The Culture and Cost of Innovation

By Jim Moffatt

The Culture and Cost of Innovation In the dozens of conversations I have with business leaders, I hear a common theme: “We’ve done the cost cutting and adjustments. We’ve done the necessary re-sizing, and we’ve done the hard work of recalibrating our cost structure to support our core business. We’re profitable, and we are holding loads of cash. Now what?”

Businesses are expected to operate at peak efficiency and profitability. Getting there is good, but it does not differentiate one organization from its competitors. Investors take it for granted, and quickly punish its absence.

To move beyond the mere expectation of cost efficiency and respectable profitability, every business needs to grow, and to grow, you need to innovate. Problem is, innovation is one of the greatest and most ill-defined buzzwords in business today. What comes to mind when I say “innovation” are open-floor labs, or a conference table ringed by whiz-bang technologists working on a white board, or the solitary inventor, on the ramparts of discovery, perhaps in a garage somewhere.

Innovation, in short, is cultural, not technical. It happens because of business routine, not exceptions to the routine. Leaders can inspire it or squelch it, organizations can invest in it or starve it, and talent is drawn to it or repelled by its absence. Companies can become innovative, and they can lose their ability to innovate—not by luck or chance, but as a direct outcome of strategic decisions by leaders.

In a sense, that’s why I like to talk about innovation in the context of growth. Because if you don’t see it as connected to the future of the business, it’s hard to make it a part of the culture. When innovation is seen as a “nice to have”—a function of especially bright inventors, for example—it gets pushed aside eventually. I tend to think of innovation as a “must have”—an essential element to the sustainability of the business.

I’ve seen countless organizations that had all the necessary ingredients for consistent innovation—brilliant discoveries, exciting products, a dynamic line of business—but failed to deliver that innovation to the market. One of the most cited examples in the study of innovation is Kodak. Here was a company that had largely invented digital photography, but was ultimately undermined by it. Kodak succeeded in developing a business-changing idea. But in the end, it did not want to change—and the company’s leaders, employees and investors paid a terrible price.

But the example of Kodak is somewhat extreme. What worries me more are the less dramatic ways that companies can miss the opportunity to innovate. So, with my colleagues at Deloitte, some of whom have spent their lifetimes evaluating innovative organizations, I’ve tried to put together a few core insights into what helps leaders develop a culture of innovation at their organizations.
First, and above all, the future is much closer than you probably think.

Business leaders need to BUILD AWARENESS not only of the pace of technological change—which is increasing exponentially, thanks to Moore’s Law of computing power, which shows that computing power, processing speed, memory capacity, sensors and even digital camera pixels doubles every 18 months. They also should build awareness of areas where the change is process-oriented, such as the way social media has accustomed people to shape their own networks and provide valuable insights into their likes and dislikes or how crowd-funding and crowd-sourcing are providing new opportunities to businesses of all types—large and small.

We have recently announced several strategic alliances; 3D Systems, the premier 3D printing company; XPRIZE, an organization that solves global challenges through the creation of large-scale incentivized competitions; and Singularity University, co-founded by Ray Kurzweil and Peter Diamandis, to expose our own teams and clients to disruptive innovations, which can promise exponential change.

Whether in robotics, 3-D printing, advanced analytics, or artificial intelligence, developments in new and emerging technologies are completely transforming the way almost every business operates and competes. Nor are these innovations entirely product-based. Some are process innovations: Crowd-sourcing, incentivized competition and gamification have completely rewritten the business models of multiple companies and industries.

We’ve seen roomfuls of business leaders come to Singularity knowing nearly nothing about what we call “exponentials” which are trends and technologies whose performance is tracking, or exceeding, Moore’s Law; after just a few days of briefings and demonstrations, they agree nearly unanimously that some or all of them will force changes to their business model within five years. One executive immediately ordered 3-D printers for all his retail locations to meet what he felt was a present need for specific parts consumers regularly purchase.

Unless business leaders actually go out and force themselves to study new innovations that are occurring outside their industry, they may get steamrolled by a smaller and more nimble competitor who sees it first. And because of the hyper-speed of our globally connected world, there’s a good chance that the competitor will be someone across the globe from a business you’ve never heard of, using a business model you didn’t see coming.

Which leads to my second point: INNOVATION IS NOT JUST ABOUT DEVELOPING A NEW PRODUCT OR PROCESS. It’s about adopting it efficiently. What every business needs, in essence, is not an ability to create whiz bang technologies; what they need is the ability to apply innovation. Applying innovation is a lot different than initiating it. This distinction helps explain why organizations can’t limit innovation to the R&D department. A key point is that innovation is a key business discipline and every leader should master it just like they should master finance, marketing, supply chain management and other core business disciplines.

Third, the greatest innovation leaders are not necessarily good at inventing things. They’re good at asking questions. They’re good at seeing connections. They’re good at protecting people from fear of failure, but they are also good at recognizing when it’s time to pull the plug. They can hold two mutually contradictory thoughts at the same time—one cautious, one audacious. They’re not wizards. THEY’RE GREAT CRITICAL THINKERS.

In the end, what creates a culture of innovation is a core belief that innovation never stops, just like financial efficiency never stops, just like supply chain improvement never stops, just like talent development never stops. Innovation takes root when it’s tended every day.

Which is why my fourth point is relevant especially to large organizations: IT’S ONE THING FOR A SINGLE INDIVIDUAL TO INNOVATE. A single individual or small business is much more likely to innovate because they have nothing to lose and everything to gain.

It’s much different for a 200,000-person organization to be innovative. In such an organization, there is an understandable focus on the core business. It is, after all, what delivers the earnings that investors and the board demand. Leaders have been trained and promoted based on their success with those businesses.

So in most organizations, disrupting the core looks risky—even disloyal, like a disease. In fact, those legions of managers who focus on risk-reduction are like antibodies. They sense out newness and, if they’re threatened, snuff it out. A culture of innovation has to somehow balance the need to sustain the core business while creating permission and autonomy for organizations to take risks. Consider the example of a leader of a major hotel chain, who passed out “Get Out of Jail, Free” cards to his customer-facing staff so they felt liberated to solve customer complaints freely—no strings attached—without having to resort to ill-suited solutions prescribed by bureaucracy and internal rules.

In the end, a culture of innovation has to welcome a simple idea: If we were the competition, and we had nothing to lose, what would we do differently? It’s a disarmingly simple question, but if an organization says: “Nothing, we’re perfect!” then the challenge is absolute. No business is immune from the transformative technologies and processes that are emerging today. And the smartest companies understand that a long history of success will not insulate any company from the challenges posed by transformative technologies and ideas.

Jim Moffatt is the Chairman and CEO of Deloitte Consulting. He’ll share more of his thoughts around innovation in his presentation “Innovation and the Three Rules” at the Consulting Summit on Oct. 24 in New York. For additional information about the Consulting Summit or to register, please visit