UK: Innovating For A Digital Future - The Leadership Challenge

Foreword

This is the final paper in our digital leadership series, during which we have grappled with some of the key challenges facing managers in technology, media and telcommunications (TMT) organisations. In developing this series, Deloitte LLP and Spencer Stuart have combined their own expertise with the perspectives derived from interviews with leaders across the TMT sector. In this third paper, we focus on a critical challenge for TMT companies – how to innovate beyond products or deeply ingrained ways of working which have been successful to date but which are now holding back an organisation from its next stage of evolution.

We all know the fast pace of change means that the speed of innovation is critical to an organisation's success. Organisations need a rapid turnover of ideas in order to get to the 'next big thing'; in order to move beyond where they are now; before smaller, more agile competitors move in.

The key word here is "smaller". Why is it that in society a mass of people is more likely to result in a highly innovative environment, yet the opposite tends to be true of major corporations? As human agglomerations have increased in size, so the rate of innovation has accelerated, a truth that holds from the highly innovative Northern Italian city states of the Renaissance to modern day metropolises. Yet all business research suggests that large organisations do not gain a similar innovation dividend from their scale. We had to ask ourselves the question – why is this the case?

By interviewing some of the leading proponents of innovation, we have highlighted the areas that leaders need to focus on to create an innovative environment. This is not a simple task. If it was, the world would be full of innovative organisations. Yet it is one that leaders in the TMT world need to apply themselves to. We hope that this paper and the case studies that it contains prove to be useful to leaders who are looking to challenge their organisations to innovate further, faster.

Introduction

Innovation: The Leadership Challenge

It would be fair to say that innovation is at the core of the human race's success as a species. Be it by trumping the claws of predators with slings and arrows, grinding otherwise inedible wheat into bread to secure our food supply or by developing vaccines to eliminate the scourge of smallpox, humanity has survived and thrived by innovating.

And the same natural selection that has been true of human beings is true of innovations. People passed them on from person to person, generation to generation. Those that were good survived and those that were not were forgotten. Communication was therefore vital to the process of development and refinement of innovations – as communications have advanced, so has the pace of innovation.

The emergence of the Internet has accelerated the decision-making process to the point where a product can be launched one day and pulled from sale only weeks later, the victim of the huge and immediate swell of information available to would-be consumers almost immediately after its launch. Success and failure have never been so polarised.

At the same time, acceleration is also reflected in consumers' willingness to embrace new technologies, which means that the process from inception to mass adoption can now take place over the span of only a couple of years. Even well entrenched incumbent market players can quickly lose their footing unless they adapt quickly to the new market conditions.

Because of these market pressures, companies that are built on creating and monetising intellectual property within the digital economy need to consider how they need to transform in order to remain relevant, competitive, and continually responsive to this pace of change. Many existing major corporations are finding that orthodox management practices and organisational principles are not well suited to support them on this journey.

Innovation emerges as key differentiator

Over the past 18 months we have been interviewing leaders of technology, media and telecommunications (TMT) firms to understand how the phenomenon of digital transformation is impacting on them and their businesses.

During this period, we have held in-depth interviews and working sessions with over 30 CxOs of leading TMT organisations. On the back of this research we have published two papers to date. In the first paper we looked at whether incumbent players were reshaping their businesses to take advantage of digital, or whether they were resizing to cut the cost out of legacy businesses. Our sense was that people were not being radical enough; for example, up to three years ago Channel 4 had a standalone New Media unit, instead of fully integrating new Media into its operations.

Facebook At the time of writing, more than 500 million people subscribe to Facebook, a phenomenon that has revolutionised the way in which people interact with each other and with the internet. It is unsurprising that Facebook has become one of the most valuable commodities in the world, with an unofficial valuation of nearly $80billion.¹ All this from a company that began in Mark Zuckerberg's dorm room in February 2004.

BBC The BBC iPlayer platform went live on Christmas Day 2007 and has since proved a runaway success, both in its ever-increasing usage figures and in the way it has brought TV on-demand into the mainstream. By February 2011, iPlayer was serving 5.3million programmes a day to UK audiences.²

Endemol Founded in 1994, Endemol Group is a creative powerhouse in the global media industry, responsible for global mega-formats such as Big Brother, Wipeout and Deal or no Deal, which has been sold to more than 100 countries. It has a growing library of over 2,300 formats across genres including entertainment, reality TV, game shows, animation, comedy and drama, and it produces local versions of these shows for leading broadcasters all over the world. Endemol is also an operational innovator, having pioneered format production factories that have, for example, enabled 23 country-specific versions of Wipeout to be produced at one facility in Argentina.

Google How many more superlatives can be heaped on Google? Incorporated in 1998, it has become the most visited website on the Internet, the world's predominant search engine and one of its most important advertising platforms. With GMail, Google Maps, Chrome, Android and Translate it has ceaselessly driven innovation in the ways in which consumers use and enjoy the Internet. And Google's innovations don't stop there: it is also at the forefront of development of cutting edge technologies such as self-driving cars and has recently entered the travel market.

Microsoft Is there a company in existence that has had as much of an impact on the way we live as Microsoft? Amongst its many achievements are Windows, the operating system that took the PC from novelty to necessity and hence ultimately enabled the Internet revolution, the Office suite – used by 80% of enterprises, and the Xbox games console, which has sold more than 75 million units worldwide. In 2010 Microsoft's Kinetic motion controller became the fastest selling consumer electronics device of all time.³

It came as no surprise that the need to innovate and to create an organisational environment which embraced, rather than rejected, innovation was top-of-mind for all of executives we interviewed. For this reason, at the end of 2010 we decided to do a deeper dive on innovation in order to understand how some organisations have achieved standout success in terms of innovation; within TMT, who is introducing the new management models that are supporting and empowering continuous innovation in the key aspects of company operation?

Innovation stands out as the differentiator that has enabled these organisations to drive value by ceaselessly driving beyond their core products or by breaking through entrenched ways of working. We were keen to see if we could learn valuable lessons from their success.

At the heart of our research in to effective innovation we found three unexpected paradoxes:

1. Innovation is a social sport. It is not the preserve of 'lone geniuses' – yet it requires lone geniuses working effectively with others to make it work.

2. Innovation is somewhat anarchic; 'organisation' can impede it. Innovation rates substantially increase where there is a large population of people, yet large organisations do not appear to gain an innovation premium – the construct of organisation itself, is in many ways anti-innovation.

3. 'Good' failure is critical to the innovation process. For innovation to flourish organisations need to embrace failure; yet not many CEOs would survive if they made failure a virtue.

1. The false notion of the lone genius

Much of the common myth of innovation starts with a lone genius in their Silicon Valley garage, or even in a bath, coming up with a moment of stunning insight which transforms the world. Whilst there remains some truth in this, most modern research points to a more social process where people build on each other's ideas and challenge each other to go further. Edison had a workshop of innovators all working together:

"Nearly every man who develops an idea works it up to the point where it looks impossible, and then he gets discouraged. That's not the place to become discouraged."

All major scientific breakthroughs have tended to be due to scientists building on of other's published (or not...) ideas. As Sir Isaac Newton observed; "If I have been able to see further, it was only because I stood on the shoulders of giants."

What is true is that innovation requires brilliant experts working together. The iPlayer required people from across the BBC collaborating in a counter-cultural way. Android was a virtual unit in Google, bringing together many different technical specialists. Innovation requires the development of a deep functional or technical specialism; which in turn requires organisational silos to be created, where these deep skills can be developed and honed. However, these functional silos impede the social interaction that is a critical component of the innovation process. Innovation often occurs when ideas are colliding with each other, often from different disciplines. The contradiction here is that leaders often have to create barriers that get in the way and then design processes to overcome these same barriers.

2. The 'organisation' dilemma

According to Johnson,⁴ innovation rates rise exponentially with increasing population density. Innovation rates are relatively low when humans live in disbursed communities. As soon as population density increases innovation rates accelerate. As Johnson's research shows, the city, like the internet, offers an unusually fertile environment for innovation. The environment is in place for the rapid creation and adoption of innovations as many people from different occupations and professions interact and share ideas. This explains why a city's innovation per capita grows exponentially as the city's population increases. This strong positive relationship means that if a city grows 10 times larger, it will become 17 times more innovative, while a city 50 times larger will be 130 times more innovative.

This is consistent with the concept that innovation is a social sport. It is the clashing together of different ideas, building on each other and morphing in to new concepts, driving innovation and progress. If this is true, then, intuitively, large organisations should benefit from an innovation dividend. We should see that the larger the organisation the greater the degree of innovation. Yet this does not appear to be the case, either in what we observe or in the organisational research which is available. Large organisations are often less innovative than their smaller counterparts. As Christenson⁵ demonstrates, large organisations often reject innovations. They do not fit their cultural norms and they are not brought through successfully. Xerox in the 70s and 80s is a classic organisational example of this.

There is something about the nature of organisation itself which would appear to discourage innovation. Whilst many senior executives cry out for greater degrees of innovation, the organisations that they lead act against their wishes. And maybe this is understandable. The concept of organisation is about quickly standardising operations – turning set ways of working in to easily replicable processes, minimising risk. The whole concept of 'organisation', and particularly 'large organisation', is deliberately anti-innovation.

3. 'Good' failure

All of our research shows that failure and how organisations learn from it is critical to the innovation process. Yet organisations are not very good at admitting or dealing with failure. At an individual level it is rare that the career of someone who is associated with failure is accelerated. People are more inclined to hide mistakes, or to avoid taking risks, than they are to openly admit they have failed. Yet the creative process requires failure. It needs people to take risks, to get things wrong and to learn from their failure.

Organisations need to find a way to make failure acceptable and to help their people to learn from failures. Although, of course, they should not go too far with this. Not many institutional investors would laud a CEO who encouraged their people to fail. Few companies would be well thought of by their clients if their CEOs openly asked their people to 'fail often'. There has to be balance. It is useful to think about two different types of failure;⁶ productive and unproductive failure. Productive failure is failure which is unforeseeable and is an important part of the process. Unproductive failures are mistakes made during everyday tasks – and which need to be eradicated, for example mistakes made on production lines. Productive failure needs to be openly acknowledged and processes need to be put in place to learn lessons from the failure. Unproductive failure needs to be minimised through effective performance management.

It has struck us through our research into innovation that leaders have a difficult role to play to create an innovative environment within their organisations. They have to deal with several paradoxes. They need to develop deep technical expertise within their exceptional talent base. They then need to get this talent to work together across necessarily strong organisational boundaries. And furthermore they need to create organisations which minimise risk and create replicable processes which are baked-in to the culture of the organisation. They then need to challenge their organisations to break these deeply embedded ways of working. And finally, they need to make productive failure acceptable without inviting everyone in their organisation to take on unpalatable risk. We have all seen where that can lead.

The challenges for leaders

All of our interviewees reflected that legacy organisations entering the digital era are operating in an arena alive with agile new market entrants who are rapidly introducing new products, new services and new business models; for many operators, the pace of change and intensity of competition can seem bewildering. Incumbent businesses need to adapt, and fast. Now more ever, innovation is not a 'nice to have'; it is a core element of a successful TMT organisation.

Culture

Creating an environment that generates successful innovation

Innovation is a key organisational capability; fundamental to building new structures, creating new products and services, identifying new business models, launching new offerings and ultimately to establishing a new market position. The theme of 'innovation' extends through digital product and service offerings to the customer experience; BSkyB face the cultural challenge of encouraging the 9.5 million homes who are used to dealing with BSkyB on the phone to move to an online help model:

"This is about retraining our customers to use the internet as their first port of call."

Mike Darcey, COO, BSkyB

Related to this, it is important to note that innovation is no longer the domain of an organisation's product teams or 'creatives', and is arguably now a core competency for the majority of roles in media organisations. For example, in a digital world underpinned by technology, IT specialists are key in turning good ideas into new digital revenue streams.

"I see software engineers being as creative and as important and critical as the editorial creative talent."

Erik Huggers, former Director Future Media and Technology, BBC

By its very nature, innovation involves a degree of trial and error and 'feeling the way'. This is a significant departure from the linear and planned production processes of old and marks a step-change to established methods of working within traditional media organisations.

The user-informed evolution of BBC iPlayer is one example where user consumption/activity has guided the process of product development, necessitating a fluid production process but achieving an end product which is arguably stronger and more popular as a result. As the Erik Huggers, former iPlayer Director, observed;

"The iPlayer isn't simply about wrapping some technology around the programme... it's about creating a new user experience."

Structure

Managing risk through organisation

Although in an ideal world, everyone in an organisation would be a radical innovator, accustomed to failure in the pursuit of great success, the reality of business is that the majority of staff exist to execute the operations of a business in a way that ensures the lights stay on and cash rolls in. The leadership challenge is therefore to create an environment where innovation is accepted and encouraged, but to strike an appropriate balance between innovation of new ideas, control of risk and ultimately of spend. It was an express concern for many that we spoke to, that the process of innovation is managed in such a way that it achieves return on investment.

Google has adopted a different approach to managing this challenge. They famously give a large number of employees one day a week to work on 'personal' projects, thereby encouraging entrepreneurialism and innovation. Efficiency of working is achieved through an 'ideas market' where individuals choose which projects they want to work on – everyone wants to work on the innovative, exciting ideas; bad ideas simply do not get off the ground and available skills are put to best use. The institution achieves control through the 'wisdom of crowds'.

Leadership

Finding leadership styles that promote innovation

Our research would suggest that the role of leader is essential. Not inspirational, 'heroic' leadership. But leadership more of the Mandela style of setting a tone rather than charging ahead; leadership which creates an environment where their people can thrive and which focuses relentlessly on designing an organisation which maximises creativity and interactions, whilst making the acquisition and retention of talent everyone's primary task. Processes and appliances cannot innovate; only people can. If there is something that unites all of the organisations that we spoke to, it is their fundamental belief that the only long term differentiator they have is their people, and that their people – if provided with the right environment and supportive organisation – will successfully innovate beyond where they are now.

Our research has shown that leaders operate across four organisational dimensions to create an organisation which is able to successfully innovate. They are:

1. Strategy & vision

2. Environment & culture

3. Organisation & design of work

4. Leadership & talent

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Footnotes

1 http://techcrunch.com/2011/03/11/new-facebook-valuation-record-at-shares-surge-5-to-31-50

2 http://www.bbc.co.uk/blogs/bbcinternet/2011/03/fenruary_2011_bbciplayer_perfo.html

3 http://community.guinnessworldrecords.com/_Kinect-Confirmed-As-Fastest-Selling-Consumer-Electronics-Device/blog/3376939/7691.html

4 Johnson "Where do good ideas come from"

5 Clayton Christensen 'The Innovators Dilemma'

6 Amy Edmonson "Failure" HBR March 2011

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