Should you centralize or decentralize our innovation efforts? When the innovation process is not performing as expected, 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 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 has always 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?
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
- Use a quick and relatively cheap way to vet early-stage teams. Support the most promising projects through the development, implementation, and scaling phases, so that you spend your resources and support wisely. We developed the T4 platform 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!
Related posts
- Bringing simplicity and rigor to the innovation process
- The Innovation Management Process
- Innovation Portfolio Management
- The Biggest Mistake in Innovation Management
- Need better ideas?
