8 rules for successful innovation

A separate hub is one important thing. But there are more aspects to consider for large companies with the ambition to be innovative. Sven Størmer Thaulow shares a set of rules.

Innovation has been one of the most used buzz words for decades. In any group of people discussing the topic there will always be different opinions on the definition. In Schibsted, we have established a common vocabulary around innovation based on the curriculum of Harvard and Professor Clayton Chris­tensen. Christensen defines sustaining innovation and disruptive innovation in the following way: Sustaining innovation occurs when a company creates better-performing products to sell for higher profits to its best customers. Typically, sustaining innovation is a strategy used by companies already successful in their industries.

Disruptive innovation is the second type of innovation and the force behind disruption. It occurs when a company with fewer resources moves upmarket and challenges an incumbent business.

A fight against the cash flow

In a large company, establishing new sustaining innovation (i.e. a new product towards the same customers) is not easy. It’s even more difficult to execute well on disruptive innovation. And God forbid – if you are disruptive against your own core business – then you are in for a real treat.

At the root of this problem is the nature of all innovation compared to the nature of a cash flow generating core business with healthy margins. Innovation means tons of experiments – of which 90% fail. Innovation often equals a long “hammock” of negative financials before hopefully some of the experiments start generating significant financial returns. Innovation = risk appetite + stamina/endurance + entrepreneurial mindset. In many large companies these are scarce resources.

The ability to succeed with inno­vation in such an environment is dependent on advanced corporate organisational engineering and hard, cool headed top management. And based on my own experiences in both operating and acting as the custodian of innovation units in large companies, I have concluded on a set of rules that can give some guidance on how to make it work. These rules are of course not an exhaustive list and many have done the same. In Schibsted, we try to learn and continually improve our efforts to stay a highly innovative company.

1. Set expectations right and avoid overly complex projects

Large companies are used to large projects and programmes. When innovating, that is not the way to do it. Fire off many small experiments with clear hypotheses about what problem you are solving and for whom. And towards your corporate stakeholders – be crystal clear that nine out of ten experiments will fail. At least!

2. Get the right ­people with the right attitude

Recruit externally primarily and hire only the right people. It’s better to grow slow and well versus fast and mediocre. Be careful with too many staff coming from the core business. Why? They bring with them the corporate way of working and rarely have the risk appetite you need. On the other hand, to not lose touch with the mothership, you do need a few from the core business in the team.

Attitude is also important. When you disrupt your core business, many colleagues in the core will react negatively to what you set out to achieve due to collision of objectives. If this is not the case, then you’re not stepping hard enough on the gas. To succeed with disrupting the core business within the same company, you will have to ask for forgiveness, not permission, and not get bogged down in the corporate way of operating. If you do, you will move too slowly.

Only use the corporate services if you need them. You should have laser focus on creating products with a market fit, not on following processes designed for a huge company.

3. Mimic the start-up setup as much as possible

From the owner’s perspective, I call this the viking ship principle. It’s when you tell the team: “Here’s your ship. It’s stacked with food, a sail, some pocket change, swords and ores. Now you guys go sailing, and we hope you make it to Scotland.”

In other words, as an owner of an innovation project, try to minimise their dependencies on others, remove as much barbed wire as possible for them, set them up with the amount of resources they need, and give them the authority to manoeuvre. And this means, there’s no one to blame! In practice, it also means establishing these radical experiments, sooner rather than later, as separate legal entities.

Why is this so important? Well, in a corporation, the teams have “gazillions” of dependencies. It slows development down. It also pulverises authority versus responsibility. There is always someone to blame. That’s a recipe for disaster for an innovation project.

4. You need a special culture to be able to operate as an antibody inside a monster

When you want to run many experiments, you will most likely do it in an accelerator-like setup. The accelerator can quickly be perceived by the staff in the core business as the privileged few, the ones who get to do the fun stuff and the ones spending the cash but not earning anything. And if some experiments are about disrupting and hence cannibalising the core – it gets even more toxic.

This can become a vicious circle for both the core and the accelerators. It’s not fun to work in a place where you feel that you are not wanted or are even worked against. The management needs to constantly manage this balancing act. One way to do this is to build a resilient accelerator culture with its own rhythm, rituals and ways of operating. But also, a culture that doesn’t become so strong that the monster’s immune system fires off on all cylinders.

5. Use governance and organisational engineering

As previously stated, radical innovation = stamina. The problem at hand is “when the manger is empty the horses fight”. Core business is under a constant margin pressure and when times are tough it’s natural to hunt for costs that can be cut in areas that don’t impact revenue too much. Hence – removing long term experimentation capacity is an easy target.
Radical innovation activities as accelerators must be organised as companies on the side of the core business areas. They should also be as high up in the organisation as possible to avoid being a victim of core business margin demands and priorities.

6. Utilise your core business for scaling products

It’s often tempting to use the core business for scaling new products and services. The classic scenario is to cross sell or bundle a new product to the existing customer base of the core business. It might be smart but very often it’s done way too early. Make sure the product market fit is well-proven as a separate service before you start “plugging” it into the core machine. Nothing is worse than selling something too early to too many customers. You only have one shot and if you fail, churn is brutal.

What’s even more difficult is to use the core business to scale a disruptive and cannibalising service, but it is possible. Schibsted did it with FINN on classifieds back in the early days of the internet. If that’s your preferred way of boosting innovation, you must deploy a combination of heavy communication about why this is important towards the core business brute force, top down-style governance, along with heavy, asymmetric incentives for the core business.

7. Make sure to use the right KPIs at the right time

It’s obvious for people who have worked in a start-up that you use different metrics at an early stage of the company compared to at a later stage. For example, pirate metrics (AARRR) are well known when you work in the venture capital space. But in a core business of a corporation, there are often other metrics, like market share, gross adds, EBITDA, revenue growth, capex to sales, etc., that are dominant. Applying these types of metrics to early-stage radical experimentation is obviously highly dangerous.

8. Seriously consider employee ownership

When you establish innovation activities as separate legal entities, you should seriously consider setting aside 10% to 15% of shares for employees. Being a part of such endeavours is much higher risk than being an employee of a large company. It also takes extreme efforts to succeed with start-ups. Hence, it should be rewarded accordingly. It’s good for both employees and the owners that the employees have a significant stake in the upside.