In the 7 Immutable Laws of Innovation, the Law of Resources states:
Innovation requires a committed level of resources (people, money, time, equipment) over an extended period of time. The level of resourcing is the validation for the importance and commitment the organization devotes to innovation. Does the executive team commit the best resources to innovation? Are the resources protected?
The automatic assumption is that the only thing an organization needs to do is spend more money. In fact, money doesn’t buy results. There is no direct relationship between the spending on innovation and the most common measures of impact on the organization (growth, profitability, shareholder return, etc.).
So what are the right mix of resources that impact innovation?
People: Most organizations make the statement that “people are our most important resources”. If it is, do you put the most valuable people on innovation? In most of the innovation reviews I’ve done for senior executives, most organizations use innovation as a reward for top performers. A carrot held out in front of them so they will stay. However, when the pressure is on, they quickly pull these people back into the core business to address some immediate problem or to ensure meeting the quarterly objectives.
Time: Just like the Law of Patience says innovation takes time, it also needs to be quality time. As a resource, are you allowing people to have dedicated time or do you limit it to a few hours a week around their core jobs? I applaud those organizations that have formalized the 10% rule (10% of every employee’s work week can be used on a project that their manager doesn’t need to approve). In variably, employee’s weeks get packed and the 10% time is 8pm to midnight. In the old days at HP, that 10% was every Friday starting at noon. This is what I mean by quality time.
Equipment: Just as quality time is important, quality access to critical enterprise resources (e.g. servers, model shop, manufacturing, supply chain) is key. Forcing the individuals working on innovations to wait and use equipment only when it’s not in use by the core business, relegates innovation to the back burner.
Money: While money is a critical resource for innovation, there isn’t a magic number or ratio that translates into success. Wall Street uses the old standby of R&D spend as a percentage of sales. Studies have shown this has no correlation to innovation impact on the organization. What has been proven is that if you are one of the top spenders, innovation will impact gross margin (the percentage of revenue left over after subtracting the costs of materials, labor, manufacturing, and direct shipping, and after paying other expenses incurred in making the products or services sold). The average impact is ~40% improvement in the gross margin. I correlate this to a margin premium that customers will pay for an innovation that leads to a better mousetrap. So, if you build a better mousetrap, why doesn’t it translate into organization impact (growth, profitability, shareholder return, etc.)? It’s because of the expenses from outside of R&D, not directly related to the creation of the product or service (marketing, sales, and the rest of the general and administrative expenses), mask the relationship between innovation spending and performance.
Assuming a leadership team gets the Law of Resources, they also need to protect those resources once they are committed. Do they make it clear to the rest of the organization that the resources are allocated and not to be trampled upon to meet some short term issue?
If not, then why should the organization believe management’s commitment to innovation?
What are the four (4) most common ways organizations break the Law of Resources?
- Make innovation a part-time commitment by not dedicating resources to the innovation agenda.
- Focusing industry benchmarking on the investment rather than looking at all of the resources (time, people or equipment) others are committing to their innovation agendas.
- Pulling back on resource commitments when financial challenges appear. This can range from actually cutting of budgets and headcount to asking teams to delay or slow down investments. Both have the same result.
- Committing innovation resources on a quarterly or annual basis forces teams to limit their work to innovations that can be delivered in the same time frame.