10. October 2013–
Doing innovation yourself? Old hat. Here, Liquid Labs' managing director Paul Jozefak justifies his "innovation laboratory" in Hamburg and argues that outsourcing innovation should be as common as sending out for comms, manufacturing or accountancy.
"Traditional innovation" within large corporations is typically slow and ineffective. This corporate malaise juxtaposes harshly with the unbridled enthusiasm and creativity driving the very startups that are spurring corporations to become more innovative.
How can corporations the startup spirit and better drive innovation? Embrace the concept of "outsourcing innovation". In basic terms, this involves outsourcing the whole process behind innovation to external companies or separate subsidiaries, such as Liquid Labs.
Liquid Labs is an innovation laboratory building financial technology companies and products, based on my own and cofounder Michael Backes’ experience of corporate VCs, private VCs, and startups, and what we had seen go wrong. We then started working with The Otto Group, which was looking into how to launch new businesses without being swallowed up by the corporate innovation process already in place.
For us, success is measured by the evolution and survival of an idea or product. This means that ultimately, the market determines our success. Companies acquired by The Otto Group remain 100 per cent owned by them and they always have the initial call option on them. However, if The Otto Group is not interested in acquiring them, we are able to spin them off to external buyers or investors.
By outsourcing innovation, large corporations can take advantage of a range of benefits:
Access to talent
Real world experience and startup knowledge can be one of the major skills missing within a corporation. By outsourcing to a specialist innovation company where this talent and experience is rife, companies can sidestep a lack of relevant technical skill and knowhow.
A different outlook
Corporations often fail to take into account the "big picture" by focusing on quarterly results rather than long-term planning. A specialist innovation group can also challenge the irrational expectations corporations often have regarding innovation.
Blackberry, for example, failed to recognise the need to refocus their product towards consumer-driven devices. When Blackberry finally caught on and attempted to launch a consumer-oriented touchscreen device, it was too little too late.
The expectation was that it would be possible to conjure up something to save the company short-term. Driven by the fear that they might soon disappear, Blackberry had irrational expectations of what a new operating system or device would be able to do.
The very nature of an outsourced innovation process also lends itself to speed. It is not constrained by the "corporate process" of slideshows and steering group meetings.
Take the example of Google, which waited far too long after Facebook to launch Google+. This was no doubt in part due to an obligation to seek board approval and buy-in at each stage. Although there is a place for G+, it is still trailing far behind Facebook because it took too long to execute.
A cost-effective solution
Innovating in-house is an expensive process with capacity and time consumed prodigiously. Hiring and keeping the top talent is an incredibly hard task and can drive up costs further. In turn, smaller budgets force creativity and a lean development process, which focus on failing fast and repositioning or retargeting resources, rather than getting bogged down on one answer to a particular problem.
We need to change how innovation is measured
Given the wide-ranging advantages, it is not hard to see why it is set to become a mainstream business practice – either by outsourcing to specialist companies or forming separate subsidiaries. Budgets for innovation will no longer be treated as a line item, described as R&D, but will be considered as a separate investment in the long-term vision of the business.
This new approach will change how the results of innovation are measured. Presently, there is no accepted metric to measure the return on investment in innovation, other than the obvious resulting new product or service. Many of the byproducts of innovation are intangible, with the experimentation and failing process creating invaluable and often unquantifiable knowledge.
Don't expect quick results
There is a risk that even when the process is outsourced, large corporations will not accept the experimentation process and instead demand quick results – stifling the very creativity they are trying to tap into.
This trend is often self-perpetuating. Once you have had initial success, there is an expectation that you will continue to deliver results. As is the norm in the startup world, it may be that only one in 10 ideas is a big hit. Therefore, even if you are successful, expectations continually increase with each new success and people become impatient.
Businesses that outsource innovation successfully will be the ones that accept that experimentation and failure are essential parts of the process and adopt a portfolio approach, which will involve trying many things, with the expectation that only a few will succeed.
Tech will lead the way – banking and insurance will follow
The tech industry is likely to be the first sector to fully embrace outsourced innovation, as the process lends itself very well to software development. Older industry sectors, such as banking and insurance, will take longer to adapt. However, when it does happen, it is likely to happen to a far greater extent. This is because while most tech companies are geared towards innovation, banks and insurers are often distracted by a myriad of other business interests, which puts innovation on the back burner. When the benefits of outsourcing innovation become apparent to these businesses, they will embrace it wholeheartedly.
The concept of outsourcing innovation is taking off and there are already examples of incubators in other sectors. For example, American Express launched an incubator with Accenture and Allianz has recently launched its own incubator in Munich.
Not without risk
However, as with any new business trend, it is not without risk. A specialist subsidiary has to be able to provide oversight to the corporation and control spending whilst working on multiple projects. Hiring talent and maintaining an atmosphere free from stifling corporate politics is also essential.
Over the next few years, outsourcing innovation may become as common and intuitive in certain industries as outsourcing communication, manufacturing or accountancy. The mixture of financial and practical benefits, coupled with economic pressure and disruptive technology, makes outsourcing innovation a compelling new tool for businesses.
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