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External Collaboration: An Indispensable Ingredient for Innovation
Ginni Rometty, Senior Vice President, IBM Global Business Services
A recently conducted Global CEO Study by IBM took a comprehensive, global look at a topic that is increasingly important to leaders worldwide: innovation. Based on in-person interviews with more than 750 of the world's top CEOs, the study included views of business and public sector leaders from 20 different industries and 11 geographic regions, representing both mature markets and developing markets such as China, India, Eastern Europe and Latin America. Participants were remarkably frank, sharing their deep insights on innovation. We learned for example, that two-thirds of them expect to drive fundamental changes within their organisations in the next two years. Surprisingly undaunted by this challenge, they see innovation as a means to seize opportunities.
One key finding was that 76 per cent of CEOs thought that external collaboration, primarily with business partners and customers, is key to innovation. This contrasts greatly with their view of internal R&D, which was cited by only 17 per cent of CEOs as a major source of innovation and new ideas.
External Collaboration is Indispensable
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Figure 1: Most significant sources of innovative ideas |
When asked which sources their companies relied on most for new ideas, CEOs' responses held some surprises (see Figure 1). Business partners ranked second - just behind employees — as a primary source for new ideas, and customers were a close third. This means that two of the top three significant sources of innovative ideas now lie outside the organisation.
According to one CEO, "Some of the boldest plans under consideration within our company work by leveraging the collaborative potential of service providers in other domains." Speaking from the perspective of one of those partners, another CEO saw his firm as "the R&D arm" of its clients.
Internal R&D, on the other hand, hovered near the bottom of the list with only 17 per cent of CEOs mentioning it. The reduced prominence of R&D as a source of new ideas is just one more indication that CEOs have expanded their innovation horizon well beyond products and services, and it raises a provocative question about what type of role R&D should be playing in operational and business model innovation.
External sources were not only prevalent in the ranking of CEOs' most significant sources of ideas; they also comprised a substantial portion of the overall quantity of ideas. This trend was particularly evident among financial outperformers. Companies with higher revenue growth reported using external sources significantly more than slower growers. One CEO declared bluntly: "If you think you have all the answers internally, you are wrong."
When we examines extensive collaborators' responses by industry, the split between internal and external ideas appeared fairly even - 43 per cent of innovative ideas came from outside in the consumer packaged goods industry; 44 per cent in government and 42 per cent in industrial products. And externally generated ideas actually outnumbered internal ideas in two industries (62 per cent in chemical and petroleum, and 54 per cent in telecommunications).
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Figure 2: Importance versus extent of collaboration and partnering |
Beyond collaboration boundaries
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The "Collaboration Gap"
Our findings on sources of ideas coincide closely with CEOs' overall opinions about collaboration and partnering. Regardless of the type of innovation undertaken, over 75 per cent of CEOs indicated that collaboration and partnering are very important to innovation. One CEO described its importance on a scale of one to five as "enormous. I'd give this a six if I could."
But CEOs have a problem - and it is not a small one. Although collaborative aspirations were high, actual implementation was dramatically lower (see Figure 2). Only half of the CEOs believed their organisations were collaborating beyond a moderate level.
The huge gap between the need for collaboration and the ability to do so is clearly a significant roadblock to innovation that CEOs need to address. And since so many ideas come from outside, leaders need to pay particular attention to strengthening collaborative capabilities at the perimeters of their organisations.
Many CEOs indicated that collaboration and partnering is "theoretically easy," but "practically hard to do." Whether it involves crossing internal or corporate boundaries, collaboration requires serious intent. As one CEO put it, "having a few beers together is not collaboration. Collaboration is a discipline."
When reflecting on the collaboration gap, CEOs spoke about lacking the skills and expertise needed to collaborate and partner externally. For one CEO, the market demands for collaboration had crept up on the organisation, forcing it to be "reactive" rather than "strategic" in its partnering arrangements. In his own words, "it has been like Relationship 101 - we are terrible and we need to improve."
The Hidden Speedbump: Internal Collaboration
Despite all the potential challenges encountered when collaborating externally, some CEOs argued that internal collaboration can sometimes be even more difficult. In fact, the inability to collaborate internally can foil companies' attempts to deliver innovative value propositions for their clients.
For example, a large media conglomerate envisioned a new offering for its clients. With large-scale operations in network TV, cable TV, radio and the Internet, it hoped to capitalise on its scope by offering complex, integrated advertising deals that bundled together spots across multiple media formats, or "platforms." While advertisers were attracted by the simultaneous access to target audiences across all of these different formats, the executives responsible for the strategy had immense difficulty creating, selling and managing unified advertising deals because the operations of the individual platforms could not collaborate effectively. They had trouble gathering ratings data for audiences across platforms, creating common financial and contractual definitions and gaining agreement on pricing decisions from multiple sales managers. The disappointing result: slow response times, high error rates, senior managers burdened by administrative tasks - all culminating in little market success.
Bottom line benefits from collaboration and partnering
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Figure 3: Collaboration and partnering benefits cited by CEOs |
CEOs described a broad spectrum of benefits from collaboration and partnering - both predictable and unexpected (see Figure 3). Cost reduction was clearly top of mind. But, this was just a start. Moving down the list, the majority of benefits were actually drivers of top-line growth.
One CEO, for example, indicated that the higher customer satisfaction generated through collaboration ultimately resulted in more revenue: "In this commoditised market, we are able to command greater customer loyalty because of collaborative innovations. This implies both higher revenues and lower risks."
The upside of collaboration is underscored not only by qualitative CEO feedback, but also by the financial performance of companies with extensive collaboration capabilities. Extensive collaborators outperformed the competition in terms of both revenue growth and average operating margin. When we analysed operating margin results, for example, over half of the extensive collaborators outperformed their closest competitors.
Conclusions
Distilling the collective thinking of 765 CEOs, we found a persistent worldwide, sector- and size-spanning push toward a more expansive view of innovation - a greater mix of innovation types, as well as more external involvement and extensive demands on CEOs to bring it to fruition. Based on these collective insights, we offer several considerations that can help you sharpen your own innovation agenda:
Think broadly, act personally and manage the innovation mix. Create and manage a broad mix of innovation that emphasizes business model change. When it comes to innovation, many CEOs still fall back on their traditional comfort zone: products/services/markets. But business model innovation is becoming more critical to compete and grow.
Make your business model deeply different. Find ways to substantially change how you add value in your current industry, or in another. Look for ways to transform your core value proposition. Pay particular attention to ignored areas of the value chain where no one is actively innovating. Search out third parties that could add value or technology that could introduce entirely new ways of doing business.
Ignite innovation thorough business and technology integration. Use technology as an innovation catalyst by combining it with business and market insights. Technology can be a catalyst - both to drive innovation and to enable it. It can play a vital part in new products, services, channels, market-entry strategies, operational transformation and industry -altering business models. Technology can even enable other innovation enablers such as collaboration.
Force an outside look - every time. Push the organisation to work with outsiders more, making it first systematic and then, a part of your culture. Left alone, most teams will attempt to solve problems internally. It is familiar territory. It is where they are most comfortable. Leaders must force the outside look, pushing the organisation to work with outsiders more than insiders. Any new product or service concept, plans for new markets or operational and business model adjustments, be sure to ask where the external contribution is.
Defy collaboration limits. Collaborate on a massive, geography-defying scale to open a world of possibilities. We now have tools to work together to shape, develop and move ideas forward faster than every before. Work can be reconfigured in totally new ways with less regard for when and where it is done, and who does it. Skill and scale can finally come together. As scattered specialist link up and collaborate, you may uncover a new, differentiated capability that you never would have imagined if those experts continued to work in isolation. Distance, scale, language, company walls - limits that once seemed impenetrable are now broken on a regular basis.
The CEOs who participated in our study are poised to seize opportunities. It is our hope that this willingness to embrace innovation will spill over into solutions for our world - innovations that will help us feed, care for and fuel a planet that may well have over 8 billion people by 2030 according to the US Census Bureau.
It is time to expand the innovation horizon, to think big and bold. Our future depends on it.
For more information on the IBM Global CEO Study 2006, visit: www.ibm.com/innovation/ceo
Biography
Ginni Rometty is the Senior Vice President of IBM's Global Business Services, a unit of IBM Global Services. She also has responsibility for the overall strategy and business development for Global Services, including advanced services solutions, the services asset strategy and acquisition strategy.
Ms Rometty was previously Managing Partner, IBM Business Consulting Services, leading the formation of the industry's largest team of business consultants and services experts specialising in helping clients leverage worldclass information technology to optimise business performance. Prior to this, she was general manager of IBM Global Services, leading a team of more than 75,000 professionals. Before joining IBM, Ms Rometty was with General Motors Corporation, where she was responsible for application and systems development.
Ms Rometty reports to the IBM Chairman, and serves on his Worldwide Management Council and Senior Leadership Team.
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2008 Sovereign Publications