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Voices Social innovation

Incubating innovation in social enterprises

Lynn TalientoMcKinsey & Company

Lynn Taliento is a partner in the Washington, DC, office and leads McKinsey’s Social Sector Practice in the Americas. After joining McKinsey in 1999, she cofounded the firm’s first practice dedicated to serving nonprofits. She works exclusively with nonprofits, philanthropies, and private and corporate foundations on strategic planning, organizational design, board governance, and advocacy. Taliento serves on the boards of the Clinton Health Access Initiative and Water.org.

@lynntaliento

Marla CapozziMcKinsey & Company

Marla Capozzi is a consultant in McKinsey’s Boston office.

The TakeawayNonprofits traditionally have not set up separate innovation teams for finding new approaches to problems, partly because current funding models don’t support such activities. Some problems, however, are best solved through a lab or incubator model. Social innovators and funders alike need to provide the resources necessary for innovation if the sector is to meet the challenges of the 21st century.

Skunk Works. Innovation Lab. Incubator. New Ventures Group. These are just some of the names companies have used over the years when they set up teams to generate new ideas or incubate new businesses outside the shackles of the day-to-day demands. When these efforts work, the results can be spectacular. Consider IBM’s Emerging Business Opportunities (EBO) program, which has generated 22 new EBOs since 2000, totaling $15 billion in revenue and growing at 40 percent each year.1 Or Cisco’s new Emerging Technologies group, a staff of 400 that created and launched TelePresence and aims to launch 20 new ventures, each with $1 billion in market potential.2 Or Amazon’s Lab126, an internal team in Palo Alto that created and launched the Kindle and the Kindle Fire.3

Companies create these groups because they know that it takes discipline and dedicated resources to innovate in the face of organizational silos, inflexible budgets, cultural resistance, and short-term operating pressures. These challenges are even more acute for nonprofit organizations. They face all the challenges of corporations with the additional burden of chronic underfunding and funding that’s tied to specific programs and outcomes. As a result, nonprofits rarely have the luxury of a strategic planning team or a group focused solely on new opportunities. When nonprofits do identify a new opportunity, they typically cannot fund it within their current budgets, as each dollar in the budget is either tied by a grant agreement to a specific activity or simply stretched too thin already trying to cover the “overhead” costs that funders are reluctant to support.

While this restricted funding makes some sense when supporting proven programs, many social-sector organizations need more flexibility to try new approaches. Social-sector leaders and the donors that support them must provide the space and the resources for innovation while continuing their commitment to proven programs if the sector is to meet the challenges of the 21st century.

Several forward-looking nonprofits—and even foundations themselves—are beginning to experiment with the corporate “innovation lab” approach. Water.org has just created a $10 million New Venture Fund, funded separately by 10 individuals, including cofounder and actor Matt Damon, to identify and support innovations in water service provision. Former president Bill Clinton’s organization, the Clinton Health Access Initiative (CHAI) is designing a Health Access Venture Fund in which a group of internal and external experts will review innovative ideas submitted by CHAI’s staff and select the leading ones for investment. ONE is also considering creating a small, flexible team to quickly analyze potential innovations that might change the way they do their advocacy. And the Bill and Melinda Gates Foundation has institutionalized a special-initiatives team to explore emerging challenges and fill in gaps not addressed by existing strategies.

As nonprofits create these innovation vehicles, they should study the lessons learned by their fellow travelers in the corporate world who already have well-honed techniques for producing new ideas efficiently.

  1. Even a skunk works needs focus. Somewhat counterintuitively, constraints drive creativity more than whitespace does. Even teams charged with something as open-ended as finding new opportunities require a clear mandate and criteria for what a successful “hunting ground” would look like. Senior leadership must set strategy and put in place guardrails that will help team members understand the types of risks they should take.4 Some nonprofits are so excited by the prospect of having unrestricted funding for innovation that they resist any attempt to define boundaries for the effort.
  2. Separate, and integrate. Ring-fencing the innovation team allows capital and talent to work efficiently and effectively. In addition, it allows the team to put in place its own processes, milestones, metrics, and decision making, all necessary for its separate mission. However, team members will almost certainly choose to leverage the assets, brand, or capabilities of the core organization, making it essential to have formal linkages through the leadership and by expertise of team members. Nonprofits that err on the side of “protecting” these enterprises by isolating them from the rest of the organization run the risk of leaving them with insufficient access to the leadership support and resources as well as the assets and capabilities they need to succeed.
  3. Talent, and more talent. Even the best-designed process cannot compensate for a poorly staffed team. Drawing on the organization’s top talent is critical for the team’s success as well as for talent development. In a McKinsey innovation survey, we found that hand-selected teams were more likely to result in successful innovation initiatives than teams made up of volunteers. Innovation teams must also have the freedom to draw on expertise outside the organization. While corporations tap their consumers, suppliers, and others in the value chain for ideas, nonprofits should look to beneficiaries, grantees, partners, and funders.

Setting up an innovation team isn’t the answer for every organization or challenge. When the goal is continuous improvement, for example, every employee should be engaged in generating ideas to improve current programs and processes. When the challenges require more focused attention and the solution is likely to fall outside the current scope of the organization’s activities, an incubator or lab model may well be the fastest way to get there.

1See Alan Deutschman, “Building a better Skunk Works,” Fast Company, March 1, 2005.
2See Tom Sanders, “Cisco reinvents the corporate incubator,” V3.co.uk, July 26, 2007.
3See Steve Denning, “How Amazon created the Kindle Fire (Part 11),” Forbes.com, September 30, 2011.
4Marla M. Capozzi, Renée Dye, and Amy Howe, “Sparking creativity in teams: An executive’s guide,” mckinseyquarterly.com, April 2011.

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