Large corporations have pursued different ways of addressing the need to speed up successful innovation. The fastest, but most expensive way is to buy successful start-up companies. The slowest, but most sustainable way is to change the corporate innovation culture. Something in between are the Innovation Labs.
An Innovation Lab is an expert center of innovation. Several companies followed this approach. Based on the successful launch of an Innovation Lab at AutoScout24, I suggest keeping the following issues in mind before you decide to go down the same road.
I. Clarify your expectations
The most crucial question for you is to clarify your expectations. An Innovation Lab with a limited budget and resources won’t disrupt an industry in a short time period or create multi-billon markets on a green field. However, Innovation Labs can help to set the right focus of the entire organization and reduce strategic investments under uncertainty. Innovations labs are based on business experiments to validate critical business hypotheses. They are therefore best utilized by questioning critical business assumptions.
Good Innovation Labs reduce uncertainty and support setting the business strategy by validated learnings.
II. State the key principles
An Innovation Lab should be guided by key principles. Certainly the most important is that the direction of the Innovation Lab is guided by the company’s purpose. All they do should get them closer to reaching the company’s purpose. If you do not have a formulated purpose or shared understanding, an Innovation Lab can help you to identify one, which needs close cooperation with top management.
Working with your own ideas or ideas of employees is a sensitive and emotional topic. Hence, you need clear guidelines on how to manage the expectations of all stakeholders. For AutoScout24 the following key principles have been proven to work:
- We test everything
- Minimum effort per experiment
- Data decides
- Partnering is key to speed
The first principle ensures that ideas are taken seriously and deserve the same level of attention – regardless of whose idea it is. This empowers employees to drive innovation, even if they do not have the resources available.
The second principle is to invest as little as possible to get to the next level. The less you really know about a customer or market, the less you should invest. With each experiment you should learn how to further decrease the investment next time (re-use or optimization).
Data is the foundation of every decision. People often mix up market potential with revenues. Just because there is a huge market, that does not mean that you can grab a part of it – not 1 %, or even 0.0001%. The real sale is what really counts and that is independent of the market size but highly depends on your idea. Once you have understood this mechanism, you can use other indicative data to validate your assumptions.
Do not be afraid to get help from partners or even competitors. You are not the only bright person on the planet and you are certainly not the only industry expert coming up with the very same idea. Cooperate with your partners until the assumptions are validated or invalidated and then evaluate how to continue. Avoid exclusivity or long running contracts.
Innovation Labs require key principles to manage the expectations of all stakeholders.
III. Setting the scope
Innovation Labs require freedom to learn. You learn best by freely experimenting. There is no need to set close boundaries for your Innovation Lab. Real new or disruptive ideas cannot be elaborated when the steering of the Innovation Lab focuses too closely on achieving a certain objective. If the employees of the Innovation Lab believe in the purpose of the company, there won’t be any additional steering required. Considerate employees will respectfully use and allocate the company’s resources.
An Innovation Lab is not a usual profit center that can be optimized by focusing on core tasks.
IV. Endure the market feedback
Innovation Labs conduct business experiments to validate hypotheses. These validated learnings reflect the customer usage of specific MVPs (minimum viable products). This means that real interactions of real customers are the foundation of any learning. Only the actions of real customers in a real decision making context result in real learning. And that is the bad news. After thousands of business experiments the target customers still do not behave as expected, and assumption after assumption is smashed by the measured behavior of the target customers. Customers rarely behave as the homo economicus would suggest.
And that leads to the sad truth that brilliant ideas of world domination do not work out in reality. Also, as a normal human reaction, top management tends to deny the validity of the business experiments since the idea offers such a huge potential – at first glance. Nevertheless, one invalid critical assumption destroys the whole idea. And that is independent of the potential, size, or degree of geniality or novelty. Customers not being willing to pay money for it destroy everything.
The outcome of an Innovation Lab is not primarily confirming what we already know. In most cases it is the unwanted reality.
V. Do not expect instant cash return
Traditionally, we evaluate innovation by the ratio investments into the new business versus the return generated by that new business. It would be just wrong to simply apply a ROI perspective on innovation, because that would certainly impact the innovation culture negatively. The acceptance of failure is one thing, but also the willingness to learn in baby steps is crucial. The question “How big could this be?” on a simple business experiment just kills the motivation to thoughtfully develop consumer-centric businesses. It is not the potential final outcome of an idea that is the criterion for evaluation, but the achieved maturity and certainty levels on the development path to a product or service.
The return of an investment into Innovation Labs is learnings and reduced uncertainty rather than dollars.
VI. Do not get dazzled by your own perception
The way we perceive companies has dramatically changed with the internet. Before the internet, consumers judged for instance the quality of retailers by size and interior. Today, everyone can build a web shop within minutes to sell globally. High quality can be built without writing a line of code or the help of a designer. Hence, it is extremely difficult to judge a company or service offering just by having a look at the web presence. Attention is the currency that really counts.
But not everything you see in the media and in the start-up community is really working. There is the trend that VIPs are investing in start-ups to provide publicity. But that does not automatically mean that those start-ups are successful. Ashton Kutcher, with 55 investments, is certainly one of the better known Hollywood artists leveraging his publicity. Nevertheless, Amen and Gidsy, two well-known investments of Ashton Kutcher, failed and showed that publicity does not guarantee success.
Innovation Labs deliver real learnings. Do not get dazzled by the publicity of some start-ups or competitors.
VII. Get the right people
The success of an Innovation Lab depends crucially on the people you hire. Recruitment managers keep on saying the best people make the best teams, which is obviously valid for all positions. But for Innovation Labs you need a specific type of person. One of the core characteristics is that the person should be a self-starter, self-motivated and hands-on. He or she should be interested in new challenges and be willing to learn. The primary motivation should be the desire to learn something new every day and their aspirations to make a difference in the whole industry. My recommendation is to start with a small team and a strong leader to establish the required innovation culture and strengthen the position and methodical approach.
Start with a small team to create the right mind-set and let them develop the hypothesis- and data-driven culture.
VIII. Respect the organization
As the name suggests, Innovation Labs are a kind of autonomous business unit. In the optimal case they are equipped with all required resources and empowered to take all relevant decisions by themselves – comparably to segment driven organizations such as Facebook or Scout24. The separation of the Innovation Lab from the rest of the company has a significant drawback – the exchange of knowledge and learning among the organization needs to be guaranteed. Unfortunately, Innovation Labs are quickly seen as some toy of the top management without links to the rest of the organization.
An Innovation Lab’s core task is to secure the sharing of learnings and inspire other teams to innovate.
IX. Do not focus on positive results
Evaluating Innovation Labs by the actual experimentation results is a typical mistake. You cannot blame Innovation Labs for invalidated hypotheses. It does not make a real difference if a hypothesis is validated or invalidated. The main objective of an Innovation Lab is to reduce uncertainty. Knowing that something does not work is as valuable as knowing that something works. If the Innovation Lab team is compelled to report mainly positive results, they will play it safe and lose out on real learnings.
Every business experiment results in learning. It does not matter if the result is positive or negative.
X. The usual KPI reporting does not work
When you have decided to run an Innovation Lab, sooner or later the question of how you measure the success will arise. While the success of typical business units such as product management can easily be measured, the return of an Innovation Lab is rather difficult to measure. Innovation Labs are established to reduce uncertainty, which can hardly be measured. I rather advise not trying to use vanity metrics such as number of new ideas, ideas per employee, or ratio of ideas you follow up. Those KPIs are misleading and just disguise the real progress towards achieving the objective of the Innovation Lab – reducing uncertainty. One approach, which I personally prefer, is the Innovation Options approach of David Binetti. He developed the idea of how to measure learning in hard currency which could be the foundation of reporting return of an Innovation Lab.
Do not treat an Innovation Lab as just another business unit of your company. Elaborate carefully what kind of reporting delivers the maximum insight.
XI. Innovation Labs have a limited reach
Innovation Labs certainly can be part of a company with a multi-national foothold. The impact of an Innovation Lab on a larger organization though is certainly limited. In general, learning works best based on a regular personal interaction. Meaning, if your primary objective is to foster an innovation culture across a global organization, an Innovation Lab approach might not be the best methodology. Furthermore, service and product innovations have their natural barriers in different customer segments (cultural or demographics). In any case, an Innovation Lab can also help you in a global environment to channel your internal communication of ideas or business proposal by establishing a central unit.
Innovation Labs work best in proximity. In all other cases they can help to channel the idea and business proposal flow in your company.
XII. Innovation Labs also work in B2B industries
No worries if you have primarily business customers. Innovation Labs are based on business experiments and you might be reluctant to experiment with your highly valued customers. While a MVP targeted at consumers that does not keep a promise 100 % (e.g. delivery times) might be appropriate (potentially you disappoint 100 of your 10,000,000 customers) the same approach with business customers (100 of 1000) could cause a lasting damage for your business relationships and brand image. You can easily do experiments also with business customers, but you need to be more careful about what you promise and how you approach sales. One general principle is to rather play with open cards and explain that you are working on something new.
Innovation Labs also work if you are in B2B industries. Just be more careful about what and how you are doing it.
Innovation Lab at AutoScout24
AutoScout24 has been running an Innovation Lab successfully for more than two years now. Hundreds of business experiments have been conducted. The learnings were used to develop new products and services, invest in companies, seek further investments in ideas, and gain insights into industry-relevant trends such as autonomous driving, shared ownership, connected cars and the electrification of cars.