How innovation caught a cold in the Covid era
Corporate innovation, our modern-day alchemy that typically aims to transform base assets and ideas into gold, is undergoing a transformation of its own. And this transformation owes much to the Covid-19 pandemic and its impact on business. At least, so it might appear according to recent research.
In this blog post, we want to consider this research against the backdrop of our own experience, and make our own suggestions about how you, as a corporate innovator, can respond to the current trends as we see them.
The research, in a report published in October 2021 by international consultancy Ayming, paints a fairly bleak picture of the innovation landscape during the pandemic. In an opinion survey of management and in-house innovation people in 585 companies across 14 countries, Ayming found that around a third (31%) of those companies had actually ceased innovating during 2020. This was particularly so among companies in the industrial, automotive, energy and biotech sectors, according to Ayming.
One in three companies “too busy” to innovate
The most common reason given by survey respondents was that they had to “attend to the more immediate concerns with the day-to-day running of their business” instead – an issue no doubt directly linked to their efforts to respond to the difficult circumstances at the time. A lack of talented staff (6%) and financial resources (5%) were also cited among various secondary factors.
The report, the latest of Ayming’s annual Innovation Barometer surveys, also noted an increasing uncertainty over innovation-related budgets, and a decline in confidence among management involved in innovation. It reported that respondents who felt that “not enough innovation was being done in their companies” had almost doubled to 23% from 12% the previous year. That’s almost one in four of the companies surveyed.
This fall in confidence extended to how people saw their companies measuring up against their competitors: around a third (32%) of respondents were either unsure or doubted that their own companies’ current level of innovation was keeping up with the level in their market generally.
But it’s not just in-house innovators who might be suffering sleepless nights over an apparent decline in innovation. The Innovation Barometer also identified a decrease in collaboration with external resources. This includes consultancies, much like Venturebright and others in the innovation space.
In more detail, the Barometer found that the share of companies focusing on only using their ‘internal resources’ had grown to 67%, compared with 58% from the year before. The share of companies using ‘external private resources’ including consultancies had “decreased dramatically” from 47% to just 29% last year – a situation the Barometer describes as a “major reversal” of the growing trend for using consultancies in the run-up to the pandemic.
A gloomier outlook for innovation?
Commenting on the overall findings, Ayming partner Mark Smith described the Barometer’s findings as “a noticeably gloomier outlook for innovation”.
The Barometer’s findings, particularly the apparent partial shutdown of innovation activity during the pandemic does sound alarming when you consider the importance of innovation for sustaining a competitive edge and for positioning a business in readiness for economic recovery and growth.
The findings also makes a good media story. Sifted, the respected innovation and start-ups magazine backed by the FT, picked up on the Barometer’s most startling finding in its headline on 12 October: “31% of companies failed to innovate during the pandemic””. Its subhead states that “nearly a third of companies were too busy trying to survive to innovate”.
It’s fair to say that Ayming did a good job at providing some interesting data on the impact of Covid on innovation.
However, should we all be troubled by its most alarming conclusions? On consideration, our answer would be ‘no’, for reasons we will explain.
We do agree with the Barometer’s key observation of a dip in innovation spend during the pandemic. We saw this ourselves directly, with the complete shut-down of some of our projects. Further, many clients directed their internal resources to ‘special’ and ‘distress’ projects related to the pandemic. This reflected the view that many organisations establishing a new operating rhythm in line with the ‘new normal’, as Ayming’s Barometer suggests.
A return of innovation: smarter, more efficient
From mid-2021, however (outside the scope of the Barometer’s research), we’ve felt a bounce-back in client spend and engagements. And it’s not simply a return to a pre-pandemic ‘normal’. In fact, many corporate innovators have come back much smarter: they are more savvy, more in tune with circumstances than they were pre-pandemic.
For example, they have a much better understanding of where their innovation capability and business gaps are. As a result, they have a better idea of the external innovators or start-ups with which they should partner. And they are more efficient in resource allocation and generally understanding the innovation mindset.
We think this is good news, and so we don’t think the picture is as gloomy as the Ayming Barometer suggest. There are two key reasons for this.
Longer-term trends in corporate innovation
Firstly, well before Covid hit in 2020, some longer-term trends were already driving changes in corporate innovation. In the 15 years or so leading up to the pandemic, companies have been increasingly working smarter, more efficiently, and handling more of the process-based activities by themselves rather than outsourcing it all to consultancies.
So, many corporate innovators are simply a lot better at it than they were 15 years ago. Their standards have risen enormously since then. For instance, many of the corporates we deal with now have their own innovation portfolios. They have their own metrics, they employ people dedicated to innovation, and many have experimented with innovation labs.
Admittedly, this has been driven partly by the needs and challenges of digital transformation. Corporates have not fully understood all of the concepts involved, so some have really messed up. But through repeated trial and error, they are learning, and their efforts in the innovation space have contributed to the evolution of a new mindset and culture.
All of these changes together have had a suppressive impact on budgets, and in some cases have actually changed the focus and nature of innovation, its location within the business, how it’s carried out, and how it’s accounted for.
However, the scope of the Innovation Barometer doesn’t really allow for the longer-term nuances of this efficiency evolution to be taken into account.
Covid: innovation’s ‘burning platform’ moment
The Barometer survey asks whether the Covid pandemic accelerated innovation, and 76% of respondents agreed. We don’t agree, but we certainly think it created a sense of urgency, leading to faster decision-making and sign-off of initiatives. However, this really a general trend in business when the chips are down. Historically, any business that has gone through a ‘burning platform’ moment tends to innovate with more focus (think of Microsoft, Nokia, Apple, and many others). And indeed, the pandemic felt like a burning platform for many firms in the early days.
Contrary to the Barometer view that the pandemic added pressure for companies to “do more, faster, we rather think that that pressure has been increasingly evident for the last 10 years. Again, we think this is due rather to that longer evolutionary process taking place in corporate innovation, mentioned above.
Corporate innovation versus R&D
Secondly, much of the Barometer’s opinion survey is actually focused on R&D. This is despite the Barometer’s regular use of the word ‘innovation’ and its own interpretation of its survey results.
This confusion between ‘innovation’ and ‘R&D’ is be quite understandable, given that Ayming’s core area of expertise is in R&D finance.
But in our view, innovation and R&D are not synonymous with each other. Despite their close connection, these are two separate subjects. Conflating them can be misleading. After all, a company that does no R&D can still innovate commercially in terms of its business model, its services, its partnerships, and its marketing to create new revenue. And a company (typically a manufacturer) that has a large R&D function for developing its products might do little to commercialise, or even protect, the raw intellectual property being developed in its labs.
So, where in those two examples does the true innovation lie? The answer clearly depends on how you define the word ‘innovation’.
Having got that off our chests, we do agree with some of Ayming’s findings. Our interpretation of course may differ because of our own perspective.
We would say that R&D-related innovation naturally has a more speculative and longer-term risk horizon than the commercially focused innovation projects where we and other consultancies tend to be involved.
So because of the pandemic and its recessionary impact, it’s quite understandable that R&D budgets would in some sectors have been trimmed back. But that’s not to say that those same firms didn’t continue to innovate commercially, perhaps by focusing on the development side of the R&D equation, in the express belief that commercial innovation can drive shorter-term gains.
Ayming’s Barometer raises concerns about R&D funding. There’s a clear indication that budgets may have been squeezed in some sectors, and that external funding has been scarcer.
We have several responses here.
Innovation budgets: a shift from R to D?
The first thing to say is that perhaps the issue is really about companies and investors turning away from speculative R&D and, instead, seeking out opportunities where there is a guarantee of a market and revenues from the R&D investment. This might sound obvious, but any R&D work which can quickly lead to new, fast-growing revenue is more likely to be funded. Even in a recession.
Over the last five or six years, we’ve seen a significant proportion of corporate innovation investment has been in the ‘digital transformation’ space. Budgets have shifted from fundamental R&D towards shorter-term initiates. As Ayming’s Barometer says, this is particularly among the IT and telco sectors, and the pandemic has effectively intensified this shift.
Most corporate R&D these days is almost entirely focusing on the D part: development. We’ve seen clients doing well in creating new platforms, operating models and business models. They are adopting ‘agile’ development and sprints, and encouraging market POCs. This is the easy stuff. There is a plethora of SaaS and API options which have helped to rapidly reduce costs in developing digital-based initiatives. What’s more, there is an ecosystem of well-funded start-ups for corporates to partner with. Most of the risk in this type of innovation is around market and customer adoption. By comparison, most of the innovation risk for R&D budgets is technology risk. This is usually a much bigger risk, involving bigger sums of money.
No surprise, then, that we see a shift away from larger, more speculative investment, and a move to more focused commercial innovation projects where faster returns are more easily found.
On that basis, the big concern raised by the Barometer is the decline in ‘pioneering’ or frontier corporate R&D. There was a time where a big part of the R&D budget would be used to explore more speculatively in areas where the economic value could not be clearly known. This was possible where R&D was decoupled from a pressure of generating fast financial returns.
This type of R&D is withering in large corporations, and the more savvy firms are instead developing ‘open innovation’ approaches in order to try and maintain pace.
OECD: “a realignment of R&D funding priorities”
Secondly, there is strong evidence from the OECD (Organisation for Economic Co-operation and Development) indicating that investment intensity in R&D is actually very healthy and stronger than ever.
The OECD, in a report on R&D expenditure published earlier this year (Main Science and Technology Indicators, March 2021) concluded that the pandemic was the first global economic crisis in OECD history in which business R&D spending did not fall in aggregate terms. R&D spend great faster, or fell less. Than corporate revenue. “This indicates an increase in R&D intensity across all industries”, the OECD report says.
The OECD did note that the pandemic had led to a “major realignment of R&D funding priorities”. This underscores our own experience, mentioned above.
The OECD report said that even though Covid had had an impact, most R&D investors had sustained investment during the crisis.
Reflecting that “major realignment,” sectors like information and communications technology and life sciences did well while others including automotive, aerospace and defence fell back. However, the overall picture for R&D investment was positive.
After Covid: the shape of innovation to come
The Covid pandemic did have an impact on innovation activity. Our own experience tells us this, and clearly the findings from the Barometer survey also show that a third of companies stopped innovating (although, due to the focus of the Barometer, this is likely to relate particularly to R&D-related activity). A quarter of the business leaders surveyed felt their companies were not innovating enough, and a third of them feared their companies may not be keeping up with their market competitors. Altogether, this loss of confidence is pretty significant.
Life for consultancies has been less rosy, too, as companies have tried to carry out much more of the innovation work in-house.
But as we’ve said already, there are longer-term trends at work here, and the pandemic has merely helped accelerate changes that were already occurring in recent years.
So how can you move your company’s innovation activity forward?
For one thing, companies can’t always do it on their own – whether it’s commercial innovation, or R&D – particularly when the there is a growing pressure for speed of delivery, when budgets are tight, and when investors are more risk-averse.
The answer is in two parts. Firstly, work with experienced innovation consultants who can provide inspiration, imagination, and ‘cognitive diversity’ – a way of looking at the world differently. This is difficult to maintain within a corporate, and this is what many of our clients look to when engaging us.
Secondly, focus more on ‘outside in’ innovation. This involves helping your company to identify, work with, and invest in carefully-selected start-ups and SMEs that can bring to you new technologies and markets.
Today, we are witnessing a major shift of emphasis, where corporates are starting to leverage technology innovation that is being created outside their boundaries, to fill the gaps in their R&D.
And since 2016, there has been a much greater input from the investment community (including venture capital) in to more fundamental / technology risk areas. This includes machine vision for robotics, battery technologies, new motor technologies, autonomy and Deep Learning, for example.
We’ll look more closely at ‘outside in’ innovation in another blog post.