38 / How To Recapture Lost Innovation ROI


Investment in innovation will bring business energy, they say, and will enable new revenue growth. Investment in innovation will lead to more efficient business operation and will deepen your brand’s hold on existing clients while attracting more prospects. Investment in innovation will help level up your team’s skill set. 

Innovation is powerful. Investment in it is a necessary condition for any growing, visionary organization. But investment in ITD (innovation, transformation, and digital) is a means to an end. Growth remains the objective. According to Mark Zawacki, it’s a difficult lesson many have learned the hard way. 

In this episode of the Product Momentum Podcast, Mark joins Sean and Paul to closely examine true impact of investment in innovation on organizations large and small. As Founder and CEO of 650 Labs, Mark is intimately aware of the challenges confronting today’s businesses. And the news is troubling.

“We’re experiencing a real crisis in corporate innovation,” Mark says. “Tens of billions of dollars invested every year, and it doesn’t appear things are coming out the other side. We’re finding it difficult to see the relationship between investment in innovation and ROI.”

Much of Mark’s analysis stems from his work with large multinational organizations, but he makes clear that the same issues scale to the business unit and team levels too. “When you unpack it, we see the same issues appearing in five key areas: Structural, Organizational, Methodology, Cultural/Political, and Advisorial.”

Here’s a quick look at the root causes of what Mark refers to as poor ITD performance:

  • Structural. Large organizations are built for stability, reliability, and predictability with executive compensation aligned with near-term results. This is hardly the environment for nurturing innovation and a new way of doing things.
  • Organizational. Digital leaders in larger organizations are rarely on the fast track to the C-suite. This suggests that they are more interested in securing the incremental innovations that come along and not the big, strategic shifts that innovative organizations pursue.
  • Methodology. The traditional companies, the incumbents, follow a pretty standard playbook. But they’re aren’t showing results for a variety of reasons – mostly because their playbook has become obsolete.
  • Behavioral/Cultural/Political. So many organizations are filled with smart but risk-averse people who tend to hire in their own image. Organizational politics is the result of individuals acting in their own self-interests. Progress grinds slowly in that environment, and radical ideas are ridiculed.
  • Advisorial. These issues arise when your incentive/compensation system is misaligned with actual problem solving.

So, how do we break through these big, hairy challenges to build an environment where innovation and risk-taking are not only welcome, but encouraged?

The answer lies in creating a new “edge” business that operates separately, but in parallel, from the company’s “core” business. Where the core is focused on delivering short-term results with incremental innovations, the edge business is built for flexibility, uncertainty, and long-term growth opportunities.

The key, Mark says, is to make sure you keep separate the core and edge pieces of your organization. Historically, we’ve tried to create the edge business within the core – and that’s where it’s not working. The edge business is designed and operated to ultimately replace the core business’ declining revenue. Why bring a high-growth asset into a low-growth environment?

Tune in to the Product Momentum Podcast to hear more of Mark Zawacki’s insights into the core/edge organizational model and how to bring transformative innovation and ROI to your organization.

[02:06] A crisis in corporate innovation. Tens of billions of dollars invested every year, and it appears there’s nothing coming out the other side.

[05:35] The relationship between investment in innovation and ROI. At a macro level, we’re finding it difficult to find one.

[06:36] At the micro-level, are companies working on the big things to replace declining revenue? If so, where? That’s when the conversation gets a little difficult.

[07:10] What’s going wrong on the inside of these companies? There are five buckets, or problem areas, where large organizations are having difficulty.

[07:32] Structural issues. Large organizations focus on the short term. They’re built for stability, reliability, and predictability. That’s the reverse of innovation and the reverse of doing new things.

[09:15] Organizational issues. The company’s digital leaders are rarely on the fast track to the C-suite. This tells me the business isn’t really thinking about big strategic change.

[10:15] Methodology issues. Start-ups don’t always play nice with corporates. They don’t make an appointment and say, “Hey, how do we partner together?” They break into your house at 3:00 in the morning and steal your stuff.

[12:05] Behavioral, political, cultural issues. These are the issues that slow innovation. Failure is a bad word that translates to “no real risk-taking.”

[12:50] Don’t confuse new ideas and great ideas. A great team with an average idea always beats an average team with a great idea.

[13:28] Advisorial issues. The vast majority of advisors are fee-based; when you have a fee-based model, your incentives are misaligned with solving problems.

[15:22] The hard stuff is easy. Hard stuff doesn’t mean difficult, but “hard” as in more scientific.

[16:18] The soft stuff is hard. The people skills, knowing talent, applying leadership and management models. How do you go about upskilling? How do we build great teams? That’s hard.

[18:43] Recipe for success. Small team, big goal. Get out of the way and they’ll figure it out.

[20:27] Dunbar’s number. Overwhelming evidence that teams of 150 – ideally under 100 – are more high performing than monolithic teams of thousands working on a goal.

[22:15] Merge the core business and the edge organization? No, never. Why bring a high-growth asset into a low-growth environment?

[29:16] “Burn the ships.” Here’s how to test a person’s intrapreneurial spirit. Few people have the risk profile to forego pay for equity, to forego comfort today for opportunity tomorrow. It’s an example the reality that we’re in.

[31:14] Pooh-poohing incremental innovation? Not at all. It’s necessary but insufficient. We are hurtling toward the technological singularity. We know in 10 years AI eats the world.

[34:13] Three horizons of innovation. Incremental, the horizon three, and transformative.

[37:11] Innovation theatre. You get all the buzz words, all the excitement. But when you push on it, when you look down the pipe to see what’s coming out the other side…that’s when results are disappointing.

Mark’s Recommended Reading

Fightback: How to win in the digital economy with platforms, ventures and entrepreneurs, by Felix Staeritz.

Dual Transformation: How To Reposition Today’s Business While Creating the Future, by Scott D. Anthony, Clark Gilbert, and Mark W. Johnson.

About Mark

Mark Zawacki is a business strategist and Board advisor, management researcher, author, keynote speaker, and investor.  Since 2001, he has led or supervised engagement teams on more than 400 clients globally, working through myriad revenue-related initiatives including growth, corporate strategy, disruptive innovation, business and corporate development, organisational change/transformation, and variety of people issues (leadership development, organisational design, talent strategy, corporate culture, etc.)

To date, he has worked in more than 80 countries. His clients span a wide variety of sectors, most notably financial services, mobile/telco, retail, media, automotive, healthcare, technology, and energy.  He has also provided strategic counsel on growth and innovation to the European Union and the governments of The Netherlands, France, Turkey, Singapore, Mexico, Switzerland, Australia, New Zealand, and others.

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Sean [00:00:18] Hi, welcome to the Product Momentum Podcast, a podcast about how to use technology to solve challenging technology problems for your organization.

Paul [00:00:29] Well hey Sean, how are you doing today?

Sean [00:00:30] Hey, Paul, I’m excited.

Paul [00:00:32] Yeah. That’s I think the first time we’ve talked about burning the ships on the podcast today.

Sean [00:00:38] We get to zoom out on this one and talk to Mark Zawacki. You know, he’s got a lot of history in Silicon Valley and in innovation, and he’s got a lot to add.

Paul [00:00:47] Yeah, I think mindset and trust are going to be two key concepts to take away. I think the teams that you’re on might not be the teams that you stay on and I think the way that organizations think about innovation might be disrupted.

Sean [00:01:02] Yeah, well, they’re gonna need to be at some point. It’s only a matter of time.

Paul [00:01:07] Alright, let’s get after it.

Paul [00:01:11] Well hello and welcome to the pod. Today we’re excited to be joined by Mark Zawacki. He is a business strategist, board advisor, management researcher, author, keynote speaker, and investor. Since 2001, he has led or supervised engagement teams on more than 400 clients globally working through myriad revenue-related initiatives, including growth, corporate strategy, disruptive innovation, business and corporate development, organizational change and transformation, and a variety of people issues. Mark, we’re so excited to have you on the pod today. Welcome to the show.

Mark [00:01:42] Thanks for having me. Delighted to be here today.

Paul [00:01:44] Excellent. So in chatting before the show, you’ve got a mantra that you try to bring forth as a transformation agent in organizations about information, transformation, and digital. Can you tell us how you’re rethinking these things in organizations today? What’s new in Silicon Valley and in technology versus 5 or 10 years ago?

Mark [00:02:06] Great question, Paul. Let me back up a little bit from those technology trends. I came to the realization probably three years ago that we had this real crisis in corporate innovation. I mean, let’s just call it ITD: innovation, transformation, and digital. I do kind of lump those things together. There are some differences in them, but they’re used more interchangeably and they’re basically in the same ballpark. But what became evident to me was that this is a multi-billion dollar industry globally, tens of billions of dollars go in every year, and it doesn’t appear things are coming out the other side. We all have corporate innovation departments, we’re all doing hackathons. We’re all doing digital transformation efforts. But when you look at the data, third party survey data, the results aren’t coming in. I think I may have shared with you earlier just a litany of this data, you know, something like 92 percent of large multinationals aren’t sufficiently growing. And a McKinsey survey said 96 percent of C-level execs they talked to don’t believe there’s a return on investment on their innovation initiatives. Another McKinsey survey said that 83 percent of all digital transformations fail. And if the listeners today want a copy of this, I’ve got like 15, 18 bullet points that just point to a pretty massive failure in that whole innovation/transformation/digital space. So I have one foot in Silicon Valley, I have one foot in Europe. The vast majority of my large clients are multinationals across multi sectors in Europe, and so it kind of gives me this perspective between, let’s call it the industrial age and the digital age. Big companies throughout the world, they want to be like Google. They want to be like Facebook. They want to be like Amazon. You know, they see these as digital-native companies and I think they’re forcing square pegs into round holes, which hopefully we’ll have time to unpack during this podcast today.

Paul [00:03:54] Yeah, so let’s dive right in. I think, you know, the ROI discussion is really interesting to me because you look at the balance sheets and there is growth happening. Shareholders wouldn’t be investing if there wasn’t. But ROI in terms of the innovation specifically as a failure is interesting because innovation seems to be one of the phrases that, you’ve used in the past that I love is, this innovation theater that goes on. There’s a lot of buzz around it, but not a lot of output at the back end. So can you share, what are the numbers that we should be seeing if there were appropriate ROI on what companies are investing?

Mark [00:04:26] So you can start by looking at the, let’s say we can look at the macro level, look at the major stock indices around the world, and what’s happening over a, let’s say, a 20 year period. NASDAQ has grown 120% over 20 years. This is January 1, 2000, to January 1, 2020, so these are all pre-COVID, pre-pandemic numbers. But we did some analysis and we looked at all these major indices between January 1st, 2000, and January 1st, 2020. At the high end, NASDAQ grew 120 percent over that time, the New York Stock Exchange grew at 102 percent. But then you start getting into the FTSE 100, it’s only grown 8.8 percent over 20 years and the CAC 40 in France only grew two percent. The AEX in the Netherlands is down almost 10 percent. And so, you know, at a macro level, these companies tell me they’re innovating. You know, they’re going through the motions and the machinations, but I’m not seeing their growth. Now, take the FTSE 100, the largest 100 companies in the U.K. Yes, they have a dividend policy, and, yes, they’re paying dividends in lieu of share price appreciation.

Mark [00:05:35] We’re doing some financial analysis on that now. At a macro level, though, we’re finding it difficult to find a relationship between investments in innovation and outputs. Part of this is how we code it, right. It usually falls in R&D and we’re measuring the number of patents a company may have, and that seems to be this accepted way of measuring innovation. I’d argue that a lot of business model innovation and a lot of, dare I say, disruption that we’re seeing in the last 10 years has nothing to do with patents. WhatsApp didn’t have a patent, but it wiped out the SMS messaging business globally, Uber doesn’t have a lot of patents around a, you know, a rideshare business, but it wiped out the independent taxi industry as we know it, right. Airbnb is the world’s largest provider of hospitality and rooms for rent. It doesn’t have a lot of patents around that business. So I’m just, you know, again, macro-level data doesn’t work. Micro-level data, you go in on a company-by-company basis and you say, you know, how many billion-dollar businesses have you built over the last decade? And the answer is usually none. Where are you working on big, strategic, you know, what in innovation circles like to be called horizon three or transformative innovation, where are you working on those big things to replace declining revenue in your core business? And that’s when the conversation gets a little difficult.

Sean [00:06:58] So what is it that you think is going wrong inside? Because I remember in our pre-podcast call we’d talked about sort of corporate structure, and that’s where I think there’s a lot of juice to be had here.

Mark [00:07:10] Right. When you unpack it, I think you’re going to find five buckets. You’ve got a structural bucket, you’ve got an organizational bucket, you’ve got a methodology bucket, let’s call it, or methodological bucket. The fourth bucket is behavioral, political, and cultural, and then a fifth bucket I like to call advisorial. Those are the five problem areas where large organizations are having difficulty. Let’s just start with the structural problem. The structural problem is you’ve got this big giant multinational. A lot of my message is really geared towards larger organizations. The smaller you are, the less prevalent these problems tend to be. But for large multinationals, for big companies over, let’s say, 500 million a year in revenue, these large companies tend to be publicly traded. They tend to have shareholders and therefore they tend to be focused on the short term, right. They’re built for stability, reliability, and predictability. They’re worried about this quarter’s result. They have to deliver some financial measure this quarter, typically the share price. It might be EBITDA, it might be earnings growth, it might be some other financial metric. But they have agreed upon a financial metric to deliver on a short-term, quarterly basis. And then we lock in that short-term metric by paying our executives their own financial bonus, you know, their variable income, based on delivering that financial metric to the shareholders. And so it’s actually designed for the reverse of innovation and the reverse of doing new things, right. That organization is built for stability, efficiency, predictability, reliably, all those terms I said earlier. So to now come in and say, “Hey, we’re going to disrupt ourselves; we’re going to change things; we’re going to throw a spanner in the works; we’re going to fundamentally change our business model,” not going to happen in that environment, full stop, because of the very reasons that it is engineered and built to deliver that short-term financial growth at the expense of longer-term issues that ought to be paid some attention to.

Mark [00:09:15] The second one, let me just kind of unpack these quickly, and then we can circle back on the interesting ones. The second one is an organizational one. You know, when I go into organizations, I see a lot of the innovation efforts supporting the chief digital officer or the CIO. And these digital leaders are rarely on the fast track to the C Suite, which signals to me these organizations aren’t really thinking about the big strategic change, but they would much rather bank incremental change. And that incremental change, that incremental innovation, is probably necessary but insufficient for the decade ahead. We’re not incentivizing these people with equity or upside in their entrepreneurial endeavors, and therefore, I think it leads to this idea that incumbents aren’t attracting a, let’s say, a caliber of talent that’s gonna be risk-taking. They’re going to attract a caliber of talent that’s risk-averse. And then, let’s face it, in large organizations, it’s very difficult to secure expenditures or resources for anything new or risky that’s going to take some time to develop.

Mark [00:10:15] The methodology issues, it’s probably in a podcast in and of itself, but all of the incumbents, all of the traditional companies, are following a pretty standard playbook of things that they’ve kind of collected or heard about that aren’t showing results for a variety of reasons. Corporate venture capital or so-called CVC; they’re doing the startup mating and the startup dating, the M&A activity, the so-called intrapreneurs, innovation labs, accelerators, hackathons. We can take them apart line item by line item, but they’re not working. Let’s pick on a couple of popular ones quickly. Startup mating and playing with startups: my assertion is that when you look at the pattern of startups that play with corporates, they tend to be the ones that want distribution. Frankly, they tend to be the less interesting ones. Remember the big game changers I talked about at the top of the podcast. Did Uber partner with the transportation industry and the taxi industry? No. Did Airbnb partner with the hospitality industry? No. And did WhatsApp partnered with the mobile operators? No. The things that are going to scare you, the things that are gonna take your market share, the things that are going to fundamentally change the shape of an industry don’t make an appointment at 10 o’clock in the morning and say, “Hey, how do we partner together?” They euphemistically break in your house at 3:00 in the morning and they steal your stuff. And so all of these methodologies, right, we’re not getting equity to those intrapreneurs that are working on this stuff, right. The so-called CBC, the economic model behind that is you pay a bonus scheme, you pay a carry, for the upside and the investment. And CVC doesn’t pay that because it’s seen as we’re going to overpay our investment team. Well, you’re not going to get the best investors if you don’t pay them industry standard rates. So all of these things, if we unpack them and look at them carefully, I think there’s a litany of case studies where it’s not working.

Mark [00:12:05] Fourth bucket, we’ve got these behavioral, political, cultural issues. Large companies are full of smart but risk-averse leaders and employees, and they tend to then recruit down that same vein. You don’t get ahead in large organizations by taking risks. The politics of organizations come into play. Organizational politics are simply people acting in their self-interest, not in the best interest of the company. Politics goes away if you can take out people acting in their self-interest. But politics still exist in organizations, which is slowing down, in my view, innovation. Failure is a bad word in large organizations. It translates into no real risk-taking, no real, what I call “it may go wrong” experimentation. And then radical ideas are ridiculed and easily dismissed. And one important one, it’s a long list; as I said, it could be its own podcast. But one important one is I think large organizations get confused with a new idea versus a great idea. New ideas are everywhere, and just because we haven’t heard of them doesn’t mean it’s a great idea. But there’s a huge confusion between new ideas and great ideas. And the reality, when you look at Silicon Valley, it doesn’t even have to be a great idea, but a great team. A great team with an average idea always beats a great idea with an average team. And the big companies are chasing new ideas. You know what? Chase great teams instead of great ideas.

Mark [00:13:28] And then the last one is, I’ll just touch on it, number five in that bucket of five lists I gave you earlier, what I call advisorial, is the vast majority of advisors in this space are fee-based, and I think when you have a fee-based model, your incentives are misaligned with solving problems and getting out of the way for your incentives are staying in for a very long time. And so I, with some candor and transparency, I hold a lot of consultees accountable for having business models that are misaligned with solving client problems and getting out of the way. Get paid in equity, get paid all in equity, figure out a way to get paid on performance, I think are going to have to be the future. And then business schools and where we think we’re learning about ideas, I don’t think we’re keeping up either.

Paul [00:14:15] I think that the way that you’re presenting the failures, or at least poor performance results of innovation, transformation, and digital, the way that they scale… You soft-pedaled and said that this is for multinationals and this is for big corporations. I would actually propose that this does scale for teams. You know, most of the folks listening to this podcast are mid-level, senior-level product managers, directors of product management, who are thinking about how digital experiences affect the humans at the other end of the pipeline. And I think that when you start talking about teams especially, I think that you’re really getting to the root of our industry. You know, the things that really move the needle on what makes a successful product launch versus a frustrating experience is really, how is the team’s morale kept up? How are you talking to the client? How is the engagement at the end-user level? Where are you developing empathy? Those things that, you might call them soft skills, are really the hard skills. It’s really what makes or breaks a product team at launch. And I think these things do proliferate down from the multinational level where you’re talking, I think, down to the digital agency or the in-house UX shop.

Mark [00:15:22] Sure. Let’s touch on all the product stuff, and you make a good point, Paul. I had this saying that the hard stuff is the easy stuff and the soft stuff is the hard stuff. And let me repeat that. The hard stuff is, “all right, we know how to do agile. We know how to think about customer experience or design thinking, or we know about methodologies. We know generally the shape of where we need to go.” That’s the hard stuff because it’s hard-wired, it’s easy to understand, books have been written about it and, you know, from an engineering or logical perspective, it’s a recipe, right? We just know the logical steps to go through. That’s the hard stuff. Meaning not difficult, but hard as in more scientific. And that’s easy. And then the soft stuff is actually the hard stuff. The soft stuff, the people stuff, the skills, the talent, you know, the leadership models, the management models. You know, how would you go about upskilling? That’s the hard stuff. How do we build great teams?

Mark [00:16:26] I’ve been involved for about six years with the business in the UK called AND Digital that I think has done a fantastic job cracking this. They keep teams together. And I think ITX has actually done this pretty well, as I understand it. But by keeping that team together and moving them from project to project, they don’t have to go through all the phases of teams forming, storming, norming, and performing. They’re already a high-performance team. And when I go talk to CIOs around the world, one of their biggest frustrations with teams is every time they start new, they’re always introducing one or two team members with unique skills to make that project successful. And like any recipe, once you put in one or two new ingredients, the recipe is going to turn out entirely different. I think the most important thing for product people to figure out isn’t what to build. That’s the easy stuff, back to my earlier analogy, but it’s how do we figure out from project to project to keep that soft stuff going and how we grok and how we constantly make sure that we’re top quartile, we’re best in class in the people stuff. Because at the end of the day, you know, small teams doing extraordinary work are gonna be the ones that are successful against just a big idea.

Sean [00:17:44] So it’s a dilemma that all product and project teams have is this the dilemma between predictability and possibility. If you keep the same team together, you’re gonna get more of a predictable result but then you’re missing out on the possibilities of bringing in some additional skills and some outside knowledge and you’ve got to balance that out.

Mark [00:18:05] Right.

Sean [00:18:07] What are your thoughts on that?

Mark [00:18:07] You know, Sean, there are ways to balance that out, right. You can matrix it, right. You can have your core delivery teams doing the process work and then you can bring in some overlays and some centers of excellence or some subject matter experts to provide that stretch and that possibility.

Sean [00:18:26] You know, going back to something you said earlier in your structural bucket about smaller, nimble companies. Is that the answer to allow smaller, more nimble groups of people or teams of people more autonomy in their work with this aim towards the same goals?

Mark [00:18:43] Absolutely. I think there’s ample evidence that you want to keep teams small and nimble. This is not a new idea, but you want to hire great people. We already talked about that. You want to give them a pretty big, ambitious goal. We’ve talked about that. And then you want to get out of the way. You know, small teams, big goal, get out of the way and they’ll figure it out. But I think we end up micromanaging our teams too much. We end up kind of putting a framework or a bucket over them, telling them they’ve got to do these things, and here’s how you’re gonna do it. And we’re kind of trying to look for some consistency so we can get our hands around it. And there’s tools that do this as well. Right? You know, 20, 25 years ago, we used to measure function points and now we’re trying to measure some, you know, some other aspects of product development. I’m probably aging myself by admitting I know something about function points.

Mark [00:19:37] Now we’re trying to measure some newer things, Pinpoint Software and others are trying to develop these tools to measure, effectively, productivity. I was talking to the CEO of a public company just the other day about the next generation of what that feature set looks like to measure, you know, product development, productivity. And he actually built something himself inside of a very large company. And we were having a talk about where that goes from here. But yes, essentially the answer is to keep those teams pretty small. And by the way, at a larger level, at a more macro level, you know, look at the research done by, I’m drawing a blank on his name right now, sorry, Dunbar, Robin Dunbar. Dunbar’s number is approximately 150 and has to do with weak versus hard ties. You know, if we’re in a larger entity of around 150 people, we know every my name, we have strong ties because we have some familiarity with what they’re working on. We can contribute to their projects. We develop a greater level of trust because we know them. And Robin Dunbar’s research says there’s overwhelming evidence that larger teams of 150, and ideally under 100, are more high performing than these monolithic, you know, teams of thousands and thousands of people working on a goal.

Paul [00:20:53] I want to jump ahead a bit and kind of spoil the ending for our listeners, because where we’ve been going, where you’ve centered your thinking is around traditional versus new and what the opportunities look like and the word that you’ve used to describe this type of organization that can burn the ships, you know, leverage the carry and give people a big hairy incentive for a hairy problem is an edge-like organization and having edge-like qualities. You know, one of the things that strikes me, frankly appeals to me, about that is the way that you think about an organization. To use Lockheed as the example, right, they’re sort of the forerunners of this model with the Skunk Works initiative. Having something inside your core traditional organization that is small and nimble and autonomous, it’s difficult, but I think the keyword that we haven’t mentioned very much here so far is trust, right. So we need to be able to have confidence in our traditional model. We need to know ourselves and our balance sheet and our numbers. But we also need to be able to trust people to say, what got us here won’t get us there and we’re spinning this up to accomplish something great. So when you’re looking at a company, whether it’s a 50 million dollar shop or a five billion dollar multinational, what are some of the conversations that you hear companies have to start that message of trust for an edge-like initiative? How do you start to break that out of the silo of the traditional model?

Mark [00:22:15] So let me elaborate on this so-called core edge. This is a podcast. You can’t see my hands, you can’t see me. But imagine in front of you or two circles and on the left, you’ve got the core business. That’s the day-to-day existing business. And the larger it gets, the more bureaucratic it gets. And the more bureaucratic it gets, the slower it gets. Now, how are you going to worry about five years from now and how are you going to go do big, bold things and potentially launch a major new thing that’s radical or transformative or dare I say, you know, disrupts the existing business? How are you going to do that as that thing rejects the antibody, as it’s built, rightfully so, to protect this core revenue every quarter? In my view, it’s not going to happen. And so what we’ve been discussing is a new way of thinking about things and that’s the second circle on the right, which you call an edge organization. So let the day-to-day business on the left run. Just keep going with it. You’ll be able to do incremental innovation in there. Although I think incremental innovation is a bit of an oxymoron. I don’t really give it much credit. It’s called doing your job. You know, keep improving the existing business. That’s fine.

Mark [00:23:28] But over here on the right, we need to go build new businesses that are going to ultimately replace declining revenue on the left. And here’s the conundrum. We’ve historically been trying to do those together. We’ve been trying to do the new big change inside the existing. And that’s where it’s not working. One analogy I like to use is, you know, football players versus, let’s say, NASCAR drivers. On the left, in that core business, we got world-class football players and football is kind of religious so I’m not going to start naming players or quarterbacks because I’ll get in trouble. If you on the left say, “my existing business is full of Pro Bowl football players. They’re all fantastic.” Well, in the new era, in the new world, we actually need world-class NASCAR drivers. And we’re not going to take world-class footballers and retrain them to be world-class NASCAR drivers. They’re just different breeds or, you know, you’re relying on the speed of a car. Let’s call them world-class baseball players, if you want, right. But we’re not going to turn world-class football players into world-class baseball players.

Mark [00:24:29] OK. So here on the right, I am hiring for an entirely different skill set. In my mind, they’re almost like night and day. And the problem as I see it, is all these companies, as I said earlier, they get excited about Google and Facebook and Amazon. They want to be like them and they’re trying to shove that into the old core business. And that’s not working. So we know what the answer is. And we know we want to design an organization like Google. You know, it’s 80/20. 80 percent we want to design and 20 percent’s poison and we don’t want to design it, right. There’s a catastrophic part to it as well. But the 80 percent good, the 80 percent right… And by the way, that 20 percent is a result of experimentation and trial and error. They’re just trying to grok their organizational model. But we know what that answer looks like on the right. And we’re starting with a clean sheet of paper and we can do all the great things we’ve heard about in the digital age to design that and just leave us alone from the right, from that core business. And just let that core business run. And then where that conversation goes, Paul, is, “oh, so does that mean that when that stuff on the right in the edge business starts growing, I want to bring it back into the core business?” That’s when I say, “no, no, you never want to do that and why would you bring a high growth asset into a low growth environment? Why would you take a bunch of entrepreneurs that have spun up a 50 or 100 million dollar business with double-digit growth, achieving a lot of success, and give that to a bunch of people that have been managing a low growth business and a business where your head of H.R. is trying to run a cultural intervention to get people to be more agile and, you know, all that stuff that goes on in traditional big business?” So build two different businesses. On the left, the core business, on the right, the edge business, and never the two shall meet.

Sean [00:26:11] All right. So is that the answer? These innovation labs, like setting up a completely independent innovation lab that’s autonomous and like a Skunk Works, like Paul said earlier, or like a Palo Alto Research Center, PARC, like Xerox did, which we know lots of innovations, like authentic innovations, came out of that organization.

Mark [00:26:29] Sure, that is part of the answer. And I’m loathe to call it an innovation lab only because there is 30 years of innovation labs and if I say innovation labs, people say, “oh, we’re doing that, OK. Tick the box. Wait, great, we’re doing what Mark says we should do.” And then when I really look at that innovation lab, it’s not on the edge. It’s an innovation lab by name, but it’s reporting back into that core organization. It might even report to the CIO. It’s working on incremental things. So the conversations I have around the world will be like this. They’ll say, “Hey, we’re doing that, Mark.” And then what I hold up is a list of criteria and my criteria say, are you really doing it? And it’s my own list but I say, “all right, do you have a mandate to disrupt the core business? Do you have a mandate to attack it? Do you have a mandate to put it out of business?” “Uh… we’re not so sure.” “Are you doing these separately? Are they physically separate and do they only meet at the board level? On that edge, have you orchestrated all buy, build, partner, and invest activities?” Those are the four levers of innovation, right? I can buy things. I can build things. I can invest things like a so-called VC or CVC, or I can part in a larger ecosystem. But those four best practices, those four activities, are all together and orchestrated in that edge organization. If I have a thesis about a certain area, if it’s growing fast and the market’s moving fast, I acquire, I buy. If it’s moving slower, I have a chance to build or invest, right. And so by those tools reporting through the same entity, I can make those tradeoffs.

Mark [00:28:11] I mentioned earlier, you don’t want to reintegrate these things, right. You don’t want to bring edge businesses back into the core. I recognize the core has things like a balance sheet and distribution and a brand. But if you bring it back in, if you too tightly couple them, you’re going to find the physics and the inertia of the core are going to slow you down, right. You’re going to fall back into all the traps of that core organization. And then, you know, how do people get across? I’ve been asked many times on this, “is this a way to move people from the core to the edge?” And I don’t believe it is. I believe very, very few people will make it to the edge from your existing core. And that’s nothing against them. I can understand they may intellectually want to go there. They may intellectually see that as an exciting place to work. I get that. But let me give you a couple of data points. One, as I said earlier, you know, on the left, in the core, we have world-class football players. On the right, what we need to recruit are world-class baseball players.

Mark [00:29:16] All right. So stick with that analogy. I know of one large company in Europe, a multi-billion dollar company, that said, “OK, out here on the edge, in this new place, we’ve identified 30 startup ideas. There’s 30 different ideas you can work on. And guess what? I’m going to pay you equity.” “This is sounding pretty good. There’s a chance for me to get equity in a startup.” Not so fast. “To go over there, number one, I just have to see if your entrepreneurial and you’re going to do some Myers-Briggs kind of stuff. I just want to profile you for your entrepreneurial capabilities.” “OK.” “Number two, you’re not going to get a corporate salary on the right. Now I’m not going to give you, you know, I’m not going to give you a haircut all the way down to you’re going to work for free until it’s funded, but you’re going to take a significant pay cut. It’s no longer a corporate type salary, but the variable pay, the equity, if it’s successful, is going to be an order of magnitude larger.” So you’re already beginning to test their entrepreneurial spirit. And then the caveat to that is, if you come across, there’s no job to go back to. This is the burn the ships comment, Paul, that you made earlier. And now, lo and behold, we just discovered there is zero intrapreneurs in the business. So this is a nice, beautiful title. But when this company put it to the test, nobody came across. They’re not real intrapreneurs. It’s a beautiful term, right? I remember hearing it a very, very long time ago during my undergraduate years. But this real example shows you that nobody has that risk profile to forego some pay for equity, to forgo some comfort today for opportunity tomorrow, and so I think it’s a very illuminative example to understand the reality that we’re in.

Sean [00:31:09] All right. So you’ve poo-poohed a little bit this concept of incremental innovation.

Mark [00:31:14] Look, I’m not pooh-poohing it. Let’s put a finer point on it, Sean. I think it’s necessary but insufficient. We are hurtling towards the technological singularity. We’re hurtling towards the Turing test, right. We know in 10 years AI eats the world. We know it’s coming, right. We’ve seen all the videos. We’ve seen what was at Google I/O last year with the talking barber making the reservation online with the barber, the hairdresser, or whatever. All you have to do is look at A.I. videos on the possible and it’s going to fundamentally change every industry. But we’re not working on that stuff and we’re not working on that stuff, really, because we’re risk-averse. We continue to work on incremental because it’s safer. It’s easier to get budget for. It solves a near-term problem.

Mark [00:32:04] My last flight was three months ago today. I was coming back from Europe. And in that last trip, on the morning of March 3rd, I met with the innovation team of one of Europe’s largest banks, and they had about 50 full-time people on innovation and I went in the room and it had all the cute Google furniture and all the slogans on the walls and, you know, all the design thinking methodologies and a giant bookshelf of different books on innovation. And it was cool. And we were talking about some things. And this head of group innovation, whom I’ve known many years, I said, “these 50 people doing innovation here in this bank, where do they spend their time? Where do they spend time on incremental innovation? What percentage? What percentage on horizon three, transformative innovation? And what percent on other?” And what he said to me, he says, “Mark, about 80 percent of our time is spent on other, regulatory issues.” This is an innovation team. “10 percent is spent on incremental and less than 10 percent is spent on transformative game-changing stuff.” And he says, “if I really had to measure, it’d be far less than 10 percent on that formative game-changing stuff.” So, again, what’s happening? The incremental stuff is easier to bank. There’s nothing wrong with it. But the incremental stuff I find is easy to copy. And if that incremental stuff is easy to copy, you’re just on the treadmill next year spending more money to level up against the competition that just copied you. And so maybe you don’t need to work on it as much as you do. Maybe you need to be a fast follower behind somebody that’s spending money on it.

Mark [00:33:44] So I just think incremental innovation generally is, again, it’s necessary. You’ve got to keep updating your core business. But is there any strategic advantage to it? Is there any, let me rephrase that, sustainable competitive advantage to it that you can build a moat around and you can monetize over a longer period of time that relates in, let’s say, double-digit growth? And then I think by definition, if you can do that, that’s not incremental innovation anymore. That’s real transformative innovation.

Paul [00:34:13] So that is an interesting question. I think one of the things that we try to bring out in each interview on the pod is a definition of innovation. And what you shared is sort of three horizons, for lack of a better term. So the incremental, the horizon three, and the transformational.

Mark [00:34:29] Yeah.

Paul [00:34:30] So is it worth distinguishing them in different words than innovation? Is the incremental innovation truly an oxymoron or is it still innovation? How would you define that term for the use in this context?

Mark [00:34:42] Again, I was being a little crass and cheeky there with my earlier explanation. But that horizon stuff you typically see in a very mature business. It’s defending, and as I said, it’s incremental. We might be working on single-digit changes, but we can justify it because we think it’s going to solve a near-term problem. Another very, very large bank, they told me they were working on something transformative. This is a bank that talks about moonshots. They literally call them moonshots. And what that bank was building was an expense tracking app. And I don’t think that’s a moonshot and I don’t think it’s transformative. I think it’s incremental. And in fact, I think most customers would kind of expect a bank to have an expense tracking app, especially for small business customers. I think it’s table stakes. I think you just, by definition, need one just to be competitive. You’re almost at a deficit and you’re leveling up just to be in the game. But they called it a moonshot and they called it a moonshot because they’d spun their board up into convincing them they’re working on something exciting.

Mark [00:35:53] But they were so risk-averse that they were in this dilemma. And this dilemma took nearly two years and twenty-five senior executives to solve. The dilemma was this: they had a brand name for this thing and then they were going to put their company name under it. So let’s just call it Project X powered by bank Y. If they called it Project X alone without any company branding under it, they were worried that it would be successful and they wouldn’t get the brand attrition for being part of it and owning it. If they called it Project X by bank Y and it was a failure, “oh my God, we’re risk-averse, if we’re associated with a failure in the market, that’s a…” So they were in this conundrum for two years, twenty-five senior banking executives, and couldn’t decide one or the other. But they told me the whole time they’re doing a moonshot. They told me the whole time, you know, they’re agile and moving fast, and it was farcical. And so that’s what I call innovation theater or innovation cabaret. You know, call it what you want, but, you know, it’s got all the buzz words, all the excitement. You know, the Internet has allowed us all to have the right jargon and lexicon. But when you push on it and when you challenge it and when you look down the pipe and see what’s coming out the other side, that’s when results are disappointing.

Sean [00:37:20] Well, this was fun, zooming out on innovation and looking at it at this scale. It’s not something we’ve done before on the pod, so thank you for your insights and for the work that you’re doing. It’s pretty cool stuff. One question we always ask of our guests is, what’s the book you’re reading right now that you’re recommending to other people?

Mark [00:37:38] Wow, that’s a great question. I’m loathe to read books because they take longer than podcasts and, you know, audiobooks. So I’m a big fan of audiobooks and podcasts.

Sean [00:37:52] That counts.

Mark [00:37:54] I’m kind of working our way through about twenty-five different podcasts. I spend a lot of time kind of in the behavioral economics space. Business books are getting pretty predictable. So I’m just kind of reading new things, different things. You can tell I haven’t been reading in a month because otherwise, I’d come up with a quick, flashy title for you. I am in the midst early on of a book project kind of around some of the things I’m talking about. And I’ve intentionally set most books aside because I don’t want to be kind of influenced by them. But the last two books I read, one was a book written by a couple of European friends of mine called Fight Back, and Fight Back is this notion of how large companies are going to push into the digital age. And there’s some similarity to this conversation today. The second book I’ve read recently is also related to this core edge concept. There’s also some daylight between the ideas, and that’s one by Scott Anthony from Innosight called Dual Innovation [Transformation], and Dual Innovation [Transformation] came out, I want to say, in about 2018. And there are some parallels to what we’re talking about, but also some distinct differences. So those are the two that I probably last read, I want to say in February, and then I turned off books for a while and the only podcasts I’m listening to are kind of more human interest ones. I like all of Joe Rogan’s stuff. I like the stuff around How I Build Things.

Sean [00:39:17] Yep.

Mark [00:39:17] The whole how I Build Things [Built This] series is great. But other than that, I’ve kind of put blinders on, partly because of my own book project, I don’t want to be influenced by other ideas, and then secondarily, I’m averaging forty-five Zoom calls a week. It’s a different cadence. I get home wiped out. I don’t have any more time to read.

Sean [00:39:34] I hear you.

Paul [00:39:37] Well, I want to close with a thought that you wrap up your talks with. It’s a quote by Peter Drucker: “The greatest danger in times of turbulence isn’t the turbulence. It’s to act with yesterday’s logic.” I think I took a bunch from today’s conversation. I want to thank you for taking 44 of your 45 calls before now to get to us. It’s been great picking your brain a bit and getting into the thinking that drives innovation, so thanks so much for taking the time today.

Sean [00:40:01] Thank you, Mark.

Mark [00:40:02] Hey, thanks all. I really appreciate your time today and I look forward to continuing the dialog with you guys.

Paul [00:40:07] Cheers.

Paul [00:40:11] Well, that’s it for today. In line with their goals of transparency in listening, we really want to hear from you. Sean and I are committed to reading every piece of feedback that we get. So please leave a comment or reading wherever you’re listening to this podcast. Not only does it help us continue to improve, but it also helps the show climb up the rankings so that we can help other listeners move, touch and inspire the world, just like you’re doing. Thanks, everyone. We’ll see you next episode.