The centralized innovation department

In one of my CEO blogs, I addressed the subject of a central versus a decentral organization of the innovation function. This subject is often a popular issue for discussion at our clients’ Board tables. In this blog, I would like to give some additional clarity about central versus decentral and in particular the central innovation department.

Do you set up a separate (central) department for innovation or not? In practice, there are two main important considerations: facilitate and or create.

The facilitation role is mostly organized to smooth the way for and support the (decentral) business units with their innovation endeavors. Most of these efforts are in the incremental domain of innovation or very close to the current business model.

Creation is about ideating, concepting, validating, and scaling own initiatives of the innovation department. Ventures that can often be found in the more disruptive realms of innovation.

The (decentral) business units are often reluctant to these kinds of more risky innovations, with more uncertainty on the longer-term returns. Also, the (decentral) businesses often lack the right incentives, time, resources, and mindset. And not to forget, innovation could lead to cannibalization of the current business, which explains why the (decentral) businesses units can be an opposing force for innovation.

Last, we also experience a great amount of obstruction from legacy systems within the business units and their parent company. All good reasons to set up shop for risky ventures outside the incumbent business and into a separate (central) unit.

Many central innovation departments struggle with this often-experienced ambiguous position between facilitation and creation. There is no right or wrong when it comes to the role of the central innovation department. Does the scope include only the ideation and execution of horizons 2 and 3 or also in supervising and facilitating horizon 1 projects of the operating companies? It is often a balancing act, with usually limited resources posing an additional challenge and creating friction between the two roles.

We see that different roles occur and that they also might change over time. This need not be conflicting. After all, the facilitating role of the central innovation department offers the opportunity to innovate closer to and with the business and to gain insights for horizon 2/3 type of projects. It is also about building bridges between the existing (old) and the new and the necessary (cultural) change. It is therefore a compliment to any centralized innovation department to be invited to participate in the strategy development of a division or business unit. What remains is off course the challenge that one of our clients, a central innovation manager, mentioned “to manage and prioritize the scarce amount of time of my team over helping the decentral business and at the same time creating new stuff of our own”.

The centralized innovation department is often a center of expertise. It supports the business units in new ways of working, transfer of innovation methodologies, active innovation coaching of leadership, and training of employees. The central department guards the company’s innovation library of knowledge, methods, and processes. You could say this is the third element of consideration or role of the innovation department: stimulate. More ‘advanced’ innovation departments also act as internal HR incubators to foster innovation talents from the business in rotating programs. These ‘trainees’ then later act as innovation ambassadors in the businesses units.

The example in my blog of the facilities company shows a very decentralized company with strong autonomy of the operating business units. These decentralized companies often have a distinct ‘laissez faire’ culture and leadership style. The Board is intrinsically facilitative and takes control on high level strategic subjects and financial performance. Entrepreneurship of decentral management is one of its key strengths. In general, in these specific situations you need to be careful with too much centralization. We often see that in these decentral corporate structures, KPI’s and incentives for decentral management are very much focused on short term financial gains. These can be conflicting with the longer-term rewards of innovation. You need to carefully position and structure the different types of innovation (from incremental to disruptive) derived from your strategic ambition.

In our professional practice at RevelX, we often see corporates trying to imitate startups in a separate central innovation department. They carry fancy names like Labs, Garages, Greenhouses, etc. And while there are often good reasons for creating organizationally autonomous units that replicate a startup culture, this does not guarantee a culture conducive to successful corporate innovation. In our opinion, it is better to focus on some of the specific startup characteristics like an obsession with customers, speed, individual accountability, and the comfort with (more extreme) risk-reward outcomes. So instead of replicating, it’s much more productive to instill some of these elements and cultural changes in your organization. After all, corporates are not startups.

The innovation center is led by an innovation manager. He/she is overall responsible for the flow of projects and the innovation process as part of a bigger innovation ecosystem. Depending on the purpose of the department the role is either to make business managers more successful at innovation, and / or their own central department, through finding more breakthrough innovations and nurturing them to a certain level of maturity. It is like playing simultaneous chess on many boards.

As mentioned, there is no good or bad in this discussion. And what holds the truth for today might change tomorrow. But there are some general remarks we like to share in terms of pros and cons to go for central and separate.

The pros for a centralized and separate department are:

• A place that makes it easier to challenge the orthodoxies, myths and beliefs in the organization, industry, and society
• A center for the search for what is new outside, stretching the boundaries and business domains
• A ‘safe’ place for a new way of working, experimenting, testing, and validating at light speed
• A place to create viable new daring opportunities and new revenue and profit sources
• A center of excellence for innovation, capture and distribute past learnings, spread the gospels through training, mentoring,
• and coaching, inspire people, departments, business units, etc.
• A place where you face less obstructions from the existing business, structures, and processes. Break free from current constraints. Protected by the corporate mothership and Board.
• A better way for exploiting the company’s real assets and strengths. You sometimes must put yourself outside of the business to better understand what strengths you really possess
• A good vehicle to embed in innovation ecosystems around the world and increase access to interesting startups

The cons for separate are:

• The physical and mental distance can create a ‘fremdkörper’ effect in the organization: too much isolation with no proper embedding
• Cultural clashes with the current and ‘political’ conflicts. It is very common for teams in separate innovation departments to develop their own sub-culture, language, and behavior. This can be good or bad. It turns out to be unproductive if it has a serious negative effect on the relations with the rest of the organization
• The “not invented here” syndrome is especially important when innovations need to be handed over to the business. The root cause is not necessarily the department itself but the lack of business involvement and commitment (governance) in earlier stages of the innovation process
• Intended, coincided, or perceived cannibalization of the current business. All the above are true. Even when it is the specific intent to cannibalize it is naïve to expect that the business will not react in some way or another. You need to manage this special effect
• Over time we have seen some departments drifting too far away with ventures from the current business. Partly because of the internal developed culture, but the root cause here is the lack of governance. Again, not the structure itself is at fault, but the lack of support or foundation from strategy and or governance and business involvement.

If you are thinking of setting up your own central (or decentral) innovation department, or you are in the middle of evaluating your past central, decentral, or networked structures, this article might help.

In our Corporate Innovation Playbook (see download link below) you can find some material on governance, but for the remainder you must wait for our new book. Or just send me an email and we can discuss your specific challenges.