Should you build an innovation department?

When is building an innovation department a good tactic for your organisation.
What is an innovation deparmtent

An innovation department is a separate division within an organisation dedicated to innovation.

Most commonly it is established within the main organisation, but there is a definite trend to establish new entities to undertake innovation - example, CBA created X15 Ventures as a new entity to create its future products.

A commonly debated question is whether innovation departments are a meaningful tactic. We would argue yes, and use part of the 'innovator's dilemma' to explain.

Innovation departments and the innovator's dilemma

The Innovator's Dilemma is a well-known book on innovation authored by the late Clayton Christensen. In the book, Clayton lays out why large organisations often fail to adopt new disruptive technology innovations. We will highlight two factors that are relevant for this article.

A strength of developing a separate innovation department is that you can deliberately separate it from the existing resource allocation system that inhibits investment into products in small emerging markets.

By doing this, you prevent resources being pulled for the mainstream business and ensure that new products can be invested in that might become meaningful long-term business growth. It allows the team to be free to invest in new ideas, fail and learn.

Some companies take this further, such as CBA, creating a whole new entity (X15 Ventures). A benefit to this approach is that while a $100 million market might not be exciting for an organisation as large as CBA, it will be for a smaller new entity such as X15 Venture. This increases the likelihood that the team are motivated and excited about a new product opportunity in an emerging market.

A risk: will you silo innovation and learning?

The truthful answer: most likely yes.

More often than not, the tactic of establishing a separate department leads to a silo which can invest in new products but it will not spread new best practices back to the rest of the organisation. The idea of innovation departments as a 'cultural lighthouse' has been tried many times and never succeeded - mainly because 'culture' is the product of the organisation as a system.

Does that undermine the value of an innovation department? Not necessarily...

When should you build an innovation department?

If you have the strategic goal of developing new revenue streams, then creating an innovation department to develop and deliver new products is a very legitimate tactic!

At Alto, we don't think a department is necessary to achieve product innovation, but it is easier than trying to optimise your organisation as a whole to support product innovation. This could include changes to leadership, strategy, organisational structure, culture change, incentive mechanisms, process, rules, policy, feedback mechanisms and resource allocation.

There is another consideration: organisations are systems optimised to achieve a given outcome. An innovation department provides the opportunity to create an optimised system for developing and delivering new products to market. This could be far more efficient and effective than trying to change the organisation with the trade-off of reduced learning back to the organisation as a whole.

A different path forward: single-threaded teams

A logical question is why can't we have both a highly optimised product innovation system alongside the knowledge sharing back to the organisation?

This is of course possible, and we would recommend a specific operations innovation as the right starting point - single-threaded teams.

The single-threaded teams concept was developed at Amazon with the goal to minimise the number of dependencies on a team. That is, in order to do your job and deliver your goals as a team, it should be as autonomous as possible without the need for you to consult any other team to deliver successfully.

How it works is you create the rule that each person is only allowed to work on a single project (including the management team).

To apply this as an experiment, you could assign a single person to manage an innovation project - this could be a new product idea. This will be their full-time job. They must then build the strategy, create the product concept, hire out a team who only work on that single product and deliver it to market.

Once this product is earning revenue, it should be fully reinvested into the team and have a focus on self-sufficiency. Treat it as business inside your business, the owner is the CEO, they are accountable for the full product, their team are accountable for managing their financials, their marketing, their sales, they product developments and so on.

You can make a fixed resource allocation for new product ideas, this puts a target on how much can be spent before a product is abandoned. The single-threaded teams must have the rule that no one is allowed to be pulled for work outside of that team!

The results? Amazon Web Services is the product of a single-threaded team lead by Andy Jassy for many years where as one of the most senior people in Amazon he decided to work on this small idea at the time (2002/2003) which became one of the most successful companies in its own right in history.

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