For generations, managers have been taught that process innovation, especially where information technology is concerned, supports and is wholly subservient to an agreed strategy. After six months or so of strategy definition, top managers toss process design responsibility over to their technical people, who embark on an exhaustive design-and-build cycle. During as much as a year of systems analysis—the methodology on which most software and process redesign is still based—the technical department is meant to come up with ideas for improved, computerized processes. There follow two to three years of implementation, by which time the creative ideas that have struggled forth from such a lengthy procedure are likely to be outdated.

The new science of business process reengineering too often follows a similar pattern. Crossfunctional teams may come up with new ideas, but as these often lack state-of-the-art technical input they tend to be incremental, and can still take years to reach implementation.

Product-led corporations would not dream of researching innovation in this way. A pharmaceutical company needing a stream of new drugs, for example, would be crazy to expect a technology department or part-time team of line managers, guided by complex and monolithic methodologies, suddenly to come up with the goods.

Instead, the search for innovation is led by high-caliber, specialist research scientists, working in the most sophisticated R&D facilities, or it is acquired by buying small, high-tech, start-up companies that have made breakthroughs in key product areas. Above all, senior managers recognize that innovation and its supporting technologies are critical to the bottom line of their businesses and focus a great deal of their own time on getting it right. In most cases, the business implications of the new product stream define corporate strategy, rather than serve it.

Product companies also approach development and commercialization of new ideas differently. Controlled, field-led experimentation, often with several iterations, precedes full product launch. New technology products, for example, pass through "Alpha tests," which prove concepts in protected environments; "Beta tests," in which the product is subjected to extensive acceptance-testing by a set of preferred customers; and, finally, "release-based upgrade," in which field experience is built into a regular program of product upgrading.

Process commercialization, by contrast, suffers from the expectation that a new system will be right first time, and all too often systems are rolled out rapidly without adequate field trials. Addition of missing functions is often constrained by resource over-runs on the original project.

Product and process innovation are of equal strategic importance, requiring the same approach

The different treatment accorded product and process innovation by many companies stems from a belief that the two have fundamentally different strategic values. Process innovation is clearly the poor relation. But in some industries, entrepreneurial managers are learning that product and process innovation are of equal strategic importance, requiring the same approach to research, development, and continuous improvement.

In the US credit card industry, for example, new, database-driven approaches to acquiring and retaining customers turned a start-up company, Capital One, into a leading industry force. Similarly, exploitation of process innovation gave Direct Line, the first direct automobile insurer in the UK, a "first-mover" lead that traditional players have failed to claw back, despite their me-too responses. Its founder ascribes his strategic advantage to continual prototyping and experimentation with processes—just as in the product world. There was no "big bang" breakthrough.

Any CEO concerned about process innovation should therefore take the time to consider how successful companies have reshaped their thinking and translated product R&D concepts into the process world.

Who needs process innovation?

The strategic importance of process innovation varies widely from industry to industry. Information-intensive industries, such as financial services, where the process is also the product, rate it highly, while others, such as commodity manufacturing, may give it a low rating. In between are industries in transition, such as grocery retailing, where narrowing profit margins and the need to pay greater attention to customer loyalty emphasize the need for new, more efficient processes.

The improvement of existing processes, usually the focus of reengineering efforts, can be exactly the wrong place to start

How then can senior managers decide where to position themselves on this scale? Curiously, the improvement of existing processes, usually the focus of reengineering efforts, can be exactly the wrong place to start. Existing processes represent the delivery infrastructure for an existing business, and any redesign is likely to amount to tinkering with the established world—a task for which existing methodologies are usually more than adequate.

Recent success stories suggest that a far better approach to deciding the importance of innovation is to make an outside-in investigation of where advances in process technology can improve customer service—a task that requires a fundamental revaluation of customer needs. In the UK, for example, First Direct developed a high-quality, telephone-based banking service that helped it achieve almost double the customer satisfaction of more traditional competitors. And in the US, Wells Fargo’s supermarket banking service is growing considerably faster than industry pundits expected. Customers, it seems, appreciate the extra convenience of being able to purchase a broad range of financial services in the same place as they do their shopping.

Yet in neither instance was the underlying process technology revolutionary. In the first case, the needed systems were bought from suppliers of telephone-based service centers, and had been around for almost a decade. In the second, new retailing formats were supported by customer-friendly, advanced automated teller machines (ATMs) and self-service kiosks, for which much of the base technology had also existed for some years.

The difference was made by aggressive exploitation of the new technologies by a small number of far-sighted managers prepared to rethink the nature of their customer-service proposition, then back their strategies with determination and scale investment.

So who does need process innovation? Clearly, it is critically important to any company whose core service it can significantly improve, and in any industry in which it could be exploited by entrepreneurial new entrants. The question is, can the entrepreneurial spirit be harnessed by more risk-averse traditional players, and how—or are they doomed, as Bill Gates of Microsoft declared at a recent meeting of US bankers, to become dinosaurs? The answer is, it can be: by institutionalizing a professional approach to the research and development of processes.

In the product world, R&D laboratories aim to combine aggressive innovation with disciplined risk avoidance. Upon both these disciplines is superimposed a strategic imperative to gain the maximum competitive advantage from discovery. Customer-focused process innovation requires exactly the same approach if companies wish to dispense with intensive, time-consuming methodologies yet secure themselves adequate safeguards when backing an essentially unproven business case. Our recent experience suggests that process innovation can be tackled in this manner by borrowing a leaf from the product R&D world’s book: its use of a staged series of iterative trials. The product R&D stages of laboratory trial—Alpha test, Beta test, and field continuous improvement—can readily be adapted to system development. The aim is not only to increase the impact of technology and process innovation, but to develop first-mover advantage by keeping cycle time to a minimum. It works like this.

Laboratory trial: Visualization and financial modeling

A disciplined, external search for technology-driven process innovation among entrepreneurs and specialist niche suppliers can prove extraordinarily fruitful in defining a first model of how your business might look if reconfigured around emerging process technologies. Teams scanning the world for such opportunities, however, should avoid opening up a yawning credibility gap with general management back at base. Researchers returning from visits abroad with exciting tales of the potential of arcane technologies and new business processes, discovered in different industries, are likely to be treated with more than a touch of scepticism by those who have stayed at home. It is sensible, therefore, to make a visual representation of the concepts defined and first-cut financial models of the impact on the bottom line before eulogizing too strongly about the new world’s potential.

Various techniques can add reality and excitement to such visualizations. Some companies have permanent visualization laboratories in which new concepts can be displayed using multimedia technologies. The new vision’s components—front-line units, service centers, telephone-response operations—can be mocked up in a couple of weeks using PC-based modeling tools, and video clips can be shown of the original site where the process was discovered.

Too often senior managers are unaware of the poor service they inflict on customers by endlessly patching old processes

Visualization can be further enhanced by acted scenarios, perhaps using professional actors, demonstrating how the new business world compares with the old. Too often senior managers are unaware of the poor service they inflict on customers by endlessly patching old processes, rather than investing in new.

The business case is then reinforced by analysis of its financial impact. Many of the underlying process and technology building blocks will already have been commercialized, making it possible to assess the opportunity in terms of productivity gain, customer attraction, and sales campaign hit rates. Top managers are still shy of technology-led change (rightly, given its track record). Yet when presented with the possibility of a multimillion dollar gain expressed through a vision they can readily understand, they will at least be prepared to move to the next stage of the R&D cycle.

The Alpha test: Proof of concept prototyping

The main process building blocks of a new business concept can quickly be developed into working prototypes. These can then be used, normally in highly controlled field tests (and often in parallel with existing work to avoid operational risk), to prove or disprove estimated impacts on productivity and service levels, and to increase the accuracy of the initial financial model. The selection of which areas to prototype should have both a business and technical focus. The business focus should be on resolving management uncertainty over new processes’ financial consequences or operational feasibility; the technology focus ought to be on ensuring that the target techniques can be transferred effectively into the user’s business environment.

Prototyping technology has improved enormously and can cut the time needed for even quite complex trials to a matter of weeks. Screen-based techniques can translate the first outline process flow design into a working system. One company recently developed a prototype retail bank sales platform in under two months, then assessed its effect on cross-selling efficiency in a limited branch trial.

The Beta test: Full-scale field pilots

The business impact of fully operational visions, especially if they aim to change customer behavior, are never entirely predictable. Prototyping within independent building blocks of the business model will provide only part of the answer. Many of these will have to come together to support a new customer-value proposition. Even with the best market research, it is impossible to forecast how users will respond to a service they have never tried before. Who, for example, could have estimated the acceptance of the ATM, when forecasts suggested that only a few thousand units worldwide would be sufficient to meet demand? Who predicted the spread of the Internet?

The problem in the past was that building a full-scale pilot required almost as much investment as developing a robust working system. Where the business case was still uncertain, great management faith was needed to support such a leap in the dark. For that reason, technology projects over the past 30 years have tended to concentrate on areas where there is a readily provable business case—cost reduction for example—and avoided riskier and unproved notions of improving customer service.

Fortunately, although the latest generation of client-server technologies may not always be able to take over volume transaction processing from earlier, mainframe-based technologies, they do have the potential to translate new business models into field-based test programs rapidly and at low cost. This emerging capability allows a new approach to the development cycle. It is no longer necessary to get it right first time—an impossible objective when building something new rather than simply improving on the past. Instead, new businesses can be built to pilot scale relatively cheaply, experimenting with the riskier, but potentially higher-yielding innovations that corporations used to avoid.

Pilot costs can be controlled by limiting the geography, customer spread, or product range used in the test. Importantly, pilot tests must happen quickly. Given the pace of change in most businesses, any pilot that cannot be put in place within nine months is unlikely to lead to competitive advantage.

Continuous improvement: Release-based roll-out programs

Converting the business model into operational reality will need carefully designed and managed roll-out programs. It is not necessary, however, to complete every aspect of piloting before planning full implementation. Training and conversion teams can be built around prototyping and piloting activities, new technology architecture can be developed in separate design and test exercises, and organizational- and people-change programs can be plotted and researched. With all these tasks, the iterative design approach implicit in the earlier R&D stages is an important advantage.

Careful use of roll-out technologies can dramatically accelerate field conversion, in the case of one service corporation enabling it to convert more than 40 sites a week. Techniques such as distance learning and on-line documentation helped win operators’ acceptance.

Manufacturing industries have long understood that continuous improvement is the key to world-class productivity

Roll-out is by no means the end of research and development, however. Manufacturing industries have long understood that continuous improvement is the key to world-class productivity. But IT-driven companies have, to their cost, not picked up this discipline. The R&D lab must therefore ensure that the new business’s technology architecture will adapt to continuous improvement. A release-based programme of continuous enhancement must be instituted, and improvements should be targeted against the original model. In one service company, for example, function enhancements were made every two weeks during the implementation phase, doubling productivity.

Through all four stages, technologies should be chosen with rapid continuous improvement in mind as well as the need for consistency. In traditional systems development, the cost of throw-away systems (those suitable for prototyping but not for full-scale use) often leads to corporate standards that enforce the use of the same technology throughout the development cycle. This notion, which can significantly lengthen the cycle, is as ridiculous as forcing developers to build the first wind-tunnel model of a new car from the technology of a fully specified production vehicle.

Building the new R&D laboratory

A stumbling block to building R&D capability might be that the present organizational structure does not think or manage in the way needed to foster continuous, high-impact innovation. Typically, improvement suggestions originate in existing business units, often following the vogue for "bottom-up" innovation popularized by behaviorist management theories such as total quality management or reengineering. Moreover, technology people see themselves as solely responsible for delivery and insist on using lengthy and comprehensive methodologies to minimize the risk of failure. Top management may adopt a vague "champion" role, but more often stays out of the firing line when sweeping change threatens a key process or organization. In short, there is no forum for experimenting with radical process ideas that might reshape the business.

As with the creation of any new unit, it is best to design a process R&D laboratory from scratch, then build the organization along the lines of best practice. Those aiming for breakthroughs in technology-led processes follow three basic organizational principles (see Exhibit 1).

The core design team is of high caliber, permanently in place and crossfunctional. Innovative, "out-of-the-box" thinking is rarely developed from the bottom up because established operational management typically focuses on improving existing processes. Also, part-time taskforces, even if they are staffed with the best available talent, quickly lose their cutting edge as participants feel the need to return to their permanent career paths. Imagine again a pharmaceutical company pinning its hopes on a part-time product development team. Process R&D means permanent R&D units.

Those units must be able to foster the elitism more commonly seen in specialist providers. To achieve that, one company set up an R&D laboratory initially staffed from a specialist prototyping/piloting software house, the productivity of which far exceeded that of the client’s own management information systems (MIS) department. Investigation showed it was the specialist company’s people and systems, rather than its technology, that made the difference. Object-oriented programming tools were used in both firms, but the specialist company recognized that their usefulness had been over-sold by the suppliers (a perennial problem with information technology). Gaining the full benefit of the new techniques required an extraordinary level of skill and motivation, rather than a few training manuals and minimal vendor support.

To counter this problem, the software supplier had developed rigorous selection criteria, using psychometric testing and practical trials which weeded out more than 98 percent of applicants. The organization’s culture was also geared to high levels of personal achievement. It was decided to replicate this culture in the larger company’s internal R&D unit, and to apply the specialist supplier’s recruitment criteria. In this elite environment, recruits rapidly acquired the skills and enthusiasm of the specialist provider.

Top management commitment facilitates major policy change. Successful process innovators recognize that driving through crossfunctional policy changes essential to a new business model can be done only from the top. Becoming personally linked to change through process innovation may be a tougher role for senior managers than overseeing strategic direction, or disciplining line managers for operational variances, but their commitment is essential. One bank deems this role worthy of a special programme board that meets weekly to discuss progress on the management of process innovation and make important policy decisions. It is a significant investment of management time, but the chairman is convinced the commitment is one of his key sources of competitive advantage.

The front line helps operationalize the new vision. Although field personnel may be too busy fighting off crisis alligators to figure out how to drain the swamp, they are excellent at operationalizing a new process or technology vision. In fact, if they are not used in this role, the potential benefits of the new business will rarely be realized. The prototyping, piloting, and roll-out of a new business vision should therefore involve them fully. For this reason the R&D lab is best sited in the field, rather than in the comfortable isolation of a headquarters building.

Exploiting the strategic advantages of process innovation

With the R&D lab in place, innovators are ready to contemplate how to turn innovation into lasting competitive advantage. Not all those who lead with product or process innovation succeed in this. The British aircraft industry led the world with the first jet aeroplane, but failed to build on its lead and capture a large share of air transport. The bank which pioneered the first on-line ATM installed it in branch lobbies, available only during limited hours. It thus failed to create the breakthrough in customer service that could have given it market domination. Too often it has been left to the entrepreneurial leaders of aggressive new companies to exploit innovations.

So how should top managers go about putting the exploitation of innovation on to their strategic agendas? Here are four questions that should start boards thinking.

Where is a first-mover advantage possible?

Customer value is the key to exploiting first-mover advantage in product and process innovation. Gaining an edge in customer-value propositions means coming up with something significantly better than the competition. Direct insurers in the UK did just that. Consumers’ average satisfaction with insurers was low (about 60 percent), and traditional players had just hiked rates to cover a drop in underwriting profitability. The market was ripe for picking. The first new entrants imported a technology-based process innovation to improve service and cut prices, building market share before established competitors knew what had hit them.

Watch customer satisfaction like a hawk, and keep scanning the world for those who have used innovation to do better

So, watch customer satisfaction like a hawk, and keep scanning the world for those who have used innovation to do better. If you don’t take the lead, someone else will.

How can I protect my advantage?

A company that has spotted an opportunity should not be arrogant enough to think it is alone. Immediately it should wonder who else has the capability to make such a competitive play, and how fast they might move. Thinking ahead like this can not only indicate the need to speed up your own plans, but may provide opportunities to slow down your competitors.

One world-class supplier of financial products realized that improving the efficiency of its credit process was vital to a new business model. A worldwide scan showed that a niche supplier had a monopoly on a new artificial intelligence technology which would give it the gain it needed. The company developed the first pilots of its new business with this supplier, then poached the core of the supplier’s design team and produced the finished model in-house. Rough tactics, you might say, but not dissimilar to many of the competitive strokes that have been played in the product world.

Can we use scale to create an "attacker’s advantage"?

Even if managers can identify the competitive potential of process and technology innovation and exploit it first, their company may not have the scale to make a serious dent in the market; but another company might. Recently, a European bank recognized that a customer-service proposition developed by a minor competitor would have more potential if it could be delivered under its own, stronger brand franchise. It quickly put together an attractive acquisition proposal and bought the innovator.

Acknowledging that another, smaller player may be a better innovator than you are may go against the grain of corporate pride, but should become a key strategy of process innovators. Returning to the product world, IBM has taken strategic stakes in many niche innovators in recent years and now appears willing to buy product range extensions wholesale; its purchase of Lotus Corporation is an example.

How can we link top management incentives to the R&D focus?

The new focus on business R&D will eventually fade unless its priorities are reinforced by new performance measures and rewards for senior managers. An obvious incentive to encourage their commitment to potentially stretching initiatives is to link rewards to stock performance. But such a strategy can backfire if short-term results are driven by factors other than innovation.

A more successful tactic is to link rewards to program milestones. The financial implications of new models will have been estimated in the first stage of the R&D cycle, then confirmed during prototyping and piloting. The expected results of the refined financial model can then be broken down into month-by-month improvement targets and incentives linked accordingly. Too often original estimates of project benefits are ignored once a project is approved. But if managers’ incentives are tied to the realization of benefits, they remain in focus. The chairman of a financial institution who rewards his top team in this way has become confident enough to use such achievement tracking as his main strategy monitoring tool, rather than operational plans and budgets.

Managing opportunities derived from the research, development, and exploitation of process and technology innovation represents a rich opportunity for corporate management. Yet at the heart of the challenge lies an important change in attitude. Process improvement, so long the poor relation, has become the guest of honour.

In industries where process innovation matters, CEOs might start by asking themselves a few simple questions. For example, does your MIS department look like the R&D lab of a pharmaceutical company, with its superb location and emphasis on attracting the best technologists? Or is it a depressing, back-street building in which the only sound is the rustle of the situations vacant pages? In the interests of risk avoidance, do you always develop innovations internally, or do you have alliances with niche suppliers? Are your commercialization processes governed by professionally managed field trials and continuous, user-led R&D? Or are new systems dumped on users with little opportunity to rectify teething problems? Is process innovation built into aggressive strategies for gaining market share, or is it slowed behind top-level pronouncements about the desirability of "fast follower" positioning or dark mutterings about the bleeding edge of technology?

If this introspection raises more than an atom of disquiet, it’s time to learn a new way of doing business. Borrowing a trick or two from successful product innovators could pay startling dividends.