(Part 2 of 'How to Innovate in a Regulated Industry. Check out Part 1 here)

Take a Portfolio Approach

The risk of taking few large safe bets in today’s environment far outweighs that of taking many small risky bets. The fact is though, we need to maintain a balance. We should never compromise the core business at the expense of the new and reconfigure all of our processes, policies, values and infrastructure to support “move fast and break things” unless we want to bring on the death of the company.

Taking many small bets helps to mimic the venture capital approach which is that for every ten investments, expect maybe one or two to deliver the desired returns and the majority to completely fail. Thus, taking small bets gives us more room to fail small but also increases the likelihood that we can win big with the few. If venture capitalists, whose job it is to invest in early stage companies, concede that they don’t get it right all the time (only 10% of the time in fact), then why should it be different for corporate executives whose job it has not traditionally been to develop new ventures and innovative business models? It’s not.

If we want to succeed every time, we can do that, but we do so while conceding that we will never deliver anything great. We will only succeed in stretching our existing S-curve as far as it will go, as did Kodak, Nokia and Borders before us. Perhaps John F Kennedy said it best when he lamented that “there are risks and costs to action, but they are far less than the long range risks of comfortable inaction”.

An environment needs to be created under which delivery of the existing and discovery of the new can co-exist. This should extend to the processes, values and infrastructure that support each approach.

While it’s difficult to experiment and move quickly in a large, often bureaucratic organisation that has implemented processes to protect and execute on a winning business model, there are many things that successful Fortune 500 companies are doing to counteract this.

Open innovation campaigns, idea contests, hackathons and innovation outposts (or corporate incubators), corporate startup partnerships and venture funds, or a combination thereof, are just some of the different methods that companies can use to successfully explore potentially disruptive business models in a fast, safe to fail environment.

A growing number of companies are looking outside the building and looking to pair their significant networks and experience with that of the structure, values, processes and talents of startups to help deliver mutually beneficial outcomes. Open innovation and the corporate startup partnership helps large organisations leverage their strengths without the burdensome bureaucracy they may operate in, without an impact on reputation, without a need to host on expensive internal systems and without regulatory pressures to worry about.

What about our brand?!

It is perfectly responsible to ask about the damaging effects of testing half baked ideas and products with the market, which is why we need to be careful about how we go about it. Remember, it’s not about finished products, it’s about validated assumptions.

How to get around it?

Test on small isolated groups that match the target market assumptionsTest with a new brandTest with full transparency the product is in beta mode and offer it for free purely for the purposes of soliciting early customer feedback (Intuit Labs do this with their “roughcuts” program)

Infrastructure Concerns

Finally, what we’re often seeing in the market is infrastructure demands and legacy systems slowing down innovation which we can break down into internal and external demands.

Internal demands:

IT departments often demand that all software be hosted on their big, costly, in-house systems, which compared to hosting on the cloud, drives development and hosting costs way up, while bringing speed of innovation teams way down. There is a valid reason why this is done for core systems, pertaining to integration, security and privacy.

Oftentimes however, an innovation team will be permitted to test new ideas in the cloud on a platform like Amazon Web Services (AWS) but as soon as additional investment is made to commercialise the product, company policies and the IT department dictate that it be hosted on the core technology and as such, budget to take the idea forward evaporates.

In the odd case that budget exists, the increase in cost means that X times more revenue is required in order to hit those efficiency targets we spoke of earlier and given that truly disruptive innovation can take several years to deliver returns, the plug is often pulled on promising innovation projects before they get near the hump.

As a lifelong Manchester United fan (please don’t hold that against me!), I can draw parallels between this plug pulling and the career of former manager Sir Alex Ferguson. Sir Alex joined the club as manager back in 1986 and was given seven years to build a team (unheard of in a time when managers come and go like seasons and loyalty is pledged only to one’s personal bank account). However, after several seasons of poor performances Ferguson was on the cusp of losing his job in 1992 if not for the unwavering support of the board.

The end result? 13 Premier League titles, 5 FA Cup titles and 2 European Cups in the 20 year period from 1993 through to his retirement in 2013.

Of course, football and large organisations are not exactly the same. In the aforementioned case the bet was taken on the core business of its top tier professional team, instead of as an isolated side project. However there is a lesson in here on patience.

We need to support innovation projects by either configuring our internal policies to support hosting on fast moving platforms or create new companies with their own policies and values.

External demands:

In the case of regulation demanding that we host particular records in house, then creating new independent companies may help to get around these problems. Companies that don’t fall under the banner of the regulator.

A Final Thought on Regulators

Ultimately though, regulation should exist to protect the consumer, not the incumbent. And unless we want to revert to a time when the first cars weren’t allowed to drive faster than horse drawn carriages to protect the then powerful horse and carriage lobby, regulators need to do a better job at exercising professional judgment when evaluating the steps that companies are taking to innovate and add value to the economy.

A job without purpose is a waste of time and regulators need to hone in on their ultimate purpose of delivering value to consumers and growing the economy instead of the archaic, process oriented ticking and crossing of boxes.