There is a great post on Harvard Business Review by Vijay Govindarajan and Jatin Desai regarding the nature of innovation in organisations. The message aligns very closely to my own experience with software products. Organisations tend to focus on building short term product innovation engines, and not enough attention to business model, process and service innovation. Software products are fragile and vulnerable to competition, easy to replicate or copy and over the long term there is little competitive advantage.

New business models

Once a software product idea has been proven, and there is a decent customer base willing to pay for it, the focus needs to be towards value added processes and services that “lock in” the customer and present new barriers to entry to competitors. These additional services could require reengineering your own organisation to develop new service capability, or could involve partnering with service providers who have unique capabilities that you dont have yourself.

The Feature Treadmill

While it is tempting to try to continue to differentiate a software product by continuing to add new features; this is a trap and puts you on a never ending treadmill as the product gets more complex to maintain. Typical request for proposals (RFP) have a list of features that the product needs to have in order to qualify. The way these RFP’s are scored by customers (and their big brand consultants) means that software vendors have to close the functionality gaps in order to win new business. The new feature set becomes the benchmark for future RFP’s and so the cycle continues. The result is bloated software with unnecessary features, complex implementations and ultimately with competition, commoditisation of the product itself. Think about big ERP (I call this the ugly guerilla software of the 90’s)!

In an age where simplicity and fit for purpose is valued, this feature bloat is clearly a bad thing.

Combining Product, Business Model and Service Innovation

By combining product innovation with business model, process and service innovation, it is possible to break out of the treadmill and offer a properly differentiated and more valuable offering.

Examples of service offerings might be auditing, engineering or consulting services that are designed to ensure the customers business itself is operating effectively, and the product is properly used. Training services are another example of process innovation (provided of course that the training is not just simply compensation for a bloated hard to use software product). Content provision services are another way whereby valuable relevant content is integrated into the service offering to add additional business value beyond simple process automation.

Software as a service offered through the cloud is a technology platform on which many of these additional services can be offered, thereby complementing a product line without requiring your people to have physical presence in every geography.

Business Process Outsourcing

The combination of business process outsourcing combined with the software products is another powerful area of innovation. Companies that have the capability to do both are in a position to offer a uniquely differentiated service. They can leverage their existing service capability and practically give the product away for free, thereby creating a new business model that will be hard to replicate by a pure play software vendor.

Dualistic Mindset – weighing up the long term against short term

In the HBR article, Vijay and Jatin highlight the need for a dualistic mindset in leadership. This is the ability to deliver near-term results and simultaneously prepare for perpetual results year after year. I couldn’t agree more.

There are some constraints in most companies that makes an integrated product and service innovation process difficult to achieve. These include a lack of maturity in developing the business case and presenting a compelling business model that links the short term investment to longer term benefits. Even if a business model is actually presented in the form of a financial model, the risks are often perceived to be too high, and the business is tempted to focus again on the short term operational imperatives. One solution is to show in the business case how risk will be mitigated.

Innovation intent

Vijay and Jatin conclude that leadership in many larger organisations simply lack the intent to overcome the constraints and barriers that are necessary to develop an effective integrated product and service innovation process.

The article states that innovation intent is characterised by several indicators,  one of which is a real belief that innovation is a differentiator for long-term growth and success. This cannot be “lip service”. A balance needs to be maintained between the innovation activities and performance (ongoing operations) areas. The former has long term strategic consequences, the latter is more short term and tactical. Measuring and driving innovation effort on short term results is a recipe for disaster.

In my experience, true innovation intent will manifest itself in the form of a clearly defined budget for R&D and for investments in new growth areas. This budget needs to be underwritten by clear business models for the combined development of new products and services. The role most suited to co-ordinate this business model is Product Management, with strong support from leadership at the Board level.

Sustainable growth

All businesses reach a point in their evolution where new product and service offerings become critical for continued growth and success. Simply increasing efficiencies by cost reduction, and using all the profits to fuel acquisitive growth is not innovation intent as defined by HBR.

True growth in business value over the long term comes from the demonstrable organic growth in the core businesses,  not  acquisitions.  Buying companies will always lead to growth,  but this can be a fragile model indeed if the acquired businesses do not contribute as well to organic growth.  Relatively few companies can sustainably grow a business through organic means only because this requires innovation intent.  The enabler for organic growth is a deliberate innovation process that considers product, business model and service innovations, and is funded and measured appropriately.  If your company does not have a clear R&D budget then unfortunately you are already on the back foot and probably permanently on the treadmill.

The HBR article can be viewed here: http://blogs.hbr.org/2013/09/innovation-isnt-just-about-new-products/

Image with acknowledgement Fritz Cartoons