Digital Innovation Units: Setting-Up for Scaling-Up

PWC's strategy consulting arm Strategy& recently surveyed 50 Chief Information Officers (CIOs) and Chief Digital Officers (CDOs) across Germany, Switzerland and Austria (with additional samples from the US, Japan and the Netherlands). They found that the majority of the surveyed companies have been facing a Scaling-Up Problem: barely 10% were managing to grow revenue from digital initiatives to more than 5% of group revenue. 40% saw no significant impact from digital innovation.

One main reason for this lack of impact: Digital Innovation Units (DIUs) that were set up and dedicated by the companies to deliver on Digital Transformation, fall short to pay off. The result: while DIUs generate a lot of activities and ideas, only a large minority of companies with DIUs have successfully scaled their ideas up into sizable digital offerings. Or to put it briefly: Digital Innovation Theater.

This result lines up with findings from other studies:

A previously discussed study from Accenture found only 22% of large organizations to had successfully scaled digital innovation proof of concepts (PoCs). Those 'Champions' enjoy up to 9.9% return on digital investments.

A new German study by Infront Consulting and Capital Magazine with focus on 'scaling performance' of digital labs and innovation units (side note: they follow us in declaring scaling to be the "supreme discipline in corporate innovation") has revealed a mixed record of those units:

• Almost 50% rate their own commercial success as "not high".
• 40% introduce max. 2 innovations to the market annually.
• Less than 20% generate a positive cash flow.
• The labs find it particularly difficult to develop innovations that are distant from the core business.

What can companies do to improve their track record in Scaling-Up? Strategy& has identified the right setup and organizational design to be a critical success factor for DIUs. In general, (digital) innovation is either carried out close to or beyond the core business. This dual perspective supports our approach which is centered around delimiting those corporate innovation angles. Innovating close to the core means that most of the activity takes place in close proximity to the existing business model and related to existing products, services, processes and staff/capabilities. To ensure the required integration and avoid not invented here rejection, core-compatible innovation is generally better owned and driven by the relevant business units or technology departments (R&D, IT) in the core business.

By contrast, aiming to innovate beyond the core - which encompasses new business models and technologies that have not been validated sufficiently to be in the current scope of the core business - suggests putting a dedicated DIU in place. This suggestion also backs our proposed concept of an Exploration Unit, which is supposed to be in charge of non-core innovation in our Dual Innovation approach.

By analyzing the DIU setups of the surveyed companies, Strategy& identified four DIU archetypes - each associated with a specific operating model. The following characterizations and examples are quoted from the Strategy& report:

Laboratory (10% of DIUs): Small team focusing on ideation. Develops ideas around themes/technologies mandated by the organization. Business units or the IT department typically take over interesting ideas at the early prototyping stage.

Example: Siemens AI Lab (not quoted from report, own appraisal)

Competence Center (60% of DIUs): Small team, often focused on refining and prototyping ideas around a specific theme (e.g. blockchain). While Scaling-Up is done by other business units or the IT department, the competence center provides support through specific expertise.

Example: Porsche Digital Lab (not quoted from report, own appraisal)

Solution Provider (20% of DIUs): End-to-end innovation unit. Takes over mature ideas or prototypes from the organization and develops them into fully-scaled offerings. Also responsible for end-to-end operations. Typically a larger unit than the two previous archetypes, with 25 to hundreds of employees.

Example: Deutsche Bank Digital Factory

Company Builder (10% of DIUs): Takes over successful prototypes/pilot projects and builds a team around the project, which will then scale up and operate the offering. May result in a spin-off or being folded into an existing business unit. Typically this is small team of about 10 experts that helps project teams scale up.

Example: Otto Group Liquid Labs / Digital Solutions

It‘s important to note that operating DIUs may also well be hybrids of these archetypes - example: a combination of Laboratory and Competence Center.

Last but not least, Strategy& offers a decision navigator that helps narrowing down a suitable setup, in alignment with a company's strategy and objectives. This may be useful for a first high-level evaluation. However, I recommend taking it with a grain of salt as appropriate setups and their implementations have proven to be highly individual and company-specific.

Takeaway

Good news: The Scaling-Up Problem of established (Digital) Innovation Units and Labs - which we have formulated as early as in 2016 - is now increasingly getting the much needed attention, particularly accelerated by the Covid-19 crisis.

Bad news: When it comes to generating innovation and transformation impact, the picture of those units is still mixed. Only very few companies and their DIUs truly succeed in Scaling-Up.

To increase their digital innovation impact, the following advice can be given to companies:

• Starting point: Take a dual perspective and break down into core and beyond-core innovation.
• Integrate vs. Separate: Innovation and transformation activities within the current scope of the core business should be driven by relevant units therein. In contrast, it's indicated to establish a DIU to drive or support beyond-core innovation.
• Setting-Up for Scaling-Up: Define the right organizational setup for this DIU to make sure the underlying operating model design is aligned with the company's purpose, digital strategy and ambitions.

What's more: Once the DIU has been set up adequately according to purpose, it's vital to employ an effective Scaling-Up approach to navigate individidual digital ventures through this transitional phase from Explore to Exploit. Scaling-Up turns out to be individualized for each venture, rather than one-size-fits-all. Therefore, a trustworthy and practicable approach builds on

• a proven and comprehensive set of guiding principles and ideas which enables effective collaboration between DIU and core business for Scaling-Up success, thereby capitalizing on available core assets and capabilities for unfair advantage,
• vs. a highly standardized Venture/Company Building blueprint that is often geared towards transferring success factors of greenfield to corporate startups.

Please drop me a message to learn more about Dual Innovation and/or how to set up your corporate innovation activities for Scaling-Up success.