Is Your Enterprise-Innovation Strategy Tired or Wired? Our Advice: Move Quickly, and Partner with Early-Stage Tech

Innovation has long been a focus for the enterprise, but is progress really being made? Is anyone doing it well?

We explored these and other questions in our recent Battery Ventures State of Cloud Software Spending Report and learned that when it comes to achieving true innovation—not making incremental changes, but radically blowing up your business model to serve a changing market or address other large trends—most large organizations are leaving a lot on the table. Sixty-four percent of companies surveyed do NOT adopt technology from early-stage startup companies in their innovation process, for example, even though this type of technology can be game-changing. What’s more, many organizations take too long to bring projects to completion, don’t fund them adequately or structure them the wrong way.

Specifically, our survey—which queried 100 CTOs, CIOs and other tech buyers across many industries who collectively represent $30 billion in annual technology spend—revealed these signs that innovation is floundering at many enterprises:

  • Only 51% of executives surveyed have an innovation budget. Of that group, only 18% devote 10% or more of their technology budget to experimentation.
  • Those budgets are expected to stay flat (53%) or decline (20%) this year, compared to prior year budgets – noteworthy in a survey that reported 2023 overall technology budgets as flat or increasing.
  • 53% of respondents say that innovation projects take at least six months, with 14% stating it takes more than a year.
  • 82% of respondents say that their innovation efforts are less than 50% successful.

…yet we also found evidence of innovation success:

  • 33% of respondents reported achieving successful innovation in less than five months.
  • Among successful innovation efforts, 63% of respondents partnered with seed- and early-stage venture-backed startups.

We all know businesses must innovate to survive—or they could go the way of Borders, Toys R Us and Blockbuster Video. But what separates successful innovation efforts from the rest of the corporate pack? Below we’ll share four best practices that work – but first let’s define innovation and its aims.

Innovation versus digital transformation

A lot of what’s termed “innovation” today is actually digital transformation: the required, technological evolution of legacy business elements, processes, or products over time. A critical vendor’s retirement of one solution necessitates transformation, as does any catch-up process to your competition. Simply migrating your business to the cloud in 2023 isn’t innovative; it is transformative.

Real innovation means launching into the unknown in a spirit of discovery. Removing the need for market proof-points or competition. Disrupting one’s own business before someone else does. Allowing for failure in the name of progress.

Innovation has walked backward into transformation for many reasons: economic uncertainty, data security, customer information protection, the talent landscape, public companies’ need to produce in-year value, and so on. But many enterprises get lost along the innovation journey by conflating these two concepts. Perhaps a lack of understanding innovation, versus transformation, has resulted in the slow and unsuccessful outcomes reported in our survey. Why is this so important to understand? Differentiating the efforts, and the resources, timelines, success criteria, and talent, is critical to enabling them both.

Four best practices for successful enterprise innovation

Enterprises succeeding at innovation have several best practices in common.

1. Commit, fund and centralize resources – and then measure success differently.

With support from the top, and enablement from the bottom, a centralized innovation capability within a large organization is proven to work. Our survey found that enterprise-wide innovation sees more success overall and faster timelines to scaled adoption than individual team innovation. Relatedly, respondents whose innovation budgets are increasing YoY run their programs by IT and centralized innovation teams, while those with declining budgets tend to decentralize innovation, with efforts run by individual teams.

In my experience, the companies with the most successful outcomes structure their innovation teams centrally so the resources responsible for rapid exploration are always one step away from a set of decision makers. This model ensures that strategic goals are understood, requirements are clear and proof-of-value can scale quickly into the business.

Successful efforts tend to have three key types of roles working together:

  • Emerging-tech teams who act as scouts and a sherpa of sorts, partnering with the VC community to source technology and helping early-stage companies navigate the enterprise ecosystem.
  • Business leaders with accountability for developing emerging-technology strategy, and integrating those capabilities horizontally. A single tip of a sharpened spear, if you will, rather than 100 pins and needles.
  • A “lab” or similar space, with a broad remit to experiment fast and frequently, and where failure is okay.

Putting measurements in place that incentivize exploration, trial, and (yes) error, is critical. In many ways, innovation is a numbers game: you need to work through a lot of ideas fast to find a few great ones. For example, some innovation teams’ performance is measured by how many business requirements they’ve been able to match to startup value propositions in a quarter. Others are measured by how many 90-day proof-of-concepts they’ve executed within a year, regardless of outcome. Innovation represents something fundamentally different to the business, and the resources behind the effort should be measured in a fundamentally different way than business-as-usual.

2. Differentiate the efforts to tackle horizons

We’ve been telling enterprise innovation teams to “fail fast” for a decade. It’s a different way of thinking, moving, and measuring; and it IS challenging to execute. Only a few have successfully embraced this mentality. For those who’ve struggled, we’d advise dividing and conquering your innovation team between near-term and long-term approaches.

Leaders who are tasked with transformations yielding in-year results have entirely different requirements, metrics, and incentives than innovation leaders thinking several years out. Long-term opportunity frequently means spit-balling ideas with no obvious use cases in sight.

While providing a platform to explore a broad and nascent remit, corporates must also balance defining innovation with laser-focus on their business’ needs. Our survey found the most successful categories of innovation are in new revenue stream creation, customer experience / acquisition, and internal efficiencies. Focusing both short-term impact and longer-term opportunities on categories of clear business value will enable both efforts to succeed.

Our survey revealed that near-term wins can seed the ground for longer-term explorations from a budget perspective: companies that experience successful innovation in less than a year-long timeframe saw their overall innovation budgets increase to support new technology exploration.

Remove as many stumbling blocks as you can. A Fortune 200 supply-chain and distribution company in our network structured a 90-day innovation pilot program, with procurement’s support, which requires zero security, technical or financial diligence until value is proven. This model defies the status quo, however. In this case, the internal partnership, combined with clean sandbox data, has removed many of the barriers typically encountered with rapid testing models.

3. Innovate before your lunch gets eaten.

Surprisingly, our survey found the industries with the most successful innovation results are also the most highly regulated, legacy-heavy ones. Financial services/insurance, healthcare and manufacturing reported the fastest rates of innovation, in that order, with the highest rates of success in three-to-five month and 6-11 month pilots, respectively. Healthcare, educational services, financial services and manufacturing have the highest overall rates of successful innovation, in that order.

You might wonder how the enterprises that are perhaps the most challenging to change are the ones doubling down on, and achieving, material innovation. Facing real disruption is eye-opening, as traditional banks learned from the arrival of the neo banks. Manufacturing capacity slowed dramatically in the United States for decades, driven by automation and cheaper factories overseas, until those companies embraced robotics and automation, among other trends, which has allowed them to optimize domestic workforces and “reshore”. Generational changes can lead consumers to shift behaviors, ignore legacy products, question the need for services their parents and grandparents paid for that are no longer relevant to them.

If leadership is taking cues from the market, they already know which disruptions lurk in the dark, even if their shadows haven’t come into focus yet. Our survey revealed that companies whose innovation budgets are trending upward are the same organizations exploring paradigm-level disruptions like generative AI. These old-line industries may have been slow to innovate originally, but survivors have learned the hard way. The result is a permanent commitment to innovation – so they’ll never be left behind again.

4. Don’t box out early-stage startups.

Enterprises often hesitate to experiment with early-stage tech. But as we mentioned earlier, our survey revealed that companies which leverage early-stage technology experience greater success in two-to-five and 6-11 month proofs-of-concept (PoCs). Given the importance of short-term wins (see #2 above), and anticipating disruption, early-stage technology is crucial to seeding successful long-term innovation.

The venture-backed ecosystem fosters these partnerships with numerous models, for example:

  • A Fortune 100 insurance company in our network runs an annual sourcing effort with a group of venture firms. Their functional, business and service organization leaders define strategic priorities for the year, and the venture community responds. The transparency this approach provides to the true size of an underlying need, across use cases, allows startups to lead a scaled approach from the start.
  • A Fortune 100 healthcare provider has created a ‘white glove support’ team who walks startups through not only the healthcare procurement process, but the implementation and scaling of their solution. This team has dramatically reduced internal concerns about working with early-stage startups, and the operating cost of the team is far outweighed by the benefits emerging tech brings to their competitive advantage.
  • A Fortune 100 bank engages an innovation council of cross-functional and business unit executives to provide input on use cases BEFORE PoCs are executed. This produces a collective ‘voice of the business’ that procurement supports, rather than challenges. It enables central innovation to deploy the appropriate budget and resources to support cross-functional opportunities for a single piece of technology. And it prioritizes value creation while staging risk-aversion across use cases.

In conclusion…

Innovation isn’t dead – but it could be thriving, given the right conditions. Building an innovation capability that leverages, rather than excludes, venture relationships and early-stage technology offers a powerful way to succeed.

This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity. 
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