There are weird creatures in the business world: corporate innovation departments. They are separate departments inside companies. They foster and grow “innovation” projects. They are part of the company with the explicit permission to build new things. To dream, to be creative. I can see the allure of why people would want to have them and work in them. Corporate innovation departments (c.i.ds. from now on) seem like a great place to be, detached from market incentives, a playground for adults.

As good as they sound. I don’t think they can work in the current form. There are too many systemic problems for them to be successful. Despite a lot of companies having them, they are rarely successful for the company. We need to reimagine them. We need to find a way to enable companies to invest in future innovations that aligns with their strategy. And c.i.ds. are not the most cost-efficient way of doing so.

A sculpture of an elephant on a bicycle Description automatically generated with low confidence

Let’s not beat around the bush. Big companies are slow. Because of risk adversity, communication overhead, and endemic inefficiencies. And many other reasons. Too many reasons to write here. Big companies also have a lot of resources, from money to human capital. They realize that being a successful business means changing. What they are doing cannot work forever. And they look for opportunities to grow. That’s how c.i.ds. are born. They are a dedicated part of the company that doesn’t need to be bogged down to usual day-to-day activity but focuses on the future.

What often happens then is that you end up having a separate department. The new department is relatively independent, but it inherits many downsides from the host company. This department keep being plagued by the bureaucracy of the host company with the related politics and communication overhead. C.i.ds. end up worrying more about stakeholder management than actual innovation. In a struggle between giving them too much freedom and keeping them accountable, the company defaults with what it knows. Bureaucracy. And bureaucracy makes senses from the perspective of the big successful company. You have something good already, it’s more important to maintain it than risking it all for something new.

And since we are at it with the tangents. What does innovation mean? Fostering “innovation” is not a concrete goal.

Only one thing is certain. You don’t want to be slowed down by bureaucracy while trying to make something new. And when you are experimenting and iterating, fast decision-making is what you need. Worrying about how smart or dumb you may look to your supervisor is not helping you.

For example, take one of your usual bureaucratic activities: Annual budgets. They affect c.i.ds. by limiting the potential upsides. Budgets induce a healthy scarcity mindset while limiting the upsides. It is hard to impossible to predict one year in advance what you are going to need. Again, slow processes hinder innovation. If financial agility is needed, yearly budgeting is not getting you there. Startups, on the other hand, are more flexible in deciding when to apply for funds and how much.

But the biggest problem? It is not bureaucracy, but a lack of incentives. Innovation is hard. Coming up with something new requires dedication, patience, and a lack of fear of failing. Often these can be achieved by the promise of future upside. Can this happen in a big company/corporate context? I have my doubts. The large regular paycheck does not bring urgency, and the lack of equity removes future upsides.

Innovating it's a zero to one effort. It is different than improving or maintaining an already successful and proven product. It requires different mindset, different activities, and efforts. You need to create an incentive structure different than what you have in your big company. To attract and develop the employees.

If I were responsible for an innovation department at a big company, I would keep this in mind. I would spin the department as a separate entity. I'd leave the new company unbounded by old and slow practices. To have them small with fast reaction speed. Free to make autonomous decisions not aligned with the parent company cadence. I would also tie compensation with performances. Making the employee participant in the upside of their ventures.

What could also work be an aligned venture investing branch that scouts and kickstarts new separate companies that have synergies with the parent company. Funds them and gives preferential access to the resources of the bigger company. That way you can have a clear separation, maintain a healthy set of incentives for the new company members, and use resources in a strategic way.

Despite all of this, there is a longer route to foster innovation. And it was all the time under our noses. The longer route is to spread an experimentation and risk-taking mindset throughout the company. Distributed innovation. Not gate-keeping future thinking in a separate department or separate company, but having each team empowered to come up with their version of the future.