When Should You Outsource Innovation?

by Matt Hunt

We often hear about the importance of failure when driving new ideas or new businesses.  We’re given advice to Fail Early, Fail Often, and Fail Cheap.  While this well-meaning advice is accurate on the whole the reality is that failure in most organizations comes with pretty heavy consequences.

Within mature organizations a failed initiative can have a dramatic impact for both the individual and the long term success of organization itself.

  • For the individual, a failure can lead to a tarnished brand, missed promotions, lost bonuses, or even termination.
  • For an organization, how it responds to failure can impact the culture and determine the success or failure of future innovation initiatives.

Until the last few years not much has been published about innovation failure rates within organizations because everyone feared the stigma or repercussions that came with disclosing any failure.  For publicly traded companies the idea of giving stock analysts any ammunition for a critical stock rating would be tantamount to committing career suicide.  Instead most organizations would prefer to quickly sweep their failed initiatives under the proverbial rug and hope they are never discussed again.

A couple of data points can go a long way in helping us to understand the frequency of innovation failure.  It is first worth noting that there are significant differences in the success/failure rates of 1) incremental innovation and 2) disruptive innovation.

Incremental innovation is most commonly thought of as product line extensions (e.g. new cereal flavors, new soda brands, etc.) which tend to have lower failure rates.  Incremental innovation can more easily be tested with consumers because there is a benchmark to compare and contrast against.  Disruptive innovation is frequently a new to market product, service, or business model (e.g. Apple iPhone, Uber, HP Touchpad, etc.) that is much more difficult to evaluate prior to launch.  With that increase in uncertainty comes a higher rate of failure.

Data scientist Thomas Thurston (@thurstont) is CEO of the strategic consulting firm Growth Science.  For years Thurston has been working with innovative startups, large corporations, and educators trying to better understand innovation success by studying failure.  Over that time he has amassed a significant data set of over 1000 corporate innovation initiatives.  In the data Thurston has found that 78% of those initiatives cease to exist seven to ten years after their initial funding.  Stated differently, 3 out of 4 of those initiatives either failed to reach scale or to become self-sustaining.  Many others in the industry hint that the 78% sounds accurate with their experiences.

Even world-class innovation organizations see a significant percentage of failed initiatives.  Last year I had a discussion on this topic with Mark Payne (@MarkF212) the President and Co-Founder of innovation consulting firm Fahrenheit 212.  At the time Mark was proactively trying to address the issue of innovation failure by sharing the lessons he and his firm had learned in a book How to Kill a Unicorn.  Mark noted that even with all of the experience that his firm brings to an engagement they see a 20-40% failure rate for innovation initiatives.  Earlier in 2014 Fahrenheit 212 conducted an informal survey of 100 Chief Innovation Officers asking “what percentage of their innovation initiatives made it to made it to market?”  What they heard back was that two thirds of the respondents saw a 75% failure rate or three out of four of their innovation initiatives never made it to market.

When leaders don’t recognize these high failure rates and the corresponding risks involved to their individual employees they are setting their organizations up for difficult consequences when innovation projects do fail.

In a previous article for Innovation Excellence (Five Ways Organizations Lose When They Cover Up Innovation Failures) I highlighted some of these consequences:

  • Concealing failures sets the wrong standard for the entire organization. Values of deceit or dishonesty are not sustainable in the long run.
  • A failure cover-up pushes out some of your most talented employees. You need those curious intrapreneurs who are willing to take the personal risk to drive the organization forward.
  • Severely punishing failures will influence other employees to reconsider and reduce their risk taking. This can have a severe impact on who will participate in your future innovation initiatives.
  • Hidden innovation failures create false expectations for future success rates. If the only stories that you share are successes then you are reinforcing deceit and cover-up for future teams.
  • Obscuring failures prevents the entire organization from learning from them. You have already spent the money on your failed initiative but not learning from it will doom your organization from seeing any return on that investment.

Based on these high failure rates and the negative impact to employees many in the innovation community have suggested it is better to just outsource their breakthrough (e.g. disruptive) innovation work to external teams.

If something sparks from that work then the internal team can focus on building out the necessary capabilities to sustain the innovation initiative.  But if the project fails there is less impact to the organization.  Simply stated the resources can more easily be eliminated if the initiative fails.

I recently co-hosted a Twitter Chat (#InnoChat) focused on the innovation domain where I posed the question of “Should mature organizations hire external teams or leverage internal resources if they want to drive breakthrough innovation?”  The participants provided some great insights and direction to this thinking.

  • Start by asking “Why?” It was suggested that organizations start by getting clear on what their innovation objectives are before determining how to resource the work.  Why are they seeking breakthrough innovation opportunities?  The follow up questions should then be a realistic assessment of how they currently treat innovation and innovators?
  • Understand the capabilities and culture within the current organization. If your internal talent is strong enough and your culture is supportive enough then absolutely include internal resources as part of your breakthrough innovation team.
  • Identify skill and knowledge gaps. If your team lacks certain domain knowledge or innovation process expertise you can “wake up the innovators” by bringing in outside resources to fill in the gaps or lead the first few iterations.  External resources can also add value to the equation by bringing a fresh perspective and questioning internal dogma.
  • Examine competitive landscape: If an organization lacks agility and is changing slower than the competition it would suggest that a more radical approach is necessary by jumpstarting the work with external teams.  It is critical to recognize that only internal teams can implement the initiatives in the long run so they need to remain as an important piece to the equation.

This is just a portion of the insights gleaned from the #InnoChat discussion but it is a great example of the “wisdom of crowds” in action.  Everyone brought their unique experiences, priorities and perspective to the conversation making it a robust exchange.  Here is a link to the complete transcript including insights into how organizations can help their employees de-risk their decision to join internal innovation initiatives.

While we still have an “it depends” answer I believe that the group has identified four great criteria that can help any organization through the process of determining their innovation resourcing strategy.

image credit: alleywatch.com
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Five Ways Organizations Lose When They Cover Up Innovation FailuresMatt Hunt is the CEO and founder of strategy and innovation consulting firm Stanford & Griggs, LLC. With over 20 years of business and technology experience he has a demonstrated excellence in business strategy, innovation, and leadership development with large companies, small companies and non-profit organizations. You can follow Matt on his blog MattHunt.co and Twitter @huntm

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