Articles

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Despite its importance to business, innovation can be a confusing distraction. An effective process for managing innovation allows organizations to respond to markets while remaining focused on business objectives.

Let's face it, innovation is what investors pay for. This axiom is especially true in small companies or startups, but it also applies to large companies and it applies to low-tech as well as high-tech. The Economist recently declared, "innovation� is the single most important ingredient in any modern economy -- accounting for more than half of economic growth in America and Britain." Innovation is the source of competitive advantage and profits because it reduces costs, raises productivity, improves products, and attracts customers. Both customers and businesses benefit from innovation, and when the business benefits so do investors.

Unfortunately, despite its importance to business, innovation can also be a distraction. Without proper management, innovation can consume resources, confuse employees and delay projects. The trick for business leaders, and one reason investors pay them substantial salaries, is to encourage and then channel innovation, so innovation both thrives and supports the business. Over the last 10 years, as president or CEO of small companies, I have used business objectives and priorities to channel the plethora of great ideas coming from employees. When handled well, good ideas proliferate and the employees themselves contribute to prioritizing ideas in the best interest of the business. Ideally, this process is lead by the Vice President of Marketing or by a COO, but it requires the support of all department heads and the most senior people in the organization. For the purposes of this article, I will focus on the channeling of product innovation in small technology companies where my experience, and the need, is greatest, but with a little imagination, the points can be applied to departments and divisions within large organizations as well.

The Paradox: Innovation vs. Focus

Organizations must constantly nurtured innovation. Once stifled, management will find innovation difficult to resuscitate in times of need, and ongoing innovation reduces the need for dramatic or revolutionary change. California residents, certainly everyone in Silicon Valley, know that a series of small earthquakes over a period of years is good because all those little adjustments release the tensions and pressures that would otherwise build up to a cataclysmic earthquake that knocks both people and buildings off their foundations. Similarly, a series of small innovations over time can preclude the need for dramatic product or organizational change in a business.

In addition, small businesses do not have deep pockets, powerful brands or large customer bases to tide them over when market conditions change. Therefore, small businesses need a sustained flow of innovations that maintain their competitive advantages. Competitive advantage derives directly from new products or product updates, time-to-market, cost, customer service and positioning. As a result, smart business leaders invest heavily in stimulating innovation, scrupulously avoid discouraging innovators, and search publications such as Innovation for ideas on how to better stimulate innovation within their organizations.

On the other hand, businesses have objectives, and a lack of focus on objectives leads to wasted resources, both capital and opportunity. Any instance of a lack of focus can be called a digression. Smaller companies, especially startups, need to focus and cannot afford to digress often or far. They must manage innovation carefully because the margin for error is small. Cash runs out, competitors get a new product or feature out first, customer priorities change. In a small company, digression, and the resulting waste of resources and opportunity, stand out and can quickly result in lost investor confidence. Unfortunately, limited resources and schedules often mean not all good innovations can be implemented, even if they fit within the parameters of corporate goals and priorities. Operating within budgets and schedules compels an organization to sacrifice some innovations in favor of others. Small companies do not have enough time or money to pursue all innovations.

Therefore, a business must evaluate and prioritize innovations according to its business objectives. For most small companies, the top priority is earnings. Any change that increases revenues without also increasing expenses (which includes lowering employee moral or increasing risk) or reduces expenses without hurting revenues (which includes damaging customer satisfaction or blemishing brand) should rise to the top of the priority list for organizations in which profits are most important to investors.

Innovation can only come from people, usually employees, vendors or customers. In a small company, especially technology start-ups, many new product innovations come from highly enthusiastic employees who want to make the product, the company, and themselves successful. Their fertile imaginations and constant exposure to new technologies, ideas and fashions can result in an overwhelming flow of improvements and enhancements to products, most of them well worth considering. You cannot blame the employees for their enthusiasm, and discouraging them from making suggestions would be fatal to the business. As a further complication, employees often become attached to the innovations they recommend and they take a highly personal view of when and how their innovations are implemented by the company. Some employees or departments take a xenophobic-like attitude towards proposals and have trouble remaining objective about the costs or consequences of the recommendations they make.

In summary, all businesses, but especially small businesses, need simple processes for handling innovation. The processes must stimulate the ongoing development and submission of ideas, mold them into team projects rather than personal causes, and prioritize the recommended innovations according to business needs and resources rather than individual or departmental desires. An effective process for managing innovation channels it so the business remains quick and responsive to the market yet focused on the objectives of the business as defined by management and investors.

Channeling Innovation

The first step in channeling innovation is communication. All participants need a clear understanding of the objectives and priorities of the business as well as the benefits and drawbacks, including costs, of each recommended innovation relative to the business's objectives and priorities.

Two forms of communication must take place. Everyone understands the first and it requires little detailed elaboration. I will expand on the second, however, later in this article because this is where innovation dies, gets out of hand, or comes to serve company interests.

1) Top-down communication: Communication from company leadership to everyone in the organization regarding company priorities and objectives. Company leaders best handle top-down communication through simple statements backed by clear, measurable milestones that everyone can see and in which everyone has a vested interest. Management does not need to give details or explain itself to be effective in communicating goals and priorities. Simple is best.

2) Lateral communication: Communication between decision-makers, implementers, and innovators regarding how innovations help or hurt achievement of the company objectives and fit within company priorities. Lateral communication is best handled as a form of ongoing brainstorming sessions. Often these sessions take place informally. While the informal sessions are important, to properly channel innovation a degree of organization is essential.

The following is a system that worked well in a recent startup that I lead, in which a coterie of highly enthusiastic employees bombarded each other with suggestions for improvements and changes. The development group was overwhelmed by the resulting inferno of great ideas and could not evaluate all of the requests on its own. The marketing department, which would normally play a major role in the evaluation process, was unable to distinguish between innovations that enhanced business objectives and those that were simply nice ideas. The marketing group could not set priorities, nor did they perceive the need to do so.

Using the following approach, the key players, including management and innovators from development, marketing, sales and operations, succeeded in picking out the highest priority proposals, which we incorporated into our product specifications and rollout schedule while keeping the enthusiasm level high and the flow of ideas steady. For the initial product rollout, we developed a 54-item, 32-page list of new product improvements and enhancements. Each item on the list had received a B-level or better priority rating by at least one person on the management team. In the course of 2 three-hour meetings, the team narrowed the list to a 15-item, 2-page list of priorities, which everyone agreed should become part of the initial rollout. We repeated the process for each subsequent product update and the team met with similar success.

You will see that the process we used reduces, without entirely removing, departmental politics and ownership of individual innovations and increases the sense of ownership of the product as a whole. It removes xenophobic blinders so participants see how a given innovation helps or hinders business objectives. Furthermore, this process maintains employee moral because everyone understands why certain innovations are implemented and others are postponed. Finally, you will notice that, assuming the corporate culture and management are open to innovation from all levels of the organization, the process is not revolutionary and requires little adjustment to integrate into the office routine, consuming little time and causing few distractions itself.

Seven Steps for Channeling Innovation

1. Clearly articulate business objectives and priorities.

Without going into a great deal of detail, participants need to understand how the business operates.

a) Revenues -- Products are a source of cash income. If the innovations apply to a product development project, participants must understand how the product generates a flow of cash into the company. This only requires a clear description of the revenue model.

b) Budgets -- Employees do not always understand the limitations of resources. Participants should learn, for example, that the number of developers available for the project is X and cannot be increased. New equipment, if needed, must also come out of some budget.

c) Schedules -- Make sure everyone knows the corporate milestones, especially product rollout and financial milestones that are critical to the project at hand. They also need to know what they as employees lose if the company misses those milestones.

d) Targeting -- Who is the target customer and why? Be sure to define the "customer" as the person who provides access to the cash that becomes revenue. What are the customer's needs and wants? Again, keep it simple and straightforward.

e) Positioning -- How does the product compare with the competition? Why will the customer choose this product rather than the competition?

f) Market share vs. revenue -- Which is more important: growing the customer base or generating near term revenue?

2) Include all the right people.

Include everyone who has an impact on the creation and implementation of innovations. Involvement is critical to the success of the process both in terms of final implementation and in terms of employee morale, which is a critical element in maintaining an ongoing stream of innovative ideas. The group cannot become too large, so an element of judgment comes into play here. Eight or ten is the most you want in a meeting.

a) Include innovators -- The innovators need to see what other ideas have been brought to the table and how their own ideas stack up relative to company objectives and priorities. They also need to come away with the sense that their ideas were given serious consideration. As a result, they will continue to submit ideas and, having been through the process, they will come up with better, more pertinent ideas.

b) Include implementers -- Sometimes the innovators are also the implementers, but when they are not there can be conflicts. Including the implementers helps the innovators understand that their ideas are sometimes more complicated and expensive than they think.

c) Include decision-makers -- In this process, everyone will play a role in the decision-making process, but the final decisions ultimately lie with management. By participating, and hopefully leading, this process the decision-makers can make informed decisions.

d) Exclude deadwood -- Skeptics are not the same as deadwood. Skeptics have their place and contribute to the process. Deadwood are people who do not participate in the communication process and do not support the implementation of decisions that come out of the process. Deadwood should be eliminated from the process and probably from the company.

3. Pick a leader and an administrator

a) The leader settles disputes and breaks deadlocks. This person must have experience in brainstorming and arbitration. Ideally, this is the most senior person in the meeting. S/he needs to be a team leader who can see all perspectives and who understands the business's objectives and priorities. During meetings, the leader articulates priorities and settles disputes, but otherwise stays in the background as much as possible.

b) The administrator is not the same person as the team leader. S/he compiles the list (see below) and distributes it to other members of the group.

4. Create a list of recommended innovations

Creation of the list resembles an ongoing brainstorming session and thus should not be subject to restrictions. As in a good brainstorming session, push people to add to the list without comment or criticism. The Web and Lotus Notes are ideal for managing the innovation list, but a Word document that is updated and distributed frequently to participants works well, too. The administrator should identify those items that are trivial and can be implemented quickly and easily without going through the entire evaluation process. The list should

a) Include a brief, descriptive name for each idea.

b) Contain a general description of each idea.

c) Provide a statement of the required resources (man-hours, individuals, additional equipment); if it affects product development schedules and the innovation will cause delays, that delay must be clearly stated here.

d) Identify tradeoffs, if any, on existing products, features, or procedures.

e) Depersonalize innovations as a way of avoiding ownership issues.

f) Identify innovations that complement each other.

g) Record an initial priority level assigned by the person submitting the innovation.

5. Publish the list and give all participants access.

Let everyone review and comment on his or her own ideas, requesting revisions. This should be a "living list," open to changes and additions on an ongoing basis. As in the first stages of a brainstorming session, all ideas should be welcomed and encouraged. No ideas should be criticized or diminished.

6. Meet regularly with a clear objective.

Depending on the product and the company but mostly on the business cycle, this could be once a month or once a quarter. Ideally (in the case of a development project), the group should meet twice shortly before specifications for the next product release are locked down. If the product supports an ongoing stream of updates, such as a Web site or Internet service, twice monthly may be appropriate. For software and other products with longer cycles, the group may meet less often. If you meet once per month or less often, continue the meeting on a second day at least three days and preferably a week later (see b below) so ideas stay fresh and participants can voice second thoughts.

a) Meeting 1 (2-4 hours):

-- Identify the most important items according to business priorities, preferably within constraints of existing budgets and schedules. Allow each participant to add at least one item to the top priority list. Keep the discussion positive. No one should berate another person's choice because each person will have his or her own opportunity to nominate a priority item.

-- Continue until the top items list contains approximately twice as many ideas as the organization can accomplish within budget and schedule restraints, then break for three days to a week. If an item or group of items is overwhelmingly important even though it breaks budget and schedule, everyone has to discuss this carefully and understand the consequences.

-- Rank the list of top priority ideas, again using business criteria.

-- Allow plenty of time for this meeting. Let each person articulate why a given idea is important and how it meets business objectives and priorities.

b) Meeting 2 (1-3 hours):

-- Revisit the list: Are these really the most important items given company objectives and priorities? How do these innovations help or hinder the company's ability to achieve its objectives.

-- Revisit the ranking: Is this really the right priority order?

-- Draw a line: Find the point at which available resources are completely used. Allow as much leeway as you feel appropriate for time and cost overruns (presumably, some leeway has already been included in the resource allocation estimates). Everything above the line is your action list and is added to your development specifications. Depending on resource restrictions, this list may have just one item. Everything below the line goes back into the pool of ideas for the next revision.

7. Stick to the lists.

Get people used to the idea that the action list is a commitment. Indecisiveness is counterproductive. Any new ideas or changed opinions about priorities must wait until the next round of evaluations. Part of meeting regularly is creating the opportunity for new ideas to work their way onto the recommended innovations list and, from there, onto the action list. If you are working with a young and energetic but inexperienced crowd, as is typical of most startups, be prepared for some mistakes at the beginning.

Although the process for channeling innovation appears somewhat elaborate, it is actually quite efficient and consumes relatively little human resource time. Communication, inclusion and preparation determine the success of the process. Everyone in the organization needs to know what the business objectives and priorities are. Thereafter, giving participants access to the list of suggested innovations and including them in the process of evaluating them relative to the business priorities keeps employees focused and channels the innovation process in the direction decided by management. The return, in the form of timely, pertinent innovations that help move the company forward, is worth the effort. The ongoing innovations and the resulting business benefits will enhance the company's competitive edge and alacrity, reduce digression and the accompanying waste of resources, and keep your innovators prepared for the times when business circumstances call for more dramatic or urgent changes.

James Fahey is a seasoned entrepreneur working with international businesses in the Internet and software markets. His most recent positions include CEO of SharedGreetings, a US-based Internet subsidiary of Japanese ad agency Hakuhodo, and President of Asia Pacific Marketing Inc, a marketing and business development consultancy to Internet and new media enterprises. Fahey has an MBA from The Anderson School at UCLA with a focus on International Business and Computers and Information Systems. [email protected]