aim of hiring entrepreneurs who will build businesses that will disrupt new business models our business.” and technologies that advance our position in the market... We’re looking at making significant impact to the overall business and not just incremental changes. – Debbie Brackeen Citi Ventures 3The Anatomy of Innovation Centers  Digital innovation centers are teams of people and often physical sites that are set up by organizations in a global tech hub, with the goal of leveraging the ecosystem of startups, venture capitalists, accelerators, vendors, and academic institutions that these hubs provide. According to the Vice President of a major fashion retailer: “An innovation center is a team, a space and a mindset.”  The primary objective of a digital innovation center is to accelerate digital innovation by rethinking the customer experience, improving operational effi ciency and testing new business models through the use of digital technologies such as Big Data, the Internet of Things, Social Media, Mobile, Robotics, Augmented Reality and 3D Printing. As Ed McLaughlin, Chief Emerging Payments Offi cer, MasterCard says: “I think the primary goal is to make sure that we can test, learn, experiment, access, incorporate, leverage all the changes that are happening out there in the industry. It gives us the ability to fail fast, to incubate things, to invest and engage with very early stage companies.”  Innovation centers also help companies to stay abreast with the latest developments and upcoming technologies in the market. Karin Weining, Global Innovation Excellence Leader at Dupont, says: “Our Innovation Center Leaders understand what’s happening in the local marketplace and the capabilities there...they’re focused on fi nding the trends and cross-business ideas that may not be captured by an individual business.” Developing New Products and Services or Proofs of Concept BMW has set up an innovation center “Future Lab” in Mountain View, with the aim of developing cutting-edge digital products and services. Its fl agship product, BMW ConnectedDrive, provides a suite of infotainment features such as MP3 connectivity and weather information. One of the latest projects, currently in progress, is to develop virtual reality goggles that will help drivers park in tricky spots 1 by enabling them to ‘see through’ the car . Designing New Business Models Medical technology major Medtronic has opened a center for Business Model Innovation in Singapore. This new center, based in the 2 current local Medtronic facility, has the mandate to design, test and scale new business models for developing Asian markets . Connecting with Startups CVS Health, operator of Minute Clinics and one of the biggest drugstore chains in US, has opened a Digital Innovation Lab in Boston 3 that is intended to “be a source of new ideas that will drive the company into the future” . One of the goals of the Digital Innovation Lab is to connect with startups that are developing healthcare-related products and services and to ensure CVS can be an ideal learning lab 4 for early-stage companies . Identifying Potential Partners and Forging Strategic Relationships AXA Lab, the insurance company’s innovation outpost in Silicon Valley, aims to “connect AXA with leading companies in the technology 5 industry that have the potential to become business partners for the company’s global marketing and distribution teams” . The most notable of these partnerships has been with Facebook, with a goal of further developing its digital, social and mobile footprint in France 6 and globally . Developing an Innovation Culture within the Organization Innovation cannot fl ourish in a company if it is limited just to an innovation center. According to the head of an innovation center for a major bank, the innovation culture of the center needs to extend into the wider enterprise. “You want to create a sustainable innovation culture and model inside an innovation center that resides in a group, and have that permeate throughout corporate,” he explains. Incubate and Invest in Startups Some innovation centers, given they are at the cutting edge of technology developments, are also tasked with identifying exciting startups that the parent company can invest in. For instance, Walmart Labs which is responsible for building and testing technology for online and mobile aspects for Walmart has acquired 14 startups in the past 3 years. However this is relatively rare among innovation centers. Understanding the Digital Customer One of the key challenges facing organizations is in understanding the digital customer. The advent of pervasive connectivity, smartphones and social media is impacting customer behavior signifi cantly. As the innovation lead at a major retailer puts it: “The mission is listen to our customers about what their needs are.” Evaluating and Testing New Technologies One of the big challenges for large organizations is the amount of time it takes for smaller vendors to reach decision-makers, particularly when it comes to new technologies. This is where an innovation center, with its lean setup, can act as a bridge. Innovation centers constantly engage with, evaluate and test a variety of technologies with various startups. Sephora’s innovation lab is modeled after their stores and the labs constantly test beacons, augmented reality applications among other technologies for application within their larger store network. Become a Recognized Part of Innovation Communities Organizations have come to realize that they cannot solve everything by themselves. They need to be a foundation for an innovation ecosystem and be recognized as a part of innovation communities. Innovation centers help achieve this. Indeed, an innovation head for a fi nancial major confi rms this as a mission for one of their innovation center when he says: “The innovation center has a stated goal to host over a million external people for different events. An entire team runs a program of external speakers who speak on Big Data, social media or peer-to-peer lending. The notion is that if you become sort of the epicenter of ideas and innovation in the space, you will benefi t from it.” 1 2 Source: : TechWorld, “BMW developing high-tech goggles to help drivers park”, February 2015 ; Medtronic website, “Medtronic To Set Up Global Center Of Excellence In 3 4 Singapore For Business Model Innovation”, August 2013 ; CVS Website, “CVS Health to Open New Digital Innovation Lab in Boston”, November 2014 ; The Boston Globe, 5 6 “CVS to open tech hub in Boston”, November 2014; AXA Website, “AXA Lab: Fostering innovation and digital culture”, Accessed June 2015; AXA Website, “AXA Announces a Strategic Partnership with Facebook to Further Develop its Digital, Social and Mobile Footprint in France and Globally”, April 2014 4The Size of the Innovation Center Prize Accelerate the Speed of Innovation centers offer a range of benefi ts. They: Innovation We have cross-  Accelerate the speed of innovation An alarming 90% percent of companies functional teams here believe that they are too slow to market  Provide a fresh source of ideas 6 and often over budget . As an executive that are able to pull  Enhance risk-taking ability at a leading global bank observed: “When from the outside world  Attract talent we look at the pace at which digital-native and reach into any part  Drive employee engagement companies operate and launch new capabilities, that’s something that doesn’t  Build a culture of innovation. of the company in order really happen in large enterprises.” to bring new ideas to According to the innovation lead at a the table. That is why Telecom major, innovation centers can our innovation center help resolve this issue. “We accelerate the Walmart’s internal was originally started. delivery of different strategic solutions,” search engine, developed she explains. “We have cross-functional – Innovation lead at a teams here that are able to pull from the by Walmart Labs in 9 Telecom major outside world and reach into any part of months, drove a 20% the company and be more agile in order to bring new ideas to the table. That is increase in online sales why our innovation center was originally conversions. started.” Walmart Labs helped Walmart develop its internal search engine in just nine months, driving a 20% increase in online sales conversions. Staples’ innovation lab helped launch a digital wallet service in 9 weeks - Staples’ fastest deployment ever (see Figure 1). Figure 1: Innovation Centers Accelerate the Speed of Innovation Zappo Labs enabled Zappos to launch its Staples’ innovation lab helped launch a digital wallet — “Ask Zappos” digital personal assistance service in 9 weeks Staples’ fastest deployment ever service in just 12 weeks Rapid Experimentation, Prototyping and Launch Walmart's search engine was developed at Walmart AT&T's Foundry innovation centers have significantly cut — Labs in 9 months with just a handful of employees the the time from idea to launch. Collaboration with startups tool drove a 20% increase in online sales conversions has delivered successful solutions such as a personalized video bill service and self-optimizing network Source: Capgemini Consulting and Altimeter Analysis 5Innovation Centers: The Different Categories Our research has uncovered four broad categories of innovation center. Models include in-house innovation labs, university residences, community anchors, and innovation outposts. Each of these models differ in their goal and the amount of investment required (see Figure 2). Figure 2: Types of Innovation Center Perform all innovation activities from inception to prototyping In-House Innovation Labs using an in-house approach. Drive innovation through university researchers. University Residence Actively identify mentors and provide opportunity to startups to work with the company to test the Community Anchor startup’s products within the company and with their customers. Small teams that are based in Innovation Outpost technology hubs that act as ears-on-the-ground Level of Investment Low High Source: Capgemini Consulting and Altimeter Analysis In-house Innovation Labs – The innovation engine for their companies, these centers perform all innovation activities from inception to prototyping using an in-house approach. Given this in-house focus, these centers are typically large in size, with hundreds of staff. Walmart Labs is part of the Walmart Global eCommerce team, which runs Walmart’s global websites. The two teams work in tandem so that e-commerce innovations can be seamlessly plugged into the websites. University Residence – In this model, companies invest to set up a center at a university campus to drive innovation through university researchers. The Volkswagen Automotive Innovation Lab (VAIL) was established by Volkswagen and Stanford University’s School of Engineering to drive innovation in automotive development. The Volkswagen Group has donated 5.75 million to the creation of VAIL, including 2 million for building construction and another 750,000 a year for fi ve years to fund research. Stanford researchers and international visiting scholars will work with automotive equipment manufacturers and Silicon Valley experts. Community Anchor – These innovation centers actively identify mentors and provide opportunities to startups to work actively with the company to test the startup’s products. The startups also gain from mentoring and the availability of mature processes to test their innovations. Allianz Digital Labs invites early-stage companies, students and innovators to run proof-of-concept pilots with the possibility of eventual licensing, development and commercialization on a large scale in areas such as Big Data, social media and mobile. Additionally, organizations might take an equity position in startups. Innovation Outpost – Innovation outposts are small teams that are based in technology hubs, typically Silicon Valley. For large organizations, the idea is to be involved in the tech community, without committing signifi cant investment. As time progresses, organizations can then choose to grow these innovation outposts to other forms of innovation centers. Take the case of Renault- Nissan. The company initially set up a small Silicon Valley Research Offi ce in 2011 focusing on vehicle IT, advanced engineering research and technology recruitment. By 2013, the offi ce was expanded to specialize in autonomous driving and connected vehicles. Similarly, Nestlé set up a Silicon Valley innovation outpost in 2013 with the aim of understanding customers better and work with large technology companies. The company has just announced that they intend to strengthen this team with more investment by Spring 2016. Source: Company Websites 6 Low High Breadth of ActivitiesProvide a Fresh Source Attract Talent Drive Employee of Ideas Engagement Organizations can use their innovation centers to showcase their brand strength Innovation centers, by virtue of their The positive impact on employee and startup culture, and attract top location and extensive engagement engagement is an often-overlooked talent at universities. In the words of an with the local community, can be a benefi t of innovation centers. Engaging innovation executive at a leading Fashion rich source of ideas. Many innovation with the latest technologies and new retailer: “We went to campus placements centers actively reach out to startups, ideas excites and motivates employees, right after the announcement of our venture capitalists, academics, and other even those in industries that are slow innovation lab and our ticket was hotter industry stakeholders for regular events. to change. An innovation executive at a than Twitter and Facebook.” One executive from a major European large bank says, “If we never graduated fi nancial services fi rm said: “We have a single concept from the labs into a stated goal to host over a million production, we would still get a ton of external people for different events from benefi t just from employee engagement. Our innovation center big data to social media and emerging That gets overlooked a lot.” payments or peer-to-peer lending. We lets us take on risks host hundreds of people in these events Build a Culture of that the rest of the every day. The idea is that if you become Innovation sort of the epicenter of the velocity of organization may be ideas and innovation in the space, you The greater positive impact of successful unwilling to take on. will benefi t from that.” innovation centers includes the development of an innovation culture – Ruth Yomtoubian, business Regular engagement with startups within the larger organization. The innovation lead at AT&T delivers signifi cant benefi ts, as an head of innovation at a leading bank executive from a global fi nancial Foundry says: “If your company is counting on institution says: “Engaging with startups your innovation center to do all your is enabling us to quickly build the domain innovation, you will fail. It should be one expertise and knowledge around new of the tools that help, and it is a sort of Also, in large organizations, the trends and move much faster.” catalyst for serving the business.” The innovations developed by centers have goal should ultimately be to, as the the opportunity to see mass adoption, Enhance Risk-Taking Ability executive says: “institutionalize a culture unlike most startups. This large canvas is where people are encouraged and Unlike their larger, risk-averse parent yet another motivation for talent. For the rewarded for trying new things.” organizations, innovation centers are parent company, the innovation centers inherently “risk-seekers”. In being so, act as a talent magnet that they wouldn’t they move the entrepreneurial risk away have been in a position to attract directly. from the parent organization. Bao Nguyen, from Walmart Global eCommerce, says: “Technologists say We went to campus This ability to take on risks is crucial that when you work at a startup, you for delivering innovation. In the words placements right after are able to launch things really quickly of AT&T’s Ruth Yomtoubian: “Our like an app, but there isn’t really much the announcement of our innovation center lets us take on risks traction. In our company, they can build innovation lab and our that the rest of the organization may something, launch it and millions of be unwilling to take on.” One common people will use it. That’s what we think ticket was hotter than challenge at large companies is trying to has been key to our success in hiring Twitter and Facebook. justify experiments. Innovation centers these great technologists.” help organizations side-step onerous – Innovation executive at processes that would otherwise act as leading retailer a brake. As an executive at a leading fi nancial services fi rm explains: “The Innovation center has a pool of funds that is specifi cally used only for testing, learning, and experimentation. It is independent of the business case or the standard budgeting process.” 7Who is Investing in Innovation Centers? While many organizations are struggling to activate their research and innovation efforts, only 38% of the leading 200 companies have set up innovation centers. The penetration of innovation centers also varies dramatically across sectors (see Figure 3). Manufacturing companies — particularly those from the high-tech sector — have the highest number of innovation centers. Many of these companies are tackling developments, such as 3D Printing (for prototyping) and the Internet of Things (to constantly monitor supply chain or operations). Similarly, telecoms companies, which have felt the full disruptive brunt of the digital revolution, have also invested signifi cantly in innovation centers. However, take-up in the fi nancial services sector, which also faces signifi cant disruption, stands at 28%. Among companies that have established innovation centers, most have committed signifi cant investment. In 2014 for 1 instance, P&G opened its third innovation center in Singapore, investing over US186 million . The center focuses on over 18 fi elds of study — from seeking consumer insights to developing and testing new prototypes, as well as designing new packaging. 1 Sources: Today News, “P&G opens S250m Innovation Centre in S’pore”, March 2014 Figure 3: Penetration of Innovation Centers by Sectors Manufacturing 58% Telecom 43% Automotive 30% Consumer Product & Retail 30% 28% Financial Services 38% Total N=200 Source: Capgemini Consulting and Altimeter Analysis 8The Innovation Center Heat Map North America Europe London (10) Munich (5) 53 centers Berlin (5) Silicon Chicago (4) Valley Paris (9) Asia Top Ten Cities Top Ten CiƟĞƐ Legend Centers Seoul (4) 1-3 centers Silicon Valley 53 Tokyo (6) Shanghai (6) London 10 4-6 centers Paris 9 Tel Aviv (4) Singapore 7 7-10 centers Tokyo 6 Shanghai 6 Berlin 5 Bangalore (4) 50 centers Munich 5 Singapore (7) Tel Aviv 4 Chicago 4 Breakdown of Innovation Centers by Region 38% of companies have set up innovation centers 61% of companies with centers have a presence in the Silicon Valley... Asia ...But other hubs are also emerging – top 10 locations represent only 35% of total centers 29% 29% 25% N=309 Source: Capgemini Consulting and Altimeter Analysis Focus Area Main Mission of Innovation Centers % of companies % of companies Mobility 63% Gaining access and exposure 51% 65% Big Data / Analytics to latest technologies 39% Internet of Things Deeper understanding of Robotics 13% 35% customer needs Virtual Reality 13% 3-D Printing 5% Single Center Vs Network of Innovation Centers Distribution of Innovation Centers by Funding Model % of companies % of companies 4% 33% Companies with Single Innovation Center Internal 23% Companies with a Network of Innovation 67% Partnership Centers 73% Data Not Available N=75 Source: Capgemini Consulting and Altimeter Analysis 9 EƵŵďĞƌŽĨ/ŶŶŽǀĂƟŽŶHow can Innovation Centers Successfully Scale the Slippery Slope of Digital Innovation? It is extremely challenging to make a CEO Support is a Must to Nurture success of innovation centers. A seasoned Innovation Centers innovation expert and senior executive at a Most innovation Innovation should be a top-down approach leading global bank told us: “About 80 to 90 where the leadership team looks to entrench centers commit one percent of innovation centers fail, and end a culture of innovation throughout the up being a massive waste of resources.” of two cardinal sins. organization. Innovation centers are at the Such high failure rate results from a slippery Either they think too forefront of this effort to change company slope of challenges that innovation centers culture. It is imperative that the leadership far out into the future, must overcome to succeed in digital team nurture the innovation centers and innovation. The challenges range from or they get involved champions its initiatives throughout the lack of leadership support and an unclear organization. Kevin McKenzie, Chief Digital in routine projects. focus to companies’ inability to scale the Offi cer of Westfi eld, says: “If companies truly innovation at an enterprise level. – Seasoned innovation expert do want to innovate, it’s got be sponsored by the CEO… Our Co-CEO has personally Leading companies avert these perils by gone out and had a conversation with the factoring critical success factors into their CEOs of just about every major retailer in journey. These factors broadly fall into three Innovation centers also need to fi nd our category of retail about this topic, about phases – laying down the foundation of the right focus and fi ght the “forces of our mission, and ultimately that’s ended in vision and governance, harnessing talent magnetism” (see Figure 5) between a go-to plan with the management teams.” and partnerships and delivering on the core everyday operations and futuristic promise of innovation (see Figure 4). projects. An innovation executive told us: Georges Nahon, CEO Orange Silicon Valley “Most innovation centers commit one of and President of the Orange Institute, adds: two cardinal sins. Either they think too far Laying Down the Foundation “Our CEO is constantly interested in reading out into the future, or they get involved in of Vision and Governance or listening to what we have to say. He routine projects.” Successful innovation comes about twice a year here. I’d say that Defi ne the Right Purpose & Focus centers establish clear space between 70% to 80% of the executive committee themselves and everyday operations yet Defi ning the purpose of the innovation visits us at least once a year. ” ensure their breakthrough innovations can center is critical. Different approaches will be turned into commercial reality. deliver different results, with an innovation outpost not delivering the same benefi ts as an in-house innovation lab. Figure 4: Critical Success Factors for Innovation Centers Extend Innovation Across the Deliver on the Core Enterprise Innovation Promise Prove Value with Maintain Quick Wins and Focus by Culling Follow Through Unfeasible Projects Harness Talent and Partnerships Engage with Hire Employees that Create a Diverse Partners Thrive in Both Cross- but Use Sound Structured and Functional Team Judgment When Unstructured Selecting Them Environments Lay Down the Foundation of Vision and Governance Define the Right Set Up a Garner CEO Ensure Business Purpose and Focus Governance Model Support Units’ Involvement Source: Capgemini Consulting and Altimeter Analysis 10Figure 5: The Right Focus: Fighting the “Forces of Magnetism” We bring all sorts of Pull towards day-to-day business goals Pull towards innovations that are far out into the future best practices and Forced to focus on incremental Gets disconnected from current realities and improvements commercial viability tools and techniques across the business to help make people more Innovation creative, more engaged, Center more innovative. – Head of innovation labs at Day-to-Day Far-Future Focus fi nancial services major Business Focus Source: Capgemini Consulting and Altimeter Analysis 7 business . AT&T’s Ruth Yomtoubian believes that early support from the business is critical. Ensure Business Units’ “We are not going to do anything unless there Involvement is a need from the business unit or their buy-in”, About 80 to 90 percent of One risk that innovation centers face is she explains. “This means you have to bring that, by working in an autonomous fashion, innovation centers fail, them in at an ideation stage and put a lot of they can get disconnected from the larger upfront energy into creating buy-in for ideas and end up being a massive organization. It is crucial that business units are that challenge the status quo.” waste of resources. closely involved in the selection, scoping and execution of innovation center projects. The – Senior executive at leading Harness Talent and lead of an innovation center of a banking major global bank Partnerships emphasized the importance of working in tandem with the business, saying: “Too often, Create a Cross-Functional Team innovation centers are looked at as outsiders The composition of the innovation center Set up a Governance Model with by those inside the corporate structure, and needs to be diverse. An innovation executive Stakeholders from Across the that can create issues when it comes to at a leading American fi nancial services fi rm Business deploying their solutions commercially.” says: “It’s about bringing the right people A common challenge cited by many Ownership and clear governance are along the journey at the right time – not too respondents in our research is the need critical. In certain cases, innovation centers soon, not too late – and having the right to identify the ‘right’ set of stakeholders are directly managed by the business and integrated teams that include the business from across the business. as a result are in sync with the business working on ideas together.” requirements. An innovation executive at a An innovation executive from a global large fi nancial services fi rm explains, “Labs Hire Employees that Thrive fi nancial services fi rm says: “It’s not are owned by their businesses. This means in both Structured and a good answer to have one or two there’s better line of sight and integration with Unstructured Environments champions for an innovation center. You real business needs as well as commercially Shortage of digital skills is an issue, but need a governance body where you have viable innovation. A global lab coordinates all attitude is as important as aptitude. The lead a number of stakeholders at a senior the business-owned labs.” at a telecom innovation center said: “The level. This will help avoid dependence on people element cannot be underestimated. people and move it to a process. This AT&T provides another example of how to It takes a certain kind of person to work in way, you also help innovation permeate overcome this potential disconnect between any innovation center, where half your time is throughout the enterprise.” the business and the innovation center. It has spent in a very open-ended and ambiguous established a network of ‘Foundry’ innovation At the same time, organizations should environment working with startups, and the centers in various locations including in Silicon ensure that the innovation center is not other half with the traditional and risk-averse Valley. But it also has centers in Plano and burdened with multiple stakeholders, with side of the business.” Atlanta, both of which are locations for important competing agendas nullifying the center’s AT&T business units. They have been set up An associated challenge around skills is goal and purpose. with the express intent of being close to the 11the actual ability of organizations to staff an It is important to rigorously scrutinize Deliver on the Core innovation center with the full range of skill each innovation before sunsetting Innovation Promise sets that are required to bring an innovation it. An innovation executive confi rms: to market. For instance, the innovation “We try to assess each of our projects Prove Value by Demonstrating executive at a major retailer conveyed her against key metrics such as market Early Wins and Following concerns when she says: “My biggest differentiators, net new revenue or cost Through on the Promise fear coming into this role was that my reduction, but we are trying not to Innovation centers, by virtue of being team would be a bunch of heads with no conduct this assessment too far upstream standalone units, must constantly prove arms and legs. We think big thoughts, we in the process where it might kill any the value that they add to the business. have great ideas, but we can’t get any of kind of innovation activities The key is to This challenge is exacerbated by the fact them done. We are a few people and we implement the right set of controls and the that innovation centers typically work on don’t have a dedicated IT, UI/UX, creative right level of controls at the different stages projects with signifi cant gestation periods. support, all these people that we need to of the innovation process.” Leading innovation centers overcome really create and scale.” this challenge by demonstrating early Extend Innovation Across the wins. When Walmart set up its innovation Engage with Diverse Partners but Enterprise center — Walmart Labs in 2011— it made Use Sound Judgment in Selecting An innovation center can be said to several key acquisitions upfront to build Them have reached its pinnacle when it is momentum. One of its early acquisitions, Engaging with the tech ecosystem is integral able to extend the innovation practices Kosmix, proved instrumental to garner to the mission of an innovation center, but it far beyond its walls and deeper into some quick wins. The fi rst key assignment is equally important not to waste too much business units and functions. One way for the team was to develop a new search 8 time. As one innovation executive puts it: of doing this is to ensure that learning engine to power its e-commerce website . “You need to avoid becoming an innovation from innovation centers is constantly Walmart Labs accomplished the task in theater where all you are doing is interacting routed back to the business. The head just nine months. The updated website with a bunch of startups that don’t really of innovation labs for a fi nancial major also increased the conversion of visitors care about your company. There are a lot of confi rms this by saying: “We bring all into buyers by as much as 20%. Today, interesting startups out there. The important sorts of best practices, tools and techniques WalmartLabs continues to be a driving 9 thing is to have a judgment as to which across the business to help make people force behind digital innovation at Walmart . ones to spend time with.” more creative, more engaged, more innovative”. Sunset Programs and Ideas that are Unfeasible… But at the Right Time Innovation centers are all about You need to avoid You need to be honest experimentation, and a trial-and-error becoming an innovation approach is one of its defi ning features. with yourself and At the same time, it is crucial to focus theater where all you are with what is working, resources and energies on the most doing is interacting with regardless of the amount feasible and viable projects. Since only a small proportion of projects usually a bunch of startups that of time, money, or succeed, the ones that are unfeasible don’t really care about personal capital you need to be terminated, and quickly. The your company. VP at the innovation lab of a leading have spent. Some of retailer said: “You need to be honest our projects that were – Innovation executive at with yourself and with what is working, banking major initially promising were regardless of the amount of time, money, or personal capital you have just not flying we had spent. Some of our projects that were to kill them. initially promising were just not fl ying, and we had to kill them.” At this retailer, – VP at innovation lab of a ideas are tested in 1-2 stores and based leading retailer on feedback, prototype is created for a pilot in 10-15 stores to quickly assess their potential. 12The Road Ahead Organizations need to take a structured There are multiple governance models approach towards operationalizing their that can be deployed. Figure 6 shows innovation centers. the centralized, decentralized and To create a sustainable autonomous options: innovation culture Set Up a Governing Body  In a decentralized model, innovation and have it permeate of Senior Stakeholders centers are closer to the business to Create a Sustainable throughout the and, as a result, are in sync with local Innovation Culture requirements. corporate structure, The innovation center will only succeed you need a governance  Centralized models, on the other hand, if its innovations, and a culture of operate with a network of innovation body with senior experimentation, are backed by centers spread across locations that stakeholders. leadership. According to the Director of a are also linked to a technology-focused global bank’s innovation center: “To create – Director of innovation center central lab. This enables better control a sustainable innovation culture and have and closer co-ordination across the at a global bank it permeate throughout the corporate centers. structure, you need a governance body of  The autonomous model allows for senior stakeholders. This is necessary to working with specifi c executives (CIO/ build a strong and sustainable connectivity CMO/CEO) on targeted missions, with the businesses and the technology working largely independently. organization. This means that they’re all part of the journey and that the innovation center is not like an internal ‘agency’ pitching for innovation activities.” Figure 6: Governance Models for Innovation Center DECENTRALIZED CENTRALIZED AUTONOMOUS Business Units Business Units CXO Central Lab Liaises directly with Co-ordination (Formal or Informal) CEO/CIO/CMO Innovation Centers Source: Capgemini Consulting and Altimeter Analysis 13Further, the metrics should be ultimately Build Cross-Functional Establish Suitable Metrics aligned to business objectives. A senior Teams that Give a Diversity to Measure and Monitor innovation executive at a fi nancial services of Perspectives Performance fi rm drives home this important point, saying: “Evaluation metrics may be very Building a team with people from various Given the fl uid and ambiguous environment different from the business ones, but functions across the organization will that innovation centers operate in, having in the end they need to tie back to the create a rich mix of diverse perspectives. the right metrics is critical for success. overarching business objectives.” It will also enable the innovation center to Some examples include number of new maintain strong links with the rest of the products/services developed, reduction organization. in costs, increase in operational effi ciency, and so on. But it is not just the output that is important, measuring the quality of Allocate Independent inputs and the effi cacy of processes is of Budgets, but Keep the equal importance. As the innovation lead Reporting Aligned to the at a manufacturing major explains: “We Business measure the outputs that we are delivering to our corporation, as that is what they are Budgets should be centralized and kept interested in. But internally, we also take independent of the business units within into account what we are taking as inputs the company. This ensures that the and also what we are doing as processes.” innovation centers have the independence to create prototypes for the business units rather than business units selecting which ideas make it to the prototype phase. An innovation center executive said: “We had the complete, independent budget to pay for everything and all of the people and resources required to run a certain number of tests to play around with technology. We could just do it independently. Even if the business was integrated into alpha tests, we were self-funded, so we did not have to ask for anything.” 14Innovation Center Checklist Parameter Question Recommendation Rationale Dedicated Innovation Center or  A dedicated innovation center(s ) - Dedicated centers enable sharper focus, greater Center Innovation Team? freedom and stronger ecosystem collaboration Number of One center or a  A network of centers is preferable - A network of centers allows the parent company Centers network of centers? over a single center to harness synergies across sectors, markets and capabilities Location In a tech hub, or  Companies should set up a - Proximity to tech, business and customers - each close to business network of centers to address all has its own importance. AT&T, for instance, has and customers? (or most) of these aspects set up its “Foundries” in Silicon Valley and Israel to leverage the tech ecosystem, and in Plano and Atlanta to be close to business and customers - Availability of niche skills is another criterion. For an example, New York and Boston have emerged as Big Data hotspots, while Israel is a frontrunner when it comes to cybersecurity Governance What reporting  Could be centralized, - A centralized model enables closer coordination Model structure is most decentralized or autonomous between the centers; a decentralized model effective? offers the practical convenience of working with  Key is to involve diverse set of the relevant BU; while an autonomous model senior stakeholders provides the freedom that is often indispensable for success - Having senior stakeholders from multiple functions ensures that the innovation center has strong, organization-wide support and backing Funding Which funding  Funded by corporate - Having direct corporate funding ensures both Mechanism mechanism is most headquarters, not by individual a greater amount of funds, and a promise of desirable? executive sponsors continued support even in the absence of immediate, short-term results Source: Capgemini Consulting and Altimeter Analysis 15of new digital entrants to relentlessly access to customers that they enjoy, The Next Innovation Wave disrupt and innovate, has created an traditional organizations have an excellent The digital economy offers a solution and innovation ecosystem that traditional opportunity to re-energize their innovation an inspiration for the perennial challenge organizations can tap into. By combining capability. of successful innovation. The advent of the culture and approach of innovation thriving technology hubs, and the appetite centers with the budget fi repower and Leadership/CEO Checklist  Have purpose and a clear area of focus for your innovation center  Ensure innovation centers keep business priorities, rather than technology considerations, at the fore  Have a mix of quick-wins vs. audacious goals for the innovation center  Ensure you are quick to translate even small gains from the innovation center back to the larger organization  Do not measure innovation centers with traditional metrics, but at the same time ensure metrics are tied to larger business objectives  Ensure there is a spread of innovation centers across key tech hubs  Ensure innovation centers are not seen as a third-party – Make them a key part of discussions on future strategy  Encourage a culture of fast-failure within the innovation centers; encourage innovation centers to experiment  Apply insights and new models to organizational design to improve and optimize culture and work 16Research Methodology For the purposes of this research, we considered a company to have an innovation center only if at least one of its centers was located in the following tech hubs: o Silicon Valley, Tel Aviv, Los Angeles, Seattle, New York City, Boston, London, Toronto, Vancouver, Chicago, Paris, Sydney, Sao Paulo, Moscow, Berlin, Waterloo (Canada), Singapore, Melbourne, Bangalore and Santiago (list based on a study of global tech ecosystems conducted by Telefonica and the Startup Genome in 2012 Telefonica Innovation Hub, “Startup Ecosystem Report”, 2012) • We adopted a comprehensive research methodology leveraging both primary and secondary approaches: o Focus interviews with executives from leading organizations, overseeing innovation related activities. Representing diverse industry sectors, all of these are large organizations with most having revenues greater than US5bn. (see below for list of executives who agreed to be named) o Web-based research of the largest 200 companies by revenue based on the Bloomberg list. We covered the following sectors — Automotive, Financial Services, Consumer Products & Retail, Manufacturing and Telecom, and picked the forty largest companies by revenue within each sector. In all, 309 innovation centers were analyzed. The research explored innovation centers along multiple dimensions : • Mission behind the centers (e.g. increase innovation output, form relationships with ecosystem partners) • Focus areas for the centers (e.g. mobility, Internet of Things, Big Data) • Collaborative relationships forged (e.g. with large companies, startups, universities) • Governance models adopted (e.g. centralized, decentralized, autonomous) • Challenges faced • Results delivered Acknowledgements We would like to thank the numerous executives who graciously spared their time for this research. In particular, we would like to thank: Ruth Yomtoubian, AT&T; Bridget Dolan, Sephora; Mark Brodeur, Nestlé; Kevin McKenzie, Westfi eld; Georges Nahon, Orange; Bao Nguyen, Walmart; Debbie Brackeen, Citi; Karin Weining, DuPont; Ed McLaughlin, MasterCard. 1 HBR, “Making Sense of Digital Disruption”, May 2015 2 Wall Street Journal, “The Billion Dollar Startup Club”, February 2015 3 Lithium, “Corporate America Under Pressure From Consumers’ Rising Expectations”, June 2015 4 Nielsen, “HOW TO FLIP 85% MISSES TO 85% HITS: LESSONS FROM THE NIELSEN BREAKTHROUGH INNOVATION PROJECT”, June 2014 5 Forbes, “Why U.S. Firms Are Dying: Failure To Innovate”, February 2015 6 Oracle, “Understanding the Best Approaches and Tools to Manage the Complexity of Innovation”, 2013 7 Capgemini Consulting Interview 8 Fast Company, “Walmart’s Evolution from Big Box Giant to E-Commerce Innovator”, November 2012 9 Capgemini Consulting, “Walmart: Where Digital Meets Physical”, July 2015 17Authors Brian Solis Jerome Buvat Subrahmanyam KVJ Principal Analyst, Altimeter Group Head of Digital Transformation Manager, Digital Transformation Research Institute Research Institute Digital Transformation Rishi Raj Singh Research Institute Senior Consultant, Digital Transformation Research Institute The authors would like to thank Olivier Hervé, Kilian Dinkelaker and Sascha Dexler from Capgemini Consulting Gemany, Didier Bonnet from Capgemini Consulting Global, Tony Fross from Capgemini Consulting US, Joe Boggio from Capgemini, Sumit Cherian, Pavan Magge, Ashish Bisht and Amol Khadikar from the Digital Transformation Research Institute and Suman Lala from Capgemini Consulting India. Capgemini Consulting Contacts Germany Sweden/ Finland France Norway Thomas Friedrich Ulf Holmgren Stephane Regnier Anders Rygh Netherlands United Kingdom United States Marc Burger Didier Bonnet Chris Miller Altimeter Contacts Brian Solis Principal Analyst, Altimeter Group Altimeter Group is a research and strategy consulting firm that helps companies understand and act on disruption. Founded in 2008 by best-selling author Charlene Li, the company works with more than 150 companies including nine of the Dow Jones 30 and 16 of the Fortune 100. Named by Fast Company as one of the “Five Most Creative Small Businesses,” Altimeter is headquartered in San Francisco, CA. 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