· 11 min read · Features

How to build an innovative company


Today is the start of a week long series on innovation. The first issue we look at is: how to build an innovative company.

Bright graffiti art covers the walls; there are more coloured felt-tips than a well-equipped nursery, and there isn’t a desk in sight. It certainly isn’t the kind of room you’d expect to find in a company that spends much of its time dealing with tax –admittedly not the sexiest of subjects. But the ‘izone’, which is equal parts playroom, artist’s studio and Bond villain’s lair (a hidden button automatically blacks out the windows for top-secret projects), is found in the heart of the City of London, in professional services firm Deloitte’s imposing glass offices.

And what does the 'i' stand for? Innovation, of course.

As Deloitte's investment proves - the izone may get old school with crayons and paper, but its impressive technical features, from interactive whiteboards to the aforementioned windows, show some serious money has been put behind it - innovation is rising higher and higher up the business agenda. In fact, the CEO Challenge Report 2012, published by New York-based research group The Conference Board, found that innovation is the number-one challenge for today's CEO, beating human capital and global political and economic risks to the top spot.

It's not hard to see why: innovation is a powerful driver of growth. Charitable organisation Nesta (the National Endowment for Science, Technology and the Arts) claims that between 2008 and 2009, innovation delivered 63% of the UK's economic growth, although it adds that since then the financial crisis has led to a "lost decade" of innovation investment, with it falling by £24 billion since 2008.

Despite that, the UK still comes an impressive fifth place in INSEAD business school and the World Intellectual Property Organization's Global Innovation Index, beating countries including the USA, Germany and Hong Kong, and being ranked below only Switzerland, Sweden, Singapore and Finland. As Dr Benjamin Reid, senior researcher at the Big Innovation Centre, says: "Our path to a prosperous future as a nation is reliant on innovation."

And it's not just a country's economy that depends on innovation for success; increasingly it's becoming a critical focus for businesses. "The rate of change in today's world means that status quo is no longer enough," says Scott Anthony, managing director at innovation consultancy Innosight. "A business that is staying stable is a business that is in decline. If you don't build that culture of innovation deep and wide, you're limiting your organisation's ability not just to grow but to survive."

There is no shortage of examples of companies who have lost market position by failing to innovate, being overtaken by competitors who never sit still. "Put simply, if an organisation wants to take market share, it needs to be different through its products, services and people," says Will Gosling, a partner in Deloitte's human capital practice.

Look at Research in Motion (RIM), the electronics firm behind the BlackBerry. Overtaken by Apple, the eternal innovator, it has lost considerable market share (suffering a net loss of £78 million in only the first three months of 2012) and last year even announced that it would be scaling back its consumer product arm as it can't compete. Or see internet corporation AOL struggling to keep up with Google. As George Day, professor of marketing and co-director of the Mack Center for Technological Innovation at the Wharton School of the University of Pennsylvania, puts it: "AOL's episodic approach to innovation always loses out to Google."

There can be no doubt that innovation is absolutely vital for any organisation operating in a challenging climate. But innovation is a big word: what does it actually mean? Luckily, there are a lot of people out there willing to tell you. Innovation consultancies are breeding like rabbits and most of the large consultancy firms now have an innovation offering.

According to Day, a world-renowned innovation expert: "We have to expand our ideas about innovation beyond products and services. It's any new method, from a product to a business model to entering a new market, that creates new value."

"It can be long-term, risky and expensive, but most companies spend their time on small 'i' innovations - that's incremental improvements. Innovation is a spectrum. Small i innovations come with less risk and modest reward; it's what you have to do to stay in the game. Big i innovation brings much higher rewards, but also higher risk."

Innosight's managing director Anthony defines innovation as "something different that has impact. Innovation is not a sport, you're not doing it for fun - you're doing it because you want to change something, from profits to performance. Impact is the critical word. While product-based innovation is great, if you look at what really creates impact, it is business model innovation."

Some might flinch to hear it, but HR does not have an especially good reputation as an innovator. "Why does HR too often kill innovation?" goes the headline of one particularly inflammatory Forbes article, while at the CIPD annual conference in November, Tony Cooke, HR director at Adidas, told delegates that the profession needed to rebrand as "'creative and innovative'. If you ask someone senior to describe HR, you get words like 'safe' and 'sober'. We need to change that."

However, everything that has to be put in place to create a culture of innovation and encourage your people to think differently falls firmly at the feet of HR. As Day says: "The most important ingredient for innovation is a supportive culture. And that's an HR challenge."

The ideal culture for innovation is one that allows collaboration across departments, functions and even companies. It's one where people feel supported enough to make suggestions, whatever their level, and feel that their ideas will be taken on board. It's a place where mistakes on the way to success are seen as something to celebrate and learn from rather than punish. And these are all areas in which HR has a part to play. "The role of HR cannot be overstated in building a culture of innovation," says Anthony. "This is a chance for HR to play an important 'yes' role."

According to Deloitte's Gosling, there are four key features that innovative companies all share: very flat hierarchies; autonomy for all staff, from the bottom up; very open communication from the senior leadership team; and as much collaboration across the company as possible. HR can make a significant difference in all of these.

Niall de Lacy is one HR director who knows very well what a true culture of innovation looks like. He is HRD, UK and Ireland, at one of the most innovative companies in the world: consumer goods giant P&G, one of the first and most vocal adopters of open innovation, where companies collaborate externally with partners, sharing both risk and reward. And de Lacy strongly disagrees with the view that HR isn't an innovative function.

"Innovation is P&G's lifeblood," he explains. "As HR, we define ourselves as playing the role of champions, catalysts, partners, leaders and stewards. Our role is to unleash the best and the power of all the people that we bring into this organisation. We cannot sit back. Innovation needs to be inherent in how we develop HR capability." At P&G, de Lacy continues, it's important that "innovation is part of everyone's job" and that HR strives to "create a culture where people have the freedom to fail, learn and grow".

So, if you want to create an organisation as conducive to innovation as that at P&G (see box on page 32 for more of its story), where do you start? According to Anthony, the first imperative task is to make sure the whole organisation is clear on what innovation means to the company. "A lack of a common language is a real problem and can impair progress," he explains. "A lot of people have a view that innovation is done in a lab by scientists in white coats. Really, it's the job of everyone in the organisation to some degree. If you don't have a common language and understanding, everything will fall apart, so that should be the first thing you do."

Once everyone is speaking the same language and understands the goals of the organisation around innovation, creating a space where people feel safe to collaborate and share ideas is crucial. "Innovation is a team sport," says Day. "You've got to have people aligned."

Doug Shaw, founder of people development consultancy What Goes Around, advocates gathering employees into diverse groups - mixed across department and function - and asking them to share knowledge. "Remember, a lot of the answers are in your people," he says. "Ask them for their expertise - it's invigorating for people. If you are trying to foster a culture of innovation, it's critically important to get people to articulate why it's important."

For many organisations, simply harnessing the brainpower of their employees, also known as crowdsourcing, can throw up thousands of ideas with minimal investment. Professional services firms are particularly ahead of the curve here, with companies like Citigroup and PWC crowdsourcing on a global level. The beauty of crowdsourcing is that, done right, anyone feels they can contribute, and if the organisation puts its money where its mouth is (offering seed capital to implement the best ideas, for example), people feel that they can make a difference, whatever their level. At Deloitte, an innovation week where employees were faced with a real client challenge and invited to suggest solutions resulted in 750 ideas. "True innovation isn't a lone genius sitting in a darkened room, it's about collaboration," says Doulla Stavrou, senior manager, innovation and brand at Deloitte.

Stevan Rolls, Deloitte's UK head of HR, puts it neatly when he calls such initiatives "sophisticated suggestion boxes". But organisations need to go much further than that if they are to reap the true benefits of people power. "You need to create a safe environment," Rolls continues, "You want to encourage people to say dumb things. That can be hard because, especially in professional services companies, your personal capital is in how bright you are, so people aren't prepared to say something dumb. But saying three stupid things can get you to one great insight."

The simple fact, and this is one that some senior leaders can struggle with, is that to reach true success in innovation, you are going to fail along the way. A lot. "If you want to kill a culture first, punish someone for their failures," says Day. "Companies fall into that trap a lot of the time." Anthony agrees: "Don't rap people across the knuckles if they take a well-thought-out risk and it doesn't pan out. Failure is often a step on the way to success in innovation. If a test doesn't work out but the steps were right, celebrate that."

The key here is the phrase "well-thought-out risk". Innovation is by its very nature risky - it wouldn't proffer such rewards if it was a safe activity. However, by starting small with what Day dubs "smart risk taking", companies can insulate themselves. Dr Graham Abbey, director of executive development at University of Bath, suggests that HR facilitates the setting up of what he calls "pockets of good practice" where managers and teams are encouraged to "execute something off the radar".

"Fail early, fail often and fail cheaply," he continues. "You can do that with little pockets, and once you've experimented, you don't just have an idea, you have good practice and evidence. It's mild rebellion. HR should help managers to legitimise their behaviour - give them cover to do something a bit off the radar." The most creative ideas often come from the strangest places (the inventor of Velcro came up with it after noticing how burrs stuck to his dog's fur, while the original clear coloured plastic iMac design was inspired by a trip to a sweet factory), so people can't be tied to the desk or the office either.

If all this talk of failure and rebellion makes innovation sound like a rather random activity, it's time to think again. Because in fact, nothing could be further from the truth. "The biggest myth about innovation is that it's chaotic," states Anthony. "But it's a discipline that can be mastered and managed." Innovation needs a structure and framework in order to flourish, and the processes around it are vital.

"There are three levels to innovation," explains Anna Marie Detert, director, people and change at KPMG. "Process, culture and structure. Process is often the biggest blockage as it can be so fragmented across different countries and departments. People do need to obsess about the nuts and bolts. You have got to have a process by which people innovate."

The most innovative organisations may often look like the most out there, but they have a systematic approach to innovation that never fails to get the most out of their talent. Take Google: while employees are famously given 20% of their time to work on their own creative projects, they are expected to spend the other 80% on everyday work. At Hotels.com, the online travel company, senior technical recruiter Kevin Sharkey describes how developers are given space and time to play with their own projects. But this is freedom within boundaries. "Their projects have to somehow benefit the business," he explains. "It's not about going off and building a robot dog."

"Best-practice companies take a disciplined approach to innovation," agrees Day. "That allows good people to flourish. The best companies have good resources and appropriate reward structures: people are motivated by that." But whether or not you should reward innovation is a bone of some contention among experts. After all, as a large proportion of experiments end in failure, doesn't only rewarding successes send the wrong message to employees?

"If you only reward people if they succeed, you risk making them risk-adverse," points out KPMG's Detert. She suggests companies introduce tiers of reward for the different stages of innovation. Anthony cites research that has found offering micro cash incentives for creative tasks actually causes performance to go down, and says that organisations should instead push the soft side of reward, such as recognition and more flexible working practices.

"You need to create an incentive for innovation to happen by spelling out what's it in for employees," advises Andy Philpott, sales and marketing director at benefits provider Edenred. "HR needs to look at how it can communicate, incentivise and reward the right behaviours - and model the role of innovator itself. This means using the power of personalised content to reach employees and of social media for sharing ideas, moving communications from 'command and control' to a more personal conversational approach."

Getting these structures in place will help you attract the right people, as well as reinvigorating the ones you already have, increasing retention. But when it comes to building a workforce for innovation, one thing stands out above everything else: diversity. And what really matters is diversity of thought and experience. So, that might mean looking outside of the graduate pool, or considering people with a totally different skillset to existing employees, or thinking about taking a chance on a young person without much experience.

"If HR can do anything," says Matt Kingdon, co-founder of innovation consultancy What If, "it is encourage diversity. But not in the way HR usually thinks of it, as ethnicity or gender, but rather diversity of skills and opinions."

He says HR needs to facilitate "collisions" between people from different departments and job roles, perhaps by encouraging the forming of social clubs or thinking about how the organisation uses its office space (if indeed it even has an office).

Bath University's Abbey agrees. He describes how innovation often comes from "bringing unlike things together. HR needs to think, how do you bring those things together and start a conversation? How do you create that environment that leads to effective diversity?" He suggests initiatives like cross-department collaboration and experimentation, and leadership exchange programmes with other organisations tackling similar challenges.

In fact, much of where HR can make a real difference in helping organisations to think differently is in leadership and managerial training and development. Innovation may flourish most of all in companies where hierarchies have been flattened and people on the frontline feel confident sharing their ideas, but how are you going to get there without complete buy-in from the top, especially when many new processes and ideas will require at least some investment? As Day puts it: "Innovation is foremost enabled by leadership and it needs consistent investment." One of the reasons a company like P&G has been able to so successfully implement open innovation is that first ex-CEO AG Lafley and now chief executive Bob McDonald have been 100% behind it.

Of course, P&G and other innovation poster children like Apple, Google and Facebook have been lucky enough to have senior leadership teams who just 'get it'. What if you don't have this, at a time when developing innovative leaders has never been more crucial? "It's incumbent on HR as leader developers to think of new ways of doing leadership development," says Abbey. "Recognise that if people are going to change, you need to create space for them to think. We're all overloaded these days: so how do we create a space for our leaders to think differently?"

The principles applied to leadership development can of course be applied to staff at any level, but for organisations that already have people with the ability to think differently and who are always looking to the next big idea, it can often seem more like a curse than a blessing. Creative people and maverick thinkers can be notoriously hard to manage.

They may frustrate at times, but these 'intrapreneurs' are exactly what an organisation needs. Innovation consultant Kingdon says that HR needs to hang onto the mavericks "who respect the organisation, but don't revere it." First of all, he says, you need to understand who these individuals are, then think about what makes them tick. "They are hard to manage and keep happy," he admits. "You need to work hard to figure out a way to keep them challenged and keep them in the business."

And if you don't recognise these traits in any of your own people, don't worry. According to Day, innovation is not innate. It is a discipline that can be trained.

"About 90% of innovation is having the right culture and environment," he concludes. "If HR is going to have a transformative impact on organisations, it needs to step up to the innovation challenge. It's a tough one, but there's a great opportunity." It seems there has never been a more exciting, or more imperative, time for HR to start thinking a little bit differently.