The Innovation Equation: Balancing Inside-Out and Outside-In

June 4, 2021

If the past year has taught us anything, it’s that innovation is not only critical to helping companies pivot to align with the pandemic induced new reality, it is also central to helping companies thrive. At the onset of the pandemic, many companies, quickly disrupted their own business models to directly serve the needs of their communities, healthcare workers, hospitals, and most importantly COVID patients. But there was also a whole host of other sectors — from food to finance, from manufacturing to mental health — that innovated to create new ways of selling and establish brand-new business models.

Stephanie Kim, KPMG LLP

It is important to understand that “innovation” doesn’t mean the same thing to all companies. For some it is internally focused and involves upgrades to existing products. For others, it means leveraging their organization’s capabilities in new ways. However, organizations interested in true transformation scan the external environment for disruptive innovation that can lead to new business models, new capabilities, and growth into new markets.

Jonathan Walker, KPMG Spark

How then should your company decide where it falls on the spectrum outlined above? Although most companies would say they are not at the right place on the spectrum, the reality is that the best mix of inside-out and outside-in activity will be different for every enterprise. Finding the sweet spot should reflect the current and future business outlook for your sector, how much disruption your corporate culture will embrace, and whether there are enough folks in your organization with an entrepreneurial mindset to make the pursuit of innovation a reality.

Find the Sweet Spot

Zach Olson, KPMG Spark

Our survey revealed that most companies are focused on inside out, or organic, innovation. They make incremental improvements and only look outside when they can’t build a solution themselves or they need to quickly respond to an unmet customer need. For example, as a privately held company, workwear manufacturer Carhartt didn’t have funding to increase headcount or undertake large innovation projects. Nevertheless, the company was able to rapidly innovate to introduce a line of comfortable, safe face masks in the heart of the pandemic.  

This approach is suitable for some companies, particularly smaller ones with a significant number of creatively minded “intrapreneurs” who essentially run a variety of internal start-ups.  However, since 43 percent of internal innovation programs have only 10 full-time employees dedicated to the effort, it is arguable that, for most companies today, a more balanced approach is in order.

In contrast, even the largest multi-national companies realize that there is more valuable innovation than ever before coming from the start-up community. Particularly as companies consider how to adapt to the post-pandemic world, they are finding that they need to take an outside-in approach to enterprise innovation to help develop, incubate and accelerate the next generation of ideas, technologies, services, and business models. One example of a large company that has adopted an entrepreneurial mindset is Shell TechWorks, which has introduced a number of innovative offerings that meet the evolving needs of their customers. 

Remember: Innovation isn’t a zero-sum game. Pursuing external innovation doesn’t mean internal innovation will or should be neglected.  

Shift Your Mindset

At KPMG, one approach we take is bringing a targeted group of startups into our network that are complementary to our vision and business priorities. We do this in a variety of ways — outright acquisition, minority investments, joint ventures, alliances, and, most recently, sponsorship of innovator networks like MassChallenge. Regarding the latter, our sponsorship has allowed us to expose our client base to emerging companies in areas such as dynamic risk management, as well as next-generation supply chain transparency, predictive analytics, and artificial intelligence. 

Although the way we choose to engage with innovators may vary, there are some imperatives that we recommend all companies keep in mind as they seek to find the disruptors of tomorrow:

  • Assign an innovation business sponsor or visionary and seek input from department and/or sector leaders to define a firmwide strategy and business innovation themes.
  • Establish an analytics team that can identify signals of disruption, undertake competitive analyses of companies pursuing innovation, and feed this intelligence back into the organization to inform decision-making.
  • Embed yourself in the innovation ecosystem by undertaking grassroots networking with startups and supporting innovator networks.
  • Think like venture capitalists by building an investment portfolio that can be continually adapted to changing needs and viewed through the lens of future earnings, potential vulnerabilities, and, of course, the risk of not innovating.
  • Understand the risks of outside-in innovation, such as the potential for conflict when new business models are perceived to be cannibalizing existing businesses, or when post-deal integration requires so much time that internal innovation is stifled.
  • And finally, don’t be afraid to pivot. Organizations embarking on their innovation journeys shouldn’t pigeonhole themselves into one approach over the other. 

Remember: Innovation isn’t a zero-sum game. Pursuing external innovation doesn’t mean internal innovation will or should be neglected.   

Take the First Steps

In order to determine where your company should fall on the spectrum between inside-out and outside-in innovation, ask yourself the following questions:  

  • How do you move the organization and make the case for innovation?
  • Should you benchmark against your own industry or should you aspire to be more like industries (e.g., pharma and tech) that are good at anticipating trends and disruption?
  • How do you deal with pushback, e.g., fear of disrupting the existing business and/or having jobs replaced by innovation?
  • What are your “super-powers” internally and how can you enhance them with external innovation?

As you undertake the calculus to determine your organization’s innovation strategy, remember that the equation may change and then change again. There may be times when your organization is so focused on near-term issues that longer-term innovation falls to the back burner. Other times, disruptive social and environmental events, like the pandemic, may require lean innovation with a focus on learning fast and fostering efficiency. Finally, you may anticipate a more pervasive industrywide disruption that requires your organization to reinvent itself through a combination of inside-out and outside-in innovation. Through it all, those organizations that have truly imbedded innovation in their organizations, from the top down, will be that much further ahead than their competitors.  


Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

InnoLead regularly publishes Thought Leadership pieces written by our Strategic Partner firms. A version of this piece also appears in our 2021 research report, “The New Imperatives.”