Don't Be "Netflixed:" Why Innovation Labs Are Vital to Government Agencies

Even though innovation never goes out of style, there has been a renewed interest in governmental innovation as all agencies face shrinking budgets and an uncertain economy. The Federal Digital Strategy calls for more innovation in the government’s technical infrastructure and how information is delivered to citizens. There are plenty of consultants, conferences, and groups ready to help governments become more innovative. For the last few months, I have read much of the latest thinking on innovation. The topics range from the Lean Startup movement to the neuroscience of innovation. As with any hot management topic, there are many books, articles, and postings with some great ideas, not-so-great ideas, and downright damaging ideas. So, for this month, I will write a series of posts giving my opinion of the better ideas in current innovation thought.

The Ingenuity Gap was published in 2002 but has relevance for today. Homer-Dixon gives a compelling case for improving our ability to be ingenious. He argues that we not only need innovation (defined as the ability to create new ideas) but also the ability to reuse existing ideas for solving complex technical, social, and economic problems. In his book, he details a number of wicked problems such as climate change and economic inequality that are exhausting our current solutions. We need to increase our ability to rapidly innovate to ensure our survival. This is an important book to read as it builds a compelling case for investing in innovation.

The Business Model Innovation Factory was just recently published and is part of the Lean Startup literature. Personally, I found Kaplan’s arguments compelling when describes the need for creating business model innovation factories in businesses and nonprofits. His main point is that businesses that don’t constantly innovate their business model will become netflixed which is defined as being "disrupted, destroyed, or displaced by a new business model” (Kaplan, 2012, p. 5). If you accept Kaplan’s definition of a business model (“a story about how an organization creates, delivers, and captures value” (p. 18)) then you can see why government agencies need a business model innovation factory.

Every government agency is established to create value. The Veterans Administration adds value by aiding veterans while the Department of Transportation adds value in regulating the nation’s transportation infrastructure. The agencies deliver the value through their operating model (p. 21) which is built of capabilities that can be further devolved to people, processes, and technology. Take any government program and you will see a cluster of capabilities that make up that program. There are the core capabilities, the key enabling capabilities, and the supporting capabilities spread throughout the agency which, if well-aligned, delivers the value promised by the agency’s strategic vision.

To avoid being netflixed, businesses and agencies need innovation labs to create and test new business models. Nothing new here but Kaplan has an important twist on just setting up innovation labs – adjacency. What this means is that the innovation lab should not be separate from the current business operations. Rather, the innovation lab should have a flow of people and ideas from the main business operations so that the lab can develop disruptive ideas which can be then tested and flowed back into the main operations. Kaplan cautions against mere tweaking of existing business models but it is vital that the main operations continue while new business models are ready to be implemented once the current business model has ran its course.

Sounds reasonable and Kaplan has plenty of examples to demonstrate the necessity for innovation labs. So, why do many of these initiatives fail? As I read the ten reasons why companies fail at business model innovation, I recognized the death grip that legacy systems have on many government agencies (pp. 40-49):

1. CEOs don’t really want a new business model: improving the performance of the current business model seems to be a safer career route for senior executives while the uncertainty of a new business model scares senior executives.
2. Business model innovation will be the next CEO’s problem: the hot potato game.
3. Product [or Program} is king – nothing else matters: subject matter expertise and program management expertise is highly-valued in government and it should be. But, too often, we are constrained by our knowledge and successes.
4. Information technology is only about keeping the trains moving and lowering costs: If given the choice between maintaining legacy systems and building new systems, the rational choice is to maintain the legacy system as current programs have to operate. This will be especially true in the era of shrinking IT budgets.
5. Cannibalization is off the table: current programs are often resource-constrained as it is. Thus, any attempts to take resources from legacy systems will be strongly resisted.
6. Nowhere near enough connecting with unusual suspects: senior executives, program managers, and subject matter experts tend to hang out with the same people. This is necessary to gain the deep knowledge of a legacy systems but the chance encounters that spark new innovations rarely happen.
7. Line executives hold your pay card: how many of you have been on the special project but your performance appraisal depends on your functional boss who also is waiting for you to return to your “real” job?
8. Great idea, what’s the ROI?: in many cases, it is difficult to determine exactly the impact of a new business model until it is tried. Thus, the Catch-22 of trying to justify a new program with an exact ROI when it is so new that there is no applicable ROI.
9. They shoot business model innovators, don’t they?: Innovators can be annoying. They criticize the current legacy system even though they don’t have the deep subject matter expertise to fully understand it. They constantly come up with new schemes but often fail to make a compelling business case for it. And they just don’t seem to appreciate the constraints that we all have to operate under.
10. You want to experiment in the real world, are you crazy?: Agencies have a mission to perform and citizens that depend on that mission. We just can’t eliminate the current program and give the citizens something untested and possibly detrimental to their expectations. We have to be responsible stewards of their tax money.

I took the liberty of pairing Kaplan’s reasons for failure with my own perspective of the common arguments justifying the reasons. I don't necessarily agree with the common arguments but there is some merit in the objections raised to calling for innovation. That is why Kaplan advocates his particular approach to adjacent innovation labs as a way of avoiding the war and helping the organization accept the new business models.

In my next post, I will describe ways of being innovative while still delivering on the agency’s mission. Till then, what do you think of the reasons above? Is government in danger of being netflixed?

Disclaimer: All opinions are my own and do not reflect the opinions of my employers or any organizations I belong to and should not be construed as such.

References:
Homer-Dixon, T. (2002). The ingenuity gap. New York: Alfred A. Knopf.
Kaplan, P. (2012). The business model innovation factory: How to stay relevant when the world is changing. Hoboken, NJ: John Wiley and Sons.