You need to rewind the clock a few decades, but UPS— with 434,000 employees and $60 billion in revenue — was once a startup.

In 1907, the company began life as a messenger service in Seattle, founded by two teenagers with a $100 loan from a friend. Couriers traveled on foot or by bicycle until 1913, when the company acquired a Model T Ford.These days, the company operates more than 100,000 cars, vans, tractor-trailers, and motorcycles.

David Lee, VP of Innovation at UPS.

David Lee, VP of Innovation at UPS.

As part of our IL Live series of conference calls, we recently spoke with David Lee, the company’s Vice President of Innovation. Lee also oversees the Strategic Enterprise Fund, UPS’ corporate investing arm.

Lee joined UPS in January 2017, after serving as Director of Innovation Programs at SunTrust Bank, headquartered in Atlanta, Georgia. Lee has also focused on emerging technologies at Bank of America, as VP of Product Development and Innovation.”My personal view on strategy and innovation,” Lee says, “is that an innovation strategy needs to be about pathways and mechanisms and partners and channels. It is less about, ‘What should you be doing,’ because in some ways the market, your customers, and your executive leadership can tell you that.”

He continues, “How do you get it done in the most cost-effective, realistic, pro-innovation method? That’s the job of an innovation team—to help guide how stuff gets done, rather than what gets done.”An edited transcript of the half-hour call is below, or you can click “play” to hear it in its entirety.

On The Move

[The transition from finance to UPS] has been quite a learning curve…Growing up in the finance industry, and in the digital industry as a whole, it’s often easy to look past the physical movement of things.

At UPS, I have to think about physically delivering 16 million packages a day in literally 200 airplanes that are moving back and forth in the United States, and 100,000 vehicles that are [driving] three billion miles. It’s been a big education for me, learning how physical stuff moves around the world. It was, in some ways, an afterthought in the banking industry.

The reason for the change largely is that…I wanted to see if the programs that we built in banking would also apply to the logistics and transportation industry. The learning has been…about trucks and planes and labor unions and people and physically moving objects. But so far, the programs that we built in banking [were] about solving cultural problems, and solving bureaucratic problems—large, corporate problems.

The barriers to innovation that existed in banking, I’m finding, are not that dissimilar to the barriers to innovation in other large corporations, even companies with a great history of innovation like UPS.

Turkey Sandwiches and Hackathons

When you’re architecting a program to try and solve different cultural problems or corporate problems, what we do is design specific programs to approach different types of problems.

For example, one of the programs was about [identifying and connecting with innovators around the company]. Often those groups are hidden, in part because if they’re uncovered they get in trouble—or people use it as their secret sauce. They don’t want other people to know about it. But in large corporations, what we have to do, especially if we’re competing against really small, nimble organizations, is to make sure that we create a space for all of our innovators. That program takes the form of like a monthly call where people get together and share ideas, [or] show off projects that they’d done.

It’s like a show-and-tell, but also an emotional support group for people who might feel like they’re the only ones who think a certain way in a large corporation.

At SunTrust we called it the “Turkey Sandwich Club.” We started around just having these informal lunches. At UPS, we started this. It was one of the first program that we launched here. It’s called “Bright Browns,” because of the color of the company. That is one of six different programs that we’re working on. It’s important to recognize that when you’re building programs to engage lots of different people and to get output, you really do want to create a specific type of program around the specific barrier that you see.

The Rise Contest [at SunTrust] was a hackathon designed for grownups. The traditional model of a hackathon is a 24-hour or a 48-hour thing where people eat pizza, drink a lot of Mountain Dew, and just create stuff.

When we’re in a corporate environment, you’re dealing with a lot of people who have family obligations. They have to go pick up the children, they’ve got to make dinner. They get tired at nine o’clock. They’re not going to want to spend 48 hours pounding through things, so we created a hackathon that would spread out over three weeks instead of 24 hours.We gave people the freedom to just build anything they wanted. One of the things that’s really important is that we wanted to get people the freedom to not only build anything they wanted but also, be anything that they wanted.

As people got together and got excited about common ideas, then they closed the gaps on their team to find the different skill sets they would need to build a working prototype over three weeks. Then they went to go build it.

The results of these contests—we ran them twice—were really remarkable. Over 400 people each time stood up and said, “Hey, I want to go build this thing,” and they built these things.

When we started off the contest, I expected maybe 8 to 12 teams to finish and give us a working prototype. What blew me away is that, three weeks later, for literally zero dollars and zero cents of hard cost, we had 50 functioning prototypes. They were solving real-world frustration points for customers and real-world frustration points for employees. It really just gave people the chance to go solve problems that were personally important to them.

We were surprised by how many functioning prototypes came back. Our initial thought was, “Let’s just take the four or five that were good, put them in front of the Executive Committee, and let them pick which ones would go to deployment.”

With 50 functioning things live, we invited people for huge demo days…We invited all of the people we could reach to come. In the second demo day, [during the] second year we did the program, we had over 2,000 employees walk through and see what people had built. They were amazed at what their co-workers had made.

We closed with a final showcase where you have a live studio audience of 250 people, and four C-Suite executives set up in a “America’s Got Talent”-type format, where each of the teams has eight minutes to pitch. What we asked for at the end of the show was that the “celebrity judges,” our C-Suite leaders, would go back into a deliberation room and not pick the one that they thought had the highest ROI or the one that they thought was the most pragmatic. What I wanted them to do is pick the one that they personally most wanted to see made real, and then stand up on stage at the end, present an award to that team, and explain why—as an individual human—they wanted to see that solution made real.

…We had a build team, and a great relationship with our IT partners. We took the four winners from the contest, as well as four to six other teams, and put them into this program called Daylight.[This program was about getting the] prototype into production in 100 days, in the most cost-effective, least-disruptive way. Each of the teams would take a slightly different path through that, but we had about a 60 to 70 percent hit rate, in terms of taking prototypes from the Rise hackathon contest and getting them into live production.

Without that mechanism, you lose a lot of the energy, excitement, and value that’s created in the hackathon…[At UPS] we’ve had some [hackathons], but we’ve been trying to scope the hackathons appropriately until we have those mechanisms to take things into production.

Ties to the C-Suite

I sit in the Corporate Strategy Group. We have a whole series of set meetings and committees… At UPS, the C-suite is referred to as the Management Committee.

We have a really good relationship with a number of key stakeholders on the Management Committee, in particular Juan Perez, our CIO, our chief engineering and information officer; Alan Gershenhorn, our chief commercial officer; and then Jim Barber, our head of UPS Global. We work with them a lot to think about the spaces [in which] we need to be creating new products. Where are the spaces that we need to achieve high-tech operational efficiencies, and how can we expand our businesses overseas?

Each of our leaders has something that they need, and what we try to do is help [evaluate] the best way to design new experiences and new solutions for everybody that’s involved.

Largely speaking, my personal view on strategy and innovation is that an innovation strategy needs to be about pathways and mechanisms and partners and channels.

It is less about, “What should you be doing,” because in some ways the market, your customers, and your executive leadership can tell you that.

How do you get it done in the most cost-effective, realistic, pro-innovation method? That’s the job of an innovation team—to help guide how stuff gets done rather than what gets done.

Bright Brown and Innovation Fridays

Innovation Friday is something that we started at SunTrust, and now I’m working on bringing an appropriate flavor over into UPS.

Innovation Friday, at its heart, is a one-day collaborative design session. We break it into three acts: Act One is the morning, Act Two is the afternoon, and Act Three is the 10-week period that happens after Innovation Friday.

[UPS will] choose a problem that’s really difficult, something that doesn’t have an obvious answer…What you do is you bring anywhere from 30 to 50 people together and have a really frank dialogue in the morning, where you need somebody…to say the thing that you would never say in a group of 50 people—a really controversial but true statement. You get the room talking about things that really bother them.

We would use stimulus questions. One was around human resources processes. We invited the room to spend three minutes silently answering the following question, “What is the process that is so painful that your friends or family members know when it’s happening? Why do they know that?”

Another question we did for another session [at SunTrust] was, “How do we make the bank a more attractive place for young talent?” We also asked everyone to silently sit and write, “What’s the most soul-crushing experience you’ve had at this company so far?”

Most of the people in the room were less than 30 to 35 years old. We had everybody stand up and read those. When you get the level of really brutal honesty and heartbreaking stories, it gives the room the chance to really connect. As facilitators, what we would do is listen and take notes on what people were saying. We’d take a break at about 11 o’clock. To close out Act One, we’d take each of the major themes that came up in the morning.

We’d hang these themes up around the room and then we’d say, “This is the end of Act One. Our time to complain about things is over. Now it’s time to try and go do something.”

People would self-select into [groups based on] one of the banners that was hung around the sides of the room. In the afternoon, those teams would get together and try to design a solution that could be implemented at the company inside of 10 weeks using no money, existing resources, and could be accomplished by a team of volunteers…They had three hours to go design a solution, come up with some ideas, and then come back to…pitch what they were trying to solve.

After these presentations, we do multi-dot voting. Often from eight working teams, we used to go down to about three…Then, you’d enter a 10-week sprint to try and implement or prototype whatever it is that you designed that afternoon.

…What was really surprising is that 10 weeks later, about 70 percent of the things that we tried to accomplish actually happened…The key was just getting enough people to agree that this was an important problem. Then, when you’re giving them license to move forward, you make progress.

At the end of 10 weeks…we celebrated all those [pitches] equally and gave people the chance to stop. Stopping things is just as important as starting. In fact, [it’s] probably more important than starting things.

‘The Rest of Us Can Just Along’

My personal belief, and the way that we case it, is that innovation absolutely could and should be happening everywhere. One of the things that is problematic about an innovation department is that you’ll have [people] say, “That’s where the innovation is supposed to happen,” and then the rest of us can just slog along at the speed of whatever…Really good organizations are ones where everyone is innovating, and coming up with things to do.

If I got 400,000 people around the world that talk to customers, move packages, drive, [and man] planes. They know much better than me where the opportunities for improvement exist. My job is to create channels for them to find collaborators who they might not normally get to.

If you have programs where it’s just the IT people, it’s incumbent on us as innovation leaders to make sure that the IT people get the chance to form teams with people in marketing, finance, or operations. At the end of the day, the people who are building technology are often not the ones who are using it. The closer we can allow people to collaborate, the more quickly we can mock up and build innovative solutions.

Working in a Unionized Industry

There are a lot of nuances. There’s a lot of legal contracts in place. I don’t claim to be an expert on it. I’ve spent several days with our drivers and package handlers, members of the Teamster Union, and other unions.

What we’re trying to do in our innovation program is to make everyone’s life better. That of the employee, and that of the customer. …The skunkworks model is a really dreamy one, but in a lot of ways, if you have a group of twenty really smart people, they can solve a lot of problems, but they don’t actually know what the problems are. It’s important for people to build these bridges between machine learning and artificial intelligence scientists, with people who are fixing airplane engines and changing tires on vehicles. These are the people who are doing the hands-on work of our companies and talking to our customers. We need to make sure that we’re creating innovation that’s valuable to everyone.

Permission to Explore and Fail

What you need from leadership is permission. You need permission to chase down certain problems and work in a slightly different way. You have to have permission to explore and fail in a way that is inconsistent with a lot of typical management [practices], where [people] go, “Hey, what’s the return on investment? How many months is this going to take?”

You might be looking at the portfolio of 30 different major projects and at the C-Suite [level], you should expect that one, two, maybe three of those projects are going to fail. The challenges of that, if you’re one of these 30 operating managers of the 30 key projects, none of you believe that it’s OK for you to fail. People do everything within their power to make sure that their projects are successful.

What’s important from an executive leadership standpoint is that when they look at their innovation departments, they go, “That’s my Department of Failure, but it’s my Department of Good Failures.”

I’ve often joked that my goal in life is to be the Vice President of Failure … I want to be the collaborative partner and I need executive support to allow me to do that, so that I’ve got funding that I can put on to small projects where I can spend time building and not spend time asking for money.

There’s no question that an innovation department has to be producing tangible, viable wins. My approach is one that is a little bit modeled after an early-stage [venture capital] group, where we’re going to take on anywhere from 15 to 30 projects in a given year. We have to have a pretty high level of confidence that at least a third of them are going to land, and within a third of [those], that there’s enough positive economic impact that it more than easily clears the cost of the other things.

Even though we’re in innovation, and even though we have a higher appetite for failure, we certainly shouldn’t be immune to financial accountability… The thing is, if you keep into account, “I spending X million this year, the funding that I’ve given back, either in new revenue or sales, is X x 2,” and you continually do that, the ability for innovation departments to outlast downturns and environments of tight pursestrings, that is key.

There’s no question that innovation is often seen as the thing they cut in tight times, but the truth of the matter is that that’s not a recipe for success in the long run.

Investments into Innovation

The UPS Strategic Enterprise Fund has a long history. It was founded in 1997… It probably made maybe 60 or so investments over that time period.

This all predates my time at UPS, but I really want to congratulate and tip my hat to the executive leadership at UPS during that period, where they said, “We are not always at the front of that curve. How do we get exposure to the very front of the curve?”

They make minority investments in early stage, seed, A, B, C-round companies, and then when possible, take a board seat or a board observer seat, so that we can help get exposure, for our UPS leaders, to emerging business trends and emerging technologies.

One of the things that I would like to add to that is a greater emphasis on operational capability.

When I think about innovation, I like to think in very short time periods. Is there something that UPS can do two months from now that we couldn’t do two months ago?

[That capability] can come from internal invention. It can come from external invention. It can come from research. We welcome partners of all shapes and sizes, because we’ve got really interesting problems to solve. We need as many talented brains and hands to solve the problems that are facing our company.