Credit: Israel Vargas
Ideas Made to Matter
3 challenges to digital innovation and how to overcome them
Digital transformation doesn’t mean just adopting new digital technologies — it requires drawing on them to create many types of business value, a continuous process with multiple initiatives underway at once. Yet launching even one successful digital initiative can be tough, especially for large, well-established companies.
To overcome that challenge, companies need to become “serial innovators,” developing the capacity to engage in multiple fast-paced experiments, according to studies from the MIT Center for Information Systems Research.
Serial innovation better positions companies to develop digital offerings, that is, revenue-generating solutions that leverage digital technologies to address customer needs, according to CISR research scientist Nils Fonstad and research affiliate Martin Mocker.
Companies hoping to launch digital offerings need to find out what customers want, what customers are willing to pay for, and what technology will work and prove economically viable, Mocker said. This means trying lots of different things.
“They’ve got to experiment, and many of these experiments will fail,” Mocker said.
Assuming a 90% failure rate, a company that’s only working on three initiatives isn’t likely to have many success stories.
In a recent case study, the researchers outlined how Munich Re, a 140-year-old insurance company headquartered in Germany, created a systematic way to overcome three main challenges — funding, expertise, and technological capabilities — in order to continuously test and develop digital initiatives.
At Munich Re, generating more and better digital offerings required creating dedicated resources, adjustments in leadership, and shifting company mindset. As of 2020, the company had launched more than 70 digital offering initiatives, with 10 on the market or about to be released. Several have led to new sources of revenue.
Munich Re was in a strong, established business position when it launched its innovation initiative, which counterintuitively made it hard to create momentum to make a change, said Dirk Heiss, head of digital platforms at Munich Re. But the company wanted to be proactive in the relatively slow-changing insurance industry.
“Otherwise, we’re the incumbent who will be attacked by new players,” he said.
Here’s how Munich Re created a systematic approach to serial innovation.
Know the three main challenges and how to overcome them
Munich Re, a company with nearly 40,000 employees, recognized that digital initiatives were often set back by challenges related to three key resources: funding, expertise, and technological capabilities. These are all critical resources, and common challenges for companies trying to launch multiple innovations, the researchers said.
After encountering these issues repeatedly, Munich Re came up with a systematic way to overcome each one.
Companies need to test digital initiatives to learn whether they are desirable, feasible, and viable enough to move forward. Risks include wasting money on innovations that won’t bring real benefits, or failing to ensure that promising projects receive enough funding.
To mitigate these risks, Munich Re created an innovation lab that provides funding for initiatives within the company. The lab aims to distribute 100 million euros annually (about $199 million in U.S. dollars) to about 30 initiatives. Employees can apply for a limited budget for an initiative through a relatively informal process by answering five questions. Funding has several stages, and if an initiative meets pre-determined goals, it becomes available for another, larger round of funding. The lab also provides mentoring and office space.
Digital innovation requires experts in technology, data analytics, and agile design thinking. But talent alone isn’t enough. The experts need to be able to overcome siloed decision-making and drive the initiative through development. At Munich Re, the IT department was focused on internal systems, so project leaders often turned to external contractors — who might not be available or don’t know the company as well — for digital initiatives.
To overcome this, Munich Re created a new unit within its information technology department called Business Technology, which is exclusively dedicated to innovation initiatives. The unit has experts including software developers, data scientists, and design thinking and agile coaches. Importantly, initiatives have dedicated dual leadership — one person from the business technology team to serve as chief technology officer for the initiative, and someone from the business side who serves in a CEO function. Having two complementary leaders as co-founders of an initiative ensures buy-in and support from different stakeholders.
3. Technological capabilities
Digital offerings often offer functions that users can’t find elsewhere. Yet companies can end up dedicating significant resources to developing technological capabilities that provide only basic functionality instead of a competitive advantage. Successful firms tend to create digital platforms that can be reused, but those platforms can be seen as burdensome tools, imposed by the company, that slow down innovation.
Because different digital offerings often share the same technology needs, Munich Re created a digital platform called Excite that is a repository of shared software components that can be used by people working on different digital offerings. Instead of mandating its use, Munich Re lets teams decide whether they want to use the new platform. Many do because developing these capabilities is expensive and time-consuming otherwise.
This method has been successful for his firm, Heiss said. For example, Munich Re’s recent partnership with Google to provide cyber insurance for Google Cloud was a product of its innovation protocol.
“What we're trying to do is develop new technologies, develop new offerings, which were always linked back to our core business,” Heiss said. When working with a prominent company like Google, Munich Re needed its startup mindset, but also the grounding of its core business and its reputation.
“We had the strength and the competence of Munich Re, combined with our digital offerings, that made that deal happen,” Heiss said.
A new approach to digital initiatives also required adjustments in leadership and company mindset.
Embrace a ‘test and learn’ approach
Moving from a few digital initiatives to serial innovation requires embracing what the researchers call a “test and learn” mindset.
In the past, companies might have had a long development process for a new initiative, and only once an offering went to market did the company learn whether customers wanted it and whether the company could scale the offering to meet demand, the researchers said.
The test and learn mindset gives teams the autonomy to try new things, the support to test these ideas in incremental ways, and mechanisms in place to evaluate whether they are worth pursuing.
“If they learn that in fact their effort merits the next round, the next stage in development, fantastic. Go for it,” Fonstad said.
Create internal resources and ensure employee buy-in
In the past, Munich Re and other companies looking to build digital initiatives often used outside corporate accelerators, worked with startup companies, or invested in new firms, which are all important options, Fonstad said.
But these choices focus on external solutions and don’t build internal capability. Munich Re listened to employees to find common challenges and then built useful services that projects could opt to use, rather than making them a requirement.
The digital platform, Excite, was a ready-made option available to initiatives. Pairing people from the tech and business side to work together on the project gave different departments a sense of ownership and a desire to see the project through. And the relatively simple funding process was more appealing to employees.
Heiss said about 80% of initiatives end up using the company’s innovation platform, especially when they realize how much is involved in bringing a product to market. But it’s ultimately an option.
“I’d rather see the services, the technologies, as more as an offering, not as, ‘If you want to do any projects you must use this,’” Heiss said. “Sooner or later, a lot of initiatives come back to me and say ‘I would like to leverage your facilities, your infrastructure, your services.’”
For Munich Re, building internal resources also helped them gain a competitive advantage against startups and other companies.
“That’s part of what Munich Re is learning, is how to innovate as an incumbent in ways that no one else can,” Fonstad said.
Focus on value
At Munich Re, digital initiatives are expected to pursue new sources of revenue by addressing five domains that are strategic to the company: cyber insurance, Internet of Things industries, digital cooperation models, digitally augmented underwriting and claims, and mobility. Employees are encouraged to pitch ideas that meet those targets.
Whatever their line of business, company leaders should be clear about how digital offerings will provide value for the organization, such as generating new services for new and existing customers.
Top management also needs to be clear about what success looks like.
“For example, revenue per product or service, do they anticipate that going up? Do they anticipate revenue per current customer going up? Do they anticipate generating new sources of revenue from new kinds of customers?” Fonstad said. “Those are all opportunities for digital offerings, and they need to be clear about how much of the company's efforts should go towards realizing that kind of value.”