Turn Employees Into Entrepreneurs And Board Members Into Investors
There is a novel trend developing in the way progressive organizations innovate. Even though they may have flat structures (like networks of teams), and possibly no dedicated, traditional R&D anymore, they have still found a powerful way to tap previously unexploited entrepreneurship.
Once a flat organizational structure is established there is often no room for the traditional R&D department. New innovations and developments that would be born out of the traditional R&D department now have to come from the multidisciplinary teams themselves. But how can this issue be dealt with effectively?
How does this happen?
Internal venture capitalists
More and more, we see organizations that have found a solution to this problem. Instead of seeing themselves solely responsible for strategy, board members now see themselves as venture capitalists of an ecosystem of start-ups.
This new situation allows highly empowered people to explore their entrepreneurship. The “venture capitalists” encourage their employees to pitch their ideas to them. If they are impressed, they invest time, effort and money in those they think show most potential value.
How does it work?
Dedicated innovation time
It all starts by allowing employees to dedicate part of their time to developing new ideas. The most creative organizations allow employees to devote 10 to 20% of their working hours to experimentation, and new business opportunities.
Some examples of such organizations we’ve seen are IT company u2i, the Belgian Ministry of Social Security, and (to a lesser extent) Spotify and Google.
In such an environment, it’s only a matter of time before pioneering employees develop new ideas and ventures. Broadly, we observe four different categories of innovation:
1. Improving an existing product or service
The first, and often the simplest, are improvements to existing products or services. Front-line employees often have ideas for small but significant improvements based on direct contact with customers and suppliers.
2. Developing a new product or service
The second category is the development of a completely new product or service, either within or outside the current portfolio of the organization.
3. Conquering new market territory
The third category is to conquer new market territory. This often means introducing and expanding the existing product or service to a new area (city, province, country, market segment) where it is not yet present.
4. Improving the way of working
The fourth category is a new or improved way of working. Employees can come up with better, smarter, cheaper, or more effective ways to do things. Actively encouraging this activity can bring great benefits.
For example, Dutch airliner KLM saved tens of millions of Euros simply by providing a “CEO Mailbox”. Any employee can send an improvement idea directly to the CEO for evaluation.
Once an employee has an idea, the next step is to pitch it to the venture capitalists (a.k.a. the leadership team). Some leaders schedule regular times (say, monthly/quarterly) for these ‘pitches’. They then decide to invest or not.
Just as a group of venture capitalists would.
Build the team
Once the employee’s idea is backed, it’s time to build a ‘dream team’. The initiator gathers a group with the expertise to bring the idea to life. It’s the initiator’s role to convince them to join his/her ‘start-up’.
Frequently, these recruits are from within the organization, but might in some cases also come from outside.
Start the 'start-up'
Once the project is backed, and the ‘dream team’ formed, the start-up is a go. Now they are often on their own. They start running the new venture, and do everything in their power to make it a success. In general, we see few boundary conditions in place:
1. Initial trial period
The leadership team is expected to fund the new ‘start-up’ with sufficient resources to survive throughout the early days. But after this initial trial period the team is expected to make the venture financially independent and to become an autonomous part within the ecosystem of start-ups. The duration of this initial trial period fluctuates highly and depends heavily on the type of project.
2. Stake in the outcome
Employees are often given a stake in the new venture. This aligns the interests of both the team and the leaders, and it rewards the team if their venture is a success.
3. Safe to fail
The new ventures are often regarded as an experiment. And during experimentation it should be safe to try and safe to fail. Therefore, if it turns out that the new ventures have not succeeded, they will still be applauded for trying and the most important lessons learned will be shared.
Ecosystem of start-ups
If this approach is scaled, the organization becomes an ecosystem of start-ups. It is not just the board influencing strategy of the organization, but also the staff who highlight opportunities.
This is a powerful mechanism for keeping organizations responsive to their environment. Why? Because employees who are in contact with customers often see future potential before senior managers do.
Danish hearing aid manufacturer Oticon has a so-called spaghetti organization. They use the approach described above in an extreme form. Once projects are up and running, the team dissolves. Members then move to other projects or set up new ones. This has proven very successful for them. Check out the entire story of Oticon here.
Employees are eager to offer new ideas for products, services, or improved ways of working. To tap this creativity, organizations need to create the right environment. A so-called ecosystem of start-ups can provide the environment in which entrepreneurship and innovation thrive.
With a board of directors turning into a group of venture capitalists, they are still important in determining the course of the organization. But the ideas and the full execution come from the employees. It is not driven from the top down, but instead initiated from the bottom up.