Building an Innovation Engine

Service companies don't have the option of standing still, but change brings plenty of risk. Here are some tips on minimizing it

Maintaining the status quo is the strategy for many in the service business. Sell the same thing, through the same channels, for roughly the same price, using the same business model, with a little bit of continuous improvement thrown in to make sure no one falls asleep. Yet with expectations on the rise due to a few smart companies that are consistently able to delight customers with truly clever and useful services (Google (GOOG) and Apple (AAPL), among others), the status quo is becoming a dangerous position.

This is especially true for service companies. If your outfit hasn't started to build a "customer experience innovation engine" by now, you won't remain a market leader for long. Chances are, your competition is already well ahead of you.

For those that have started building an innovative corporation, the challenge is to learn how to manage the higher risk associated with a business model based on generating new ideas and innovative products and services.

Here are a few tried-and-true methods for taking risk out of innovation efforts:

No whims allowed. Robust innovations that can deliver true competitive advantage are rarely based on passing thoughts or ideas. Great innovations are generally built around macroeconomic trends, targeted customer lifestyles and emotional needs, and the efficient use of available technology. The well-informed insights that help drive innovation don't come lightly to any organization -- the cost of collection and analysis alone can be substantial. But they provide both a valuable catalyst and a critical framework for ideation that's grounded in both today's reality and tomorrow's opportunity.

Expand the collection of insights to all stakeholders. Services are especially fraught with complexity, because every service ecosystem has many important stakeholders -- that is, entities who can make or break your success. All of those stakeholders must be considered as concepts emerge. Miss one, and your new offering could be DOA.

Take the airline business. From the time you hit the curb at the start of your journey until you pass through the exit on the other end, you encounter at least six different types of airline employees, plus an airport authority, local transportation vendors, perhaps customs officials, etc. They all should be consulted, or at least considered, when an airline seeks to improve the customer experience.

When Virgin Atlantic introduced its famed Upper Class service that swiftly got you from point to point with no hassles, it was the analysis of various "pain points" in the system that drove them to their vision of how normal human beings could travel like celebrities.

Test to learn, not to forecast. Doing tests to forecast the size of the market in the early stages of concept development is a futile exercise. Back-of-the-envelope-type economics is about the best one can hope for at this point, especially for new innovations.

So save that money for later, but do budget and run small concept tests with lead users, key customers, and channel partners. They're critical to the successful launch of anything new that challenges the norm. The point is to solicit informal feedback very early, gaining understanding and incorporating what you have learned into the latest concept-development work.

Taking the opportunity to work out the inevitable conflicts early in the innovation process is decidedly safer than trying to fix something late in the game -- or even after it's on the market.

Prototype. Prototype. Prototype. My company's research into service innovation over the past 18 months suggests that the value of prototyping -- so eloquently described by legions of academics and practitioners in the product-development world -- has been completely lost on the services community. Seasoned product developers wouldn't make a move without a series of increasingly robust prototypes, and service innovators shouldn't either.

Prototypes reduce risk in several different ways: in the marketplace (does the customer want it?), in corporate organizations (can our team deliver it?),and in the financial books (can we meet the cost objectives?). Prototypes are a sort of language unto themselves, integrating perspectives and vision for many groups involved in creating new products.

Make a little, sell a little. Some businesses can do low-volume testing easily because of the nature of the offering (software, regionally based services, etc). This is a particularly good idea when the cost of a limited rollout is low relative to the risk of getting the offering wrong and there's still time to play with final specifications. This approach is a variation on "test to learn," with the benefit of receiving some revenue to help offset the cost while moving towards a perfected version that presumably mitigates any disaster and at best gets the kinks out.

Develop with a key customer. Take a page from the U.S. aerospace industry handbook -- find a key customer (say, a big one, like the U.S. government) and get them to pay for the development for an important initiative (say, a new fighter jet). Then, take the knowhow and intellectual property developed in that low-risk setting (where the cost is underwritten by the key customer) and parlay that into a new set of offerings for new or existing other customers.

Look around, this model is at work every day and is a key way that big companies such as IBM (IBM) use customer archetypes to pilot-test new ways of doing business that are too risky to take on as speculative ventures. The company's Emerging Business Opportunity (EBO) program is specifically focused on developing multibillion dollar businesses in short periods of time through organizing market experiments involving a few important customers.

What they learn in the process informs the value proposition, hones the operating model requirements, and provides insights into whether the business can scale at an aggressive rate. In fact, one of the biggest risks that IBM undertakes with its EBOs is to put its best talent on board to help make them successful. Why? Removing them from the mainstay businesses leaves a void, and there's no guarantee the person who formerly ran a multibillion dollar business is going to thrive in a startup atmosphere.

Nevertheless, IBM's incentive structure has been revised to accommodate such moves, and its EBO track record is remarkable -- Since 2000, 22 of 25 experiments have been successful and now account for $15 billion in annual revenue, growing at a rate of more than 40% per year.

Do nothing. Oops -- only kidding. This is not an option.

Seasoned innovators make bold moves using tools, methods, and practices that mitigate the inherent risk of going beyond the status quo. Good development methods can help manage risk in many other ways. The trick is to know how and when to apply the appropriate protocols.

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