Sunday, September 8, 2013

Why does Ram Charan say “It is a myth that innovation is expensive”?

A couple of weeks ago I got following question during a webinar to senior managers of an IT services firm: “Isn’t systematic innovation expensive?” That reminded me of what Ram Charan, a leading CEO coach, said in an interview in Economic Times, “It is a myth that innovation is expensive”. I want to explore this quote in this article. Why does Ram Charan say innovation is not expensive? 

Let’s begin with Ram Charan’s complete response. He was asked, “Is innovation expensive?” And he answered:
It is a myth that innovation is expensive. We need to consider it in three parts. Part one is sourcing of ideas, which can be done inexpensively. The second part is the conversion of that idea to the point where you can scale it up and execute it. The third part is actual execution. The middle part needs very small amount of total revenues; the large amount goes to the final part. That is a business decision, not an innovation decision. So you have to ring-fence a certain amount of money, select a few projects, focus on it, fail more and fail often.

For the sake of simplicity let’s call the three parts Ram Charan mentioned as – idea generation, incubation and execution. After having facilitated / witnessed several idea generation sessions, I can safely say that generation of ideas is not expensive. I don’t recall any session where less than 3 ideas per person were generated no matter how hard the challenge is. With the advent of Internet and collaboration tools, the cost is further reduced.

Ram Charan doesn’t consider financing the third part – execution - as an innovation expense.  Perhaps that can be debated. But for now let’s focus on the middle part – incubation where innovation efforts usually falls through. Question is: Are you ring-fencing a few incubation projects expecting them to fail often?  As Ram Charan says, you don’t need a big army of people here. Even Tata Nano got incubated with a four member team.

Resources is just one part of the story. The second part is related to design of experiments in order validate assumptions of an idea. During a workshop last month where 11 startup teams applied our “8 steps to innovation” framework, many found out very inexpensive experiments (1 day to 1 week duration) to validate some of the crucial assumptions behind their ventures. The third part is related to the rigor and rhythm of innovation review. I feel that most organizations have a long way to go in their effectiveness with which incubation projects are run.

Irrespective whether you consider execution of new ideas as part of your innovation budget, you definitely need a small part for running incubation projects and in all likelihood you will benefit from understanding the design of “low-cost high-speed experiments” (step-4 in our book) and what it means to “do the last experiment first” (part of step-8). Moreover, it will help to do effective reviews of incubation projects.

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