This piece is excerpted from the new book Breaking Innovation Barriers: Fifteen Strategies to Win Management Buy-In for Change.
SAP employs more than 100,000 people globally. Can you imagine that employees are able to test drive new product ideas with customers almost as if they would run their own start-up? Let me explain how we have been able to establish such an environment – a safe experimentation zone.
For large corporations like SAP to be innovative, the biggest challenge is not a lack of creativity. Corporations have lots of talented people and a plenitude of exchanges with external stakeholders such as customers, partners, and academic institutions. Innovation in large corporations is difficult primarily for two other reasons.
First, it can’t be predicted which of the many ideas will result in noticeable market success. Managing – and reducing – the unavoidable uncertainty is not a skill set that commonly resides in larger corporations.
And second, a truly innovative idea will sooner or later face the corporate immune system. This exists for good reason, that is, to protect and optimize the corporation’s core and running business. But it’s not great for supporting the creation of new businesses. “An immune system is a system that protects an organism against diseases. It detects a wide variety of agents and distinguishes them from the organism’s own healthy tissue.” Applying this in a business context means that basically anything that is different to what the corporation knows, may lead to a disease. Which is why innovation – due to it being new and different – is prevented. And for intrapreneurs, this represents a competitive disadvantage by design compared to independent start-ups that are pursuing the same market. So how can we overcome this?
Shared Pain Points
Back in 2016, I led the Business Model Innovation team at SAP that was responsible for commercialising new business models. We were part of the larger finance & administration board area and thus, reviewed all requests for new business model ideas together with stakeholders of the different functions. For example, for every new offering to be commercialized, the accounting team needed to determine the appropriate revenue recognition treatment to ensure that revenues are recognized in compliance with global accounting standards. Which in turn required a time-consuming cost structure determination and fair value calculation of the offering along with a business case with all key assumptions.
One day in the summer of that year, I met our Chief Accounting Officer at the coffee corner and told him how painful and time-consuming it is to educate his team and wait on their guidance, especially recognising that most of these new offerings were failing in the market anyway. So my question to him was: “Why are we trying to be super accurate from an accounting perspective when there is usually no significant revenue anyway?” To my surprise, he shared my observation – he didn’t find it valuable that his team was spending time on commercialising new offerings that did not result in recognisable market success. He asked me to predict market successes better so that we can avoid wasting his team’s time. I responded that that is not possible, and that we can only find out whether an offering is successful by testing it under real market conditions.
We basically invented an accounting grey zone for innovation. Or, in other words, enabled innovation to happen based on a rounding error in the group’s P&L statement.
Eventually, we agreed to task both our teams to design a programme for testing innovation where the standard commercialization process would only be applied AFTER a successful test, not BEFORE. Which would help both our teams to spend time on things that really matter. Of course, this approach itself was required to be compliant with accounting standards. Therefore, we ideated a small list of boundary conditions like a revenue ceiling and a limitation in terms of number of seats on the programme to have this environment controlled in some way and off we went. The decisive element was the revenue ceiling – that is, the annual sum of the revenues of all offerings on the programme needed to be below a certain amount to be far from being material to the overall annual revenues of the SAP group (€22.1 billion in 2016). We basically invented an accounting grey zone for innovation. Or, in other words, enabled innovation to happen based on a rounding error in the group’s P&L statement.
Mutual Respect
To reach this pragmatic solution on how to account for early innovations required three principles. First, to openly share and discuss the pain points that result out of the application of corporate standards (e.g., wasted efforts or long delays). Second, to develop a trusted relationship to corporate functions that are required for innovation to succeed. You need them as a partner, not as a blocker. And third, to make the corporate functions part of the innovation programme – instead of allowing them to say no to your request, ask questions in an open, almost provocative manner such as: “Under which circumstances would you support this?”
When we applied these principles along all key corporate functions, we realized that we were onto something. The establishment of a safe experimentation zone. A zone where intrapreneurs, that is, entrepreneurs within the corporation, can pursue their business idea almost independently from corporate constraints. We realized that for this zone to be successful, it needed to demonstrate the following principles:
Intrapreneurs
- Want to observe psychological safety to be allowed to fail in the pursuit of their business idea – failure is actually a common outcome and, therefore, it needs to be accepted.
- Want to be shielded from the corporate immune system so that they can pursue their business idea in a very fast, flexible and inexpensive manner – almost like a start-up within the corporation.
The corporation
- Wants no disruption of its core operations – for example, there must be no compromise on compliance with rules that are enforced legally.
- Has an interest that experiments happen in a rather disciplined manner – when there is failure, it should happen fast and inexpensively.
Ultimately, the goal is to minimize the disadvantages and maximize the advantages for intrapreneurs of being part of the larger corporation. At the end of the day, the funding for the intrapreneurs’ experiments comes from the corporation’s profitable core operations. Which is an advantage over independent start-ups that constantly need to worry about their fundraising from investors.
With the above principles we even convinced our Chief Financial Officer to sponsor our approach and motivate his teams to support it. He recognized that this safe experimentation zone was needed due to the risky nature of innovation and the otherwise cumbersome processes being applied, especially from many of the teams he was responsible for.
Dropping the need for intrapreneurs to gather complex approvals or following cumbersome processes also helped…teams to spend less time and effort…at early stages.
Joint Solution
With this sponsorship from our CFO, we went ahead and organized a workshop with senior executives from key functions across the company to solicit their buy-in to the overall idea of a safe experimentation zone. It was fascinating to observe how the attitude changed from: “no, this is not possible” to: “in this controlled environment, we can be more flexible and make it happen.” The workshop was a turning point, especially given that the executives recognized that the safe experimentation zone was also helpful for them. Dropping the need for intrapreneurs to gather complex approvals or following cumbersome processes also helped their teams to spend less time and effort with such cases at early stages.
We eventually called our innovative way to innovate our ‘incubation channel’ and in the following years continued to further enhance its mechanics and the support provided by the various functions from across the company. Below are a few examples of the benefits that teams enjoy when utilising the incubation channel for their early-stage innovation.
Procurement
- Teams are exempted from running a request for proposal, organized by the corporate procurement team, and can select their own vendors and products if the respective procurement amount is below a certain threshold.
Hiring
- Teams can hire through their recruiting agency of choice; any corporate hiring restrictions don’t apply.
Engineering
- Only legally required product qualities are to be complied with, such as product security, data protection and privacy, and licensing requirements from utilized third-party products; all other product qualities (e.g., performance, user experience, localization) are at the full discretion of the team (and can be dropped if determined as unnecessary).
Cloud operations & support
- There is full flexibility on how to operate cloud service instances, yet compliance to corporate software delivery requirements (e.g., export control) is needed.
- There is no need to provide 24/7 enterprise support for customers, best effort is sufficient.
Commercialization
- There is no need to develop a business case and follow the standard commercialization process, which has an idea-to-market time of several months.
- Teams enjoy complete commercial flexibility, products can be provided free-of-charge or tested with a known or new pricing model and set of price points.
- There is dedicated support for contract creation and finance processes such as contracting and order-to-cash from corporate legal and corporate process teams, respectively.
GtM & Sales
- Account executives will be compensated against their sales quota towards selling products out of the incubation channel so that there is no disadvantage compared to regular products on the standard pricelist.
Benefits and Call to Action
Using the incubation channel, we have been able to test drive some 30+ product ideas over the past few years with customers around the globe. Many of these ideas were later discontinued and we recognized that this was also much faster and cheaper compared to standard products. At the same time, a few product ideas became true success stories that now appreciate the scale of SAP’s market presence: SAP Signavio Process Insights and SAP Green Token were both started by a team of two and now contribute to our growing cloud revenue streams. In early 2017, our Chief Innovation Officer sent an email to our CEO stating: “It took a team of four people just two months from the first line of code to our approved ‘beta launch.’ We look forward to sharing many such stories in the future of SAP innovating at start-up speed!”
The incubation channel, SAP’s safe experimentation zone for innovation, has demonstrated that innovation – even if being adjacent to the core business – can thrive organically. And talent does not need to leave SAP to pursue new business ideas and demonstrate their entrepreneurial skills.
Do you think this concept is useful for your organization? Consider these five key elements of success:
- Secure an executive sponsor
In SAP’s case, it was our CFO who understood that innovation, due to its new way of doing business, required a safe experimentation zone. In your case, it might be an executive with a different function, but make sure that they have the power to bend the rules as far as needed for innovation to succeed. - Establish a core team taking ownership for the safe experimentation zone
Ideally, you bring together people that understand the needs from both the corporate functions and operations as well as the intrapreneurs to be served. We had a good experience hiring consultants that became translators and bridge builders between both worlds. - Build bridges to key corporate functions
Identify all corporate functions from which you need support. And recruit representatives from their teams to virtually join your team and spend part of their time on building and protecting the safe experimentation zone. In our case, some of the key corporate functions were legal, accounting as well as engineering and finance processes. - Design service catalogue
When designing the elements of the safe experimentation zone, you have basically three options:- Ignore corporate constraints that don’t add value to intrapreneurs (e.g., cost structure determination and revenue recognition assessment).
- Follow minimum corporate requirements to ensure legal compliance (e.g., data protection and privacy).
- Borrow existing corporate services or specifically adapt them to intrapreneurs’ needs (e.g., sales compensation equal to standard sales incentivization model).
In any case, design the safe experimentation zone in a way that you consider the benefits for both, the intrapreneurs and the corporate functions.
- Celebrate early successes and never stop learning
Make sure that the outcomes of the safe experimentation zone are recognized. Let the first intrapreneurs in your organization share their appreciation of the benefits. Regularly thank the corporate functions for their support – even better if this comes from your executive sponsor.
Claus von Riegen is Head of Strategy, New Ventures & Technologies at SAP. This piece is an excerpt from the forthcoming book Breaking Innovation Barriers: Fifteen Strategies to Win Management Buy-In for Change by Gijs van Wulfen.
Featured image by Sebastián León Prado on Unsplash.
