Innovating for Profit: My Conversation with Bruno Pesec
Today, we’re talking with innovation expert Bruno Pesec. Bruno hails from Oslo, Norway and is very active within the Norwegian startup ecosystem. He co-founded the Norwegian Lean Startup Circle, which is Norway's largest Lean Startup community. An engineer by training, he brings a uniquely analytical perspective to innovation.
Clinton: I'm so excited that you're here. One of the things that I love about your approach, aside from your passion for innovation, is your focus on innovation as a profit center. When I meet with customers, one of the things I'm always looking to bring up is tracking ROI, return on innovation. From your perspective, how can organizations innovate profitably?
Bruno: First Clinton, so happy to be here and share more on that topic with you. Unfortunately, I have similar observations as you when I come to organizations and they start talking about innovation. It's often perceived as something that's attractive almost like a PR exercise first and then value generating exercise second. When it comes to returns on innovation, what we have to accept or at least recognize it, if we look at innovation as a core capacity or a process, it is fundamentally uncertain. That's what it is. Otherwise it wouldn't be innovative. Then it would just be execution or delivery of something that's very well known. So we have to accept this uncertainty. But accepting that uncertainty does not mean that we relinquish our responsibility to conduct this process responsibly. What I mean by that is, even though the final outcome is uncertain to some extent, how we select ideas, how we develop ideas, how we develop business, how we test those ideas, how we run experiments, how we invest in those ideas or men, all of that we are in control of so we can control inputs into the innovation process and that is how we can contribute to potential profitability of any idea or any investment in innovation.
Clinton: That's great. Let me ask you this, because I think it tees it up very nicely. Why do large companies rarely see return on their innovation investments, where is the gap?
Bruno: The gap usually appears in taking ideas that will ultimately not be profitable or will be very little profitable, taking them too far. What I mean by that we usually suffer from something called sunk cost fallacy. So we have been investing in this specific theme or this specific division. We've been running it for three years. Another year maybe something comes around the corner. Well, the problem is you have both the cost of continuing to invest in that specific unprofitable idea, division, whatever, and you have the opportunity cost. So by giving them one more year, it's not just that you're paying the operational expenses, capital expenditure, whatever else you need to invest, but you're also incurring an invisible opportunity cost which is basically what this talented people could have been doing instead for a whole year. Another thing is that often happens and why returns on investing innovation suffer a lot is especially when we go into larger organizations, there is sometimes lack of understanding of how big an opportunity has to be to even make sense. And what I mean by that is let me give you an example. So there was a big company in Europe, innovation labs, everything, very good processes, and they had an innovation team that was working on a specific idea for three years. What they achieved was €40 million in annual recurring revenue. That would be brilliant for any startup, but for that company, if it wasn't in €1 billion range, it's not even a blip on the radar. So ultimately that team could have been used for something that would have actually made a difference for that specific organization. So every organization must understand its own context before understanding is this idea valuable for us or if it isn't valuable for us?
Clinton: Really interesting. A lot of organizations talk about incremental improvement and wanting to innovate there and the focus should be on on scaling up for 10X improvement. You want exponential improvement on incremental improvement, that's where the investment should be because you have to get that return.
Bruno: What I would also say what's very important so I agree with you 10X, 100X, unicorns, that's kind of what everybody wants. But this isn't black or white. This is not a binary decision. I like to present this as continuum. So yes, you want to capture those 10X, 100X's whatever comes your way. But in order to build capacity to actually exploit those opportunities to really grab them, you need to be doing that incremental innovation all the time. So imagine, one day you wake up and you decide, I want to lift 200 kilos. You just go to the gym and put on the weights and start lifting them, you will probably injure yourself. You need to be going to the gym maybe for months or years to slowly build up the strength necessary to lift those 200 kilos safely. And a similar thing happens with innovation capabilities. I mean, it's a skill set or rather a family of skills that need developing and nurturing. You cannot just go out and hire an expert or a consulting firm or just steal employees from another company and tell them, hey we just identified a massive opportunity, go grab it. That's usually a recipe. I will not say disaster, but it is not a recipe for profitable innovation, unfortunately.
Clinton: Exactly. Thank you. That's great. So you distinguish between doing and managing innovation. Can you tell us more about the why and the how behind that idea?
Bruno: Absolutely. I'd love to. When we talk about having an idea and developing that idea into a new product or service or business model, that is something I call doing innovation. So you have an innovator or you have an entrepreneur and they have this brilliant idea and they start turning it and forming it into business. Now when we start going into established organizations, especially larger organizations that have multiple business units, multiple product lines, multiple PNL centers, they have another big issue and that is how to do innovation at scale. If I have 100 innovators, how do I establish processes that will enable these innovators to come up with relevant ideas, filter them through our strategy process, get appropriate funding, get the appropriate attention within our organization, and how then as an organization, are we going to be able to monitor and decide on this ideas, innovators and projects? That is why I say it's important to distinguish between doing and managing innovation, because they are fundamentally different problem sets and that problems become managing innovation. Problems become more and more noticeable the larger the organization is. Frankly, those problems aren't so felt in entrepreneurial spaces or in startup spaces. Why? Because startups usually have one strategy. They don't have a strategy for getting toilet paper or getting vendors or that stuff. They have one strategy which is basically both business and product strategy. But the moment they are going into larger established organizations, you will find multiple, sometimes even competing strategies. So it is a real problem how to actually orchestrate, manage, assign funds, follow up with people within an established organization. How does that land with you? [overlap]
Clinton: Yeah, 100%. Totally agree. It's really interesting. I think actually this is one of the reasons that executives fear innovation. And you've said that in your writings that executives often fear innovation. Can you elaborate on that and why that is?
Bruno: Absolutely. Here I'm using a bit of a strong word that executives don't like hearing. You already implied in the connections you made, it's already implied. But let me make it explicit. As I mentioned in the beginning, innovation which for the purposes of our conversation, I consider innovation to be creating something new that creates value, new not to the history of mankind, but new for your customers or clients and new to the organization. And value must be bidirectional. So it must be valuable both for the customer, but also valuable for the organization. And as I said, innovation is fundamentally uncertain. So even when we do everything right, this idea might still not be promising. It may still not be a success in the market. So we have to accept it.
Now when we go at the executive level, these people are very talented and are rewarded for their performance. Investing in something that doesn't even have to be out there, but that carries significant risk of potentially not just not coming to anything, but in damaging their reputation, their standing and their face. There's this human side or ego side that we cannot ignore. It's not organizations that innovate. Organizations are dead entities. It is people like Bruno and Clinton and listeners that have ideas and that bring them to life. So we cannot ignore the human nature when we're talking about innovation in large enterprises. And this fears are very humane, even if sometimes we can provide numbers that, hey, you should not be afraid of, that our brains aren't wired that way. If I tell you there's 1% or 0.5% that something will fail, your brain cannot distinguish between 1%, 10%, and 100%. Okay, maybe between 10 and 100, we have better natural grass, but between 1 and 10%. It's like why would I go for that If I can go for something that's in my mind 100% success? So there's this set of fears that basically preventing them and I don't want to say forcing them, but encourages them to play defensively.
Clinton: Yeah, a lot of times we're dealing with customers and your biggest opponent is not the competition, it's the desire to do nothing and just inertia. We’re always trying to tell customers doing nothing is not a viable business strategy because everyone around you is trying to innovate. And if you don't innovate, they will innovate you out of the marketplace. So very interesting stuff. What are some of the biggest mistakes and innovation that you've seen?
Bruno: Before answering that, Clinton, you express this so nicely, Inertia. I express that much more clumsily. So I completely agree with you. And what I often say is, number one reason for companies failing with innovation is incompetence and not external competition. And here I do not mean incompetence as an insult because somehow the word incompetence became an insult. But really everybody is incompetent and something because it's just few things that we become competent in life, things that we invest in, develop our skill set, etc. But like, I'm an incompetent cook. I can make [inaudible] that are edible, but I wouldn't serve them to you Clinton unless you were starving. I don't think that there's an insult when people tell me, Oh, Bruno, you're a bad cook. But when it comes to innovation, if you tell people and companies, you're not that good at innovation process, they will take it as insult. But the reality is, if you were better at understanding what's happening in the market, in understanding customer behaviors, the desired outcomes in developing product faster than the rest of the people, you would have been in a better place. And they take that as horrible insult.
Bruno: But the beautiful upside of that is like, hey, all of these are opportunities to improve your skills and capabilities. But back to the ego story and back to your question about mistakes. I could talk about the innovation mistakes for way too long. But let me focus on one fundamental one that if you do not solve this, there is no conversation to be had. And that is when people, especially in companies, starts with ideas. Thought is unfinished, you can't do anything with thought. If I wake up and say Ah, what if ice cream could be a square block that I could just print? That's not an idea. That's a thought. It's unfinished. I would need to sit down, think a little bit more about Okay, who is this for? What is it actually about? What would be the benefit? I don't need to answer how it could be feasibly done, but just flesh it out a bit. Then I have an idea that I can actually analyze and filter and prioritize or develop further. Why do I have this idea? Well, to give you an example. In one big company, they were holding an innovation day, basically a big event where we get a bunch of employees and you ask them to come up with a bunch of ideas and at the end of it they gathered around 80 ideas, which the innovation team took and started to analyze.
The problem was that they took every idea at face value, treated it like an idea. What that meant was that they spent several days for every contribution. But the reality was that around 30 of those were not ideas, they were just a thought. Basically something when you shower and it just comes to your mind and you just say it and that's it. You just say hanging up in the air. Especially for corporates and organizations, it's important to distinguish between these unfinished thoughts and ideas. Because if Clinton comes to me and has this unfinished thought, then I can help Clinton crystallize it into an idea. But before that, it doesn't make sense for me to seriously analyze and consider and evaluate that. It's just a waste of time. And this is a very small thing, but remember again in organizations, we are talking about dealing with potentially ideas. So imagine prioritizing thousands of thoughts and then realizing, Oh wait, we cannot actually do anything with any of those. You'll never get that time back.
Clinton: That's really interesting. I think the delineation between thoughts and ideas is a very important one and one that thankfully you've written a decent amount on. One of the things that I'm really excited about having you on is people get your insights. But obviously we're going to end this interview shortly. Where can people go to read your writing and to find out more about you and what you're doing currently?
Bruno: Clinton, I'm sure or rather dear listeners, Clinton has all my contact information, everything. Reach out to him. He'll be happy to hook you up. In the meantime, you can find me on the pesec.no. Everything I share about today plus much much more, I make it freely available. I like to say I had the good fortune of having access to very good education. Some very smart people in life who helped me develop as a person. And I made a commitment to make whatever I know available out there. So you will find all the resources, all the topics I talk about. You will be able to find them on my website. No strings attached, no tricks, no hidden payment gateways or anything like that.
Clinton: Yeah. Bruno is one of the few people out there who's incredibly intelligent, but also truly altruistic, which is a wonderful combination. So Bruno, thanks so much for coming on the show. I really appreciate it. I think I learned a lot today. I know that our listeners learned a lot today, too. And we really appreciate your time. Thanks again.
Bruno: Thank you.
Bruno regularly publishes articles, white-papers, case studies, ebooks, webinars, and podcasts on innovation, strategy, and entrepreneurship, which can be accessed for free at www.pesec.no.