DELIVERGOHOMEO

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Outsourced innovation is entering its adolescence.

The Accountability Issue

Time now for it to grow upand embrace accountability.

It’s Ironic But True . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02Source Of The Outsource . . . . . . . . . . . . . . . . . . . . . . . 04Perfect Storm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05

Who’s Playing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 06Fast Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 08Fil l ing Out The Toolbox . . . . . . . . . . . . . . . . . . . . . . . . . 1 0

Accountability At Work . . . . . . . . . . . . . . . . . . . . . . . . . 1 1

BY MARK PAYN E WI NTER / SPRI NG 201 2

FAH REN H EIT 21 2

DELIVER OR GO HOME2 IT’S IRONIC BUT TRUE

The outsourcing of innovation — the increasingly ubiquitous practice where companies enlist the help of outsiders to transform the altitude and impact of their innovation programs — is ready for a transformation of its own.

IT’S IRONIC,BUT TRUE.

Over the past decade, most chief execs have come to the realization that ideas born outside their companies are as valuable to their shareholders as ideas born within.

They are tapping an expanding roster of external innovation partners to uncover opportunities they can’t readily see themselves, to tease out latent market needs, and to answer them with new products, brands, technologies and businesses more quickly, more effectively, and often with better ROI than they can on their own.

But as the innovation outsourcing movement is catalyzing change and sparking growth, it is also sowing seeds of its own reinvention.

Because for all the lateral thinking, talent, good intentions and seemingly promising methodologies in circulation, one ingredient remains glaringly rare: accountability.

Absent Account!bilit"Innov!tion Sphere, Innov!tion In#redients, %

L!ter!l Thinkin# T!lent Good Intentions

Promisin# Methodolo#ies Account!bilit"

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WINTER / SPRING 2012 3IT’S IRONIC BUT TRUE

This is a surprising thing.

Competition is intensifying in every

‘Innovate or die’ is an increasingly common mantra for CEOs and growth strategists alike.

It seems implausible that innovation’s rising tide of urgency won’t seep over time into every capillary in the innovation ecosystem, caffeinating everyone it touches with a new edgy intensity and a ‘deliver or go home’ mindset.

It’s coming, but it’s not there yet.

It’s as if the innovator’s need to embrace the omnipresent risk of failure has morphed into a sort of psychological bubble wrap—insulating external innovation partners from losing sleep over whether their grand visions of better products, businesses and human experiences ever come to anything more than a pile of Post-it notes and a few fleeting goose bumps in a conference room.

The shareholders bankrolling the prevailing innovation failure rates will tell you there’s a big difference between accepting failure as a possibility, and accepting it as a normal, consequence-free thing to be shrugged off.

For innovation outsourcing to fulfill its great promise and migrate from a new tool in the arsenal to a permanent best practice, its leading players need to drink the Kool-Aid of new accountability. It’s time to draw sharp lines between bona fide value creation and ethereal prognostication that comes to little more than interesting presentations. And to separate the relatively easy business of tabling an intriguing idea from the only endgame shareholders care about—a viable, compelling product, a winning value proposition and a great business.

Before we go deeper on how to unlock the movement’s bright-but-different future, there’s important context to be drawn from its past and present.

4. Goose Bumps: Best saved for key shareholder

project to market.

2. Sleepful Nights: An innovation partner’s reward for embracing the psychological bubble wrap.

1. Bubble Wrap: Used for insulation against all things fragile, including a healthy concern over failure.

3. Post-it Notes: Wonderful ideas go here. Be wary though. More often than not, this is as far as a good idea reaches.

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DELIVER OR GO HOME4 SOURCE OF THE OUTSOURCE

Sh!rp Y!wn Incre!seProduct Diversific!tion vs. Consumer Boredom

Consumer Y!wns, ‘000,000

Number of Product Line Twe!ks

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What sparked the rush of companies throwing open the windows in search of transformational ideas from the outside?

The roots run broad and deep, back to the days of disco.

In the seventies, the so-called modern corporation was blinded by the era’s

was a time of head-scratcher moves like soft drink companies buying movie studios and booze makers buying bakeries —delivering near-term spikes to the top

equal measure.

This period of over-reaching ambition set in motion a long, painful return to growing core business around core competencies.

The timing of it all gave the plot an interesting twist.

The prodigal return came at a point in history when close-in product proliferation had already run amok.

Across industries, the proverbial shelves were, by the early nineties, buckling under the weight of an unprecedented profusion of marginally differentiated new products and services. The consequences were profound for business leaders and consumers alike.

They would soon realize that the paradigm-busting lateral thinking they would need to stoke growth in mature core businesses wasn’t a core competency. Need is a mother. Outside help became a necessity.

Consumers who were once easily impressed with a tweak of a fender line, the barely new and the marginally improved, were now yawning. This left core competency evangelists in an uncomfortable quandary: they were betting their future on driving core business at a time when the low-hanging fruit had already been plucked.

SOURCE OF THEOUTSOURCE

WINTER / SPRING 2012 5PERFECT STORM

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2 3Glob!l Competitors, ‘000Bre!kthrou"h H!lf-life, Ye!rs

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In FMCG, the dual threats of increasingly powerful retailers and emboldened private labels were turning breakthrough innovation from a luxury to a survivalist necessity.

PERFECT STORM

Across industries, nimble global competition was shortening the half-life of the breakthrough to the point that big innovations could no longer be viewed as serendipitous, once-a-decade lightning strikes; driving predictable top line growth demanded a reliable year-on-year pipeline.

A newly connected world was empowering companies to look outside to the proverbial ‘guy in the garage’ with the answers to the problems they couldn’t crack themselves.

If the direction of the wind was clear, transformational market forces made it a perfect storm for innovation outsourcing to take flight:

Design, for too long treated as an afterthought, was proving to be a powerful di!erentiator, exciting consumers in markets where it never mattered before.

Paradigm-busting success stories from Starbucks to the Mini Cooper, Red Bull to Swi!er, and the iPod to Google left companies pondering their own incremental initiatives and realizing they’d be hard-pressed to get to such successful market disruptions on their own.

A decade of right-sizing and Six Sigma had created an appetite for alternatives to the slow and expensive journey of homegrown R&D.

Luxur! Necessit!

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Put all these forces together and a new marketplace was born: outsourced innovation, the other corporate ladder — outsiders helping companies hoist their innovation to new altitudes, up to the higher

fruit they not only couldn’t reach on their own, but often couldn’t see. Like any self-respecting movement, innovation outsourcing

CEO and ‘innovator in chief’ of P&G, stood at the podium and declared that he wanted half the new ideas his famously insular company would bring to market in the years ahead to come from outside the company. Game on.

WHO’S PLAYING?

6 DELIVER OR GO HOME WHO’S PLAYING

Innov!tionSpeci!lists

Knows precisel" wh!t to we!r. Is prett" sure wh!t to we!r.

Will put on wh!tever works th!t ni#ht.

Does Your Innov!tion P!rtner Know How to Dress?

Desi#nComp!nies

Rese!rchComp!nies

Br!ndin#Comp!nies

M!n!#ementConsult!ncies

Other

LIKE ANY HOT PARTY WITH AN OPEN INVITATION AND NO DRESS CODE, THE OUTSOURCING OF INNOVATION IS DRAWING AN ECLECTIC CAST OF CHARACTERS.

WINTER / SPRING 2012 7WHO’S PLAYING

There is now a big enough experience base for forward-looking assessment of the gaps in the outsourcing models in use today, to define a more robust future.

All this dynamism is a healthy thing. It is helping to change the altitude of the innovation conversation in many great companies. Ambitions are stretching. And when it goes right, velocity and ROI are improving. While it’s hard to put metrics on the impact (companies getting kudos for their big wins often ask their external partners to stay behind the curtain), all indicators suggest that the change is reaping big dividends and is here to stay.

Pure-play innovation specialist firms (like Fahrenheit 212) are obsessing about nothing else.

Design companies are eager to prove their value earlier in the innovation food chain.

Research companies and concept shops are focusing single-mindedly on insights.

Branding companies are trying to lay claim to the line extension.

Management consultancies are trying to stretch from merely defining where to play, to how to synthesize tangible solutions.

And legions of wide-eyed optimists are leaping into the fray, drawn to innovation’s newfound fashionability, slinging around ideas with little worry about what’s strategically relevant, operationally feasible or financially attractive.

1. The pure-play innovation specialist.

2. The eager-to-play designer.

3. The single-minded insight seeker.

4. The brand-driven prospector.

5. The reaching management consultant.

6. The wide-eyed enthusiasts.

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DELIVER OR GO HOME8 FAST FORWARD

FASTFORWARD

What lies ahead as innovation outsourcing’s next wave is a new era of accountability.

Understanding why this is necessary and how it will play out starts with understanding the impact of decades of rampant innovation failure, and the ways companies are responding to it, reshaping the way they structure their innovation efforts.

Innovation failure has for so long been so common (comfortably north of 90% failure on a project-inception basis), that it has become normalized and oddly acceptable.

Far too many projects have churned on, quarter to quarter, burning cash and resources in half-pregnant gestation,

enough for a chief exec or consumer to say

that there never was a big opportunity in sight.

One of the overdue realizations is that many of these dead-end projects were

out of the gate, but moved forward anyway. Predictably enough, the pendulum is now swinging hard the other way.

P!st Future

From F!ilure to the FutureInnov!tion Initi!tives, Av". Per Firm

Innov!tion Success, ‘0%Account!bilit#, ‘0%

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WINTER / SPRING 2012 9FAST FORWARD

‘Fewer-bigger’ is the new mantra on the lips of every CFO these days.

What’s taking hold is a desire to replace what had organically become a shotgun approach, spraying scores of small, loosely

with something more akin to a bazooka

against bigger, more strategically robust, larger scale opportunities.

This new orientation comes with big

then for the outside partners they enlist to add spark to their innovation efforts.

Internally, the shift toward ‘fewer-bigger’ means lines of accountability will sharpen. In truth, the shotgun approach offered lush insulation. The importance of any one initiative hitting the jackpot was low, and project failures were so abundant that few stood out, leaving accountability thinly spread across the organization. But ‘fewer-bigger’ will change that, putting higher expectations and a brighter spotlight on every program.

While companies will continue to wrangle with the tension between the need for greater accountability and the desire to foster a climate that encourages their best innovators to swing for the fences, external innovation partners, who have for the most part skated along with no skin in the game and little pressure to deliver tangible outcomes, will inevitably face rising demands and expectations, and will step up to meet them or face a Darwinian cull.

1. Fewer-bigger: Placing heavier bets on fewer spots is the new mantra of every CFO these days.

2. Shotgun Approach: The shotgun sprays an array

3. Bazooka Approach: The bazooka concentrates

4. Darwinian Cull: Innovation partners need to face accountability. Failure to do so could lead to extinction.

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DELIVER OR GO HOME10 FILLING OUT THE TOOLBOX

To deliver valuable impact in this fewer-bigger world, external partners will need broader, nimbler skill sets, complementing disruptive creativity with vastly sharper

and a new appreciation of the distance between a clever scribble on a Post-it note and in-market success.

They’ll also need new foundational insights about what separates the innovations that work from those that don’t. Foremost among these will be the realization that in

and solving for consumer needs is only half of what success requires—a critical half to be sure, but still just half.

Successful innovation ideas have to solve both the needs of the consumer, and the aggregate needs of the company out to serve her—spanning its strategic imperatives, its operational realities, its risk thresholds, its brands and its ROI requirements.

A two-sided approach to concurrently solving for the needs of the company and the consumer— which in our practice, we call Money & Magic —transforms the likelihood and velocity of success,

the only option.

Backed with a skin-in-the-game performance-based compensation

with that of our client partners, creates an obsession with tangible outcomes rather than esoteric intrigue, and makes accountability a here-and-now reality.

History unequivocally shows that a

— relegating the needs of the business to secondary status or subsequent work streams—has been a primary contributor to innovation failure rates and poor ROI.

So too has been a belief that solving the company’s needs requires any less lateral creative thinking than those of the consumer.

Today, the vast majority of would-be external innovation partners work in this unhelpfully one-sided way, which comes with a baked-in tendency to serve up consumer solutions wrapped in layers of unsolved strategic, commercial and operational questions.

Leaving their client partners to worry about whether those commercial questions can in fact be solved at all, they comfortably dodge real accountability for delivering tangible outcomes.

Complete Innov!tion Solution

1. Mone" 2. M!#ic

FILLING OUT THE TOOLBOX

1. Precision Tools: In order to complement disruptive creativity, sharp strategic skills are required.

2. Step to the Mic: Those presenting more problems than solutions will have to face the crowd.

3. Dodgeball: A thing to be dodged. Beware of those who comfortably duck accountability.

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WINTER / SPRING 2012 11ACCOUNTABILITY AT WORK

Bury the myth that creativity performs best when coddled, sheltered from criticism and insulated from pressure to

in the 1940s and is still propagated today

promise nothing’ implications, is both unhelpful and untrue. Multiple studies have debunked it, proving not only that performance pressure and critique aren’t destructive to creativity, but that they actually elevate it, increasing the breadth and depth of creative solutions. It takes pressure to turn carbon into diamonds. 1

Here are five ways to infuse a healthy new accountability into your engagements with external innovation partners.

Don’t ask less of your innovation partners than your company asks of you. As innovation continues to take on greater urgency in the growth agenda of every enterprise, innovation leaders are facing increased scrutiny, tighter performance metrics and greater oversight in where, when and how they spend their budgets. To not comparably ratchet up the performance metrics you place on external partners and how they get paid doesn’t really make sense.

Don’t bring a unicycle to an off-road race. Not all innovation projects are created equal. If all you’re after is a fresh riff on a well-established value proposition and business model, a dose of lateral thinking and fresh consumer insight may be enough to get you rolling. But bigger ambitions for transformational innovation and step-change growth typically come with bigger, more diverse and more complex strategic, operational and commercial questions that need solving. Dig beneath the surface to interrogate whether a potential partner has the real depth and breadth to work across the whole challenge, rather than just a piece of it. And ask yourself not just whether a potential partner would be helpful, but whether you’d be comfortable holding them accountable.

Don’t ever apologizeas ideas that are both transformational and feasible, and failure as anything less. The black hole into which accountability and a whole lot of money disappears is the one where external partners are allowed to believe that their value lies in the delivery of clever, disruptive thinking. Your shareholders don’t measure success in interesting afternoons. You can’t either. The sweet spot is strategically relevant ideas that disrupt the marketplace without

disruption to the business that they never have a real shot at getting to market. To not make this overtly clear to your partners is to let them off the hook.

If your partner won’t bet on you, think twice before you bet on them. In the pursuit of transformational innovation, everyone from the top of the food chain on down is placing bets. A CFO bets a chunk of money. A division head bets a pool of her best and brightest talent. The point person on a project bets their career trajectory. For external partners to skate by with zero risk—guaranteed a full payout regardless of whether they crack the code —is undoubtedly common, but thoroughly at odds with what’s happening across the rest of the food chain. Accountability means shared risk and shared reward. Ask a partner to bet on you, with performance-based compensation. Be leery of anyone who doesn’t insist on it. Only when your partner bets on you will you achieve true alignment of purpose,

ACCOUNTABILITY AT WORK

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1. For more on this: Jonah Lehrer, “Groupthink,” Annals of Ideas,The New Yorker, January 30, 2012, p.22

Pressure M!kes Di!mondsDebunkin" the coddlers of innov!tion solutions.

Cre!tivit#, ‘0ºs of !m!$in" vs.

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Pressure, ISO’s of critique

Fahrenheit 212 is an innovation consultancy that is engaged to deliver top line growth. To learn more about our transformational approach to innovation, visit www.fahrenheit-212.com. Contact Geoff@fahrenheit-212.com for more details. © Fahrenheit 212 LLC. All Rights Reserved 2012