There are at least 1.3 million professional service firms in the US, who combined have a total annual revenue of $2.7 trillion dollars. The department of commerce expects that 50% of all new employment between 2012 and 2022 will be created in the health and professional services industries. In today’s world, to benefit from this growth you will have to be innovative. That is, develop services for new client segments, incorporate novel technologies, develop new service delivery models, etc. How can you build a culture for innovation in your firm, that will enable you to benefit from this growth?
Make innovation pay-off
To foster a culture for innovation in your firm, there has to be a pay-off. After all, innovation is an investment in the future of the firm. In most industries, the average return on investment for innovation is around 18%.
However, from our consulting experience we know that most professional service firms lose money from their innovation efforts. That is, they don’t generate any revenue at all. Innovation is a nice-to-have cost-center. A feel good, reputation booster, that helps to retain talent. Yet, that is very costly to maintain and does not result in sufficient or significant new revenue streams to bear the cost.
While there are many reasons why this is the case, it does not have to be.
The most common failure points in innovation are gut feelings and opinions. Most brilliant ideas come to us as ugly and unpromising, like the plant in the picture above. It is in the eye of the beholder to see the beauty and potential of an idea.
As a result, meetings about allocations of funds for ideas result in endless debates about the potential of each idea. A discussion about opinions that does not bring any value, nor does it advance these ideas in any meaningful way. In most organizations, these time consuming meetings are nevertheless important. Since it is the only way to appropriate and secure funds for the projects you are interested in. The people that can best advocate for their idea secure the scarcely available funds.
From an innovation and organizational perspective, these types of meetings are a waste of time and resources. Moreover, this way of allocating funds tanks the overall performance of the innovation efforts and in the process kills any effort to foster a culture for innovation.
The reason: decisions are being made based on gut feelings and opinions. History and research show that humans have less than a 50% track record of guessing which projects are worth investment. Due to biases, the track record is closer to 10%. The hard truth is that flipping a coin is in most cases more effective (50%) than the performance you can obtain by meeting and opining about the potential of early stage innovation ideas.
Setting the bar
To create an alternative for these meetings and decision investments, lets first set the expectations about what a culture for innovation should bring.
Innovation contributes to the reputation of the firm, the happiness of employees, and the satisfaction of clients. While these metrics create goodwill, kudos, and bonus points, they are not sufficient to guide and manage your innovation efforts. So let’s spell out what you should expect.
To create a return from your innovation efforts, you first will have to make an investment. The National Institute of Standards and Technology estimates that the professional services industry spends $11.8 billion on R&D annually, which implies that on average each firm spends 0.9% of its revenues on innovation (all based on 2013 numbers).
For an organization with $10 million in revenues, your innovation budget should thus be around $90,000.
Nagji and Tuff’s article in the Harvard Business Review calculated that the average return on investment of your innovation portfolio should be 18% for your innovation efforts. To be more specific:
- 90% of your efforts targeted at incremental types of innovation should give you 10% return on investment on average
- 20% of the efforts targeted at next generation services should provide you with a 20% return on investment
- 10% of innovations targeted at breakthrough types of new services should deliver a 70% return on investment.
On average, this means that you should get an 18% return on investment from your total innovation portfolio.
For the firm in the example above, it means that with a budget for innovation of $90,000, it should be able to create $106,200 in revenues related to new business that comes from your innovation efforts.
Translating this to your organization: if your firm had:
Creating the culture for innovation
Considering innovation as some wishy-washy feel-good activity will not generate the results above. Innovation and new service development should be well-designed processes in order to achieve these kinds of results.
Below are 6 tips that will help you set up these processes in such a way that it will deliver results and build a culture for innovation in your organization.
Tip 1: State your innovation vision
State what you want to accomplish. Where does your firm want to be next year, 5 years from now, and 10 years from now? Besides stating what you want to accomplish, also state how much you are willing to invest in getting there and what you expect in return from this investment.
State your vision on where the organization is heading. Demonstrate the willingness to invest in executing upon this vision by making the necessary resources available.
Tip 2: Instill a process
Don’t expect ideas to be transformed into valuable new services and profitable new revenue streams by chance. You need a predefined process to bring ideas to practice. A process that starts with ideation, followed by development, then implementation and ends with the diffusion of successful concepts.
Instill a new service development process to transform ideas into new services, consisting of ideation, development, implementation and diffusion of new services.
Tip 3: Start a training program
In the professional services, it takes a team of talented employees to bring an idea to practice. After all, it is much easier to train your employees on how to innovate than it is to teach an innovation expert the intricacies of your profession. The implication is that you need to make the appropriate innovation training available to your employees.
Start a training program that teaches your professionals how to transform their ideas into new services, using the innovation process.
Tip 4: Build an innovation support function
Professional service organizations typically have flat hierarchies. Decision-making structures are simple and professionals have a lot of autonomy over their daily tasks. Use the same approach to your innovation infrastructure. Don’t suddenly enforce top-down decision-making for the innovation process just because it uses common funds.
Instead, use the process and training explained above to select teams that demonstrate the willingness to put in the necessary effort. By doing so, each team will reveal their potential.
The role of the innovation function is then to support and monitor the training program and innovation efforts. Such a function does not need a large staff and is thus relatively inexpensive to maintain.
Without its own staff or the authority to make investment decisions, the innovation function cannot be held responsible for the overall results (the targeted 18% return on investment). However, the function can be held responsible for optimizing the innovation process and giving management the tools that will enable them to identify the most promising teams.
Build an innovation support function that is responsible for the training programs, the optimization of the new service development process, and tracking of the return on investment of the entire portfolio of innovation activities.
Tip 5: Create alignment
With everyone acting upon their own ideas and being trained in the innovation process, your innovation portfolio will be liking a curiosity cabinet. How do you bring order to this zoo?
Instead of debating about the best ideas and what to invest in, align the top-down and bottom-up processes. Put the funding where you need most activity and let the projects compete among themselves for those funds. With clear – effort and result-based – metrics, it is possible to identify the best performing teams. Invest only in these teams that demonstrate the willingness to put in the work and that address opportunities that are aligned with the predefined strategic goals.
An interesting side effect we have observed from such an approach is that it fosters unlikely collaborations between otherwise competing factions. Teams quickly realize that proceeding together increases their chances of support and success.
Create alignment between the innovation projects that are being pursued and the strategic goals of the organization by strategically allocating funds.
Tip 6: A diligent execution of innovation activities
Last but not least, vigorously enforce all teams to use the same diligent approach to execute innovation activities. We cannot stress enough that successful innovation is not about looking into a crystal ball and opining about what the best idea is.
Instead, it is about diligently executing on a well defined process. Not one innovation project is alike. Yet, the innovation process that leads to success is pretty similar for all types of innovation projects. What makes this process challenging, are all the uncertainties involved. Uncertainties that need to be expressed and tested. Teams that follow this process diligently can easily be identified. It is even possible to predict likely winners based on their work, effort, and potential.
This approach requires management to be unbiased in their decision-making. It also requires taking away funding from all projects that do not follow the process or that are not aligned with the organization’s strategic goals. Such projects should not be eligible to receive scarcely available innovation resources. If you want to get an 18% return on investment from your innovation efforts, there is no room for favoritism.
Enforce all teams to use the same diligent approach to execute innovation activities. Make investment decisions based on facts – effort put forth by the teams and results – not based on gut-feelings or favoritism.
What about the culture you may ask?
After reading all of these tips, you may ask yourself, what about the culture? Creating a culture for innovation is not the starting point, but the result of your innovation efforts. By setting clear goals and objectives, fostering the early champions of innovation projects in your organization, supporting them in their diligent efforts, bringing structure to the innovation process, and showcasing your early results, you will build a culture for innovation that is sustainable. An innovation culture that will enable your organization to grow and thrive in the long term.