by Partners and Principals of Arthur D. Little in promotion of the new “Breakthrough Incubator” model. More information can be found here.

Open innovation is well established, but how many companies are prepared to outsource the whole innovation effort? Some companies are already paving the way and reaping the benefits.

By now all companies have got the message that effective innovation needs an “ecosystem” of partners. A good innovation ecosystem for a large company might include suppliers, specialist service providers, universities, start-ups, research institutes, funders, customers and, in certain cases, peers or competitors. But in most cases, companies use their ecosystem partners merely as contributors to their innovation processes – co-innovators, maybe, but the overall process remains firmly under the control of the company.

There are some understandable reasons for this: Firstly, product and service innovation is usually seen as key for competitive advantage, and so needs to be governed and managed in-house, even if there are multiple partners involved in its delivery. Secondly, innovation is inherently risky, and anything risky is difficult to contract out to a third party. And thirdly, turkeys generally don’t vote for Christmas – open innovation is one thing, but outsourcing innovation altogether feels pretty threatening for in-house innovation managers.

Why some companies are now taking the plunge

The combined pressures of low or stagnant growth in mature markets (such as consumer goods markets), disruption from rapidly scaling start-ups, and convergence between sectors, often with digital components, are creating actual or potential growth gaps. To meet these gaps, companies are being driven towards either expensive and risky acquisitions, or increased emphasis on breakthrough innovation to create new step-out growth beyond the core. If you can make it work, creating a new business through breakthrough innovation costs a small fraction of the cost of an acquisition.

The pitfalls of managing breakthrough innovation at scale
However, managing effective breakthrough innovation on this bigger scale is not easy. Leveraging the innovation ecosystem is certainly a big part of the solution, but there are still some difficulties. In many large companies, brand is king, so many great breakthrough concepts get strangled at birth or severely watered down because they don’t fit within the straightjacket of existing brands. Many companies create internal breakthrough teams, which are in some way insulated from normal restrictive corporate practices. However, these teams often focus on the front end of the innovation cycle, especially trend forecasting, idea generation, concept creation and prototype development. When the time comes for scale-up and commercialization, breakthroughs often flounder because the corporate “antibodies” from the receiving functions, departments and business units start to attack the business before it’s been de-risked. A breakthrough may also fail at this stage because there is no suitable “home” in the current organizational structure.

Relying on incubating and accelerating start-ups for all your breakthroughs is also risky – start-ups have their own interests, and they may not be as attractive as they first appeared to be. Internal groups are often not truly agile, and tend to adopt the frills without the real philosophy. In addition, signaling your potential breakthroughs to your competitors long before they are launched can be hugely value-destroying. We have found that nearly 90 percent of companies are unhappy with their current approaches for systematic breakthrough innovation.

The case for externalizing

Externalizing the whole breakthrough innovation process can overcome many of these problems. In practice, this means appointing an external partner organization to run the innovation process end to end, including market testing and even scale-up and launch. By doing this you can create a genuine step-out business without any adverse interference from the body corporate. You can work brand-agnostic. You can keep the new business anonymous, both internally and externally, until it’s ready. You can test and de-risk the business before involving the company at large. And an external partner can be truly agile, working multi-functionally with a small team to integrate technology, strategy, commercial and operational issues and move towards MVPs and early testing. We’ve seen cost and time-to-market reductions of up to 30 percent, as well as greatly enhanced insight and analytical underpinning.

Of course, the company still needs to monitor closely what the partner is doing, as well as staying involved in key decision-making – so close, day-to-day interaction through one or two trusted individuals is essential, and there needs to be a senior steering group. Your company needs to be very clear with the partner at the outset about what the objective is. There also must be a comprehensive transitioning process to integrate the new business back into the company in the latter stages. And you need to be sure that the partner has the right capabilities and skills in the first place.

Your company may still think it’s risky to externalize innovation, even if you are looking for rapid step-out growth. However, when you compare it to the alternatives, such as a major acquisition or trying to manage the whole thing internally, you might conclude that, actually, it’s the least risky option of all.

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