Innovation’s Dirty Little Secret

The Businessweek Article Innovation’s Dirty Little Secret talks about how many organizations pay lip-service to Innovation:

Recently I spoke with a group of executives from a $3 billion division of a large industrial company. They were faced with a mandate from the chief executive to expand the firm’s service revenue from 20 percent to 33 percent. That’s almost $400 million in new revenue, yet when I asked how many people were on the team, the leader replied meekly: “Two.”

Some organizations like IBM clearly seem to invest a lot in Innovation and have found ways to make it successful (I am not sure what is innovation in a transformation from product to service business…)

Rosabeth Moss Kanter’s October 2009 Harvard Business School case study, ‘IBM in the 21st Century: The Coming of the Globally Integrated Enterprise,’ details many acts carried out by the leadership team during the company’s fabled transformation from a product to a service company. Executives were prepared to put big money where their mouths were when it came to supporting service-based ideas, such as ‘Innovation Jam,’ or such businesses as ‘On-Demand’ software, and strong messages about the importance of services were sent.

One last interesting learning from Kaiser – it is a great approach to make sure high risk high reward projects actually get implemented:

when a promising innovation project is about 50 percent complete, she brings together representatives from information technology, patient services, and facilities management to assess how to scale it across the company’s vast system. By evaluating the “O-Gap”—that is, the space between pilot and operations—this group takes into consideration everything from process realignment to environmental modifications, as well as the training requirements needed to foster wide adoption of the change.

Strategy for maintaining proprietary information in R&D outsourcing

R&D management journal has laid out an interesting strategy for managing Information leakage in innovation outsourcing:

This paper studies an R&D outsourcing contract between a firm and a contractor, considering the possibility that in the interim stage, the contractor might sell the innovation to a rival firm. Our result points out that due to the competition in the interim stage, the reward needed to prevent leakage will be pushed up to the extent that a profitable leakage-free contract does not exist. This result will also apply to cases considering revenue-sharing schemes and a disclosure punishment for commercial theft.

Take away in this case is that the before the R&D matures and revenue sharing begins, the contractor has an incentive to maximize revenues by “leaking” the information. Rewards and or punishment for leaks need to be higher during the R&D phase and can be moderated at manufacturing stage.

Then, we demonstrate that in a competitive mechanism where the R&D firm hires two contractors together with a relative performance scheme, the disclosure punishment might help and there exists a perfect Bayesian Nash equilibrium where the probability of information leakage is lower and the equilibrium reward is also cheaper than hiring one contractor.

This is very interesting. If we have two contractors than probability of leakage is lower! Sounds counter intuitive on the surface, but clearly there is some logic to it – if rivalry can work in internal R&D teams, it could help with external collaborators as well. May be R&D managers can consider Coloplast’s approach?

You’re Getting a Bonus! So Why Aren’t You Motivated?

An interesting article from HBR You’re Getting a Bonus! So Why Aren’t You Motivated? lays out two factors that reduce effectiveness of bonuses as a motivator in R&D teams. R&D managers must keep both in mind while determining the best way to motivate teams into improving performance – especially when teams are virtual.

1.The connection between values and behavior. Typically, bonuses are tied to financial achievement —they’re paid out when a certain benchmark is hit such as yearly company revenue, earnings per share, or department revenue targets. But the connection between the outcomes you truly value and the behaviors you want to see from employees can be far from obvious.

This is very true in large R&D organizations. I have worked with many companies were even large bonuses did not encourage right behavior because there was no direct link between individual performance and bonuses. Several companies attempted to address this using a flow down of corporate performance requirements into individual goals. However, this is extremely difficult to do – how does one link a success of a research project that may enable a new subsystem which in turn might have an impact on several future products to bonuses? Even when the bonuses were tied to behaviors, the second problem prevented good outcome:

2.The connection between a worker and his/her direct supervisor. Plenty of research has shown that the most important influencer of workers’ performance, for better or worse, is the dynamic between them and their bosses. For example, research into workplace deviance by Lance Ferris of Singapore Management University shows a higher level of outright deviance among employees who feel they’ve been treated rudely or unfairly by their immediate supervisors. By the same token, there is nothing more motivating than recognition that comes directly from the higher-up who knows your work best: your manager. At that close range, a reward is a relationship-builder. Administered more remotely, as bonuses are, it’s only a transaction.

I would add to this factor: In several companies, the bonuses were decided at the division level and the supervisors were just handed a “decision” to communicate. This made it quite difficult for the supervisor to even explain rewards, much less guide behavior! May be it is time to consider other approaches to motivate teams?

Spurring Cross-Functional Integration

Journal of Product Innovation Management has an interesting article on Spurring Cross-Functional Integration for Higher New Product Performance: A Group Effectiveness Perspective. The article recognizes, that cross functional integration is crucial, but difficult to do:

Firms are increasingly assembling cross-functional new product development (NPD) teams for this purpose. However, integration of team members’ divergent orientations and expertise is notoriously difficult to achieve. Individuals from distinct functions such as design, marketing, manufacturing, and research and development (R&D) are often assigned to NPD teams but have contrasting backgrounds, priorities, and thought worlds. If not well managed, this diversity can yield unproductive conflict and chaos rather than successful new products.

The paper lays of the result of a formal study based on group theory that scientifically validates that cross-functional integration does have a positive effect on R&D effectiveness:

The model developed from this theory was then tested by conducting a survey of dual informants in 206 NPD teams in an array of U.S. high-technology companies. In answer to the first research question, the findings show that cross-functional integration indeed contributes to new product performance as long conjectured. This finding is important in that it highlights that bringing together the skills, efforts, and knowledge of differing functions in an NPD team has a clear and coveted payoff: high-performing new products.

The study finds that two types of factors impact cross-functional integration:

Specifically, social cohesion and superordinate identity as internal team factors and market-oriented reward system, planning process formalization, and managerial encouragement to take risks as external team factors foster integration.

Authors recommend that BOTH factors need to be addressed effectively to integrate teams:

These findings underscore that spurring integration requires addressing the conditions inside as well as outside NPD teams. These specialized work groups operate as organizations within organizations; recognition of this in situ arrangement is the first step toward better managing and ensuring rewards from team integration.

Clearly, internal factors are much more difficult to address in diverse teams that are dispersed across multiple locations. In fact, it is very difficult to get virtual teams to believe that they are a single organization. That is where R&D managers can help!

How To Keep Your Team Loose

As we have seen in several recent posts, R&D managers have to be increasingly effective about managing complexity, especially when the teams are scattered across geographies and organizations (e.g. co-design). Managers have to make sure that these virtual teams remain effective and focused. HBR has some hints on How To Keep Your Team Loose and performing:

Instill camaraderie. Optimal team performance depends on people pulling together for one another. Camaraderie-building can happen naturally between teammates, but managers can encourage it by creating groups or units of people whose talents complement each other. Injecting some humor into the mix through jokes and gentle teasing can speed the meshing of individuals. Camaraderie builds when people can laugh with each other, not always at each other. (That is, you can tease, but make certain you are available to be teased yourself.)

Get personal. Know your people and their capabilities. The secret to maintaining a loose atmosphere is belief in individuals’ and the team’s ability to perform. Trust that people know their stuff and will execute. Being light and loose with underperformers is not advised. You need to get people in gear before you can ease up with levity.

Coach ’em up. The art of management is putting the right people in the right places so they can succeed. Toward that end, good managers spend their time coaching their people for performance. If a manager has established good rapport with individuals through his light-hearted demeanor, he has a better ability to connect and get them to listen. (Note: too much joking will undercut a manager’s ability to be perceived as serious.)

A good reminder to any R&D managers trying to engender innovation…

Customer Driven R&D

It is interesting how R&D managers have to navigate the complex world of management advice – I guess thats what makes it interesting. The article Avoid The Commoditization Trap from Forbes recommends customer driven R&D:

To do that, gather together the best minds in your business, including representatives of all the company’s critical functions, and ask them the following question: ‘Knowing what we all know, if you were our customers, how would you go about deciding whether to purchase our products or services?’ Your cross-functional and top-performing team should then make a list of all of the questions that arise about the problems to be solved for your customers and the questions those customers should be asking a potential solution provider. If those questions are positioned correctly, you’ll be able to expand your customers’ awareness of how you can address their needs, increase your credibility and ultimately set yourself further apart from your competition.

This is actually the opposite of the University of Illinois study recommending focus on technology instead of customers to drive innovation. However both view points have value at probably different times in the R&D life-cycle. In fact, managers need to balance investment between both approaches.

Clearly Intel believes in this approach – they have hired their on social scientists to design new computing solutions that could use their chips! The article has one good suggestion about deciding on customer impact that is quite useful in a B2B situation:

First, fully examine the impact your solution can have on a customer’s situation and how it can benefit them long-term. The only true measure of value is how your solution changes your customer’s net profit. Instruct your team in how to clearly and effectively relay such information, helping customers see your value from their own point of view–not in terms of industry averages, past experiences with other customers or generalizations, but in ways that will make them want to defend the validity of your solution to their own colleagues. That’s when you’ll know you’ve succeeded.

Off to the races…

Improving quality of R&D portfolio management decisions

Yesterday, we discussed the need for an effective checklist in portfolio management and R&D decision making. An article from Business Week Business Investment: Too Little, Too Late? describes what the checklist should cover:

Surfacing biases in the decision process—Reveal and remove emotional and political factors that have impact on decisions.
Systematically cataloging assumptions—Consistently capture presumptions that underlie decisions.
Scoping options into investments—Assess the future potential moves or investments opened by near term decisions.
Calculating Opportunity Cost of Decisions—Consider the value of the next best alternative forgone as the result of making a decision.

These four considerations are difficult to implement in an absolute sense. For example, it is hardly ever possible to compute the opportunity cost of R&D project decisions – especially the early stage opportunities. However, that does not mean that the managers should not consider opportunity costs. A checklist is an effective solution here because it avoids the effort of actual computation while removing biases across managers that pure judgement calls might introduce. This is especially true if one makes the choices in the checklist more objective: Instead of just asking portfolio reviewers to put in a score of 1 to 5, provide a brief description for each score. We could always use the alternate discussion approach if there are significant differences across portfolio reviewers.

Please post a comment or email if you would like to see some examples…

Get Your Team to Stop Fighting and Start Working

Here is a quick little best practice reminder from HBR for the weekend: Get Your Team to Stop Fighting and Start Working. Skepticism and questioning are part of the R&D environment. However, they could lead to conflict – especially in virtual teams. Managers would do well to follow this advice from HBR:

Intervene early. When two or more team members are engaged in a conflict, the sooner you step in the better. Once the dispute starts, emotions can run high, making it harder to diffuse the situation. Letting conflicts fester can result in hurt feelings and lasting resentment. Boyatzis points out that a simple disagreement can turn into a serious conflict in milliseconds, so it’s critical for team managers to be aware of the team dynamics and sense when a disagreement is percolating.

R&D portfolio management best practices

Another article with some best practices for the weekend – this time from the Corporate Executive Board on R&D project portfolio management –Pick a Winner and Make it Pay. As the pressure on improving R&D efficiency increases, one approach organizations seem to be following is increased portfolio reviews.

However, reviews do not automatically improve portfolio quality. One of the key reasons for that is that projects need to be measured on equal terms across product lines, technologies, maturity, and divisions. This is hard to do, but essential:

We saw the best portfolio managers focus on two capabilities in particular: 1. Ensuring project valuation and selection criteria are consistent across the enterprise. 2. Identifying and managing risk from the portfolio level down, rather than from the project level up.

The other problem in reviews is lack of uniform categorization scheme (along three axes – product lines, technologies and maturities). I have found that many large organizations have multiple parallel (often redundant) R&D projects. Since the projects are not categorized in a consistent manner, it becomes extremely difficult for R&D managers to make effective decisions.

There are two practices that clients find particularly helpful in making the shift from a ‘project-up’ view to a ‘portfolio-down’ one. The first, that we came across in our current research, is from Deutsche Telekom and helps with the perennial problem of categorizing projects into the ‘kill’ or the ‘fund’ category. The firm’s T-Labs R&D group divides its portfolio into agreed zones to increase clarity of project scope and stimulate productive discussions on border line projects.

A systematic categorization allows organizations to aggregate data across projects and make strategic decisions at the portfolio level. Even when data is available, the portfolio decisions still need significant management intuition. A problem tends to be that this intuition is not uniform across managers and it is often difficult to quantify it. The article suggests voting as an approach:

The second is a client favorite from Ecolab , a cleaning services firm. Its R&D group developed a portfolio prioritization process that engages business leaders in the creation of high-growth R&D portfolios. Using an objective voting mechanism, senior managers rank proposed projects based on their potential ability to address the organization’s strategic objectives.

I believe a more useful approach could be scoring based on a uniform / simple checklist. A score for each project can calculated from the list. In addition to quantifying manager intuition, these checklists allow organizations to learn from success / failure of funded projects.

I have a few examples that I could share. Please send me an email.

Playing Well With Others

MIT Sloan Management Review had an interesting article Playing Well With Others about communication between R&D and marketing:

The Situation: Different priorities and ways of thinking often create gaps in understanding between marketing and research-and-development staff.

The Problem: Such gaps often mean that one side dominates the development of new products, giving short shrift to the other. When marketing dominates, R&D can be under too much pressure to hit on breakthrough ideas. When R&D dominates, new products can lack marketable strengths.

Effective communication is very important in R&D environment. In fact, some amount of questioning and skepticism is absolutely essential to scientific / engineering progress and to innovation. However, when two different departments like marketing and R&D are involved, effective communication becomes more difficult and essential. The article suggests:

The Solution: Companies should help both sides learn to appreciate each other’s strengths, and encourage them to work closely together at the earliest stages of product development.

I believe that R&D managers need to put in place a communication bridge that transcends jargons (both engineering and marketing) to allow a free flow of communication. The bridge could be individual dependent (like in FreeScale) or in terms of an effective process and tool-set that allows everyone to focus on what is of common interest (product specs and customer requirements) while bypassing what is not (details of engineering implementation or product surveys). The article points out the same:

Make sure everybody recognizes the value that each department brings to the process—and how one side complements the other.
If one department or the other is dominating a company’s process for developing new products, bring the two more into balance.
Have the two sides speak a common language.
Get out of your silos—up to a point.
Focus on the consumer.