How should professional services businesses manage their innovation investment?

In a previous post, I discussed how to balance an innovation portfolio, and the need for embedding innovation as part of business collaboration. In this post I look at the issues of investment and resources for professional services businesses.

As a reminder, the Harvard Business Review diagram below provides a useful context.  Whilst the great majority of businesses invest in core innovation, the greatest payback comes from transformational innovation.  But in order to balance the portfolio, investing businesses must also balance the risk.

harvard matrix

John Stewart of Tate & Lyle points out that there are different investment and resourcing strategies that can be called upon, depending on the type of innovation and when it’s needed by.   In his paper ‘Network building, scouting and becoming the Partner of Choice’ he identifies some 10 different action-lines for driving innovation.  It’s interesting to compare these to the Harvard model, as the following table demonstrates.

innovation strategies

These are not mutually exclusive by any means, but provide a simple guideline to businesses depending on their ambition.

Core investment

For typical professional services businesses with a low margin/utilisation ratio, it’s challenging to free up valuable resource (typically the most valuable resource) to devote their time to innovation when it’s being paid for out of business development or marketing budget, in effect a double-whammy on leadership and productivity, often resulting in off-timesheet activity for those involved. At the same time, identifying new innovation opportunities through the business development process and discussion with clients, is a relatively cheap way to generate ideas.  Not surprisingly therefore, a significant amount of innovation remains in the core, stimulated through business development and financed in house using professional staff.  There are obvious constraints on core innovation done this way.

An alternative, which might occur through ‘scouting’ for solutions is to license in a product and if some element of exclusivity can be negotiated (for example, an opportunity window) this can help get ahead of the competition and might also spill over into adjacent markets and adjacent offerings.  Since this is relatively low-risk insofar as no sale, no effort required this is also popular with professional services businesses, although exclusivity would only be successfully negotiated with evidence of significant market share or client retention.  Internal transfer within larger firms (for example, setting up an innovation team of experts who ensure good knowledge sharing across complementary areas) is now being practised by firms such as Atkins but it is not uncommon for silo structures in large professional services businesses to demonstrate poor collaboration on innovation. This results in repetition and unnecessary cost, as well as sub-optimal performance.

Investing in adjacent innovation

Whilst pushing into adjacent markets can make use of the same strategies as the core, the greater risk of failure and additional strain on internal resources and budgets increases the value of looking to some form of co-development or joint venture involving another partner. This might be another division in the same business, or an external organisation involving resolution of difficult issues such as intellectual property, the trading model, investment and return.  Such a step is not taken lightly and will take strategic thinking. This is one reason why many professional services companies fail to take the step to adjacent markets and focus on incremental innovation within their core domain.

Investing in transformational innovation

Transformational innovation that creates new markets, changes existing ones (for example, destructive technology) and / or create new products and services will usually demand far greater investment, take longer and therefore involve more risk.  The need for research and invention (even if combining existing services) is likely to require a different strategy, for example academic collaboration. A joint venture between businesses might incur excessive costs unless transformational innovation already exists.  Time scales will be much longer, but payback could be significantly more.

What is interesting is the role of crowdsourcing, which can be internal and external to the organisation.  As a means of generating original ideas, crowdsourcing can be used across all investment models.  Industries such as pharmaceuticals are prepared to pay for crowd-sourced ideas and will buy the IP from the innovator.  Crowd-sourcing can also be used to challenge all stages of an innovation pipeline, ensuring that stage-gates will get passed, helping identify different ways of achieving each stage of the process.  Where confidentiality is essential, crowd-sourcers will need to enter into an agreement and some form of recognition and reward will be expected. This should still be cheaper than internal think-tanks and brainstorms using professional staff.

So a balanced portfolio will probably contain different investment strategies and devote attention both to core and adjacent markets, potentially taking some risk and longer-term investment in something transformational, with explicit decisions on where and when IP and risk should be shared, and with whom.  The important thing is to be aware of what is being invested in and why and then, to consider all the different ways of getting there.

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