Four ways companies can encourage innovation

September 02, 2014

From: Magazine

Five years ago, an Executive MBA alumnus who had taken a course with Michael Gibbs, clinical professor of economics and faculty director of the Executive MBA Program at Chicago Booth, stopped by to visit—and mentioned in passing that the firm where he worked had been tracking the progression of thousands of new ideas. “You have a database of new ideas and what happened to them? Can I get access for research?” Gibbs recalls asking. 

Companies usually loathe revealing what makes them successful, lest competitors profit from the information. But what the alumnus described struck Gibbs as an unusually good store of data he could use to analyze creativity in the workplace. Academics interested in the subject rarely get an opportunity to measure what works, or doesn’t, outside of a laboratory or controlled situation. Furthermore, he soon learned that the company had even more data: it had recently run an experiment to see if incentives could encourage more and better ideas.

The firm agreed to share its data, on the condition that the company’s name and other identifying details be kept secret. (Gibbs and his coresearchers—Susanne Neckermann of Erasmus University Rotterdam in the Netherlands and Christoph Siemroth of the University of Mannheim in Germany—can only say that it’s a publicly-traded IT-services firm that employs more than 70,000 people and does business-process outsourcing.)

And after analyzing the progression of 5,000 ideas, the researchers identified a few operational decisions that collectively paid off more than tenfold. Their findings, especially when coupled with those of their colleagues in academia and industry, contain four approaches companies can use to spur innovation. 

#1 Use an idea portal

The IT firm Gibbs studied had in place an “idea portal,” an intranet-based tool that helps track ideas from seed to implementation. As a portal is usually accessible to most employees, it makes ideas and their origins transparent. 

At the company, employees formed small groups to come up with and submit new product ideas as well as operational suggestions ranging from how to better communicate with client teams to how to make work patterns more efficient within specific departments.

“Many companies struggle to generate an overall culture of innovation. They have an R&D group and hope that this will lead to new products,” Gibbs says. But an idea portal can encourage all employees to share new ideas, he says, and showing those ideas to other employees can stimulate thinking, help create friendly competition, and encourage better ideas.

Larger companies can have a particularly hard time inspiring employees to generate and pitch new ideas. Positions may be narrowly defined, job descriptions may not formally include “developing new ideas,” and employees may not want the hassle of doing extra work.

But many employees “have useful knowledge about customers, and may have ideas about ways to improve processes, customer service, or product design,” the researchers write. Those employees need a chance to see their ideas put into practice. 

In the past few years, several companies have implemented programs to prevent potentially valuable ideas from getting lost. Consulting giant Accenture, headquartered in Dublin, launched an idea-proposal competition for staff, with cash rewards. At Mumbai-based Tata Consultancy Services, employees use IdeaMax, billed as a social innovation platform, to encourage ideas from its consultants. Chemical giant BASF’s “We Create Chemistry Portal” allows employees and clients to share ideas. Other companies have experimented with innovation consultancies by crowdsourcing new ideas.

To get the most from portals, one innovation expert suggests narrowing the scope of submittable ideas. For example, companies including Citibank and Coca-Cola are guiding employees to come up with answers for specific areas of the company where ideas are most crucial, says Scott Anthony, managing partner at Innosight, an innovation consulting firm, and the Singapore-based author of The First Mile: A Launch Manual for Getting Great Ideas into the Market.

“The way to be smart about these crowdsourcing efforts is to constrain the quest, so that employees and customers are trying to solve a very specific problem,” says Anthony. 

Gibbs agrees that a firm-wide innovation 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,” he says. In the IT firm he studied, employees were encouraged to develop ideas related to their roles.

#2 Reward good ideas

Many business schools and leadership programs teach executives to believe that creativity is a personality trait that can’t be swayed by old-fashioned rewards. According to this mindset, incentives could actually undermine employee creativity. 

Gibbs disagrees, saying that creativity is similar to behaviors such as leadership or management skills. “While most psychologists and sociologists would argue that innovative behavior tends to be different, and creativity tends to be undermined by rewards, we found it was just the opposite,” he says. 

The firm he studied had run a well-developed, yearlong experiment to test whether incentives could spur innovation. It had offered incentives to 5,400 employees, and when the company or one of its clients implemented an idea that had been developed through the idea portal, management awarded praise and points to the responsible employees. The points could be traded for prizes such as smartphones and gift certificates. 

Meanwhile, the company had also created a control group of 6,000 employees operating without incentives. And this allowed the researchers to see that rewards had a clear impact: workers across all departments responded to the company-organized experiment, and they generated better ideas as rewards increased. 

The rewards, the researchers found, inspired more lower-level employees to use the portal. And they increased the quality of ideas. “Our findings suggest a trade-off between quality and quantity in idea-creation,” the researchers write. This is important, Gibbs stresses, as rewards can motivate employees to focus on quality, generating fewer but better ideas.

Even after the experiment ended, employees who had received awards kept contributing good ideas. Gibbs speculates that generating good ideas became habit, or a part of the corporate culture. 

When Gibbs, Neckermann, and Siemroth calculated the return on investment for the experiment, they found that rewarding the best ideas cost the company $14,250 over the year. Meanwhile, it stands to earn an estimated $1.4 million–$8.3 million in annual net profits, on average, as the company believes a few of the ideas have potential to generate huge returns. One in particular could improve revenue by an estimated $22 million per year.

The researchers also tested the claim that rewards displace intrinsic motivation, comparing what happened when they offered rewards to previously-identified “creative” employees to what happened when they offered them to other employees. The rewards, they found, did not reduce innovation among the employees who had previously suggested quality ideas.

Despite the clear impact of incentives, Gibbs advises that companies exercise caution when doling out rewards. “If you set these [incentives] up in the wrong way, employees will do the wrong thing,” says Gibbs. 

#3 Court longtime employees

The IT firm’s idea portal attracted a range of workers, including young and inexperienced employees low in the company hierarchy. Gibbs says that’s a good development, as newer workers can have perspectives and ideas that could otherwise be overlooked.

That said, the data reinforced the value of experience. The researchers used the data to identify the employees who were more likely to submit better ideas, and analyzed how that likelihood related to tenure, age, salary, and position. 

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.

When it came to the most viable ideas, tenure—not age—mattered most. Some people may find doing the same work on a day-to-day basis boring, but it also gives them a deeper understanding of the client’s goals, products, and methods. “Innovation arises in part from experience in the same company with the same clients,” Gibbs says.

Rank also matters: more senior, higher-paid employees submitted ideas of slightly better quality than workers paid less. 

#4 Embrace analytics 

It takes a long-term commitment to build a successful idea pipeline. To make the time and effort worthwhile, companies need to show employees that each idea has the potential to improve the company, says Gibbs. 

For large companies such as Toyota, based in Japan’s Aichi Prefecture and with more than 330,000 employees worldwide, simply acknowledging and sorting ideas is a huge endeavor, says John R. Birge, Jerry W. and Carol Lee Levin Professor of Operations Management at Chicago Booth, who consults for the automotive industry and has studied Toyota. Big companies “have to show that they are taking every suggestion seriously, because that’s how they encourage people to keep making those suggestions,” says Birge. 

It’s also crucial to “define a ready path to execution” for employees, says Innosight’s Anthony. Most employees will only continue sharing ideas if they see their top suggestions seriously considered. If companies don’t have the resources to act on at least some of the proposed innovations, the idea pipelines can dry up. 

Gibbs recommends using data and analytics, and thinking like a personnel economist. As companies have been using big data and analytics in many other aspects of business, he says, it’s nice to see companies start to use analytics to also help manage and motivate employees more effectively. In this example, the idea portal allowed the IT firm to track, quantify, and analyze employee innovation.

Data and analytics also makes it possible for companies to test and refine policies before implementing them company-wide, just as the IT-services company did. Based on the researchers’ findings, the IT firm is now implementing a permanent reward structure. It offers cash payouts that are automatically added to an employee’s paycheck for all implemented ideas. “All companies say they want to reward innovation, but [they] really need to do it,” Gibbs says.

Work cited

Michael Gibbs, Susanne Neckermann, and Christoph Siemroth, “A Field Experiment in Motivating Employee Ideas,” Initiative on Global Markets working paper, April 2014.