Innovation is as critical to large corporates as it is to start-ups. But as Chicago Booth Professor Michael Gibbs, states in a recent article “Many companies struggle to generate an overall culture of innovation.”
We are reminded that winning this struggle can be critical, by news today in relation to Tesco, the UKs largest and previously most successful retailer. “Tesco’s fundamental problem is… Its entrepreneurial element seems to have been replaced by a corporate approach…” said Lord Haskins former chairman and founder of Northern Foods speaking on BBC Radio 4.
Encouraging the “entrepreneurial element” and seeking ways to spur innovation in large corporations was the motivation behind revealing research carried out by Gibbs and his co-researchers Susanne Neckermann of Erasmus University Rotterdam and Christoph Siemroth of the University of Mannheim, when they investigated a publicly-traded IT-services firm with more than 70,000 employees.
Unusually this firm had tracked the progression of thousands of new ideas and had recently run an experiment to see if incentives could encourage more and better ideas. After analysing the progression of 5,000 ideas, the researchers identified these four modus operandi that collectively paid off more than tenfold:
The Use of an Idea Portal
The IT firm ran an intranet-based ‘Idea Portal’ which was accessible to most employees, making ideas and their origins transparent, and tracking them from seed to implementation.
An idea portal can encourage employees to share ideas, stimulate thinking, create friendly competition, and encourage better ideas. It can also overcome some of the difficulty corporates have in engaging employees due to narrowly defined roles and job descriptions. It can also allow employees to see their ideas put into practice.
However such a system can require some guidance from executives. Companies “need to train employees in idea-creation methods, and encourage them to focus on areas where they are most likely to make useful suggestions,” says Professor Gibbs.
Reward Good Ideas
The researchers contest the belief that creativity is a personality trait that can’t be swayed by rewards and incentives. “While most psychologists and sociologists would argue that innovative behaviour tends to be different, and creativity tends to be undermined by rewards, we found it was just the opposite,” says Gibbs.
The IT firm had run a year-long experiment to test whether incentives could spur innovation. It had offered incentives to 5,400 employees which it compared to a control group. When an idea, developed through the portal, was implemented, management awarded praise and points to the responsible employees. The points could be traded for prizes such as smartphones.
The rewards had a clear impact. Better ideas were generated as rewards increased, more lower-level employees submitted ideas, and the quality of ideas increased. The research revealed that rewards can motivate employees to focus on quality, generating fewer but better ideas.
Calculating the ROI for the experiment, the researchers found that rewarding the best ideas cost the company $14,250 over the year; whereas the ideas generated were estimated to have added $1.4 million–$8.3 million to annual net profits. However companies should exercise caution when doling out rewards. “If you set these [incentives] up in the wrong way, employees will do the wrong thing,” says Gibbs.
Court Long-time Employees
Newer workers can bring new perspectives to a business. However the researchers found that the employees who had been with the company the longest submitted the best ideas. Younger employees presented slightly more ideas, but those tended to be of lower quality. “Innovation arises in part from experience in the same company with the same clients,” Gibbs says. Rank also had an effect in that more senior employees submitted ideas of slightly better quality than others.
To keep the ideas pipeline going companies have to show that they are taking every suggestion seriously. This can in itself be a major task. For large companies like Toyota, with more than 330,000 employees worldwide using data analysis is essential.
The IT-services company used data and analytics to track and quantify employee innovation, and also to test and refine policies before implementing them company-wide. It will also enable them to implement a permanent reward structure, which they plan to do as a result of the researchers’ findings.
Read the full article in Chicago Booth's Capital Ideas magazine
Read the research paper “A Field Experiment in Motivating Employee Ideas”