Leaders will invest less in transformational innovation due to fears over the economy
February 6, 2023 | by Chris Kalaboukis
One of the biggest questions I am getting from businesses at the moment is what the potential impact of a recession or the slowdown of the economy might have on their innovation efforts.
And according to a new report by Innovation Leader and KPMG USA called “Benchmarking Innovation Impact, from InnoLead.” (available for download from Tuesday 7 Feb 2023), the outlook shows that there are potentially major problems ahead for innovation teams.
This report is a follow up to the amazing InnoLead reports I have previously written and spoken about, including the one which outlined how over time companies planned to invest more and more in adjacent and transformational innovations.
However, that data came from before the recent pandemic, war in Ukraine and potential coming global recession.
The new data from the 2023 report paints a very different picture.
While it is not all bad news for innovation teams, there are major challenges ahead, not only for the innovation teams themselves but also for the way they work with the rest of their organisations.
So let us go into some of the most important data points highlighted by the report:
1. Companies are going to invest less in Transformational Innovation
The trend for the past decades was previously that the 70-20-10 split of an innovation portfolio was being replaced by more investment into adjacent and transformational innovation, with many companies even having a 48-26-26 split.
Data for 2023 shows that trend is reversing.
With fears over the economy and news of major layoffs across industries as companies try to cut costs, innovation teams and leaders now expect that more of their focus will once again be on incremental “core business” innovations. And the biggest drop is in what proportion of projects will be for transformational innovations.
This may upset a lot of startups or innovation teams who feel like it is their duty to look to the future and pull their company into new disruptive technologies.
However, it might be the right thing to do.
As we know, appetite to try new things is linked clearly to people’s feelings of stability and safety. And while managers already dislike creative new ideas, this feeling of unease will become even stronger as the fears over the impact of a recession grow. So appetite to invest in transformational projects which are seen as more risky will be lower at the higher levels of many companies, based purely on psychology and neuroscience.
Nonetheless, this is not all bad news.
While the appetite for transformational innovation is falling sharply (and I would love to see how the averages changed over time, I would expect the most recent data in 2023 would show the deepest drops) the fact that nearly 1/6 of budget is still allocated to transformational innovation is a good sign.
Moreover, what times like this allow is companies to take a hard look at their innovation portfolio, and do the hard work of killing their darlings which may be underperforming, allowing the remaining projects to have the resources and focus to actually grow and develop more effectively.
Times of pruning like this are important for innovation teams to stay on track and deliver real results.
2. Innovation budgets may decrease or grow more slowly
So while the proportion of companies’ innovation portfolios is changing, what may be a bigger issue is that in many companies, the budget available for innovation itself may decrease.
According the report data, across the board in every category compared to 2020, the innovation budgets for 2023 are likely to grow more slowly than in previous years. And in many cases, the budget is likely to decrease.
This is where a lot of innovation teams may end up really struggling.
Often, innovation teams have the luxury of not being constrained by revenue KPIs they are expected to meet, instead forcussing on “growth” and testing ideas. As a result, they often grow to the size of the budget allocated to them, with the expectation that they will continue growing in the future. However, when their budget is reduced, or they are asked to continue projects into the next stages of scaling with a similar budget than was required for ideation, these teams begin to struggle.
This may be because the skills and experience recruited for in innovation teams are often based more on the “front end” of innovation, and less on the operational / scaling back end. As a result, many teams struggle when more operational structure and expectations are set on them to deliver, rather than just design.
It also may mean that teams which were too focussed on transformational innovations, which unfortunately is where a lot of innovation theatre is performed, may be challenged to show progress this year, and may fail to meet this challenge.
This may result in a painful situation for a lot of innovation team members across many companies in 2023 and 2024 are let go, as some teams may need to stop projects, shed headcount or even shut down completely.
Again, this pruning may be very painful, but it is important for the long-term health of the innovation teams and their portfolio of projects.
3. The top challenges to innovation in big organisations
The report also does an excellent job of breaking down the Top 10 Challenges facing innovation in big organisations.
- Politics / Turf Wars / No alignment
- Cultural Issues
- Inability to act on signals or development critical to the future of the business
- Lack of Budget
- Lack of Strategy, vision
- Lack of executive support
- Not adopting emerging technologies
- Recruiting / Not enough high-demand skillsets
- Inability to pick up on signals or developments critical to the future of the business
- Lack of CEO support
What I found especially interesting was looking through the data at which of these had changed over time between 2020 and 2023:
In many cases, these challenges seem to have been falling between 2020 and 2023. This indicates that the work of innovation teams to change the culture and mindset in many organisations is working.
This was the case in almost every category, apart from one.
“Lack of Executive support” seems to have become more challenging between 2020 and 2023.
Interesting, “Lack of CEO support” was better in 2023, so at the highest levels of the organisation, CEOs appear more willing to talk about how important innovation is.
But it is the lower-level executives, who often hold their own budget lines, who are becoming less supportive of innovation projects.
This would explain one of the reasons why the budgets for innovation appear to be falling or growing more slowly than before.
4. The enablers of innovation success
On the flip side, the report also found the top 8 factors which innovation leaders said enabled their team to succeed:
- Leadership support
- Ability to test, learn, iterate
- Right team, types of employees
- Right strategy, vision
- Right approach, tactics
- Right level of funding
- Organisation accepts failure well
- Correct technology / Infrastructure
Many of these are the exact opposite of the challenges previously mentioned.
Likely, this would show that in companies where these factors exist, they are indeed the enablers. However, in companies where they are lacking, this is causing them to be challenges.
5. How innovation teams collaborate
Finally, the last big learning from the report is about how innovation teams collaborate.
With all of the questions nowadays about whether people are unproductive when working from home, there is more and more emphasis on understanding how teams should collaborate most effectively.
And with innovation teams, the data clearly shows that a hybrid model is how those teams choose to collaborate, with over 81% of teams using a hybrid model (and less than 6% of teams working completely in-person).
This makes sense. Working in a hybrid model has been shown to bring the best of both worlds, with the flexibility and autonomy of remote work combined with the fact that some work requiring collaboration really is more effective face-to-face.
Nonetheless, the data is almost certainly not representative of wider company teams. Innovation teams are often filled with tech-savvy, open-minded and often younger team members who are comfortable with digital collaboration tools, and who value their freedom to work in the way they choose. So of course they will be the perfect candidate teams to choose a hybrid model.
What will be interesting is how these teams react in companies where managers want employees to spend more time in the office again.
Once again, this is a highly valuable report for anyone involved in or leading an innovation team.
The trends we are seeing may surprise some people, they may upset others, but in the long run they likely mean that 2023 will be an inflection point where the expectations on innovation teams change, and the weak are filtered from the strong.
In times like these, it is especially helpful to understand the structure of your innovation portfolio, and have a method to validate whether your innovation teams and projects are moving in the right direction.
If you would like me to assist your teams in preparing for this, contact me and let us talk about how I can best be of value to you.
Big thanks to Scott Kirsner and the whole InnoLead team for putting together this amazing research report.