The right road to innovation

“The single biggest mistake IT managers make is listening to their customers,” says Michael Schrage, a research associate at the MIT Media Lab. Wait, don’t turn the page! Schrage can explain (and he does below).

Schrage specializes in the “economics of innovation,” a discipline that moves the topic of innovation out of the realm of marketing hype and into a world where the laws of economics apply and where, he says, intuition often proves incorrect.

He has advised companies such as BP, Wells Fargo, Google and Cisco. His work explores the role of models, rapid prototyping and simulations as ways to help manage innovation and risk.

Schrage says these techniques, when combined with technologies like the Internet, can lead to “hyperinnovation” in areas such as supply chain and customer relationship management. He recently talked about some winning and losing innovation strategies.

What’s wrong with the way companies innovate today? There are too many organizations that believe that the value of innovation comes from the creation of choice – more features, more functions. When your cell phone company gives you more options, they claim they are being innovative. But that’s rubbish. There may be supply, but where’s the demand? Research shows that only a fraction of people use more than 20 percent of the cell phone’s functionality. Same is true for PCs, servers, ERP and CRM systems – you name it. The unit of innovation is not choice, but value from use.

So companies should have simple products that do the basics very well? The question is, which [features] expand the value from use? A company like Amazon or Google may have interfaces that are so simple that adding more choice creates monumentally more value. For others, more choice just means more confusion, not more value.

How can IT help strike the right balance? It used to be that segmenting markets was very expensive. One of the fantastic things about the network economy is that we now have mass segmentation; segmentation is a marginal cost. Amazon and iTunes have recommendation engines that show you that people like you want x. Marketing 101 tells you to study your audience and segment it, but digital technology allows you to see how your audience segments itself.

It’s something the traditional media least understand. They understand mass audiences, but they suck at exploiting digital technologies to create multiple segments.

Are there other companies that don’t get it? Blockbuster is a company that was either unwilling or unable to effectively embrace the Web. Netflix took direct aim at one of the major flaws in the Blockbuster business model, which was to make a lot of money off late fees. Netflix branded itself as the no-late-fees company, and Blockbuster couldn’t adapt.

If value from use, not choice, is the measure of innovation, then use must be measured, right? The single biggest mistake IT managers make is listening to their customers instead of looking at how they actually interact with a system. Talk to an IT shop that runs a CRM or supply chain system, and ask them, “What are the three most-used functions? The least used? What’s been the biggest change in usage over the past two years?” They won’t know. They are too concerned with keeping it running.

So it comes down to, “Watch what we do, not what we say?” The best senior executives calibrate what people say with how they behave. Most organizations go out and build these requirements documents. It’s a bunch of crap. They come up with 500 requirements, they build a system, and when people see it, they say, “That’s what we asked for, but now that we’ve seen it, it’s not really what we want.” So you build prototypes, then you iterate around that. The reason you build prototypes is to observe how people behave.

The prototyping and iterating helps get you the right system, but should you continue to observe user behavior after that? Yes. Sometimes you’ll see a dramatic drop-off in usage over time. What’s happened is some department has built its own [system] – shadow IT. They are tired of using the IT shop.

Why would they be tired of using the IT shop? You’re a P&L manager. You go to IT for help, and IT says, “We can do that in six months, and here’s what it will cost you.” So you talk to your own people and they say, “We could do that on and get 80 percent of the functionality for 15 percent of the cost, in under 60 days.” What would you do?

Are these shadow apps such a bad thing? There’s a major force threatening to kill shadow apps, even turn shadow apps into a crime. It’s Sarbanes-Oxley. What Sarb-Ox insists on is that you make key business processes transparent and accessible. By definition, shadow apps are less transparent. I predict that there will be a division of a Fortune 500 company that triggers a regulatory investigation because it had undocumented apps running.

IT was all the rage in the late 1990s, but then the dot-com bubble burst and much of the allure of IT seems to have faded, at least in some quarters. Will the pendulum swing back in IT’s favor? For people who really understand technology innovation and business model innovation, the pendulum never swung away. It was the lemmings and greed-heads that got caught up in the bubble. The fact is, there isn’t a single company in finance, professional services, manufacturing, design or retail that hasn’t been utterly transformed by their investments in IT.

So has the old bricks-vs.-clicks debate been settled in favor of clicks? The people who thought the rise of Amazon meant the decline of Wal-Mart were by definition idiotic. But the people who predicted that the rise of Netflix meant the demise of Blockbuster weren’t so idiotic. What does that mean? That companies that are ready, willing and able to adapt can. So the shift has been from bricks vs. clicks to bricks and clicks. That negotiation is still going on, and as it does, IT can be more valuable, not less valuable. 076339

—Gary Anthes

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