Finding the Right Mix of Internal and External Innovation

January 17, 2019

When companies begin to broaden their innovation portfolios, leaders must decide what to pursue internally and which ideas should be explored outside of the company. And while incremental innovations are typically best pursued close to operations, working on transformational change can be difficult internally.

Dublin-based home security company, Allegion, takes a comprehensive approach to their innovation portfolio, focusing on 4 engines: internal incubation, mergers and acquisitions, corporate venture capital, and building externally. Transformational innovation at the company often lies in their external efforts.

Rob Martens, President of Allegion Ventures

“We needed to find a mechanism to stay close to those things so [industry-wide trends] didn’t surprise us, smack us upside the head, and throw us for a loop,” said Rob Martens, President of the company’s venture capital arm Allegion Ventures, during a recent IL Live Call. “[We looked for a way] we can plan and…in certain cases invest, via ventures.”

Allegion often works with the Indianapolis-based venture studio High Alpha  to help with spinning out new companies. Elliott Parker, Managing Director of Business Design and Corporate Innovation at High Alpha, agrees that corporations pursuing transformational innovation externally have more success. However other companies still remain lost: “We’re in an environment right now where you see companies with more capital on their balance sheets than ever before. You see massive share buy-backs, which signals that companies have capital but aren’t sure how to invest it to do the next thing,” he said.

During a recent conference call with InnoLead members, Martens discussed the role of venture capital at Allegion and how his company balances internal and external innovation. Parker also shared external innovation success stories during the call.

Martens said that when Allegion began to pursue transformational change, his team sought to spin out ideas into their own companies or “ships.”

“[We wanted to play in a] constantly more complex ecosystem of other partners,” Martens said. “And the only way to do that was to understand and partner with people who are working with emerging technologies that either we ourselves were not able to develop or might not have a reason in that given point in time be able to play with directly… or in other cases where we have a unique advantage partner with the right people, potentially build a team and look at launching a ship.”

When ship-building, Allegion works with High Alpha.  In this collaboration, the companies define a large set of business ideas and explored viability through customer research.

“In the case in the example with Allegion, what we did is we said, ‘Hey we’re good at launching new businesses. We can move really quickly. You guys… [have] deep industry expertise. You got scale, Let’s marry up these strengths that we got and see what happens,'” Parker said. “So we go through a process of identifying ideas, and vetting those, and eventually taking them through a sprint.”

High Alpha launches companies through sprints, a process that condenses the first six months of a new business into four days. At the end of the process, the team has gained enough information to decide if the idea should be killed or selected for investment.  While High Alpha seeks to launch one to two companies a quarter, not every sprint yields results. In their most recent sprint, no ideas were strong enough to become new companies.

According to Martens, exploring new terrain and discovering new ideas has been one of the biggest benefits of innovating externally.

“Discovery… it’s the biggest benefit,” Martens said. “You’re going to find that you’ll have financial benefits that come out the back end anyway, that’s been our experience. But engagement and discovery are two huge things to focus on.”