Innovation in an era of caution

Technologies, particularly computing and communication technologies, have entered our daily lives in ways unimagined 10 years ago: surfing the web for entertainment, shopping or information is now as normal as reading a daily paper. We make free phone calls from home through the internet, and when we’re out and about we communicate with a myriad of mobile devices with cameras and much other bewildering functionality. iPods and other MP3 players punctuate daily commuter journeys. It appears there are inventions to cater for every modern whim.

At the same time, the term ‘innovation’ appears everywhere: in newspapers, books, journals; government policies on competitiveness and education; and in connection with the amorphous debate about creativity and the knowledge economy. If you search for ‘technological innovation’ on Lexis-Nexis, the online global database of newspapers and journals over the past three decades, the increased use of the term is remarkable:

— Between 1970 and 1980, there were 55 articles that mentioned the term;

— Between 1980 and 1990, this grew to 993;

— Between 1990 and 2000, this grew to 3,575;

— And from 2000 to today, the figure stands at 4,583.

Search the term ‘innovation’ on Amazon and a staggering 4,762 books are returned. Reading through these titles reveals how widespread and all encompassing the term ‘innovation’ has become. We now have ‘Innovation Management’, ‘Managing Strategic Innovation and Change’, ‘Radical Innovation’, ‘The Ten Faces of Innovation’, ‘Theories of Innovation’, ‘The Art of Innovation’, ‘the Dynamics of Innovation’, ‘The Diffusion of Innovations’, ‘Innovation and Entrepreneurship’, ‘Managing Creativity and Innovation’, ‘Quick, Fun Activities for Jumpstarting Innovation’, ‘Open Innovation’, ‘Democratising Innovation’, ‘Non-stop Creativity and Innovation’, ‘Making Innovation Work’, ‘How to Unlock the Mystery of Tacit Knowledge and Release the Power of Innovation’, ‘Inspire to Innovate’, ‘Smart Things to Know About Innovation and Creativity’, and ‘New Model for Corporate Innovation’.

This isn’t confined to business practice. Even the church, that ‘icon of innovation’, is getting in on the act: ‘Innovation and Mission for the 21st Century Church’ reads one title. Apparently ‘Outdoor Play in the Early Years’ now also entails ‘Management and Innovation’; while there has be been ‘Innovation Since 1900’ in ‘Modern Garden Design’. Even areas of poverty and deprivation are new sites for innovation: ‘Shack Chic: Innovation in the Shack-Lands of South Africa.’ Surely it’s a matter of time before someone writes a book titled ‘Getting out of Bed on the Wrong Side: Embracing Disruptive Innovation in Everyday Life’!

This shows how trivialised and vacuous the term has become. The concept has become a cultural affectation and an advertising gimmick. Innovation is no longer simply about research and development (R&D), technology or investment, but is now applied to everything that moves: culture, employees, creativity, role-models. This reveals that the discussion is taking place within its own terms, and is no longer linked to a broader purpose. In fact, the extraordinary attempt to promote innovation is a sign of its absence.

If we were living through an era of innovation we would be talking about inventions or technologies, or their impact, or what is next. Instead we are talking about innovation as an end in itself. This apes the equally vacuous debate in political circles about the ‘Big Idea’. If it existed politicians and the media would be talking about solving problems rather than the Big Idea.

In reality we are living in an era characterised by short-term pragmatism, fuelled by an institutionalised conservative culture of risk-aversion. This risk-averse business culture with its focus upon short-term and predictable market returns has reduced innovation to narrow and instrumental terms. The best expression of this is the proliferation of patents. Once regarded as an indicator of innovation, patents have increasingly become an end in themselves – a means to recoup costs of R&D and thus to minimise the risks of investment in R&D.

According to the Organisation for Economic Cooperation and Development (OECD), more than 442,000 patents applications were filed in Europe and the USA in 2002, compared to around 224,000 a decade earlier (1). In their revealing study of the patent system in the USA, authors Adam B Jaffe and Josh Lerner make the point that this increase in patenting does not reflect an explosion of inventiveness or innovation. Instead, they argue that there has been a proliferation of patent awards of dubious merit (2).

According to a 2004 study by James Bessen, a researcher at Boston University’s School of Law, and Robert Hunt, an economist at the Federal Reserve Bank of Philadelphia, by the end of the 1990s firms were able to obtain more than twice as many software patents for every R&D dollar spent than at the start of the decade. They concluded that the growth in the number of patents was now exceeding the increase in R&D expenditure, which indicated that ‘cheap’ patents were being used as a substitute for more R&D. Reporting this study, The Economist remarked: ‘In other words, the cake is not getting much bigger; it is merely being cut into more and ever thinner slices. Is the industry doing too much patenting merely for the sake of it?’ (3)

The proliferation of ‘cheap’ patents means that innovation is becoming an end in itself. Developing a patent portfolio has become a key means of maximising the risks of both R&D investment and competition. IBM alone now earns over $1billion annually from its patent portfolio, while a company like HP has seen its revenue from licensing quadruple in less than three years to over $200million this year. Microsoft, a company that held a mere five patents in 1990 (when it was at its monopolistic height) is on course to file 3,000 patents this year, with over 10,000 patent applications pending.

Like many large companies, Microsoft now also has a new Corporate Division to exchange its technology for cash or equity in start-up firms, and to pursue patent infringements. The increase in patent-related litigation has increasingly made lawyers the key players in the competitive struggle between firms, rather than entrepreneurs and researchers. Litigation licensing units in large firms are successfully extracting license agreements and/or past royalties from smaller rivals. Texas Instrument, for example, has in recent years netted close to $1billion annually from patent licenses and settlements resulting from an aggressive enforcement policy. In some years, revenues from these sources have exceeded net income from product sales (4).

Short-term risk aversion increasingly informs R&D itself. Global R&D spending continues to grow significantly, reaching a total of $384billion last year according to Booz Allen Hamilton (an annual growth of 6.5 per cent since 1999, while the pace of increase has accelerated to 11 per cent during the past two years) (5). However, the split between spending on research versus development has begun to tilt towards development, or what some now refer to as ‘applied R&D’. In the USA, for example, the share of total business R&D performed by small and medium-sized enterprises grew from 12 to18 per cent during the 1990s, while the largest companies saw their share decline (6). Yesterday’s large R&D labs, like Bell Labs, which once employed 6,000 people and whose research endeavours creating the bedrock upon which many of the innovations we experience today still depend, resemble ghost towns or have disappeared altogether (7).

The downsizing of basic research – that is, scientific exploration and experimentation – undermines future innovation. As Benjamin Hunt argues in his very interesting book The Timid Corporation: Why Business is Terrified of Taking Risk: ‘Innovations [of today] are built on basic research that was done long ago – 15 or 20 years ago for electronics and communications, and 20 to 30 years earlier for new materials.’ (8) With the shift from R to D in the short term, it is difficult to see where the longer-term foundation for innovation will come from.

The shift from R to D represents a lowering of expectations of what R&D can achieve. And this is not surprising. As Hunt argues, companies today are driven to grow their business in order to increase stock market valuations to meet expectations of growth; they face pressure to deliver predictable results every quarter. The impulse is to reduce the prevalence of factors that cause volatility and deviation from meeting financial targets.

The result is rigidity, controlled environments and the institutionalisation of ‘Time to market’ product or service development. This is best illustrated by the approach of a new acclaimed book Fast Innovation: Achieving Superior Differentiation, Speed to market and Increased Profitability, by Michael l George, James Work and Kimberly Watson-Hemphill. The authors – citing the Law of Lead Time (Little’s Law), which suggests that the more active projects you have the longer it will take to complete all of them – implore executives to ‘flush out the pipeline, as GE did when it cut 1,000 research projects down to 20 that could be seen to contribute in three to five years’ (9).

It is not simply the shortening of the timescale that is problematic, but the expectation that within this time-scale success can be guaranteed and delivered. The focus must be on backing winners. The result is the development of a culture of success that cannot countenance failure or deviation from delivering predictable results. Unpredictability – the necessary foundation of exploration and experimentation – is regarded as disruptive, which must be minimised. The process of minimising unpredictable outcomes raises pragmatism and the knowable to an operating principle.

Yet a culture of experimentation and failure is what has underpinned so many of the breakthroughs of the past: the discovery of penicillin is one of the most famous examples. More contemporary examples include Pfizer’s development of Viagra, which emerged from a failed treatment for angina (called compound UK-92,480).

In the Hall of Fame of those who failed to learn from failure, Xerox Palo Alto Research Centre stands head and shoulders above the rest – when it didn’t see the results it sought from a number of projects, it terminated funding. Today we know these as Ethernet (developed later by 3Com) and PostScript (developed by Adobe). Eleven of 35 of its projects were to become world-beaters but were developed outside of Xerox Palo Alto. In fact, these projects’ combined market capitalisation is more than twice that of Xerox itself.

In reality, unexpected successes and failures are such productive sources of innovation opportunities because most businesses dismiss them, disregard them and even resent them.

Contemporary corporate culture and reporting systems further ingrain this ‘it-should-not-have-happened’ approach to unexpected outcomes, for they draw attention away from unanticipated possibilities and institutionalise expected outcomes. This is a self-fulfilling prophecy. In such a culture, Christopher Columbus would have been fired for not delivering his target of discovering a new route to India and discovering America instead.

The dangers can be seen in the proliferation of what we understand or expect from ‘innovation. The iPod, which is held up as a symbol of this new innovative era, illustrates how our standards and expectations have been lowered. Apple doesn’t own any of the intellectual property contained in the iPod. The electronic guts of the machine were engineered by a small Sillicon Valley company called PortalPlayer. What Apple did do was solve a problem – it created a better way of transferring music to a portable device, through iTunes. The big innovation was nothing more thrilling than persuading the music majors to allow their songs to be sold for 99cents. The fact that the combination of existing software, incrementally improved hardware with a new business model and a wonderful design, can be regarded as the hottest innovation in town, illustrates how our expectations have been lowered.

The problem we face with the reduction of innovation to a set of rigid expected outcomes is not that society will aim to high and achieve nothing. The real danger is that we will aim low and achieve it.

Norman Lewis is director of technology research for Wanadoo, the home division of France Telecom. This is an edited version of his speech in the session ‘Innovation in an Era of Caution’ at the Battle of Ideas festival, where he spoke in a personal capacity.

(1) http://lysander.sourceoecd.org, OECD Science, Technology and Industry Scoreboard 2005

(2) Innovation and Its Discontents: How our Broken patent system is endangering innovation and progress and what to do about it, Jaffe, A.E & Lerner, J (2004), Princeton University Press, Princeton, p11/12

(3) See ‘A Market of Ideas, A survey of Patents and Technology, October 22 2005’, The Economist, October 22 2005, p10

(4) Innovation and Its Discontents: How our Broken patent system is endangering innovation and progress and what to do about it, Jaffe, A.E & Lerner, J (2004), Princeton University Press, Princeton, p14/15

(5) See ‘Innovation spending soars but “does not buy results”’, The Times, 11 October, 2005, p47

(6) ‘R&D spending: Research budgets know no boundaries’, Financial Times, 7 June 2005

(7) See Lab for Sale, Robert W Lucky, IEEE Spectrum, September 2005

(8) The Timid Corporation: Why Business is Terrified of Taking Risk, Benjamin Hunt, John Wiley and Sons, 2003

(9) See the Harvard Business School Working Knowledge Portal Book Report