To be truly effective, an innovation team needs freedom to operate, a separate measurement framework and incentives.

Jonny Crowe runs value creation advisory company Liminal Ventures

While politicians love to make announcements about abstract billions flowing into innovation, in the real world of business, it can be challenging to create an environment that inspires innovation.

Creating a space where innovation can flourish involves breaking, questioning or testing ways of thinking and working, making new decisions and doing away with traditional operating systems or mindsets.

Of course, that’s easier said than done. I’ve seen leadership teams spend hours discussing it, while still failing to have the right conversations.

So here are six practical steps leaders can take to begin creating a culture where innovation can thrive:

1. Separate innovation at the highest level

Innovation doesn’t derive from consensus or hierarchy, but from hypotheses tested by experiment. It follows then that innovation teams can only thrive if they can change things up. They are solving the creative disruption that builds value for the business. The ideal person in charge of this team doesn’t care about status titles like ‘head of innovation’; instead, they know where the bodies are buried, are impatient for change and have the natural authority to get stuff done. That person, without question, should report directly to the CEO or a board committee, regardless of seniority level. To be able to experiment in the knowledge they can fail safely, the team must be separated from the company’s hierarchy at the highest possible level. Equally, avoid having innovative startups sit under and answer to any other operating entity, least of all the ‘business as usual’ unit they are trying to disrupt.

2. Make the CEO a champion of innovation

To create the space and autonomy the innovation team needs, the CEO must be active in the process. But they must be equal players, not leaders, and take part in workshops, boot camps, hackathons, etc., at the grass-roots level. This way, the CEO signals both the importance of the activity and the expertise of the team leading the session. Leaders should also ensure that the initiatives and successes of the innovation team are highly visible and talked about on both the management level and as part of the larger business.

3. Information does not need to be equally shared

A one-way knowledge flow principle must be established by the leadership and accepted by all. Requiring the innovation team to provide information on activity or success rate is a proxy for control — most likely one of the ways that nervous or threatened executives may seek to direct or gain oversight over the team. Information should be allowed to flow from the core to the innovation unit, but executives should be ok with information not being shared the other way equally. With innovation, it’s important for a leader to know when to trust and let go. Holding an innovation team too close inevitably smothers it. Burdening an internal startup or scale-up with the same reporting and bureaucracy we refined for our behemoth main business is like putting a 40kg rucksack on a puppy. Don’t do either.

“Holding an innovation team too close inevitably smothers it.”

4. Create a separate measurement framework for the innovation team

If innovation aims to uncover opportunity, leadership teams must measure success according to those indicators. By all means, count and measure outcomes, but don’t obsess over anything that wasn’t deemed “a success” through the lens of the core business BAU reporting. In fact, ignore the rest of your annual reporting cycles and create a separate measurement framework for this team based on the innovation goals. You can’t expect something to create value by nature of it being different, only to then measure it as if it’s the same as your other lines of business. While a separate success framework for the innovation team may upset the more jittery “status quoists” within the business (sometimes including your board, your shareholders AND your CFO), this action signals to those stakeholders that we will be using a different yardstick and also shows the innovator team that you’ve got their back.

5. Incentivise the innovators

In ROI-focused organisations, this should be obvious but often isn’t. As mentioned above, the part of the business that leads on innovation requires substantial autonomy and separated goals, but it also needs a clear, standalone incentive structure. Otherwise, they will revert to the “mean” of the core business every time. Given the unpredictability of life, not to mention big corporate’s record on disrupting itself, that would be both safer and easier.

“We don’t talk about this enough. It seems almost taboo.”

I recently spoke at an IoD roundtable about the importance of meaningful equity incentive schemes that can be separated from the core business. Look at incentivising your innovators in the same way that start-ups do. That means spreading meaningful equity beyond the usual C-suite. Incentives should be transparent, openly valued, and promoted within the culture. We don’t talk about this enough. It seems almost taboo.

6. Make good use of the board – but beware the “quantum effect”

Boards should help set the general direction and then shift to removing any obstacles that are prevnting the innovation team from doing their thing. Board members should keep an eye on whether the leadership team is sufficiently engaged and invested in innovation and if they are walking the walk as well as talking the talk. Doing some ‘mystery shopping’ and speaking to team members and customers can be great. But at the same time, they should beware of what I call the “quantum effect”; when anyone in a leadership position pays too close attention to an initiative, the granular attention can distort it. The act of observation has an impact on the observed. Teams naturally try to second-guess what the leader wants to hear and subconsciously adapt to that wish.

“When anyone in a leadership position pays too close attention to an initiative, the granular attention can distort it.”

A board’s fiduciary duty includes increasing the business’s overall value and making it defensible – how better than promoting innovation? Board members for large corporations can learn a lot from small innovative startups in terms of what they bring to the table. Regardless of company size, all board members ought to act and think like they are investing in the next Google (they probably aren’t, but it would help to try).

The key takeaway is to foster the right environment for innovation to grow, giving the team both the autonomy and the support needed to experiment safely, incentivising them to refrain from playing it too safe by having them participate in the value of the upside they will create. True innovation challenges precisely the things that have so far brought consistency, certainty and safety to the business, and requires leaders not just to think differently but to do differently. If you value innovation, start by innovating the way you lead.

Jonny Crowe runs value creation advisory company Liminal Ventures. Until 2019 he was CEO of disruptive online car retailer cinch and Chief Digital Officer of leading European automotive company BCA Marketplace Plc. Before that he worked for leading PE firm Apax Partners, after serving as Interim CEO of Apax investment Wehkamp, the leading Dutch fashion and home online retail group.