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Business Adviser

The culture of innovation

By Dennis Fortnum
Canadian Managing Partner, KPMG Enterprise
Global Head, Middle Markets, KPMG LLP

Traditionally, a constant challenge for any business owner is the balance between containing cost and driving innovation. However, in today’s highly unpredictable business environment, innovation is a must in order to differentiate yourself from others by finding new ways of adding value to your customers. The concept of innovation has changed from developing a new product or service to adopting a corporate culture that defines a company’s constant ability to adapt and evolve repeatedly and rapidly to stay one step ahead of the competition. 

A culture of innovation aims to achieve efficiency, creativity and growth. It needs to be sustainable and embraced by the entire company with full hands-on motivation, dedication and commitment to continuous creative thinking by all. The desire for innovation needs to be felt from upper management right down to each and every member of the company. A culture of innovation also concentrates on the core services of the company in order to be able to deliver customer service-focused solutions.

Establishing this innovative culture, however, does not come without challenges. The first being time and resources needed to put in place a sustainable, long-term plan. In the face of a fast-pace business environment with its constant instant demands, companies usually find themselves slow to respond and not coordinated enough to provide valuable solutions, becoming reactive instead of proactive to the market. Often, a limited consumer insight also prevents companies from delivering customer-focused solutions, which can ultimately lead to a conclusion that the investment in innovation is not producing the desired results.

Businesses that have successfully undertaken innovation initiatives have done so by providing strong leadership, following a strategic plan and building multifunctional groups to deliver at each step of the way. Equally, more and more companies embark on innovation from within, by improving internal functions such as sales, marketing or human resources, combined with good leadership through every level of management and a customer-focused business model.

In summary, private companies will maintain a competitive edge by adopting an innovative culture and mindset where the leadership group has established an environment of trust and openness that allows and empowers change, so everyone in the company feels the desire to participate, accepts the responsibility and understands that innovation will reward everyone.

The place to start innovating is right in front of you By Inge Christensen Creative Expeditions Inc.

Despite a tremendous amount of discussion in the media, innovation is still unfamiliar waters to most business leaders. They hesitate to plunge in, even when “WWADI” (the Way We’ve Always Done It) is no longer delivering results and new thinking is urgently needed.

Hesitation is understandable. In my last article for KPMG Enterprise, I observed that fear can inhibit both employees and leaders from expressing and accepting new ideas. Creativity is personal and people decide how they will contribute ideas to their organization (or not) based on their feelings.

The pressure to make a big splash doesn’t make it any easier to get in the water. The media focuses on “game-changing” innovation and showcases the successes of giants such as Apple and icons such as the late Steve Jobs. That’s inspiring but also intimidating. 

Innovation doesn’t have to be a deep dive; you can wade in. The critical decisions are where and how.

Choose an single entry point

The best entry point is a small, self-contained pilot project based in incremental innovation i.e., improvements to existing products, services and processes. Look for challenges requiring genuinely new thinking vs. a practical fix within the realm of “WWADI” (the Way We’ve Always Done It).

There are innovation opportunities right in front of you; some are obvious. Build a full menu of options before you choose a pilot project.

Review the current business plan. There may be new challenges to execution. Maybe you have fewer resources. Maybe the competitive landscape is suddenly crowded. Maybe customer demands are greater. Either way, there is a call for new thinking.

Ask for feedback from customers, employees and suppliers. Customers will likely highlight unmet needs and opportunities to add marketable value to your current offering. The people who work “in the trenches” will likely point out things that can work better. An online survey will reveal the spectrum of possibilities. Clarify with interviews.

If your conclusion is far-reaching e.g., “we need to manufacture different products,” you’re beyond a self-facilitated pilot project – you need help from a specialist.

Wade in, step by step

The steps below are common sense. All of them address the fear factor inherent in innovation.

• Define a small pilot project. The goal of the pilot is two-fold: implement a valuable idea, and gauge how well your people adopt innovation behaviours and processes. Choose an opportunity aligned with your current strategic plan and set realistic goals for the pilot. Be specific about how value will be generated and measured. Identify potential risks and mitigate what you can without killing the freedom to try something new. (You can’t go swimming without getting wet!)
• Pick a pilot team. Focus on creating champions for the pilot as well as future innovation projects and include people willing to play devil’s advocate. Ensure the pilot leader has an open mind!
• Follow these 5 steps for idea development. Avoid skipping steps in a rush to get a result.
  1. Define the challenge. Figure out what you are trying to solve and then get consensus that it will create measurable value for the organization. If you can’t agree, it’s a sign you’re entering the water at the wrong spot or you’re not ready to take the plunge.
  2. Gather data. Cultivate fresh insights/ideas with various types of research. This step is about making thought-provoking connections from the known to the new, and from the new to the known.
  3. Generate ideas. Explore NEW ideas (go for quantity and variety) and defer evaluation.
  4. Refine ideas. Strengthen/select the most promising ideas using a matrix of relevant business criteria. Then translate ideas into viable solutions.
  5. Propose ideas. Make a strong business case to secure approval and resources for implementation.

Start swimming

Implement the winning idea. Pause to test it against success measures, and improve as needed.

Before you implement, communicate the goals and expectations for the pilot to the organization. Doing things differently requires support from all those affected. Use regular project updates to generate excitement and give credit to the team. Reveal what was learned from failures to reinforce that innovation is not sink or swim – ideas that don’t work often trigger ideas that DO work!

When the pilot is complete and the team reports on lessons learned, you will be more equipped to determine the role of innovation in your organization’s business strategy, processes and culture.

Sustainable innovation By Dr. David S. Weiss President & CEO of Weiss International Ltd. www.weissinternational.ca; david.weiss@weissinternational.ca

A decade’s worth of surveys on innovation highlight a significant gap between what leaders say they want and what their organizations deliver. Over eighty percent of leaders surveyed believe innovation is important for their future success, but less than thirty percent are satisfied with their current level of innovation. So why, despite all the talking, have leaders in public and private sector organizations not given innovation the attention it requires? The short answer is that they have not had sustainable solutions, practical and reliable programs that deliver long-term, sustainable results. Instead, they have had an endless array of partial answers. They are left with an alarming innovation gap.

Our research in Innovative Intelligence: The Art and Practice of Leading Sustainable Innovation in Your Organization (John Wiley & Sons, 2011), explains the core principles that are essential in overcoming the innovation gap. The following story illustrates what happens in many organizations, and it provides an example for describing three of the core principles.

An executive asks a key talent leader to work on a project that requires innovation. The executive tells the leader that he wants “out of the box” thinking and real innovative solutions. The leader asks the question, “Do you mean that any idea is a good idea? Are there any ideas that are unacceptable?” The executive replies: “We want all of your ideas for new and innovative ways of thinking about this problem. There are no limits.”

The leader thinks this is the career opportunity he has been waiting for so he takes a week off to work on the project independently. His ideas are based on the executive's assurance that there are no limits on innovation. He comes to the executive meeting to present his recommendations. During the presentation, he describes many innovative ideas, including some that could be implemented immediately and others that require significant financial investment over the next three years, a restructuring of the organization to support the innovative ideas, and a significant change in the organization's technology infrastructure.

During the presentation the executives listen attentively without comment. The leader thinks, “They are really listening; they must love my ideas.” As he completes his presentation, the executive who delegated the project slowly puts down his pen and says, “What were you thinking? Do you really believe we are going to change our overall strategy and restructure the organization for one innovation project? Do you think we are going to invest that level of resources into the ideas you are suggesting? Where is your professional judgment?”

The leader walks out of the room dejected and disengaged. He feels betrayed by the executive and believes he was treated unfairly. Within one year the organization does not implement any initiatives associated with that innovation challenge, and the key talent leader leaves the organization to join a competitor.

What went wrong in this story? As with all situations, the fault does not lie with just one individual. Everybody contributed to the problem. We can derive several core principles from the story that are essential to discover sustainable solutions to overcome the innovation gap.

Principle #1: Innovation Works Best Within Precise Boundaries
The executive who delegated the project said that he wanted “out of the box thinking.” However, when it came to the presentation, clearly the executive knew what the limits were in advance. The organization was not prepared to restructure, not prepared for a three-year financial investment, and not prepared to change its overall technology infrastructure to support the innovation.

Boundaries need to be defined precisely for innovation. In the story, the lack of precise boundaries forced the leader to guess what the boundaries were. He did the right thing when he asked if there were any limits, but the executive’s answer was not truthful. There were limits. The executive did not want to share them, perhaps based on a false belief that any limits would constrain innovative solutions. In the absence of precise boundaries, leaders have two options. One option is to take the executive at his or her word and present all the possible ideas. However, the outcome is often exactly as described in our story where the leader went beyond the implicit limits and, as a result, was seen as unprofessional. The alternative option is that leaders play it safe and ensure that they do not go beyond the implicit boundaries. This approach reduces the area within which innovation can be explored, and the solutions are often inadequate. The correct approach is that the executive articulates the boundaries precisely. Then, within those precise boundaries, the leader should exercise unlimited creativity. In the event that the precise boundaries are not clear to anyone at the outset of the project, the leader should get confirmation from the executive of the limits of possible solutions as the project evolves.

Principle #2: Innovation Works Best With Diverse Teams
In the story, the leader chose to develop the innovative recommendations independently. He saw this assignment as a career opportunity to show that he was an innovative leader. However, by working alone he had only his ideas to consider. He did not solicit other viewpoints to stimulate alternative ideas, and he did not collaborate with others to explore risks. Had he worked with a diverse team, they would have generated insights from their various perspectives and contributed to solutions that would have perhaps been much more acceptable. In addition, if the team included diverse members with different perspectives, the viewpoints would have been helpful to gain insight about the issue and to define the problem more precisely. Also, the combination of ideas from the diverse team members would have been useful in the process of discovering alternative solutions and generating the best possible recommendations.

Principle #3: Sustainable Innovation Needs Leaders of Innovation Rather Than Innovative Leaders
Many organizations focus on developing their employees' innovative thinking abilities as the way to overcome the innovation gap. However, most employees have spent their entire lives developing their own approach to thinking, and one training course will not change their ability to be more innovative. Perhaps they will learn several techniques, but in the stress of real work situations, it's very possible that they will revert back to their normal way of thinking, which has given them success up to that point.

The alternative approach is to focus training on how leaders can become leaders of innovation. This means that leaders need to excel at drawing out the innovative capacity of their employees and team, rather than trying to lead by being the most innovative person on the team. They need to create the environment of trust and collaboration that allows all team members and employees to gain insight into issues and discover innovative solutions. Leaders can learn how to be leaders of innovation, and this capability can be taught. When organizations ensure that all their leaders are leaders of innovation, they will have a sustainable approach to overcoming the innovation gap.

This is not to say that innovative leaders who generate a great deal of innovative ideas are unimportant to organizations. The opposite is true. They are great resources, but it is not a sustainable model. When those people leave, it is not easy to replace them. Also, when those leaders work in teams, they often dominate the discussions with their innovative ideas, which reduces the capability of others to contribute their insights and discover new innovative solutions to challenging problems.

In conclusion, the innovation gap is a great challenge to most organizations. Many approaches have led organizations to quick solutions with the hope that this will fix the problem immediately. However, sustainable innovation is built on the three principles identified in this article: Innovation works best within precise boundaries, innovation works best with diverse teams, and sustainable innovation needs leaders of innovation rather than innovative leaders. This approach represents a major shift organizations should take to achieve sustainable innovation and to overcome the innovation gap.

Dr. David S. Weiss is President & CEO of Weiss International Ltd., a firm specializing in innovation, leadership, and HR consulting. Previously Chief Innovation Officer in a multi-national firm, he is a frequent keynote speaker and the coauthor of five books including Innovative Intelligence (Wiley, 2011). For more information visit www.weissinternational.ca.

R&D and Digital Media Tax Credits – Tap into tax savings from your innovations By Bob Waterworth Partner, KPMG Enterprise, Toronto

Are you overlooking a potential source of cash for your small business? If you haven’t considered whether any of your business’ activities qualify for research and development or Digital Media tax credits, you may be missing out. You may think of R&D as something that big companies with labs full of white coat-wearing scientists do, but if you’re investing in technology or developing new or improved products or processes for your business, you may be eligible to claim refundable R&D and Digital Media tax credits.

Canada’s R&D tax incentives are among the most generous in the world and they’re especially favourable for small businesses. Each year, the R&D program provides approximately $3.5 billion in tax credits to more than 21,000 claimants, 75 percent of which are small businesses.

Under the federal R&D rules, “Canadian-controlled private corporations”, which have to be resident in Canada and not controlled by any combination of non-residents or public corporations, can be eligible for a refundable tax credit (payable even if the company has no tax to pay) of 35 percent of their qualifying R&D costs. Other corporations can earn a non-refundable credit of 20 percent of qualifying costs.

These qualifying costs include salaries and wages, materials, purchased or leased machinery and other equipment, overhead costs and certain contract payments for R&D work.

Any activity your business carries out that is integral to the development of a new product or process may qualify, even if the product or process does not end up being commercially viable. A wide variety of activities in different types of businesses may qualify. For example, I’ve seen eligible R&D in industries ranging from food and consumer products to high-tech information, communication and video games, to auto parts and engineering.

The list goes on but the common theme is that where there is innovation, R&D tax credits are likely waiting to be claimed.

For example, I know a small start-up company with about 15 employees that was developing a new construction supply product to break into a mature market. They knew that to be successful they would have to offer a cheaper product than the competition that would also meet and outperform all criteria of the existing marketplace options. Their efforts to develop this low-cost, high-performance product with special features involved three projects in which they spent about $1.2 million (including labour, materials, contractors, leases and capital equipment) that wound up being eligible for R&D credits, resulting in a refund of almost $500,000.

This refund allowed the company to invest in further research into developing a new material in partnership with a local university, sharing equipment and staff for both parties’ benefit. Taking the time to file an R&D tax credit claim helped take a small start-up business and its research to the next level, benefiting both the company and a university.

Of course, the Canada Revenue Agency often reviews R&D claims, and this company was no exception. The company’s documents and prototypes, along with their commitment to their developmental efforts and challenges they overcame, satisfied the CRA and the claim was accepted as filed.

If your company is considering an R&D claim, it’s helpful to keep track of the time your employees spend working on R&D projects and make sure the work is well documented to support your claim.

Along with the federal credit, your business may also be able to take advantage of provincial R&D tax credits offered in B.C., Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia and Newfoundland. When provincial credits are included, the after-tax cost of $1,000 spent by a small business on R&D can generally range between $180 in Quebec, $272 in Ontario and $315 in B.C. In addition to the R&D tax incentives noted above, several provinces also offer refundable Digital Media tax credits for corporations which may be filed in addition to any R&D claims made in order to maximize the savings that can be generated from your company’s eligible activities.

To make an R&D claim, you will have to file an income tax return and some specific forms available from the CRA. The deadline is 18 months from the end of the tax year in which your business incurred the expenses. Of course, you don’t have to wait until the deadline to file your claim. The CRA aims to process refundable claims within 120 to 240 days after receiving them but sometimes does so even sooner. For instance, I have seen some companies receive their refunds ranging from $100,000 to $500,000 in as little as one to five weeks after filing their claims.

Though it takes some paperwork, it can definitely be worthwhile for your small business to claim any R&D and Digital Media tax credits you’re eligible for because claiming these credits can reduce your tax burden and give your cash flow a significant boost — two things that are always welcome in any business, large or small.

This article was originally published in the National Post in August 2010 and has been updated for this publication.

Business Adviser is published by KPMG Enterprise™ specifically for owners and executives of private companies. KPMG Enterprise is a network of professionals devoted exclusively to helping business owners and entrepreneurs build value and grow thriving enterprises. kpmg.ca/enterprise.