By Steve Bailey, FCCA – Director Medius Consulting

Day in, day out, we read, hear and see breakthroughs that are changing the way we live and work. Examples are wide ranging– the Apple iPhone X, the internet of things and treatments that have dramatically increased the survival rates from disease, not to mention the ubiquitous impact of big data and AI.

So, we may think that innovation is alive and well. But is it?

Companies are still spending heavily on R&D with PwC reporting that the 1,000 largest corporate R&D spenders globally increased their R&D spend by 3.2 percent in 2017 to $702 billion (over £500 billion). As PwC’s report states, there is still a shared belief among executives that “… innovation today is a key driver of organic growth for all companies – regardless of sector or geography.”

Is innovation getting harder or are we just getting worse at innovation?

The question posed in a recent Harvard Business Review article is whether those investments in innovation are seeing a sustainable return? The data suggests not, with returns to companies’ R&D spending declining by 65% since the late 1980s, a decline that mirrors the worrying decline in productivity that continues to vex economists.

Is it simply that innovation has become harder as scientists, engineers and those engaged in R&D struggle to find evermore incremental ways to add value to the processes and technologies already in place? Or is it that some companies are better at innovation than others and, if that is the case, what is it about those companies that enables them to be better than others at innovation?

A deeper dive into the data indicates that the decline in returns from R&D spend is not necessarily true of all companies. The not so good news is that many companies are making it harder for themselves to achieve a return from the spend on R&D. They are just not very good at innovation.

Why this isn’t just about smarts and process, and why the letter C is important

While returns from R&D spend have been declining, organisations, private and public, have expended enormous efforts in processes for managing R&D not least in change management. The problem with these efforts is that all too often they have ignored one fundamental factor in successful change – culture. And, yes, that’s where the letter C comes in and why that letter C is not about yet another change management programme.

This became clear at a recent meeting of 100 CEO’s organised by IBM’s Ginni Romerty. Representing 17 different industries and some $2 trillion (£1.5 trillion) in revenues, the meeting was upbeat that technology was about to see a new wave of disruption by helping companies leverage their core expertise through more effective management of data. Upbeat though this meeting was, Time magazine found a challenge shared among CEO’s in realising this opportunity: “…the biggest problem they face is not technology, but rather creating a culture that can embrace and adapt to technological change”.

This isn’t surprising when you consider that innovation is principally about new futures – new products, new services and new ways of doing things. It is about future states. While those charged with innovation are pursuing those future states, their colleagues are focused on business as usual, the current state they have been trained and socialised to understand and work with. Bridging these two states – current and future – is the crux of the problem recognised by those CEOs attending the IBM event.

A tale of two companies

Consider two companies in the same sector – banking and financial services – with very different histories in implementing new customer technologies: one applauded by industry peers for their new mobile customer apps and receiving continuous positive feedback from their customers for enabling a more frictionless customer experience; and one in the media for yet more platform problems, outages and customer woes.

Both companies have mature processes for managing their R&D investments and for managing the internal change necessary for adopting new customer service technologies. What’s more, from the projects we’ve conducted for them, both have the talents in place to support effective innovation teams. They both have the innovators.

The difference that our data showed was that the company receiving industry peer and customer plaudits had much stronger alignment between those innovation talents and the wider company.

In other words, the wider company was much more likely to be receptive to new innovations and to be able to diffuse innovation effectively as it continuously evolved business as usual. This company is wired behaviourally to bridge that gap between current and future states.

Does that mean the other company is doomed in its attempts to innovate? The short answer is no and, after all, it doesn’t have the choice of not innovating if it wants to compete. This company has realised that more investment in innovation and change management in themselves is not the answer. To borrow from Einstein, just doing the same thing and expecting an improvement is, to quote from them, corporate insanity.

They have recognised that they need to address three key sets of questions:

• What do we mean by innovation? Is the way we think about innovation today what we really aspire to? What are the tangible behaviours we need to promote to realise our aspirations for innovation?
• Do we have the talents we need among our innovators? Can they provide the behavioural platform to drive the innovation we need? If they can, what is getting in their way?
• Where are the specific gaps between our innovation teams and the rest of the company? What do those gaps mean in terms of the behaviours we need to encourage for diffusion of innovation to be more effective?

Addressing the cultural barriers to innovation is about focusing on behaviours

Just as culture can seem intangible, so change can seem intractable. The insight for the second of our two companies is that these dual challenges can be addressed by focusing on behaviours – what their people do and are less likely to do to support a return on their investment in innovation.

With a clearer and tangible definition of what innovation means for them, that company is now focusing on the behaviours they need to sustain among their innovators, on enabling those innovators to better understand the behaviours they need to influence in the wider company, and on how to promote behaviours across the wider company to open it up to more effective adoption of innovation.

The second of our two companies now has a route map that’s driving progress from a better understanding at board level about why innovation went wrong in the past and what the company needs to focus on to get a better return from innovation going forward, to streamlining the approval processes that their innovators work with, to where in the company the beachheads are for them to start to get the traction they need when they roll out new innovative products, services and ways of working.

The change agenda …

Is innovation getting harder? It would seem that it is for many organisations. Our experience suggests that many organisations are making it harder for themselves by either ignoring the importance of culture or because they lack the insight they need on whether their culture is enabling or disabling their efforts to innovate.

That’s why we believe that effective innovation needs the letter C and why the letter C is for culture.

Medius is an independent regulatory consultancy operating in the financial services market.