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Centralize or decentralize your innovation activities?

Sheep on a meadow

Should we centralize or decentralize our innovation efforts? When the innovation process is up and running but without great successes, this question tends to come up. So, what is better? The answer depends on what you are trying to achieve with this change. In general, for professional service organizations, decentralized innovation efforts combined with centralized oversight over the process is the best option.

A similar history

It is interesting that this question comes up in organizations that typically have a similar history:

Innovation initiatives always took place. The organization delivered very innovative solutions to their clients, but it was all informal and ad-hoc. About 5 to 10 years ago the organization recognized that innovation was important and deserved more attention. With the understanding, that more leverage would be possible if the innovation process was better organized.

A better-organized innovation process

Now, a few years later and with a better-organized innovation process in place, the contribution of innovation to the organization has become clear. There is a lot of positive impact in terms of client satisfaction, attracting new talent, etc. that can be attributed to the innovation efforts.

However, with more transparency, it also has become clear that innovating is a costly endeavor. In many cases, the costs don’t seem to outweigh the returns. Instead of the expected 1.2x to 3x return on investment, they run at a significant loss. It is not unusual to have for every $1 million investment in innovation efforts, a return in revenues from new offerings of about $10,000 only. Obviously, that is not sustainable.

However, stopping with innovating is not an option, as clients expect state of the art services and employees chose the firm for that reason. Going back to the old ways of ad-hoc is not an option either, as that won’t reduce the costs by any means. It just obscures the facts.

With the reputation of the firm at stake and the current way of innovating not sustainable, what should the firm do? Centralize its innovation activities, to get better control and reduce the costs?

Does it indeed work better to flock the sheep so the speak, or should you leave them to roam freely?

A flock of sheep

What problem are you trying to solve?

Even if your circumstances are exactly the same as those described above, the question should innovation be centralized or decentralized, is probably not the right question to ask. As it requires you to compare two possible solutions, without knowing the problem you are trying to solve – other than that you are looking for a better return.

In other words, by changing from a centralized to a decentralized or vice versa process, what problem are you trying to solve? What is currently causing your innovation process to be so costly and why are the returns not higher?

Common problems

A few common problems that make the innovation process very expensive and that you may want to address:

  • Is there a misfit between innovation activities and the strategic mission or vision of the organization?
  • Are you lacking oversight over the innovation initiatives?
  • Are you looking for a more efficient process and or faster process, so it takes less time and is less costly to bring an idea to practice?
  • Are you struggling with saying no to teams and do you have too many projects in the portfolio?
  • Do unfeasible projects stay too long in the portfolio? That is, do you have a relatively high failure rate of late-stage projects?
  • Do you leave opportunities with high potential rewards on the table?
  • Are you struggling to scale your winners and leverage successes?
  • Are incentives misaligned between innovation activities and business unit operations?

If any of these are your challenges, you may want to focus on improving the innovation process itself, before housing it elsewhere in the organization.

What works well and what doesn’t?

Before deciding whether to centralize or decentralize the innovation activities or make any changes for that matter, the first step should be to identify what currently works and what needs to be improved.

You don’t want to lose the things that are working well at the moment.

With that information, you can then start to consider whether centralizing or decentralizing your innovation efforts is the better solution, or if any of the actions above are perhaps sufficient.

Below I have outlined the good, bad, and ugly for both a centralized and a decentralized innovation process.

The good, bad and ugly for a decentralized process

The good

  • Close to the customer, making it easy to get feedback from the market
  • Involvement of your most knowledgeable experts, no need to replicate knowledge elsewhere in the organization

The bad

  • Difficult to invest in larger initiatives – funding by single business units
  • Diffusion is a challenge – predominantly local initiatives, no incentives to share

The ugly

  • Limited control over the innovation process and ongoing projects from an organization perspective
  • Many under the radar screen projects
  • Many pet projects & insincere attempts
  • Difficult to keep teams going – business needs are always more urgent

The good bad and ugly of a centralized process

The good

The bad

  • Difficult to implement initiatives – lack of buy-in from business units
  • Diffusion is a challenge, as there are limited incentives to adopt the newly developed approaches, services, technologies etc. throughout the organization.

The ugly:

Now what?

Management 101 dictates that centralized processes are more efficient and effective. So I suspect that thinking also drives the question about whether or not to centralize or decentralize the innovation process. However, our research has shown that centralizing innovation activities leads to more innovation but it is not associated with a higher return on investment in service firms (source).

For service providers, because of the limited scalability and opportunities to create a return on investment, decentralization is often the better solution. For the simple reason that it is more cost-effective if you don’t have many innovation efforts ongoing, if you have a broad range of disciplines to support, and if you lack the ability to create 10x or 100x return on investments even on your most successful projects because of scaling limitations.

If so, the better option is to become extremely diligent in the investments you make and to keep your innovation process decentralized. Decentralized efforts will help you to get the most out of your current people and assets. Yet, to do so diligently, you will want to consider having the oversight of the innovation process itself be centralized. With everyone adhering to the same process, it will become clear what each business unit is doing and where there are opportunities for improvement.

In addition, regardless of whether you have a centralized or decentralized innovation process, you can take many actions to improve the outcomes of the innovation process:

  • Identify the best project teams by using data and testing assumptions, so you spend less on unpromising teams
  • Focus on talent over ideas – identify dedicated teams and their eagerness to learn, so that the chances of success of each investment is higher
  • Support the most promising projects through the develop, implement, and scale phases, while using a quick and relatively cheap way to vet early-stage projects, so that you spend your resources and support wisely. We developed our T4 accelerator program for that purpose.
  • Start small and simple and engage business units throughout the process to ensure buy-in, so you don’t invest in projects that won’t find a home in the organization. Unless the new offering is designed to disrupt and steal away the current business, in which case it needs to be protected from the current operations.
  • Make it very attractive to participate in innovation training & support program(s), so all teams are following the same process and their performance can be compared.
  • Foster new offerings until they have similar profit margins as the ongoing business, so successful projects get a chance to prove their worth.

Success!