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Can You Outsource Innovation?

Does innovation have to come from within?

23Mar

The temptation for many when talking about innovation is to draw for the extreme cases. The image of the disruptive, agile startup destabilizing an old monolith is romanticized, but such intense innovation isn’t right for every company. There’s also an argument that too much of a focus on innovation can distract a company from its core working practices, chasing new ideas rather than cementing and exploiting old ones. In businesses with the resources to do so, dedicated innovation teams can keep the process to tick over, but could that process be outsourced?

We often hear about incremental innovation coming from larger organizations, while smaller more agile companies are positioned to practice disruptive innovation. For the bigger companies, incremental is preferable because the failure rate is far lower and obligations to shareholders compound the fear of that failure. For smaller companies, incremental innovation won’t get them far, and complete disruption of an industry’s major incumbents is the holy grail. For the average company, though, the way forward is to ensure that innovation is steady, but not so revolutionary that it risks derailing the business.

One major problem for a lot of organizations is the process of innovation becoming siloed. When some businesses set up innovation hubs, or appoint a Chief Innovation Officer, there is a temptation for the rest of the organization to assume that innovation is being taken care of elsewhere. It’s difficult to cultivate company-wide innovation practices, and investing in a dedicated team can actually be risky.

One option to get around this is to partner with a smaller, more innovative company that are doing interesting things within the market. Small companies are in a better position to innovate because they are not subject to the same regulatory constraints as their larger counterparts, and bringing in fresh ideas can be invaluable. This can be in the form of either collaboration or acquisition. The alternative is to turn to a consultancy, but without any real knowledge of the day-to-day working practices of the organization, these initiatives can often be poor value.

There are risks to buying innovation, though. Brian Quinn, principal at Doblin, Deloitte’s innovation consulting practice, writing for Forbes, explains how though M&A is a ‘seemingly less risky alternative,’ all things considered this is ‘false comfort.’ Failure rates for M&A can be as high as 90% (depending on which study you subscribe to), barely an improvement when compared to the admittedly low success rates of innovation initiatives. The criticisms are that, not only does M&A activity for the sake of innovation demonstrate a lack of faith in your own innovators, it also comes with an easily avoided price tag.

The only other form of quasi-outsourcing of innovation is in the creation of startup incubators or accelerators. Similar to the M&A process, the hope is that in helping smaller businesses succeed, the company creating the accelerator will have access to the top talent coming out of it, not to mention the ideas it produces. But again, this is flawed, not least because most industries are saturated with these kind of programs. Before going down this route, you must ask whether or not your industry needs another incubator, and whether your brand is fashionable enough for startups to preferentially use yours over others.

Essentially, there is no perfect way to outsource innovation. The pitfalls in consultancy, M&A activity, and startup acceleration are huge, and where possible companies should keep the process in-house. Instilling a culture of innovation and risk-taking isn’t easy, and innovation teams are in danger of being siloed, but against the alternative, internal innovation should be any company’s first choice. 

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