There were at least 1.3 million professional service firms in the US, who combined had in total annual revenues of $2.7 trillion dollars before the pandemic. In today's world, to survive firms must be innovative. That is, develop services for new client segments, incorporate novel technologies, develop new service delivery models, etc. How can you create a culture for innovation in your workplace in today's economy, that will enable you to innovate faster than your competitors?
Make a culture for innovation in the workplace pay-off
In most industries, the average return on investment for innovation is around 18%. However, please note two things. First, it is a return on investment. Innovation starts with an investment, an investment in the future of the firm. Second, the 18% return is not a given.
Many firms lose money from their innovation efforts. The reasons are many. It can be because one or two large development did not pan out. However, more often it is because the innovation process is not managed very well.
While there are many reasons why this is the case, it does not have to be.
Setting the bar
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 make your innovation efforts profitable. So let's spell out what you can expect from building a culture for innovation in the workplace.
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:
Putting these numbers in perspective
Investing 0.9% of revenues into innovation efforts may sound like a lot. However, if you compare it to firms like Google and Amazon it is nothing. They spent close to 20% of their revenues on innovation. For example, Amazon spent $22.6 Billion on R&D in 2017. However, comparing yourself with such innovation giants is not realistic.
To put the innovation investments in perspective, it may help to look at how much the firm invest in personal development and training and how much goes into unbillable hours. If you could tap into 10% of the training budget and 10% of the unbillable hours and redirect that in a structured way to benefit the firms' innovation activities, you have the means to create a culture for innovation in the workplace.
Creating a culture for innovation
However, just acting upon ideas and investing in innovation projects 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 the workplace.
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 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 defined process to bring ideas to practice. A process that starts with ideation, followed by development, then implementation and ends with scaling successful concepts.
Instill a new service development process to transform ideas into new services, consisting of ideation, development, implementation and scaling 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 creating a culture for innovation in the workplace? Creating a culture 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.