Consumer-Driven Innovation: More Than Words

For good reason, when we think about innovation we think about visionary entrepreneurs molding reality to realize their visions.  But it is also worthwhile to consider innovation from the customer-side, i.e., what are customers doing to demand innovation and are there systematic differences in incenting innovation with different types of customers?  In other words, what is the relationship between the type of customer (consumer, enterprise, government) and innovation?

Not to grossly oversimplify, but there are at least some directional differences.  For companies in consumer industries, innovation is often about survival: stop innovating and you stop (or have no hope of) getting attention or getting paid.  For companies selling to enterprise and government customers, innovation sometimes is little more than marketing copy  — mere words added onto incentive structures that do not require innovation.  It is the innovation equivalent of pretending that the cherry on your ice cream sundae makes it healthy.

In an interview with Fortune magazine, former US CIO Vivek Kundra reflected on his experience in government and commented on the difference in innovation between consumer and enterprise IT, noting one relationship (observed by not just him) is that consumer companies must innovate constantly as they are “one click away from extinction.”

There’s a huge divide between the consumer space and the public sector. Why? The reason is that in government there isn’t a Darwinian pressure to innovate that’s in the consumer space. Consumer companies are one click away from extinction, so they have to innovate constantly. Yet in enterprise IT, which is far inferior to consumer IT, victory is considered winning that contract. Once companies win that contract, the incentives are to optimize their margins, not to innovate or make sure they’re providing better services.  You address that problem by adopting consumer technologies.”

As he notes, enterprise IT is about winning a long-term contract, and collecting annual maintenance checks.  By contrast, in dealing with consumers, you are dealing with consumers with shallow-pockets, unable to scrounge for and deliver dollars if the product is not delivering value.  In fact, it is hard to monetize even when you are delivering value — think about how hard it is has been to find revenue models for consumer internet companies where the consumers pay.  Consumers are less likely to sign contracts, and when something better comes along or the product becomes less interesting, they move on.

In fact, If you are marketing to consumers, it’s all about the consumers.  Consumers are not likely to cut producers any slack like a business or government customer might.  In that same vein, Kundra noted about procurement:

I asked a very simple question: How would a startup company launch in the private sector? If you went to venture capitalists or your board of directors and said, “I need millions of dollars to hire an army of consultants to stand up my e-mail system and build a custom financial system and build out a data center so I can host a website,” you would get laughed out of the room. And that’s exactly what the federal government was doing.

Startups are going to Google for e-mail, or to Microsoft, or to Hotmail. They’re going to Intuit and using QuickBooks for the financial systems. They’re going to a number of providers online to set up a website, and they get value day one, literally. They don’t spend months or years procuring those services. Imagine if the federal government, with purchasing power of $80 billion, demanded from the vendor community, “We want value day one. We don’t want to wait years, and we don’t want to spend millions of dollars, because we’ve seen this movie, and it always ends poorly.”

If you are serving a customer base that demands value from day 1 or there is no check, there is no choice but to innovate from the industry.  Contrast this with an industry, in which there is a stream of huge payments even before there is a product, and a massive stream of payments even where the product has missed numerous timing, cost, and performance benchmarks. The extreme example is defense procurement.  The Economist had a recent story about the F-35 Joint Strike Fighter, our next-generation fighter jet, and the most expensive military program in history. It is running 6 years late, and the planes are running at double the acquisition cost, and at a”jawdropping” trillion dollar cost to support and operate after the $400 billion or so it will cost to buy the planes. Despite this, apparently, Lockheed, the contractor, thinks it is doing a great job.

Obviously, things are different, but can you imagine an angel or venture capitalist handing out gold stars to a portfolio company that had such results?