McKinsey & Co. Exec on the Perils of Innovation Committees

April 25, 2016

Marla Capozzi, leader of the Global Strategy & Innovation practice at McKinsey & Co., joined us on a recent InnoLead Live conference call, to discuss creating the optimal organizational conditions for innovation to succeed.

  • Why an organization’s commitment to innovation shouldn’t wax and wane — even when there’s an executive shuffle or re-org. “It’s hard to imagine any time when a senior leadership team shouldn’t be focusing on growth and the future,” Capozzi says.
  • The risk of innovation committees running off the rails. Everyone has “seen successful committees and extremely unsuccessful committees in your organization. Unfortunately, most of them err on the side of not having the type of impact that we would like them to have.”
  • Why it’s vital to create new metrics for the pilot tests and experiments you run. “If you’re doing something brand new, you can’t apply old metrics.”
  • “Seed funding is the easy part” for companies investing in new initiatives, Capozzi says. But setting up a path to larger investments — what Capozzi calls “scale funding” — is much harder.
  • Capozzi believes most companies need to create new, non-traditional approaches to testing ideas with customers. If you’re a food company, for instance, “Why aren’t you just driving a food truck around, and testing things with people, and seeing if they like them, and bringing the information back?”

InnoLead: Tell us about some of the best scenarios you’ve seen companies set up, and maybe some of the not-so-good scenarios, when they’re trying to create a structure for exploring new business models, or new technologies, or new stuff that they think the company should be involved with.

Marla Capozzi: Absolutely. This is a great question, and something that is really top-of-mind right now, because innovation is a core part of strategy. For every organization, the definition of innovation, and where to play, and where to innovate is and should be different because it’s a strategic choice that you’re making.

If it’s the same as everybody else’s, then I think we know how that’s going to play out. I think that companies who were doing this well have really learned from the 1999 dot-com boom, where all of these separate structures were set up. “Oh, they have to be left alone. They need different stock options. They need to be able to wear shorts to work.”Now that we’ve seen those go away, and a resurgence of “Innovation Centers 2.0,” one of the things that leaders are really doing is thinking hard about the strategic choices that they’re making. Nobody has unlimited resources.

What we’ve seen with incumbents is a lot of the innovation that creates the greatest value is innovation at scale [based] off of the assets that they have, but entering into new business models, leveraging digital technologies, etc.Don’t get me wrong, there certainly are industries that are seeing more disruption than others, like the teleco industry and publishing, where things are being completely upended by online, or mobile. But if you look at a large majority of industries, there’s still opportunities for growth.

This is a long way of saying that the company-wide innovation portfolio needs to be governed by the CEO and the C-suite. This isn’t something that you can put one person in charge of — a Chief Innovation officer, Chief Digital Officer, Chief Whatever Officer.Governance, at its core, has to be a part of the senior leadership team. They have to have visibility into the more out-there, or disruptive new business opportunities, as well as the core, because it’s only at that senior level where you can integrate and scale.

The second thing that I see organizations doing really well is being very smart about seed funding and scale funding of their resources. Seed funding is the easy part. You can throw $50,000 or $100,000 at anything.What has happened is, it’s easy to just [make] $50,000 investments and throw them all over the place, trying to take a venture capital approach, thinking that something will stick and pay me the returns from all the other ones that I’ve spent.

That doesn’t happen in large companies, because then you end up with lots of pockets of innovation, and no ability to scale those. You’re less likely to have some sort of a one-hit-wonder that’s going to compensate for all of the other ones. The scale money is the real money. That’s where we’re talking about $5 million, $10 million, $20 million dollars. The only way that money gets allocated is, again, at the C-suite. The first [step] is [making] very clear strategic choices. The second [step] is very, very conscious resource allocation, and tracking those investments as well.

The third [step is] how they’re doing it. It’s less about putting the box on an org chart and trying to put innovation in there. It’s a lot more about trying to set up short design sprints, getting new data, getting out there in the marketplace quickly with consumers, and very rapidly using that information to make decisions.The CEO isn’t making decisions after a week. However, people are making more rapid decisions, and this is becoming more and more transparent. That type of a structure is something that I see. When those things are in place, you see much more rapid time-to-market, and better ideas being developed within large organizations.

Setting Up Innovation Outposts

InnoLead: Let me just go back and ask one follow-up, because it sounds like maybe you’re not a fan of the insulated, off-somewhere-else innovation center, innovation lab where a company — Staples for example — put a lot of their e-commerce folks in Seattle because they thought they could hire the right help they needed there. We went to visit Ford last week in Palo Alto. They have a hundred-plus person R&D lab there. Do you not like that model at all, or do you feel like it can work in certain circumstances?

Capozzi: I think it’s a fine model. Having e-commerce in Seattle because that’s where the talent is, or Ford being in Palo Alto, because otherwise they would have no visibility into that [ecosystem.] Those types of outposts and structures are fine, as long as they are well-designed to execute against their particular mission.

There’s good reason for having them there. My issue is that organizations will have, let’s say, an outpost in Silicon Valley, a corporate venture capital unit, an innovation center located at their headquarters, maybe some innovation activities happening in a business unit, and none of them are connected up to the C-level.The difference here is that governance is the glue that holds these portfolio of structures together and achieves scale value from them. …If they’re extremely disconnected, then it’s harder for them to capture value.

Dangers of the Innovation Committee

InnoLead: I want to ask you about the innovation committee, because a lot of people, even when it’s a CEO/COO initiative, they often feel the impulse to create this committee. The CFO is on it, and some business unit heads are on it, may be some functional folks like the IT head or the CTO. That’s the committee that’s reviewing all of these ideas that get seed funded and maybe are lean startup prototypes. What do you advise people about the innovation committee?

Capozzi: The innovation committee is a very tricky one. As I’m sure everybody knows, you have seen successful committees and extremely unsuccessful committees in your organization. Unfortunately, most of them err on the side of not having the type of impact that we would like them to have.

The problem with an innovation committee, and the real challenge, is that what the innovation committee is going to accomplish has to be extremely clear. For example, are they allocating funding? Are they making recommendations to the C-suite? Are they more of a problem-solving organization to push the ideas further?Most of them are set up without a very clear charter, without real accountability as to what they’re going to deliver as a team. Oftentimes, if the group isn’t accountable, for example reporting to the CEO, then one business unit leader has a conflict so they send someone in their place. Then the other business leaders say, “If they’re going to send somebody else, send somebody in my place.”

All of a sudden, it’s a committee of whoever can show up, and it’s not very effective. It suffers from all of those typical committee-type problems. The ones that I’ve seen work well are ones where they set very clear protocols. They will say to each other, “OK, this is our responsibility. We all come to the meetings. If we can’t come, we dial in, we don’t send any substitutes. Our responsibility is to push these ideas to the point we are ready to go to the CEO for scale funding.” It really requires a lot of discipline.People find that a little bit counter-intuitive — especially those who are not involved in innovation on a regular basis — because innovation, in a way, requires more discipline than other things that we do because it is so new, and different. You have to apply that discipline to get the outcomes that you want.

InnoLead: That’s an interesting point. Every time the committee meets, you’re looking at different kinds of ideas that are at different stages. It’s harder to make [decisions about those] than it is about typical operational stuff like facilities, or sales, or what have you.

Capozzi: Right. The worst thing that you can do is to let them set themselves up thinking that they’re a venture capital team. I observed one in a very large food company that was set up, and it’s amazing how quickly people can start acting like venture capitalists when they have absolutely no idea what a venture capitalist actually does.

It became very counterproductive, because they would say, “Tell me why I should invest in this idea.” I thought to myself, “Well, this isn’t your money.” It doesn’t make any sense to me.

InnoLead: The one positive thing I see from the venture capital metaphor is at least they have a sense of the pace at which they should be making new investments. When VCs get together, they say, “Well, we really want to be making this number of A-round investments every quarter.” I think, sometimes, these innovation committees become the “committee of no,” and they never make an investment. They always are saying, “Go back and bring us more data,” as opposed to, “Here’s the money you need.”

Capozzi: That goes back to the protocol. You can have your protocol be [that] you have to convince us beyond a reasonable doubt that this is a good idea; or, the more effective ones say, “We are the business leaders of this organization. We hold the most expertise of anybody here. It is our job to push these ideas forward to the point where they can be successful, or kill them quickly enough…”

How to Think about Metrics

InnoLead: We have a question about metrics, and that was something I definitely wanted to get to. What should you been reporting on, to whom, and how do you not get caught up in the traditional metrics of the business?

Capozzi: Everybody loves metrics. In a way, it doesn’t really matter what they are. You don’t need to be totally flippant about that, but the best way to do it is to set your own metrics.

What people care about, and what CFOs want to hear about, is that you’re applying a discipline, that you’re not going to go off the reservation, that you’re going to have some sort of a return on that investment, and there’s a trajectory going forward.It should not look like the core business, but it still has to look disciplined and it has to have a set of metrics. For example, it may be that your first and most important metric is the number of customers that we think we can acquire with this particular new product or service.

Then, if you can show through your early testing that you’re above 90 percent, that’s the metric. The next metric is, what are people going to pay for it? …If you’re doing something brand new, you can’t apply old metrics.You have to be the one that says, “Here’s the new idea. Here are the set of metrics that I’m going to [apply] that are going to de-risk, prove this idea, help me pivot, help me make the right decisions. Each time, I’m going to come to you with a different set, or a different set of learning against them.” Then you can be forward-looking, not backward-looking. If you’re creating something new, you can’t look backwards.

InnoLead: We have one specific question about how metrics can reflect the effort behind discovery and fast failure. I’m guessing you would say, “We’ll [keep track] as we’re doing these pilot tests or these experiments. Here’s how many we’ve run. Here’s how many customers we’ve interacted with.” That sort of thing?

Capozzi: Exactly. Fast failure in itself shouldn’t be an objective. The only thing that fast failure does for you is it either proves that you’re [going] in the right direction, the wrong direction, how you’re going to pivot, and whether or not you’re going to go forward.

There’s a little bit of an overemphasis, in my opinion, on the Silicon Valley startup fast failure thing. The cognitive research shows that we don’t necessarily always learn from our failure. You want to prove that, “OK, this didn’t work, but this did;” or, “We quickly ran two one-week sprints, and this product clearly has a future and this one doesn’t, therefore we’re pulling it.” That’s the context of governance, not just, “We’re failing fast, so you should just keep giving us more money.”

InnoLead: I think that’s an interesting point. We’re seeing the lean startup approach really gain a big foothold in large companies, but [I think] the expectation is that it’s not just going to produce a lot of experiments. Eventually, it’s going to produce something you can put money behind and scale at some point.

Capozzi: Right. The lean startup idea — this is no different than the whole idea of a design sprint. It’s just taking one week, concentrated, everyone’s locked in a room. You bring the consumer in three or four times during the week. You co-create. You design a prototype. You test it again. You refine it. You start to look at your business model. At the end of the week, you have new data, a business model, market intelligence, etc., where you can say, “Is this a good idea, or a bad idea?” That’s the discipline of a process.

Where governance comes in is, what do you do with that information at the end of the week? How quickly are you reviewing it? How quickly are you making your decision to either go or no-go, or what happens next?

The Role of the CTO and CDO

InnoLead: There’s a question from a listener in the consumer electronics industry who wants to talk about the role of the CTO today and in the future, including what is the CTO’s domain versus the Chief Digital Officer, in the case where a company has a Chief Digital Officer?

Capozzi: Oh, that is a great question. Given how much innovation is centered on digital right now, this is something a lot of our clients are struggling with. Unfortunately, there’s not any particular model that’s emerging. What I have seen is, the role of the CTO is absolutely paramount. If the technology organization, and the CTO, and his or her leadership team is very strong, I’ve seen a lot of executives embed digital [responsibilities] within the CTO’s [group.] In some cases, where technology organizations are much more about keeping the lights on, or where they have to run the network, the talent is not there, [nor is the expertise to be able to do some of the digital initiatives.

…So they had to set things up separately. If, for example, it’s all about social media and digital as it relates to marketing, I’ve seen a lot of those things embedded under the Chief Marketing Officer. This comes back to where we started, which is, what’s the strategic direction and then where-to-play choices for innovation? If you’re, for example, a retail bank, you have to be digitizing almost everything you do. It’s hard to imagine that the CTO isn’t going to play the leading role in doing something like that. …That’s a great, and very thorny question.

InnoLead: I want to ask a follow-up about resources, because we often see a new Chief Digital Officer, or a new VP of Innovation, they’re looking internally for the resources to be able to build stuff quickly, and do rapid prototyping. Then they run into a CTO, or a CIO, who says, “You know what? You got to put your request in at the back of the line, after these 5,000 other requests we have.” Are there some things you’ve seen people doing — other than you go outside and you hire a design firm, or a development firm? What do people do to do an end-run around the internal resource constraints?

Capozzi: I believe that the internal resource constraints should be alleviated, if this is enough of a strategic priority. The only way that that can happen is in the C-suite. [You have] the CTO sitting with a set of business leaders, and peers, and the CEO. Everyone is saying, “Our future depends on this,” or, “This is our strategic direction. Therefore, we need to reallocate resources. We don’t get to put this stuff at the end of the line. We need to figure out, do you need more resources, should you reallocate? Is it a talent problem?” In the absence of good governance, and these things being discussed on a regular basis at the top of the organization, what you just described is going to continue to happen, because people are being left to their own devices to do it.

Does Organizational Structure Affect Performance?

InnoLead: We have a question from the financial services industry. Where should innovation teams sit in the organization? The questioner says that they are exploring putting their inside the technology group. I know this is probably specific to each company, but are there some pluses and minuses [related to where] where you put the team?

Capozzi: All the research I’ve done is [that there is] absolutely no correlation between structural choices and performance outcome. That’s the good news, because the choice of where you put it isn’t going to affect the outcome.

Second of all, because there’s no right or wrong answer, I think it would mostly depend on the type of outcomes that you’re hoping to achieve and what part of the organization is going to be affected the most. For example, a lot of banks, as I mentioned, are digitizing core processes. How do I make a mobile-first on-boarding experience for a checking account? How do I engage with customers via mobile apps on a regular basis, versus the branch? What role does the branch play? How do I add new services onto that?That’s the core business of a retail bank. Having that with the chief technology officer, because scale is going to matter, is a perfectly logical place to put it. If you said, “OK, I really want put a team together, and evaluate whether or not we should get into peer-to-peer lending, or online payments, which we’re doing nothing in.” Then, a separate team still may be within chief technology officer, but those things are very, very new. They don’t quite yet impact enterprise IT infrastructure. You might choose to do something different to explore that…

InnoLead: We have a question from the world of consumer packaged goods about getting to customers. I presume they mean being able to test with customers, and show things to customers early. They point out that “marketing wants to be the gatekeeper in our organization for anything that customers see.” Is that always going to be the case?

Capozzi: Yeah, that’s definitely common within consumer packaged goods. However, this gets back to the process piece that we were talking about. Marketing does tend to be the gatekeeper, especially for line extensions and more incremental innovation.

I’ve just been working with food companies recently, and we’ve been talking about, why don’t you have a food truck? Why aren’t you just driving a food truck around, and testing things with people, and seeing if they like them, and bringing the information back — versus making everything a market research study.That is a very unnatural act for a big food company, versus [traditional] marketing. “We have a process. We go through this. We find our sample size.” It’s much more of a traditional market research approach, versus, like I said, “Let’s just drive a food truck around with five different offerings and talk to people.”

Pioneer, or Follow Fast?

InnoLead: That’s a really fascinating experiment to run. Someone wants to know, beyond prior articles that Marla has published, do she have new works on the horizon, either with McKinsey or via another source? I guess that’s a long way of saying, what are you working on these days?

Capozzi: I’m actually working on governance right now. It’s something that I’m really fascinated with, especially the biases and the way in which people make some of the go, no-go decisions. The other area that I’m really interested in is where more value is captured in certain sectors — market pioneering or [being a] fast follower?

We make this assumption that innovation has to be new. Nobody’s ever seen an iPad before, nobody ever saw an iPhone before, and we get very quickly ingrained into our bias that that’s what innovation is. Then we organize ourselves to strive to create something like that.The reality is, most of the successful products [in the market]…were actually the fast follower, because they were able to innovate the mass-market offering.

They were able to innovate at scale, versus just innovate. I think for large incumbents, you don’t necessarily have to have the idea first. You have to be able to track the idea. For some areas, you might want to be the first, but in other areas you might want to fast follow.With food companies, obviously plant-based protein, the healthy alternatives, the organics, etc., is here and now, and you’re fast-following in that manner. The fastest-growing protein segment, at 53 percent, is insect protein — cricket flour, etc. Two billion people in the world eat insects and insect protein on a regular basis. They just don’t happen to be in the United States of America, because people here are still creeped out about eating bugs. However, you have to believe that at some point there’s going to be a tipping, and so how do you follow that? When do you get in? When do you pay attention? When do you start making offers, etc.? That’s an innovation trajectory to really think about.

InnoLead: Yeah, I guess that’s the key part of fast followers, that you’re doing it fast. We were out in Silicon Valley last week, visiting Ford’s R&D center in Palo Alto, and it happened to be the day that Tesla started taking pre-orders for the Model 3, their $35,000 sedan. The question that was on my mind was, how quickly is Ford going to be able to follow Tesla, or is Tesla going to be the dominant brand, the Apple of the electric car marketplace, and everybody else is going to be seen as — what’s a good brand to compare to Apple? The HP, or the Lenovo?

Capozzi: Those interested in this type of story, there’s actually a great magazine article about GM and the Chevy Volt, and this whole concept of who’s going to take it to scale? Tesla is probably always going to be niche and high-end.

They say they’re going to develop the car for the mid-market, but who has the assets to develop the best mid-market car, Tesla or General Motors? If I had to put my money somewhere, I’d put it on General Motors. They know have to scale, they have the infrastructure, and that’s what this article is about. Tesla may have been the innovator, but GM is going to capture a ton of value with this Volt.

Interacting with the Startup Ecosystem

InnoLead: It’s going to be interesting to watch. Let me see if I can get one last question in here. It’s another question about best practices for interacting with the startup ecosystem. Is it by connecting with venture capital firms, or individual startups? This is from a company in the retail space.

Capozzi: I think the answer is both. If I look at companies who are [engaging with] ecosystems really well, they have as many touch points as they can within the focus areas that they’re going after. If you have a look at, for example, the J&J innovation center, there’s one in Kendall Square. All they do there is connect with the external marketplace and try and bring things in. That’s the sole focus of that particular innovation center. They’re connecting directly with startups, directly with entrepreneurs, [and building] relationships with venture capitalists.

There’s a win-win there for you, as incumbent, to know what those startups are. You may want to acquire them. You may want to partner. They will take meetings with you, because they’ll be able to better understand various exit strategies for their startup. Some organizations have put money into venture funds, or into incubators. There’s a hardware incubator in Boston called Bolt. A lot of it is funded by incumbent organizations that have put money into it to fund startups in various hardware products and services.Again, once you have your strategic focus area, you can look at who are the venture capitalists that are most active in that space. Who are the ones that are local or that I may engage with? Go from there to create your own ecosystem.

What Happens when ‘Innovation Urgency’ Ebbs

InnoLead: Let me ask you a last quick question. We hear from a lot of people who feel like the innovation urgency right now is driven by the current moment [and] all the unicorn startups with billion-dollar-plus valuations, and a sense that we’re in a time of transition from the desktop to mobile, or from internal combustion to electric, or from traditional foods to gluten-free and cricket flour.

Do you feel like this kind of “innovation urgency” is something that ebbs and flows in different industries, or is that something that you feel like really ought to be there all the time, a certain level of paranoia, or curiosity, or assertiveness about figuring out what are the new businesses we should be in?

Capozzi: That’s a great question. It’s hard to imagine this ebbing and flowing, and having it work. You lose the muscle to do it and you lose the focus. Then you have to build it back [up.] It’s hard to imagine any time when a senior leadership team shouldn’t be focusing on growth and the future.

…If you take your focus completely off the future, that’s how these things get missed. I’ve been in so many conversations where I’ve had a cable company tell me, “We developed the multi-room DVR five years ago, and our competitor came out with it first.” Or, “We were ahead of gluten-free, and we missed it.”That’s what happens. Sometimes you have to control your urgency, because so much of what happens is people go out too early, and they’re not ready, or the market isn’t ready.

InnoLead: A lot of what you’re talking about — a lot of the ebbs and flows — my guess is they are related to senior management changes and a new CEO or COO. Just the changing of the guard, and you get somebody in who’s more of an operator or an acquirer, and then the focus shifts that way, right?

Capozzi: Right.

InnoLead: We should wrap up in the interest of time. Marla, thanks so much for joining us this morning.

Capozzi: That’s a lot of great questions, so thank you all.