This is a follow-up to our Business Insider ‘Big corporates should just ditch innovation labs’ interview. 

A 2016 Capgemini report found corporate innovation labs are opening at a rate of ten per week. Despite the enthusiasm, they’re not producing the industry disruption corporations are desperate for. Capgemini suggests it is “extremely challenging” to make innovation labs work and reports up to 90% are failing.

Failure comes at a cost. CBA’s innovation lab, opened in 2014, cost a reported $4 million to establish. The annual operating costs of a lab, considering salaries and other expenses, would far outweigh setup costs. However the business cost is far more important than the financial.

52% of the Fortune 500 have been merged, acquired, or have gone bankrupt since 2000. Over half of the Fortune 500 have disappeared, and the ASX faces the same risks. Innovation failure brings a company closer to failing. The risk is real, imminent, and the clock is ticking for corporate Australia.

Why do innovation labs fail? Firms aren’t creating innovation labs for the right reasons. ‘Innovation theatre’ is all most innovation labs amount to. These ‘labs’ temporarily keep the board and shareholders appeased, and provide an answer to “what are you doing about innovation?” until they fall apart.

British Airways announced its innovation lab in March 2013. Named ‘UnGrounded’ and garnering “first innovation lab in the sky” headlines, the inaugural UnGrounded event consisted of a team of “Silicon Valley luminaries” taking part in a “hackathon in the air”. The last UnGrounded article on the British Airways website was posted in June 2013, only months after UnGrounded was announced. UnGrounded hasn’t been mentioned since. The UnGroundedThinking.com website has vanished and the website domain is for sale. British Airways is left with a handful of headlines, a domain selling for US$499, and a textbook example of innovation theatre.

Compare this with Daimler, also in the business of transport. Daimler’s innovation team piloted its car sharing idea in 2008 – a year after the innovation team was founded. Daimler’s Car2Go is now the largest carsharing company worldwide, servicing 2.4 million customers and operating in 26 locations. While Car2Go’s commercial metrics are undisclosed, it contributed to Daimler’s record profit of €8.8 billion in 2016.

So many labs are producing so little innovation. Most are failing and bringing their firms closer to failure. Yet Daimler was one of the few that managed to successfully innovate and create a commercial success. What’s the secret to making corporate innovation work?

It turns out it’s not the ‘lab’ itself that’s important. There’s a blueprint for success established by accomplished innovators including Daimler, P&G and Philips. Corporate innovation is far more dependent on external collaboration and customer insight than having a ‘lab’.

The five principles for corporate innovation success

People. The founding head of Daimler’s innovation team was Jérôme Guillen, a former McKinsey turnaround specialist now at Tesla. Will taking people out of the business and placing them into a new department change their thinking? No way. Those successful in corporate innovation are more entrepreneurial and more customer-centered, and usually come from outside of the organisation.

Commercial intent. Every Daimler innovation project requires a commercial forecast. To progress, a venture must demonstrate how it could ultimately generate at least €100 million in annual revenue from a market worth at least €1 billion, and promise higher profit margins than usual.

Organisational architecture. Whether it’s an innovation lab or simply an innovation department, separating the innovation team from the rest of the business is important. While the team may be bound by the same organisational policies, separation has cultural benefits. The most critical separation is not in terms of physical space, but in the team’s roles and responsibilities. Having employees attempt to function in both an ‘innovation’ role and ‘business as usual’ role is counterproductive and confusing. Innovation is an exclusive job.

External collaboration. Working with consultants and customers from outside of the organisation has long been a contributor to corporate innovation success. Companies attempting a Silicon Valley-style ‘lone genius’ breakthrough are headed towards failure. P&G’s ‘Connect and Develop’ innovation model, designed to bring outside thinking together with P&G’s own teams, is attributed with helping to double the P&G share price within five years. When the share price had doubled, 45% of P&G’s product development portfolio had key elements developed externally.

Customer insight. Innovations solve real customer problems. Daimler was working to make it easier for people to live without owning cars. The concept of hiring a car wasn’t new, but allowing people to pick up cars on a whim, use them for as long as they like, and drop them off anywhere was entirely new. Staying close to customers and getting out of the building is how customer problems are discovered. Philips’ industry-first ‘lighting as a service’ model, which now powers the entire city of Jakarta, was co-created with a customer.

Whether a firm has a ‘lab’, an innovation team, or is simply attempting to innovate, these are the five principles that make the difference between success and failure.

Australian firms must decide whether they’re satisfied with short-term labs and ‘innovation theatre’. Chances are those that choose this route will fail and could disappear inside a decade.

The future of the ASX will be forged from genuine corporate innovation, not ‘labs’. The market-leading firms of tomorrow will focus today on re-inventing their business to drive sustainable shareholder value.

Innovation is business, not theatre, and the future of the ASX depends on it. The clock’s ticking.

This is a follow-up to our Business Insider ‘Big corporates should just ditch innovation labs’ interview.