It is often falsely believed that innovation pays for itself. For example, medical R&D is expensive and for most hospitals innovation it is a cost center, often even a money sink. Why is innovation a cash cow in industry, but does not translate into revenues and growth in medical centers and many other service organizations?

Laudable goals

At the outset, the expectations of innovation centers can be ambitious, to say the least. Take for instance the Sheikh Zayed Institute for Pediatric Surgical Innovation at Children’s National Health System in Washington, DC. Its leaders’ goal was to make pediatric surgery more precise, less invasive and pain-free. Four principal investigators covering an even larger number of surgical domains were involved, with an available budget of $150 million and a 5-year plan. It would already have been ambitious to bring even one medical device to market given this budget and time frame, especially because the institute had to be built from scratch. Furthermore, pediatrics is an extremely challenging environment for developing devices, given the population sizes and liabilities. In sum, the institute started out with very laudable, but not very realistic goals.

Designed for research

Another challenge is that many innovation institutes are housed as part of research departments, even though research is very different from innovation for a number of reasons.

• Most medical research is funded by the NIH, which allows generous overhead budgets, while innovation is often funded by industry or investors, who require lean execution and have no tolerance for unnecessary indirect costs.
• Research is a process of discovery, where you go from A, to B, to C, until you have reached an endpoint. Innovation follows a different process. When innovating, it is essential that you first define where you plan to go, verify whether this is a desirable goal from a user and market perspective, and only then start planning how to get there. In other words, to innovate you have to start with the end in mind.
• Research projects follow a sort of natural selection process, as only those that obtain (external) funding can get more funding. Without funding, they will stop. In other words, research projects are funded on the go, and will run as long as there is money to fund them. Innovation projects, on the other hand, require making an upfront investment with the expectation that this investment will pay itself back. As few innovation projects in fact are capable of doing this, it’s extremely important to pursue the ones most likely to succeed.

It is not surprising that innovation — without rigorous project selection, with a research mindset, with no mechanisms for killing ongoing projects and with high overhead costs — often becomes a cost sink instead of the envisioned profit center and revenue generator many hospitals want it to be.

How to avoid this cost trap

There are three simple ways to avoid the cost trap:

1. Paradoxically, to make innovation cost effective you need to start with many projects, as more projects increase the likelihood of success. However, this only works in combination with the ability to ruthlessly cancel all projects that are less than very promising. Investment should only be made in projects that are stellar opportunities from every possible perspective. All others take time and resources away from the promising ones.
2. During the development phase, your most scarce resource is the time of your best people. Stellar opportunities exist because of stellar people, not the other way around. Development is a time-consuming endeavor, so make sure your best people know what it takes to innovate, and enrich teams with support structures and connect them with external resources to make them even stronger.
3. In health care and service organizations in general, success has to be shared with others. A medical center does not have the abilities pharmaceutical or device companies have to scale up drug and device development, clinical testing, manufacturing, and sales. Nor does the Hippocratic oath allow for unfettered commercial gain. Neither does it have the scale to leverage innovations that benefit its own operations. Such a scale is only achievable through collaborations, either with industry, and other medical centers.

Focus on facilitating

I am the first to acknowledge that these steps are easier said than done. And, to be sure, some of these issues are also a challenge in industry, not only for service organizations.

Most firms therefore purposely focus on a much smaller number of specialties than medical centers so as to prioritize and execute innovation projects much more easily. They contract the components or elements they need from others. They have scalability when successful and can make one success cover many less successful endeavors — a luxury that is rare in the world of medical centers.

Interestingly, it seems to me that innovation centers that start in education departments have a better chance at getting it right. Perhaps because educators are more attuned to learning — that is, learning how to get it right through trial and error.