Minimizing the High Risk of Failure of Corporate Innovation

Much of today’s new technology may not impact the organization’s business directly, but it almost certainly will impact it indirectly. The Internet of Things (IoT), big data, artificial intelligence (AI), robotics, blockchain, cryptocurrency and virtual reality (VR), to name but a few, will make sure of that. There is also technology such as the Interplanetary File System (IPFS), a network protocol so significant it could completely reimagine interactions with the Internet, beginning with addressing the Internet’s major privacy shortcomings.¹

With the increasingly rapid rate of change in technology, key questions organizations face are how to make sense of it all, how to apply it practically and how to do these things before their competitors do. The innovation hub is a tool often used to achieve these objectives. An innovation hub is a department or business unit that typically considers technological innovations that can potentially benefit an organization’s competitiveness. In some organizations, the function performing similar activities is called the research and development (R&D) department The problem is quite simply that most innovation hubs actually fail to meet their objectives. There is a difference between the failure of individual innovations and the failure of whole innovation hubs. This article addresses the latter.

It also introduces what the board can do to help mitigate the risk of failure for its innovation activities. Stated differently, it introduces a governance framework that helps ensure that organizational innovation activities produce the value expected of them.

Why Organizations Innovate

Some of the reasons organizations innovate are to stay on the offensive, to gain an edge and to enable entry into new markets faster and more cost effectively.² In this respect, innovation hubs primarily aim to increase digital innovation, rethink customer experience, improve operational efficiency and test new business models.³

Softer reasons for technology innovation include the fact that the ability to demonstrate technological proficiency is key to being perceived as being competent and capable, thus augmenting the organization’s reputation and making people’s heads turn.⁴ The latter is particularly useful if the organization wants to attract the best talent.

Innovation’s Two Focus Areas

Two focus areas in innovation thinking are the process of innovation and the content of innovation.⁵ This article focuses on the process of innovation, because, with the right process and governance enablers, the content of innovation will have a greater likelihood of driving a return on the organization’s overall investments in innovation.

Structure for Innovation

Organizations are actively creating all manner of sandboxes, accelerators and innovation hubs to explore new technology, where teams of intrapreneurs try to understand and, hopefully, meaningfully apply the relevant new technology to their organizations. The often-implicit expectation is that this will ultimately help maintain or even grow the competitiveness of their organizations.⁶

As an example, the decentralized, distributed nature of blockchain technology has been particularly threatening for financial services and, in turn, has driven banks and other financial services organizations to explore blockchain technology for themselves, both independently and through consortia such as R3 CEV.

In particular, bitcoin and other major cryptocurrencies threaten to disrupt the payment system, thereby negatively impacting the revenue streams of established intermediaries such as banks and payment intermediaries (e.g., Visa and Paypal). Furthermore, Ripple, a blockchain-based technology focused on transfers of money between countries, threatens to disrupt SWIFT, currently the de facto protocol for transferring funds abroad.

Both of these examples offer lower costs, but Ripple’s value proposition also includes multiple orders of magnitude faster processing times for international money transfers, from two or more days to three to six seconds as shown in figure 1.⁷

Based on data from: Olszewicz, J.; “Ripple Price Analysis—Trend Reversal Likely,” Brave New Coin, 10 October 2017, https://bravenewcoin.com/news/ripple-price-analysis-trend-reversal-likely

In the midst of innovation successes, however, 70 to 90 percent of intrapreneurship efforts fail⁸ and there is no doubt that many of the blockchain-focused innovation hubs will follow suit. One of the ways some aim to reduce this rate of failure is for organizations to partner with financial technology (fintech) start-ups.⁹ But even in this case, success is not a given. Indeed, there is a significant struggle to make these types of relationships work.¹⁰

The Role of the Board in Ensuring Meaningful Innovation

While the relationship between corporate governance and innovation is a dilemma,¹¹ could suboptimal corporate governance be a key reason for the failure of innovation hubs?

Many attempts at innovation fail because the tough questions about an idea are not asked at the outset.¹² Furthermore, there is also the problem of innovation operationalization. Within three years of a chief executive officer (CEO) announcing an innovation program, many of them will have failed due to poor operationalization. Indeed, Target, Alaska Airlines, Coca-Cola, The New York Times and Chubb are examples of organizational innovation failures.¹³ Ensuring the tough questions are asked and enabling the requisite degree of operationalization are certainly the kinds of governance and operational risk management issues that deserve attention.

From a governance perspective, the reasons organizations innovate can be aligned with the governance construct of “sustainability,” and with the accounting construct of the “going concern.”

Both of these constructs are about helping to ensure that the organization continually evolves to live a long and productive life.

Both of these constructs can be encapsulated within the contemporary governance term, “resilience,” where resilience is defined as “an organization’s capacity to anticipate and react to change, not only to survive, but also to evolve.”¹⁴ Technology is a major driver of change, so to ensure resilience, better ways of impacting technology as a driver of change need to be implemented if resilience is a desired outcome.

There are at least five governance constructs to consider in the context of the board’s oversight of technological innovation, detailed in figure 2.

When the novelty of simply being involved in innovation wears off, the board should, ultimately, be able to see the fruits of the innovation and how these fruits help achieve organizational objectives such as resilience and aligning that innovation with organizational strategy. There should also be relevant oversight of the innovation to ensure that the organization’s value is protected and that cash reserves are not wasted.

It is essential that the board ensures that appropriate resources are made available to effectively operationalize innovations that have the potential to increase the organization’s resilience and its competitiveness.

Part of ensuring that the outcomes of the innovation hub contribute to the sustainability and growth of the organization includes defining and carefully articulating the scope of the innovation hub. The scope is referred to as its width and depth in figure 2 and needs to help maintain the focus on the expected contribution of those innovation activities to the organization.

Furthermore, if a new technology that strongly contrasts with the existing organizational technology architecture is proposed by the innovation hub while simultaneously being more strongly aligned with the organization’s strategy than alternative proposals, then the board’s role is to ensure that the risk factors of potentially integrating the new technology into the organization are appropriately identified, assessed, mitigated and monitored.

Conclusion

Appropriate corporate governance can ensure that the challenges innovation hubs face in producing the value expected of them are addressed. In this respect, governance should ultimately serve to remove the roadblocks to successful corporate innovation.

The article highlights five important IT governance constructs that are key in an innovation management context:

1. Clarifying the scope of innovation to ensure its effectiveness: its width and depth
2. Ensuring a focus on resilience, thereby ensuring the sustainability and the growing concern of the organization
3. Understanding the implications and risk of the partnership model, the current preferred model for organizational innovation
4. Focusing on value, ensuring the right degree of financial resources are made available for effective operationalization and the innovation hub, in turn, creates measurable value for the organization
5. Ensuring not only that the new technology is able to be integrated into the organization, but also that the new technology is most effective compared to alternatives in supporting the organization’s strategy

In the midst of an increasing number of technological innovations, both innovation and innovation governance are must-do’s for organizations today. Innovation finds ways that promising technologies can add value to the organization, while governance ensures that these innovation activities are focused on adding value and they contribute to the resilience of the organization, thereby ensuring that resources are not wasted or unnecessarily diverted.

It is evident that strong IT leadership and experience on the board is needed to ensure that the tough questions about innovation are asked up-front, which, in turn, actively enables an innovation hub to effectively contribute to the resilience, sustainability and competitiveness of the organization.

Endnotes

¹ Macdonald, R.; “Locking the Web Open, a Call for a Distributed Web,” Internet Archive Blogs, 11 February 2015, http://blog.archive.org/2015/02/11/locking-the-web-open-a-call-for-a-distributed-web/
² Charan, R.; A.G. Lafley; “Why Innovation Matters,” Fast Company, 30 May 2008, https://www.fastcompany.com/874798/why-innovation-matters
³ Solis, B.; “Are Corporate Innovation Centers the Last Hope for Companies Too Big to Fail?,” InnovationManagement, 9 February 2017, www.innovationmanagement.se/2017/02/09/corporate-innovation-centers/
⁴ Bracey, L.; “The Importance of Business Reputation,” Business in Focus, October 2012
⁵ Deschamps, J.; “Nine Different Models in Use for Innovation Governance,” InnovationManagement, 8 May 2013, www.innovationmanagement.se/2013/05/08/9-different-models-in-use-for-innovation-governance/
⁶ Hoehn, R.; “Five Reasons Why Your Company Should Innovate,” InnovationManagement, 7 July 2016, www.innovationmanagement.se/2016/07/07/5-reasons-why-your-company-should-innovate/
⁷ Olszewicz, J.; “Ripple Price Analysis—Trend Reversal Likely,” Brave New Coin, 10 October 2017, https://bravenewcoin.com/news/ripple-price-analysis-trend-reversal-likely/
⁸ Altringer, B.; “A New Model for Innovation in Big Companies,” Harvard Business Review, 19 November 2013, https://hbr.org/2013/11/a-new-model-for-innovation-in-big-companies
⁹ Griffith, E.; “2016 Is the Year Startups and Corporates Became BFFs,” Fortune, 9 August 2016, http://fortune.com/2016/08/09/startup-fortune-500-corporations/
¹⁰ Harlé, N.; P. Soussan; A. de la Tour; “What Deep-Tech Startups Want from Corporate Partners,” BCG Henderson Institute, 3 April 2017, https://www.bcg.com/en-ca/publications/2017/technology-digital-joint-ventures-alliances-what-deep-tech-startups-corporate-partners.aspx
¹¹ Serretta, H.; M. Bendixen; M. Sutherland; “Core Corporate Governance Dilemmas Facing Boards: A South African Perspective,” South African Journal of Economic and Management Sciences, 22 August, 2011, https://sajems.org/index.php/sajems/article/view/276/94
¹² Fisher, A.; “Why Most Innovations are Great Big Failures,” Fortune, 7 October 2014, http://fortune.com/2014/10/07/innovation-failure/
¹³ Kirsner, S.; “The Stage Where Most Innovation Projects Fail,” Harvard Business Review, 11 April 2017, https://hbr.org/2017/04/the-stage-where-most-innovation-projects-fail
¹⁴ PricewaterhouseCoopers, Corporate Governance in the Boardroom: A Practical Perspective, June 2015, https://www.pwc.com/ee/et/publications/pub/corporate-governance-in-the-boardroom.pdf
¹⁵ Institute of Directors South Africa, King IV Report on Corporate Governance for South Africa 2016, 2016, http://c.ymcdn.com/sites/www.iodsa.co.za/resource/resmgr/king_iv/King_IV_Report/IoDSA_King_IV_Report_-_WebVe.pdf
¹⁶ Op cit Deschamps
¹⁷ Op cit PricewaterhouseCoopers
¹⁸ Tencer, K.; “Why Your Company Is Failing to Innovate,” The Globe and Mail, 4 December 2015, https://www.theglobeandmail.com/report-on-business/small-business/sb-growth/why-your-company-is-failing-to-innovate/article27510973/