One of the challenges encountered by executives involved with innovation programs at their companies is how to keep them sustainable. In addition to other interests that are competing for attention within the organization, other impediments to innovation initiatives include cultural barriers such as bureaucracy.
These obstacles help explain why 94% of executives are dissatisfied with their firms’ innovation performance, according to a McKinsey study.
HMG Strategy recently caught up with Nikhil Gupta, Vice President of Cloud Security Strategy at Sophos Inc. to explore effective approaches to address these challenges. Nikhil joined Sophos through the acquisition of Avid Secure Inc, where he was Co-Founder and CEO. Nikhil is an Advisory Board member and a speaker for HMG Strategy’s upcoming 2020 Silicon Valley Global Innovation Summit, taking place on February 11 at the Rosewood Sand Hill in Menlo Park, CA.
HMG Strategy: One of the challenges many executives cite with innovation programs are the challenges associated with keeping them sustainable. Can you offer any recommendations on how to keep innovation programs fresh and enduring?
Nikhil Gupta: Innovation is how great companies are built. Even the largest of the largest companies such as Microsoft, once were startups. Microsoft was a market leader in the desktop Office suite, but when the world moved towards the web, Microsoft was slow to innovate in the online version of the Office suite. This gave companies such as Google an opportunity to innovate and get a head start on the online Office suite compromising of Google Docs, Google Sheets, etc.
The classic reason for a large company to lose to a competitor is when the product is a market leader in its category and technology disruption happens. In such a scenario, the market leader has to cannibalize their own products to keep ahead of the game. Not only does a potential short-term revenue loss hinder the support for innovation, but also for the new innovation to foster, marketing, sales and other functions are also required to overhaul.
Very few companies are able to overcome the challenge. One of the companies that became super successful in disrupting themselves is Adobe. Adobe has been a market leader in desktop design programs. The software was distributed as a compact disc (CD) and the software license was perpetual. With the advent of cloud, more and more end customers were relying on the cloud and customers were expecting subscription pricing versus perpetual pricing. Adobe’s leadership team starting from the CEO realized the significance of disrupting their own business model and drove the change throughout the organization to successfully transform their business to an online subscription business. A rare feat of innovation success in a large company, Wall Street rewarded the innovation as the company’s stock price quintupled in the past five years.
Having worked for several large companies such as Bell Labs, Ericsson, and Cisco, my recommendation is that innovation must be a mindset. Innovation in large companies requires a lot of changes and thus innovation should be driven from the CEO all the way down. In today's cutthroat world, large companies are under constant pressure to increase the top and bottom lines, and when times get tough, the first thing that gets cut is the `innovation program.’ So, if the CEO and the Board are bought in to the innovation program, then there should be a separate fund and a leader who is identified to run the innovation program. If the funds and leadership are in place, then we can rest assured that innovation will be fresh and enduring.
One of the historical case studies is Bell Labs, the research arm of Lucent Technologies. Lucent technologies had a separate research/innovation arm called Bell Labs and Bell Labs’ budget was around 10%-to-12% of the company’s top line. Bell Labs had their own president and organization. Numerous leading innovations such as C language and the UNIX operating system were all developed in Bell Labs between 1920 into the 1990's. Later, there was pressure on the research arm and the budget started to get impacted and thus the quality and pace of innovation took a hit.
Innovations in startups are a different game all together. It’s certainly a little easy, as the startups are usually built around a single innovation, so the entire team is behind a single mission of making the innovation successful. However, the biggest challenge in innovations for startups is timing and budget. There is a small window of opportunity when the competitors don’t have a solution, so the startup has to innovate fast. Budget/Funding is another big consideration. Unlike with a large company which has infinitely more money and resources, a startup has limited funding and they have to innovate and meet timelines to continue to draw more funding. Often in a startup, once the innovation is done, company leaders realize that the product/solution is not meeting the end customer in mind. As a result, the startup has to pivot, which is very challenging. The challenges in a startup are that every pivot depletes funds which shortens the time frame the company has to innovate. Also, depending upon the age of the startup, employees are burnt out and motivating them is a different challenge.
What are some of the primary obstacles associated with innovation efforts? For each of the challenges you cite, can you please share effective approaches for overcoming those obstacles?
NG: The biggest obstacle I see in an innovation effort is `conflict of interest.’ In large companies, when a product is super successful and generating billions of dollars of revenue, taking the profits from this product line to innovate a new product which will eat up in the revenue of the old cash cow product which funded this innovation is not easy. The general manager who is running this cash cow business needs to be incentivized differently because after a new innovation, the top line of his/her business is going to go down.
Similarly, the sales team should be incentivized differently. One of the classic examples are innovations tied to cloud adoption which require changes in the sales methodologies. Enterprise IT products used to be sold as 3- or 5-year perpetual contracts which ran into a multi-million-dollar contracts. Now, with advent of the cloud, customers started to expect subscription-based business models, and as a result, customers started signing smaller monthly subscriptions. So, from the sales team’s perspective, the same amount of effort yields smaller contracts, hence smaller commission. So, while the business transformation is happening from perpetual to subscription models, usually there is chaos in the sales compensation models.
Citing the Adobe success mentioned earlier, the effective approaches are that the CEO, along with board, should revisit the leadership structure and compensations. Tremendous education should be done across the company to emphasize the need for innovation, especially if the innovation entails disrupting the current cash cow product line. The vision should be clearly articulated, and a corresponding strategy should be built. Last but not the least, talk is cheap. The program should be closely managed and measured. Innovation requires culture change and that should be carefully managed.
What are some approaches to innovation that have worked well for you and other companies you’re aware of?
NG: I have been fortunate to have worked at places like Bell Labs and Ericsson where I was part of innovation initiatives. I also founded my own startup (Avid Secure) from the ground up and built an innovative market-leading product.
At Bell Labs, I was part of the Pathstar product, which was a result of innovation done by a small group of Bell Labs researchers. To foster that innovation, a separate business unit was created with a general manager and separate engineering, sales, and marketing functions. While this product partially overlapped with one of the other cash cow product lines of Lucent, leadership buy-in and funding played a key role in the success. Significant ground-breaking innovation occurred in a very short span.
In my startup (Avid Secure), after speaking to a lot of customers, we identified a hole in the existing solution. Then we built a world-class team to address this gap. We went ahead and raised money to address the problem. So, in a nutshell, everyone - investors, the CEO and the entire team - was focused on innovation to solve the unmet customer problem.
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