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If profit and loss pressures are holding back your innovation efforts, the solution might be to create an R&D incubator inside the organization. Here's how it works.
Technology is highly innovative—but if you don't have an organization (or an area in the organization) where innovation can be pursued without the pressures of quickly generating revenues and profits, the task can be daunting.
These challenges are especially felt in large enterprises, where there are many more policies, procedures, and governance standards to follow. All can stifle innovation. So if you are a large enterprise, how do you stimulate new research and product development while you're running the business?
One approach is to compartmentalize your R&D.
"We had a history of enhancing our existing products, but with enhancements that didn't require significant risk taking," said Eric Haller, executive vice president and global head of Experian DataLabs, a research and development arm within credit bureau and financial services company Experian, "In this environment, we tended to focus on the timeliness of new development to see how quickly revenues could be realized. But what we finally determined was that in our product development efforts, we weren't swinging for the fences of great new ideas often enough."
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Haller and others within Experian persuaded their board to fund an innovative startup operation known as DataLabs within the company that would not be subject to the profit-and-loss pressures that can hamper innovation in a regular business unit. The goal was to create a core of innovative movers and shakers who would come up with dynamic new products without daily P&L pressures to weigh them down.
"The idea caught on quickly," Haller said. "We secured funding within three weeks of the request."
The case against business startups and idea incubators is that many innovative ideas fail. But in DataLabs' case, the results have been 12 new products over the past five years that are generating more than eight figures in revenue, with a CAGR of more than 50% being realized year after year.
"Our goal is to identify new products and markets, and from a revenue perspective, our startup organization is also operating in the black," Haller said. He turned the R&D startup within the company, with no KPIs (key performance indicators) for the first three years of its operation, into a revenue generator. "Since data is central to our business, we have also used many outside data science PhDs in our effort, and we are hiring data science talent."
Staying in the mix
Despite being its own entity, Haller's startup has been careful to maintain a connection with other product lines inside Experian.
"When you are running a separate startup within an established company, it is easy to feel isolated from the day-to-day lines of business," he said. This can be dangerous for an internal R&D incubator, because you risk losing visibility and funding.
Haller and his organization tackled these issues with a unique approach that ensured the startup stayed on course and in plain view of the lines of business and executive management: They actively and continuously engaged product line managers who have P&L responsibilities with the startup in new product generation efforts.
"Each of these business units had ideas of how new product enhancements or product derivatives could become profitable business lines, but they lacked the talent and/or the bandwidth to pursue these ideas because of their P&L responsibilities," Haller said. "So we created communications channels where business unit managers with P&L accountabilities would spin off their ideas to the lab, and we would work on developing them."
The result has been a stream of innovative new products built from market and product experience that the product teams already had.
Does the approach work for every company?
Business cultures vary, so the answer is probably no. But it's difficult to imagine how companies won't gain from active collaboration between their business units and a business incubator unit.
"At the beginning, starting a business incubator is tough," Haller acknowledged. "But if the vision is shared and you begin to gain traction with results, incubation becomes an integral part of your overall business and a potential market differentiator."