CORPORATE TRANSFORMATION
7 Tips for Succeeding with an “Innovation Org”
A reference playbook when leading or joining an “innovation organization”
“There are innovative companies and then there are companies with innovation departments.”
This arrogant quip is something I used to say when I was coming from the startup posture looking to re-invent categories and in the process disrupt the incumbents. When I was at many of these startups, I had to navigate these larger companies as a partner to help them think through how to bring in our disruptive solutions. Years later, I found myself in an “Innovation Department” of a larger organization with the mission to build a new software and services organization. Being on the other side of the table forced me to confront this flippant phrase in the context of my new mission and perspectives gained.
The reality is that the world isn’t as simple as this distilled insult. Companies that get to the size or level of success that leads them to create an “innovation department” are fundamentally successful and are built on top of a series of innovations that enabled that success. But as Software started to eat the world, we know the dynamics of success fundamentally shifted, enabling two people in a “garage” with a totally different experience background to topple industry giants. The talent, questions, incentives, planning, time-horizons, and tools used to drive success became totally different. These differences in approach coupled with the selection bias of talent attracted to larger established companies result in a culture shift to be an “incumbent mindset” vs. “insurgent mindset.” Many of these ideas were described in Innovator’s Dilemma yet those were prior to the tectonic shift software brought into the equation.
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There are huge fundamental differences that must be rationalized between these two groups:
- Do things that don’t scale vs. Efficiency and profits come from scale
- Solving problems people don’t know they have vs. “Our focus group said”
- Long-term Big Bets vs. Short-term profit pressure
- Let’s create good problems vs. let’s manage away our problems
- Rewarding failure vs. Failure = promotion passed over
- Move Fast and Break Things vs. Stability for our customers
- No sacred cows/ rethink everything vs. “We’ve always done it this way.”
- Taking risks vs. avoiding risks
The seasoned Fortune 500 leaders know that staying the course and doing nothing is certain death. 2020 has only made this more clear as adoption curves accelerated, changing the way consumers buy and the way employees work. As Scott Galloway pointed out early in the pandemic, “Covid-19 is just making the future happen faster.” Yet, changing the core of a large business is near impossible even without this acceleration due to the fundamental differences described above and the requirements to achieve self-disruption being counter to the near-term investor and established manager interests.
A solution is to create an organization or sub-division that can be unconstrained (or less constrained) from the day-to-day needs of the core of the business, yet is aligned to a long-term goal — the “Innovation Department”. However, history shows us these efforts typically fail. Many innovation departments last a few years, far short of the average time it takes for a disruptive startup to get to what a large company would consider impactful.
So what is to be done? Are incumbents simply destined to fail under their own weight? As a VC or Startup person, I go back to my original quote and say yes. I then proceed to create huge value and returns while the large companies grapple with these challenges. I will encourage the large incumbent companies to partner with my startups to acquire them to “help change” and then watch the talent leave and fund them again for their next thing. This is not to say, incumbents shouldn’t do these things, they are necessary bridge steps. As someone who has now sat on the other side, these strategies buy time but don’t solve the long-term problem for the incumbents to prevent disruption.
As an incumbent, you must create an environment that will home-grow this type of disruption. You need a place that will attract the right talent vs. them going to a Google, Facebook, or Amazon. You need a place that will retain acquired talent and companies past the payout period. Beyond the products or initial disruption, what is most magical about Amazon, Apple, Google, Facebook and many of the other companies built over the past 20 years is that they attempted to design a culture and structure that would inoculate them against Innovator’s Dilemma.
If you are looking to create an “innovation department” or join one, here are a few of the lessons I’ve learned that are essential for an organization like this to work. Throughout, I’ll refer to this “Innovation Department” as “Team X”.
1 — Alignment and Commitment from the Top (and Across)
2 — Hire a New Profile of Talent
*** The Talent Profile
*** Your Story of Change
*** Support for This Type of Talent
3 — New Systems and Tools to Enable your Talent
4 — New Comp Models and Hiring Structures
5 — Rethink Approach to Goals
6 — Leverage the Isolation
7 — A shared Incentive for Team X to Succeed
*** The Core Supporting Team X
*** Gradually Shift the Core through Osmosis
*** Team X acquires the Core vs. the Core acquiring Team X
1 — Alignment and Commitment from the Top (and Across)
The most important factor to Team X being successful is for there to be alignment and commitment from the top. By definition, it is disruptive and at odds with the core of the business, and this requires recognition that there will be conflict and challenges. New DNA will be joining the company. A different culture will appear. Team X will have different near-term priorities. There can be disproportionate excitement for new shiny objects coming out of Team X and this can and will drive conflict, jealousy, competition, politics, and budget friction. That is OK. It needs air-cover from investors and support from peers that this internal disruption is normal and all towards a common goal. Support from the CEO AND (ideally) the peer organizations is key to navigating these moments.
This is super easy early on, but these forces strike hard during Team X’s equivalent of the Trough of Disillusionment. Another factor to consider is when an organization has gotten to the point of needing to disrupt itself, there’s often ongoing pressure and changes happening at the leadership level. Are there ways to have this alignment and commitment persist across these changes even if the leaders themselves change?
2 — Hire a new profile of Talent
With clear support, Talent is the most important part of successfully creating disruption. If you can’t attract the same people who go to the startups or the FAANG companies, you can’t compete with them. There are three aspects to this: The Talent Profile you Need, Your Story of Change, and Support for this type of Talent.
The Talent Profile — Think about some of the most disruptive CEOs, Technologists, and Product Leaders you know. Would you have hired them before they disrupted your industry? Many were likely college drop-outs, spectacular failures in previous attempts, or other misses on the “checklist” items. All too often, it’s a 30+ year company or incumbent industry veteran put in charge of these efforts in the company. Why would this yield a different result?
You are hiring for strengths, not lack of weakness.
You are hiring for strengths, not lack of weakness. You are hiring people who can manage through the creative process of disruption. These individuals often have less traditional experience. These are people who can be dynamic, creative, scrappy, comfortable with the unknown, and move quickly. These are multi-disciplinary people with a strong growth mindset. For managers, these are modern managers who both lead and roll-up-sleeves and work side-by-side with their teams bringing practical skills and experiences to help the team through vs. just being generic managers of people. Their teams see them as adding value vs. just overhead.
Your Story of Change — Insurgent mindset individuals want to take on big missions with a like-minded tribe. They need to hear about your authentic long-term commitment (#1) while also understanding what matters to them (working on big problems with freedom). To attract talent, I often had to say “I’m trying to hire people who don’t want to work at <big company>.” This was not an insult to the company, but a signal that I knew of the perceptions and stigma they had heard of the company and the need to drive change. Of course, they knew where they would be working, and that was a compelling, next-level part of the story & mission. The opportunity to make a big impact and change a storied brand sounds impossible, but this is exactly the type of mission for the insurgent mindset.
The interview settings also reinforce this story. Our Team X was based out of a WeWork (and distributed) which provided a startup setting to give the feel of scrappy and different. (Note, this can’t be smoke & mirrors, it has to authentically match the feel when they arrive, which it did in my case. In fact, some of our failed hires often had discounted how scrappy we were and wrongfully focused more on the big company brand vs. the words we said. Be clear on this.) The nuance here is you must find people who like the disruptive, startup way of working, but can also appreciate and see the benefit of scale and connection to a larger company. Pure startup-only people may not understand this value. As a leader, you can isolate many of the ICs from this, though it’s a risk if assumed everywhere. Many will see the value if you pitch it, but understanding the reality of the structure is important to their success as well.
Support for This Type of Talent — Create room for these teams to define new cultural values and behaviors matched to the disruptive nature of their work. In most situations, they should not conflict with the stated values of the core of the businesses, but provide an extra level of definition for how this talent should work.
Another key is how the talent is supported. If these teams are moving as fast and differently as they should be, they will have people challenges that are very different from the core of the business. These teams will go through many iterations of forming, storming, norming, performing. Investing in People Business Partners who are like-minded, dynamic, and experienced in creative environments is helpful in this journey. Legacy HR doesn’t cut it for these dynamics of fast-moving disruptive teams.
3 — New Systems and Tools to Enable your Talent
Great talent needs to be empowered and enabled to do great work. The tools they use are an essential part of their performance but are often overlooked as part of this change process. Some may describe the tools as “preference”, but the entire SaaS and tools landscape exists around deeply understanding the workflow needs of today’s top talent. Time is one of the most important assets for those trying to disrupt a market and eating away at this time is counterproductive and a fundamental misunderstanding to how disruption works. These tools are designed to enable creativity, collaboration, and take slices of time out of the day to complete more tasks and get more customer signals through the noise.
This seems easy, but often there is a huge gap in IT and procurement policies. Enable the team to work like a startup, set up their own systems and try new tools that match their needs, and explore quickly. If the core of the business wants to also adopt these, it’s a subtle and great way to have the change start to impact the core of the way the business works, but don’t let that slow down Team X.
4 — New Comp Models and Hiring Structures
The mission, story, leadership and team profiles, and supporting systems go a long way to create the right environment for the talent, but the next consideration is compensation models. The disruptors going after large markets know the value of winning the market and pay to attract the talent. As Reed Hastings says, they are easily worth 10x more or Bill Gates went further to say 10,000x more.
The argument here is not to say “you need to be ready to outbid Facebook, Google, or Tesla” as you are unlikely to win in that game, especially on the outliers. But you should be in the ballpark for the average FAANG talent and create tools and guidelines to support outliers.
These tools can come in a variety of forms:
- Stock options packages
- Flexibility around bands
- Overlay retention packages
- Rev-sharing for value creation
- and other creative ideas
It’s also important to be attuned to the market and differences of what’s in demand. The outliers are typically domain-specific, meaning not all engineering roles are the same. A machine-learning engineer will be different from a web-dev.
Along with this, enable different hiring structures. Using work-from-home, Independent talent, and talent from different regions are all ways to tap into new talent and new mindsets. Often there are policies and structural challenges in doing this. Remove the roadblocks. Startups don’t have these and even more troubling is the FAANG companies generally don’t have many of the roadblocks either and they are large companies themselves.
5 — Rethink Approach to Goals
The core of the business is well understood through a clear set of metrics, business levers, and operational cadence that enables a very predictable and precise goal setting and management process. However, innovation and disruption are unpredictable. Applying the core business goal-setting approach will restrict innovation and narrow thinking. Think about aspirational long-term goals with North-star, 10x type thinking. Reward the creativity, grit, failure, resilience, persistence towards a big vision rather than the ability to predict with false precisions the near-term achievement. Enable your goals to support multiple paths to the end-state. Focus on progress towards this direction vs. precision on setting a metric or rewarding checklist activity. This story of Sundar’s goal-setting demonstrates how the precision of setting the right goal is less important than the direction.
At each decision point, think as a VC might in a funding process. Standing where things are today, are the following materially true:
- Do I have the right team in place to win?
- Does the team have a big vision to win a large market?
- Are the right signals continuing to validate the hypothesis?
- Are we quickly learning from our failures?
A system like OKRs can often be useful in this type of org, but be careful that OKRs are used with the comfort and failure aspects built-in vs. another way to just write rigid KPIs. Separate compensation from the precision of landing these disruptive goals.
6 — Leverage the Isolation
One of the counterarguments to a Team X succeeding in a larger organization is that the organization has more to lose and can’t take the same risks a startup attacking the problem would. While this is true in some situations, many times the “No” heard day-to-day can actually be solved by leaning into and celebrating the differences of this department.
Often new business models will structurally work differently, be communicated to the market through different paths, and need to bias towards speed and relevance in the market. By creating legal entities and supporting the team in driving their own stories and releases into the market, it better matches how a startup works. The live-in-market feedback is a key part of the needed testing to get a signal for the product and most importantly following the customer needs. There is typically room for major disruption when the customers are changing but the incumbent business is focused on the needs of the business instead of following the customer. Let Team X follow the customer.
Let Team X follow the customer.
One example of following the customer is for Team X products to be used by a broad portion of the market, including competitors. While there are some situations where this is really strategic, keep in mind that part of what drives the disruptive abilities of startups is they are learning from their customers and iterating to solve their needs. By constraining the potential customers of Team X, you are constraining the learning you are wanting to have.
Often the “risks” are on the brand, but this can be protected by leveraging new brands or qualifier brands. Define the values of these brands to work more like a startup. State overtly that failure and iteration will happen. Things will start and stop. Google X or Google’s use of Beta became a liberating factor enabling them to start and stop efforts with much greater ease than the traditional companies. Instead of over-thinking the cost of getting something out into the world, they can quickly get a signal through real usage. If it fails and stops, it’s an expected part of the process. That’s ok. Create this type of asset for your Team X efforts.
Sales and partnership groups will often get pressure to kill Team X’s efforts. A startup or tech company may say, “I’ll do this deal, but you are competing with us with your Team X project. Stop that project in return for the deal.” This is how tech companies get incumbents to weaken themselves so they can end up competing. Yet if you look at tech giants, they compete and collaborate at the same time. Truly empower Team X to be at arm's length, so in channel or partner discussions the core of the business can legitimately say “I can’t control them. It’s a big company, they have a very different mission and aren’t connected to us.”
7 — A Shared Incentive for Team X to Succeed
Getting all the above right can help build a Team X that is successful in isolation, but the big question now becomes how to have it create an impact on the core of the business. Conceptually, think of 3 key things:
- The Core of the Business should help Team X when Asked
- Gradually shift the core of the business through osmosis via interactions with Team X
- Have Team X projects acquire the core of the business vs. the core of the business acquire the Team X project
The Core of the Business should help Team X when Asked
For this, you need to create incentives for the core of the business to help Team X when asked. The specific solution that will work best in your environment or culture will vary, but you need to solve for two things: a.) creating an incentive to prioritize helping when asked and b.) culturally not viewing Team X’s success as a failure of the core of the business.
Team X getting access to an asset that belongs to the core of the business can be a unique differentiator or accelerant for Team X vs. what an outside startup could do. While it’s hugely valuable to Team X, or any startup, in the early stages, it may be of little value to the core of the business in the near-term or could be even distracting. I’ve seen many situations where it felt easier for Team X to do a deal and get the attention of an external company vs. the internal organization.
There must be an incentive to encourage the core of the business to prioritize collaboration with Team X.
There must be an incentive to encourage the core of the business to prioritize collaboration with Team X. It could be in the form of recognition and rewards programs celebrating those who went above and beyond to support Team X. It could be a clearly aligned top-level goal everyone can point to. Perhaps shared stock incentive models exist so everyone has a stake in the success of Team X. While Team X work typically has long-term value, often the markets will over-value press out of Team X as it disproportionately moves market perception. Reinforcing this when it happens can help connect the dots.
The human elements of politics and competition can also play a big role in the incentives or disincentives of collaborating. Some may view the success of Team X as a failure of the core of the business. This must be solved culturally and all leaders must play a role in watching and squashing these dynamics. One tactical suggestion is to not call the team an “innovation” org as it immediately implies everything else isn’t innovative. This is why I’ve used “Team X” here. Finding the balance between enabling isolation and preserving the freedom of Team X, while also feeling like everyone is on one overall team is hard, but an important balance to find. I often give the analogy of a healthy relationship, where each individual’s strong independence and confidence do not detract from the power of the relationship, it makes the sum of the two greater and the relationship stronger.
Nothing is worse for an early idea than having to prioritize finding a way to work with a large organization vs. solving the more fundamental challenges and needs of the customer.
When thinking about incentive models to help, it’s important to not force it. Nothing is worse for an early idea than having to prioritize finding a way to work with a large organization vs. solving the more fundamental challenges and needs of the customer. Let Team X prioritize when it’s right vs. having it get crushed under the weight of a massive organization all reaching out to “help”.
Gradually shift through osmosis
Create moments, structures, and other mechanisms that allow the core of the business to learn from and adopt processes and technologies being created by Team X and even hire similar people. This can happen in many ways but often is the result of open lines of communication and an incentive model of Team X to share and the core of the business to adopt new ways of working that are proving successful. Encourage Team X to share out progress with a window into how work is being done. Adopt the tools Team X is using. Leverage the new processes that are being created. Create paths for people in Team X to take on operational roles in the core of the business. Create ways for Team X to recruit out of the core of the business. Examples over the past 5 years that would have been observed out of Team X groups with flexibility would be things like (how many of these did Covid force companies to finally do in a rushed way?):
- Adopting more work from home policies (an expectation of modern workforce and aligns closer to focus on output vs. activity)
- Transitioning to Zoom and creating Zoom rooms (Better at collaboration and briding hybrid office + distributed cultures)
- Switch to cloud-native SaaS tools (better collaboration with tighter workflow integration)
Team X Acquires vs. Core Business Acquiring
If the goal at the macro-level is to have Team X disrupt your business vs an external company, then this only happens by letting it grow to the point it can. Software and disruptive businesses are not built and done. As Bezos puts it, it’s always Day 1. Too often companies have great disruption and then try to integrate it into the core of the business, which kills it. This is because it’s usually too early and not yet at a stage of self-sufficiency to really thrive. Additionally, the mindset of the new leadership immediately and unknowingly inverts what’s working.
Instead, think of the moment when a Team X could acquire the core of the business. The small insurgent iPhone team didn’t get folded into the iPod or Mac team once successful, instead, they ran in parallel until at some point iPod didn’t exist anymore as its own thing.
In the real world, this dynamic typically works against the incentive model described above. Team X’s success now really can mean failure for the core of the business or more specifically perceived loss of roles for individuals in the core of the business. This is an individual people challenge and can be managed as such. When startups scale, they bring in people who have experience at larger organizations. These are key moments where the core of the business leaders can be pulled in. It’s also a place where the leaders who have been in touch throughout are more likely to be selected and succeed because their “get it” factor for the disruptive business is high and relationships are built. Now there is an incentive to help along the way. This holds true at every level of the organization. There is a slow drain from the core as it scales and then it transitions naturally at the right time. It seems obvious and simple but is exactly the opposite from how the dynamics and mindset typically play out in organizations.
Theory or Reality?
In talking with people over the years about these dynamics, the conversation typically circles around some flavor of “all this is right in theory, but the reality is in the real world no one does these things and therefore it’s doomed to fail.” Perhaps they are right and all incumbents are doomed to be massively disrupted falling under their own weight. But what’s the end-state of that thinking? To walk off into the pasture and silently watch your business collapse around you? Of course not. You have to try and more importantly, this defeatist thinking misses the reality of the advantages that exist for the incumbent through distribution, brand awareness, cash-flow, access to capital, etc.
My hope is that the above tips provide a bit of a playbook and reinforcement to those attempting to drive change. Use it as ammo when you see the opposite happening. Use it when joining an “innovation org” to test their commitment and understanding of the challenges. Use it to set up your own Team X and to build structural systems to avoid the core business killing it. Use it to inoculate your change agent from what common wisdom and history tell us is typically inevitable.
I believe self-disruption at a massive scale is not only possible but will be proven in the next two decades in a way we have not seen before.
Or maybe it’s just my insurgent mindset thinking the impossible is possible.
Of course, time will tell. What do you think?
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