INNOVATING INNOVATION INVEST, INCENTIVISE, INCORPORATE

Executive Summary
The breakthrough in innovation will not come from new initiatives. It will come from consistent
implementation of a small number of organisational habits, chosen by observing real-life human
behaviour. To succeed:
1. Invest in individuals psychological well-being;
2. Incentivise with immediate rewards; and
3. Incorporate trust into every interchange.

Problem
It is striking that while best practice in management is well-known and widely promoted, a
minority of companies actually follow these practices systematically. For example, only 4% of UK
companies in the World Management Survey achieved an average management score between 4
and 5 (on a scale from 1 to 5). [Source: 1, Figure 1]
Figure 1: Proportion of firms achieving different levels of average management scores

Source: World Management Survey (2004-2010)

The implication is clear: implementation is a real bottleneck. The same is true for innovation
practices. Many text-book solutions to innovation suffer from two interrelated short-comings: they
are rarely based on empirical evidence of what works; and hence while sounding logical are
rarely practical to implement fully in the real world. So what?
Well, it is no surprise that organisations fail to implement innovation policies which:
Go against the grain of human nature i.e., assume perfect rationality;
Are over-complicated i.e., with too many changes required in one go; or
Are overly simplistic i.e., ignore the whole system nature of organisations.
This paper does not claim to put all of this right but it does aim to provide a new perspective along
with some important hypotheses to test further. The main message of the paper is for organisations
to pick a small number of innovation practices and implement them with 100% consistency.

Solution
In any system that exhibits increasing returns, it pays to do a few things well rather than a large
number of things in a mediocre fashion. This paper asserts that the same is true for implementing
innovation. It proposes three areas of focus:
1. Invest in individuals especially in their psychological well-being;
2. Incentivise with immediate rewards turning innovation into a keystone habit;
3. Incorporate trust into every interchange eradicating fear and fostering openness.
The rationale and implications of each of these are explored in more detail below. By addressing
barriers to innovation at the level of individual employees (1), processes (2) and the organisation as a
whole (3), one can keep it simple while still recognising the whole-system nature of innovation.

1. Invest in individuals especially in their psychological well-being
Every year, more than 50% of companies in the UK undertake a staff survey. Yet, 80% of employees
think it will make absolutely no difference to their work. [Source: 2] This is despite the fact that
companies in the top 100 great places to work have outperformed the stock market every year
between 1985 and 2011 by 2.3-3.8%. [Source: 3]
So, it may be that few companies actually invest substantially in the most important aspect of their
most important asset (people), and few consider themselves responsible for the psychological well-
being of their employees. Yet, research shows that positive emotions markedly improve performance
and, in particular, enhance innovation, openness and flexibility. [Source: 4]
But how can organisations increase individuals positivity? I would like to offer just two suggestions:
Offer cognitive behavioural therapy (CBT) or mindfulness interventions to improve the
resilience and optimism of individual employees [Source: 5]
Implement the other proposals in this paper under 2. and 3. below.
Much of the motivational literature assumes that it is organisations and managers job to make their
employees engaged. However, if individual employees do not have the skills for resilience and
optimism, this may be an impossible task. No wonder managers find it so challenging!

2. Incentivise with immediate rewards turning innovation into a keystone habit
A vast and growing literature now shows that human beings are not perfectly rational, self-
interested utility maximisers. Rather, evolutionary history has led to clear biases in Dan Arielys
words, we are predictably irrational. For innovation incentives to work, they need be in harmony
with actual real people, not homo economicus.
Lets highlight some of the behavioural patterns that seem to have most relevance for innovation:
Risk-aversion combined with parabolic discounting it is very hard for organisations to
commit to the long-term, necessarily risky investments associated with innovation
Bounded self-control combined with inertia and procrastination while all humans possess
the capacity for innovation, most of them prefer the status quo and habitually stick to it
Reciprocity and trust see section 3. Below.
So how might one try to change the habitual behaviour that sooner or later saps the energy from
most innovation initiatives? One idea would be to turn innovation into a keystone habit to rewire
the organisations brains and processes to constantly cue and reward innovative behaviours. [Source:
6] So what kind of cues and rewards are most likely to be successful?
In the spirit of this paper, lets keep it simple. (Decisions involving complexity, self-doubt or
inconvenience put people off.) Every-day cues that could help are:
Re-state the organisations commitment to innovation at the beginning of each meeting
including ground rules such as aiming for a positive, inquiring style of interaction [Source: 4]
Institutionalise habits to spend time with customers and suppliers or hearing from them for
example, include a short video of a customer or supplier interview in weekly team meetings
Many readers may think these examples trivial. Others may say that they already do this. What is
more likely, however, is that they have decided to do it but actually dont follow through with 100%
consistency. Too often, innovation is a topic that gets priority for a short period of time but then
something else customer satisfaction, cost control, brand takes over as the next new priority.
The rewards need to be similarly simple and effective. A consistent and immediate reward (eg.,
praise and appreciation), following a particular action (e.g., innovative behaviour) can change the
neural pathways in the brain to seek and look forward to opportunities for taking that action again.
This way, the whole organisation can adopt the habit of innovation.
The rewards should be frequent (e.g., daily or weekly) and non-monetary (e.g., praise, a treat, senior
attention), in order for them to be habit-forming and effective. Ex-ante financial rewards (e.g., bonus
schemes) have been shown to lead to myopia, probably due to their impact on stress hormones
which encourage fight or flight behaviours. [Source: 7] On the other hand, ex-post non-financial
rewards are seen by employees as more effective sources of motivation. [Source: 8]

3. Incorporate trust into every interchange eradicating fear and fostering openness
Trust-based communities across the world are more prosperous. [Source: 9] Why? Because trust
encourages co-operation which in turn allows specialisation and reduces transaction costs, leading to
a more productive economy. The same dynamics to apply to organisations, and their customers and
suppliers, too.
In the context of innovation, I would emphasise the emotional benefits of a trust-based environment.
The absence of fear and hence a fight or flight response from the body and mind is critical for
innovation and creativity. Trust and reciprocity also enable sharing of ideas which leads to an
exponential number of new ideas generated.
It is not easy to eradicate fear the human system is wired to scan for, detect and react to it at the
smallest provocation. The steps proposed in 1. above will help, but there may also be a need to more
fundamentally revise values and behaviours especially of those in powerful positions. Actions speak
louder than words and staff draw strong conclusions from senior leaders smallest gestures.
The top team therefore need to consistently behave in ways that demonstrate their trust in others
and their own trust-worthiness. This is at the same time obvious and incredibly difficult. For example,
research now shows that power does corrupt people that are given authority behave in more
selfish and ruthless ways. [Source: 10] It takes real discipline to never make promises you dont keep,
never threaten anyone and always prioritise the greater good.
This picture will not fit everyones idea of leadership in commercially successful organisations and
that is precisely why most of them fail to institutionalise innovation.
You need to make a clear choice either to truly prioritise innovation and act accordingly; or accept
that half-hearted implementation will not deliver the same rewards.

Practical impact
Organisations that succeed in implementing innovation can look forward to a virtuous cycle of more
positive and engaged staff, more courage and ideas to challenge the status quo and a genuine energy
to delight customers. Given that the rewards are not just financial but also emotional, it is highly
likely that the organisation can sustain the momentum created in the longer-term as well.
Employees and managers will benefit in additional ways in their careers and personal lives, by
learning to apply effective tools for understanding and addressing behavioural issues, such as
negativity. Feeling less stressed, and more confident and resourceful will enhance their health,
relationships and general well-being.
An innovative organisation, with a reputation for motivated and happy staff, a creative attitude to
work, and a culture of positive reinforcement will attract high quality talent and suppliers. The
internal practices will also contribute to its brand and customer relationships. Which customer would
not like to interact with a consistently inspired and inspiring organisation?

Challenges
It seems clear that to implement innovation successfully, one has to throw ones unwavering
commitment behind it. This is inevitably both costly (in terms of time and opportunity cost) and risky
(because success depends on on-the-ground application). For this commitment to be sustainable,
therefore, it needs to be based on a compelling business case.
However, quantifying all the costs and benefits of such a course of action is challenging, and requires
commitment in its own right. Moreover, it is entirely plausible that an innovation-focused model
does not add up for every organisation. While it is tempting to think of innovation as a kind of meta-
strategy that trumps other approaches (e.g., cost control), this would be overly simplistic.
Finally, depending on the starting point, we may be dealing with significant cognitive and behavioural
change that requires relinquishing deep-seated beliefs, preferences, habits and patterns. As anyone
who has tried self-improvement, to change sustainably takes perseverance, patience and high levels
of self-observation and self-awareness.

First Steps
As is clear from the challenges above, the first step is to answer the question: are you up for it? Do
the benefits outweigh the costs? Do you have what it takes and are you willing to put the effort in?
If the answer is yes, then you are ready to proceed to:
Develop your own, pragmatic and tailored plan to implement innovation, picking the 4-6
actions you will take 100% consistently going forward; and
Get widespread and sustainable support for to the plan before moving forward which
involves smoking out any passive aggressive behaviour and explicitly agreeing what real
commitment means (e.g., in terms of time, money and opportunity cost)
Of course, you will also want to put in place some kind of simple evaluation system to track how the
implementation is going. And then praise, praise, praise the successes as they start to emerge.

References
Source 1: World Management Survey (2004-2010), 2004-2010 combined survey data downloaded
from http://worldmanagementsurvey.org/?page_id=183
Source 2: Nic Marks @ 5x15 video at http://vimeo.com/49224226
Source 3: The Link Between Job Satisfaction and Firm Value, with Implications for Corporate Social
Responsibility by Alex Edmans at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2054066
Source 4: Positive Affect and the Complex Dynamics of Human Flourishing by Barbara L.
Fredrickson and Marcial F. Losada at http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3126111/
Source 5: Psychological Wellbeing: Evidence Regarding Its Causes and Consequences by Felicia A.
Huppert et al http://www.bis.gov.uk/assets/foresight/docs/mental-capital/sr-x2_mcwv2.pdf
Source 6: The Power of Habit by Charles Duhigg at http://charlesduhigg.com/
Source 7: Drive by Daniel Pink at http://www.danpink.com/books/drive
Source 8: Motivating people: Getting beyond money in McKinsey Quarterly November 2009 at
https://www.mckinseyquarterly.com/Motivating_people_Getting_beyond_money_2460
Source 9: Culture Matters: How Values Shape Human Progress by L.E. Harrison and S.P. Huntington
at http://www.amazon.com/Culture-Matters-Values-Shape-Progress/dp/0465031757
Source 10: How to Be a Good Boss in a Bad Economy by Robert I. Sutton in the Harvard Business
Review June 2009 at http://hbr.org/2009/06/how-to-be-a-good-boss-in-a-bad-economy/ar/1