Innovation Resources: A lot does (not) help a lot

Strategic Renewal with a Holistic Innovation Management System: Resources & Infrastructure

This article is part 6 of an article series about building an innovation management system for strategic renewal. This article was originally published in German at the Haufe NewManagement Magazine together with Lucas Sauberschwarz from venture.idea . You can find the introductory article here.  

To continuously adapt to today's uncertain and dynamic environment, companies need the organizational capabilities for continuous and effective innovation. These capabilities can be developed through a holistic innovation management system. The individual levers of this system are discussed in this series of articles. After the basic introduction, this article focuses on the "Resources & Infrastructure" lever.

Resources & Infrastructure for Systematic Innovation Development

“Spending more on R&D does not lead to better results. The most important factors are strategic alignment and a culture that supports innovation.”

This statement from Booz & Company's annual Global Innovation Ranking 1000 reflects the established fact that more spending on innovation does not necessarily lead to more market value or growth. Worse, a study of all publicly traded U.S. companies by U.S. professor Anne Marie Knott shows that R&D revenues have declined by 65 percent over the past three years. So when in doubt, is it right to forgo innovation resources, or at least to manage them as restrictively as possible?

It's not quite that simple. The same study by Anne Marie Knott also shows that maximum R&D productivity (a high return on R&D investment) is not only demonstrable but has actually increased in recent decades. That means, some companies manage to successfully invest in R&D in order to grow profitably through innovation. Because of this paradox, questions about financial and human resources for innovation or R&D are an ‘evergreen’:

• How many resources does innovation require?
• What type of resources are needed?
• Who should control the resources?
• How are resources used?
• How are the resources allocated and distributed?

Strategic Value of Innovation

The first question can be answered quite well if, as described in the previous articles in this series, a strategic value contribution for innovation has been determined and an innovation portfolio with resource requirements has been set up accordingly. The answer to the "how much" of resources is then primarily based on what is to be achieved through innovation and which projects are necessary for this at what cost.

Regarding the second question, it is clear, at least at first glance, that some things are simply necessary to be able to operate at all – i.e. a core team, workspace, IT tolls, and expenses budget.  We call this the infrastructure for innovation. But finding answers beyond that becomes more complicated. At the latest when it comes to the question of the necessary project resources and their control, use and distribution, opinions in organizations are usually divided; after all, resource control also means decision-making power. As a result, a resource battle often breaks out between project teams, business units, and central functions or management. To settle this battle, let's take a closer look at the possible answers to the remaining questions above.

The foundation: infrastructure for operational work

Most (larger) companies now realize that innovation is (at least) as important a permanent business function as marketing or HR. Accordingly, it needs a place in the organization. While innovation in the sense of new ideas can take place anywhere in an organization, it makes sense to have a dedicated responsibility in an innovation unit to be able to develop new innovations in a systematic and targeted way. In traditional manufacturing companies, this may be the R&D department; in others, it may be an innovation lab or something similar.

Regardless of the exact structure, a dedicated innovation unit needs a minimum set of physical, financial, human, and digital resources to be operational. This includes at least one person responsible for (strategic) innovation and, ideally, a core team that can also take on basic overarching tasks such as portfolio management, methodological coaching, or research and analysis. In most cases, an office or at least meeting facilities are also required, as well as the necessary equipment, including IT hardware and software. An independent budget for basic expenses, travel, consulting, etc. is also essential for innovation work. Accordingly, the first step is simply to evaluate which basic resources are needed as infrastructure for an operational innovation unit - and which are still missing (Figure 1).

But before you hire hundreds of people and spread them across three continents in fancy "innovation outposts," it's better to start small! After all, you want to build up as few resources as possible independently of projects - so that the most resources can be invested and distributed as effectively as possible. Even if physical resources like offices need to be planned a bit more independently of individual projects, personnel costs and related equipment beyond the core team should be planned and (dynamically) distributed depending on the innovation portfolio, just like financial investments, as described below.

The resources: Between dependence and independence

With the basic infrastructure, the dynamic capabilities of scoping (to define the strategic framework) and configuring (to manage the innovation portfolio and associated project resources) can be established in the innovation unit. However, innovations still need to be identified (sensing), developed (seizing), and implemented (transforming) to fulfill the remaining dynamic capabilities. Therefore, the establishment and application of these dynamic capabilities in the organization usually takes up most of the innovation resources. They should be allocated as specific resources as directly as possible to projects in order to use them as effectively as possible. But who should be responsible for this?

Depending on whether all or only some of these capabilities are to be covered by the innovation unit itself or by the rest of the organization, the control of the associated project resources must also be adapted. A distinction can be made whether an innovation unit does not need its own project resources at all, is allocated resources depending on the projects, or can generally allocate its own resources to own projects independently.

Accordingly, the question of the right resource control cannot be answered in general terms, but must go hand in hand with how the dynamic capabilities for strategic innovation are distributed within the company (see Figure 2).

• If, in addition to scoping and configuring, the innovation unit is only responsible for sensing ("Connector"), it does not need its own project-specific resources, but only a basic budget for portfolio management, strategic analyses and workshops, external partnerships and similar basic activities. Specific project topics are then always passed on to the organization (or externally), where appropriate project resources must be made available for further development and implementation. However, these are usually the responsibility of the developing and implementing units, such as business units with their own product or business development, or central management for external investments or acquisitions.
• If the unit is also responsible for seizing ("Developer"), it must at least have project-specific access to human and financial resources. For example, projects can be carried out with project staff borrowed from business units as "intrapreneurs", various divisions can provide development budgets as "sponsors", or management can finance proof-of-concepts with start-ups. To gain access to project resources, the relevant stakeholders must always be convinced - which, of course, also ensures their support.
• If the unit is to be responsible for the transforming itself ("StrategyLab"), it must have its own pool of project personnel and a project budget that can be allocated to projects. The company's own resources do not necessarily have to cover all project requirements, but at least provide the opportunity to initiate and drive projects - similar to seed funding for start-ups. Subsequently, further budgets for costs or personnel can either continue to be allocated from the unit's own resource pool or be contributed by business units/management as "sponsors". However, in order to really cover "transforming", such a unit is best organized as a profit center and is therefore responsible for its own profit and loss account. The goal here is to create an "evergreen" unit in which the income from innovations can finance new innovation projects after a few years. For example, "Körber Digital" is being set up as an independent business unit which develops new digital business models are brings them to market as ventures and also operates them afterwards.

Such an innovation unit, which covers all dynamic capabilities with its own autonomous budget and flexible human resources, naturally has the greatest opportunities for direct strategic value contribution. For most companies, however, the previous "Developer" approach makes sense, since projects should be transferred to the business units at the latest for implementation, and often already during development, in order to exploit their competitive advantages in a targeted manner. A higher degree of resource autonomy only makes sense if completely new business areas are to be established, as in the case of Körber Digital. In all other cases, resource management tends to be hybrid: Some of the resources consist of the company's own personnel and budget for setting up and initiating projects but the (usually larger) share of resources for the further development and implementation of projects comes from the business units and central management. In this way, innovation work may be slower, but is much more integrated.

The "right" model for resource control thus depends especially on the intended integration of the developed innovation in the core business. While for efficiency reasons, the innovations should always be as disruptive as necessary (for high customer fit) and as close to the core as possible (for high traction), they can be usually differentiated into three horizons (see Figure 3).

• Horizon 1 covers innovations with products/markets close to the existing business. A "connector" model is usually sufficient for an innovation unit, as it can focus on scoping, configuring and sensing, while these innovations are then easily developed within the existing business units or R&D functions
• Horizon 2 covers innovations with products/markets that are new to the company. It usually require at least a "developer" model for the innovation units to also cover the development of these innovations (seizing). However, existing resources from the organization might be used for this development to integrate the innovations later to the core business.
• Horizon 3 covers innovations with products/markets that are new to the world. It requires a "strategylab" model for the innovation units to also cover the further implementation and scaling of these innovations (transforming). Own resources provide the required speed and funding to be able to build up such completely new businesses independently from the existing organization.

Utilizing resources: open or closed innovation?

Wherever the resources come from, the question remains as to how they should be used. After all, it is not always traditional research and development that is carried out. Instead, "build," "buy," or "partner" can be used to implement projects ranging from closed innovation within the company to open innovation involving external partners (see Figure 4).

• In terms of closed innovation, "Build" focuses on internal development (inside-in/inside-out). Accordingly, resources must be available in the unit itself or provided by the organization as a whole. In terms of personnel, this can also be borrowed from outside, but used for internal purposes, as is common with freelancers, consultancies or agencies, for example.
• "Buy" extends closed innovation by investing in or acquiring external companies in order to bring skills and assets into the organization (outside-in). M&A, Corporate Venture Capital (CVC) and similar financial transaction vehicles play a role here. There are either separate budget pools for these, such as a CVC fund, or they are coordinated with top management, as is usual for acquisitions.
• "Partner" bypasses resource limitations and relies on outside-out collaboration with third parties such as technology companies, start-ups, competitors or research institutes in the spirit of open innovation. This can involve a variety of vehicles, such as venture clienting, alliances, strategic partnerships, joint ventures, and more, which must be managed accordingly. At best, some of the company's own personnel and budget will be available for this, while other resources for specific business opportunities with third parties will be released by management or business units.

This means that project resources can be used or extended in a variety of ways. There is no single best solution. While many companies have specific preferences, such as buying a lot or developing a lot, ideally there should be options for all variants. This way, depending on the specific innovation project, a decision can be made as to which path is the most efficient. Of course, the chosen option must be taken into account when allocating resources to the project, which brings us to the next point of resource allocation.

Dynamic and incremental resource allocation

Having an overview of who is allocating project resources to what can be helpful - but how exactly they are allocated is the critical operational factor. Equipping projects with lavish resources from the start leads to the same trap as equipping an entire innovation unit - more is not always better!

Whether self-managed or project-based access, whether buy, build or partner, project resources must be effectively allocated according to the prioritized innovation portfolio. And not just once, but over and over again. A regular review of the entire innovation portfolio, as well as the individual progress of each innovation project, can ensure that the allocation of resources is dynamically optimized over and over again. This is usually achieved with some form of a "stage-gate" process with a new resource allocation decision at each gate/milestone of a project (see Figure 6).

Impact on dynamic capabilities

Overall, it is actually possible to answer the question of how much (depending on the required value contribution and the portfolio) and which (base and project budget) resources are needed for innovation, what they are used for, and who should control and distribute them and how. Combined with an appropriate portfolio management, a dynamic use of resources for continuous adaptation (agility) is created.

The described availability of resources is directly linked to the creation and application of the "dynamic capabilities" required for strategic innovation. These enable the company to continuously develop and realize new competitive advantages.

While resources for scoping, configuring, and sensing must always be available as a minimum in innovation units, the extent to which the innovation unit itself is equipped with resources for seizing and transforming varies as described. But one thing is certain: the resources for the capabilities must be available somewhere inside or outside the organization! And only if the expected capabilities of the innovation unit are also aligned with the availability of resources, they can be fulfilled.

But that's not all. There are other levers to consider in developing innovation capabilities, which will be discussed in the other articles in this series. Want to know where your company stands on the journey to continuous, strategic innovation? The "Capability Check" provides a free, quick self-assessment of all dynamic capabilities using a scientific questionnaire.

The next articles in this series will continue with the next lever of the innovation system: competencies and skills for innovation. #follow and stay tuned to not miss out and get an overview of the complete innovation management system!