Big Companies Good at Innovation are Rarities

Practitioners of innovation almost always believe their chances of succeeding are quite high. They would not make the effort unless they did believe that was the case. But, statistically, innovation tends to be quite hard. Consider venture capital, which is innovation with clear or+metrics for success

A general rule of thumb for venture capitalists is that 75 percent of venture capital startups fail completely. Another three or four return the original investment, and one or two produce virtually all the significant financial returns. 

Also, keep in mind that perhaps one percent of proposals actually wind up getting funding. 

According to Cambridge Associates. Information technology digital media startups from 2001 to 2011 produced uneven multiples of the original investment. In more than 60 percent of cases, the startups did not earn enough to produce a return on invested  capital. About seven percent of all funded companies are able to produce returns in excess of five times the original investment. 

source: jtangoVC 

So outright failure is the case at least 63 percent of the time. Another 30 percent produce an actual return. Less than one in ten are big winners. 

Some studies suggest 74 percent of digital transformation efforts fail. Historically, most big information technology projects fail. BCG research suggests that 70 percent of digital transformations fall short of their objectives. 

From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings. IT project success rates range between 28 percent and 30 percent, Standish also notes. The World Bank has estimated that large-scale information and communication projects (each worth over U.S. $6 million) fail or partially fail at a rate of 71 percent. 

McKinsey says that big IT projects also often run over budget. Roughly half of all large IT projects—defined as those with initial price tags exceeding $15 million—run over budget. On average, large IT projects run 45 percent over budget and seven percent over time, while delivering 56 percent less value than predicted, McKinsey says. 

Beyond IT, virtually all efforts at organizational change arguably also fail. The rule of thumb is that 70 percent of organizational change programs fail, in part or completely. 

Of the $1.3 trillion that was spent on digital transformation--using digital technologies to create new or modify existing business processes--in 2018, it is estimated that $900 billion went to waste , say Ed Lam, Li & Fung CFO, Kirk Girard, former Director of Planning and Development in Santa Clara County and Vernon Irvin Lumen Technologies president of Government, Education, and Mid & Small Business. 

All that accumulated experience helps us understand why innovation so often comes from the young, who have less to lose; from small firms rather than big, established firms; from outside an industry rather than from within it. 

A rational actor in any large, established industry or firm has more to lose than to gain from an attempt at innovation: odds of success are three in 10. A small attacker might well conclude that those odds are worth the effort, especially if the attacker is led by young people who can survive an early failure or two with little long-term damage. 

Quite the opposite is true for older leaders who have risen to the top precisely because they know how the legacy business runs, and benefit from it. A professional manager who expects to remain in the top post for less than a decade has much more to lose than to gain by any serious effort to transform the existing business model. 

When the person at the top of any big organization is three to five years away from retirement, what else would you expect, other than behavior that is basically “do not mess it up?” 

The upshot is that innovation is risky, destined to fail seven times out of 10. “Letting someone else take the risk of attempting innovation” therefore can appear a wise strategy. The exceptions often occur when a firm’s core business model is unraveling. Then the risk of trying to innovate is less than the risk of staying a failing course. 

There seems to be far less research done on how successful firms are at rescuing themselves from failing business models. Impressionistically, the odds are even worse than seven out of 10, as the common remedy is a sale of the asset to some other entity, assuming outright bankruptcy is avoided.

Digital Transformation is Hard

If you have been around information technology investments long enough, you know that outcomes often are negative: the hoped-for benefits do not emerge at all, or prove to be less than expected. Possibly 30 percent of major IT investments actually produce the expected results. 

The same continues to be true of digital transformation efforts and investments. A new survey of IT professionals suggests DX has the same outcomes. 

source: Walkme 

The study also had respondents estimating that, of all IT projects, fully 41 percent failed to meet objectives, in the form of key performance indicators. And the larger the organization, the more likely it is that DX or any other IT initiative will fail. Larger enterprise respondents reported failure rates at six times the rate of small entities. 

source: Walkme 

To be sure, the more-important KPIs deal with financial performance: productivity, equity value growth, higher income or lower costs. 

Such “failures” are not hard to understand. Most large enterprises rely significantly on third-party integrators to attempt complex initiatives. That means lots of organizational complexity. And the number of persons who must not only agree to support, but actively ande usefully support such initiatives is therefore quite high. 

source: Walkme 

And that runs squarely up against an immutable law: the more permissions one requires to get anything done, the lower the chances of success. Consider any project with a number of key influencers. Assume that at each stage, the chances of getting a “yes” are 50 percent.

If only one “yes” is required, odds of success are 50 percent. If two “yes” hurdles are required, success rates drop to 25 percent. If three “yes” hurdles exist, odds drop to 13 percent. Each successive hurdle reduces success rates further. 

As you can see, even a small number of hurdles, each with a 50-50 chance of success, quickly reduces odds of success to an impossible level. After seven hurdles, odds of success are one in 100. 

Obviously, any complex IT project has many more gates than seven. With sufficiently vigorous top-level support, the odds of success at each gate are likely higher than 50 percent. But there are so many more hurdles or gates that odds of success are low; odds of failure high. 

The conventional wisdom is that about 30 percent of big IT projects actually succeed as expected.

Sequential Hurdles Explain Low Rates of Transformation Success

A common rule of thumb is that about 70 percent of information technology projects fail to meet their objectives. Historically, most big information technology projects fail in some major way, failing to produce expected cost savings or revenue enhancements or even expected process improvements. 

Some would argue the digital transformation failure rate is the same. “74 percent of cloud-related transformations fail to capture expected savings or business value, ” say McKinsey consultants  Matthias Kässer, Wolf Richter, Gundbert Scherf, and Christoph Schrey. 

Of the $1.3 trillion that was spent on digital transformation--using digital technologies to create new or modify existing business processes--in 2018, it is estimated that $900 billion went to waste, say Ed Lam, Li & Fung CFO, Kirk Girard is former Director of Planning and Development in Santa Clara County and Vernon Irvin Lumen Technologies president of Government, Education, and Mid & Small Business. 

BCG research, for example, suggests that 70 percent of digital transformations fall short of their objectives. 

From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings.

Some industries arguably do better than others, especially consumer-facing businesses and industries. The success of e-commerce is one likely reason why that occurs. Compared to changing a whole business model, shifting sales partly to online mechanisms is relatively risk free.

Another common rule of thumb is that about the same percentage of digital transformation efforts also fail. Many reasons are cited. 

• Company Culture is not aligned

• CxOs do not really support it

• Silos

• Knowledge gaps about cause and effect

• Indecision or tepid initiatives

• Technology novelty not harnessed to business processes

• Expectations not in line with reality

• Not iterating fast enough

• Human capital mismatch

• Lack of continuity and consistency

• Unclear vision

• Business and IT execs do not agree on objectives

• Organizational inertia

• Lack of employee buy in

• Governance not aligned

Those concerns typically are found in every industry and firm that attempts DX, as this example from the banking industry suggests. 

 

source: Banking Circle 

There is a simple way of illustrating why innovation is so hard. If you have ever spent time and effort trying to create something new in the communications business, you know it rarely is easy, simple or uncomplicated to do so, and the larger the organization you work for, the harder it seems to be. That is because all organizational change involves power and politics, and changes will be resisted.  

There is a reason 70 percent of organizational change programs fail, in part or completely. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). 

source: John Troller 

The odds get longer for any change process that actually requires multiple approvals. Assume there are five sets of approvals. Assume your odds of success are high--about 66 percent--at each stage. In that case, your odds of success are about one in eight (.66x.66x.66x.66x.66=82/243). 

The more hurdles (approvals) required for a change to happen, the less likely the change will happen. Even when the odds of approval at any stage are 66 percent, the necessity of just five approvals will lead to seven of eight change efforts failing. 

source: BCG

Why IT Failure is So Common

Beyond IT, virtually all efforts at organizational change arguably also fail. The rule of thumb is that 70 percent of organizational change programs fail, in part or completely. 

There is a reason for that experience. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). 

In other words, if only two approvals are required to make any change, and the odds of success are 50-50 for each stage, the odds of success are one in four. 

Consider new drug approval rates. Consider a four-phase drug approval process, where the real mortality (58 percent to 87 percent failure) is the gate from phase one to phase two. Where there are three development phases and then an “approval” process of four stages, overall success rates range from 14 percent to 21 percent. 

American Council on Science and Health 

Other examinations of drug approval success rates suggest the odds of success are less than 10 percent for a four-stage set of hurdles, up to perhaps 11 percent.  

source: Seeking Alpha 

In the venture capital business, the odds of getting funding are less than one percent. 

souce: Corporate Finance Institute

In other words, change is hard because any complex process, with multiple stakeholders--with the ability to stop any proposal--is mathematically challenging.

74% of Digital Transformation Efforts Fail

“74 percent of cloud-related transformations fail to capture expected savings or business value,” say McKinsey consultants  Matthias Kässer, Wolf Richter, Gundbert Scherf, and Christoph Schrey. 

Similarly, almost half of all respondents experienced cloud technology as more, or much more,  complex than they initially expected, while 40 percent overran their cloud budgets, some to a significant degree, they note. 

source: McKinsey 

Those results would not be unfamiliar to anyone who follows success rates of information technology initiatives, where the rule of thumb is that 70 percent of projects fail in some way.

Of the $1.3 trillion that was spent on digital transformation--using digital technologies to create new or modify existing business processes--in 2018, it is estimated that $900 billion went to waste, say Ed Lam, Li & Fung CFO, Kirk Girard is former Director of Planning and Development in Santa Clara County and Vernon Irvin Lumen Technologies president of Government, Education, and Mid & Small Business. 

That should not come as a surprise, as historically, most big information technology projects fail. BCG research suggests that 70 percent of digital transformations fall short of their objectives. 

From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings.

source: BCG 

IT project success rates range between 28 percent and 30 percent, Standish also notes. The World Bank has estimated that large-scale information and communication projects (each worth over U.S. $6 million) fail or partially fail at a rate of 71 percent. 

McKinsey says that big IT projects also often run over budget. Roughly half of all large IT projects—defined as those with initial price tags exceeding $15 million—run over budget. On average, large IT projects run 45 percent over budget and seven percent over time, while delivering 56 percent less value than predicted, McKinsey says. 

Beyond IT, virtually all efforts at organizational change arguably also fail. The rule of thumb is that 70 percent of organizational change programs fail, in part or completely. 

There is a reason for that experience. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). 

In other words, if only two approvals are required to make any change, and the odds of success are 50-50 for each stage, the odds of success are one in four. 

The odds of success get longer for any change process that actually requires multiple approvals. 

Assume there are five sets of approvals. Assume your odds of success are high--about 66 percent--at each stage. In that case, your odds of success are about one in eight for any change that requires five key approvals (.66x.66x.66x.66x.66=82/243). 

In a more realistic scenario where odds of approval at any key chokepoint are 50 percent, and there are 15 such approval gates, the odds of success are about 0.0000305. 

source: John Troller 

So it is not digital transformation specifically which tends to fail. Most big IT projects fail.

Telcos Now Hope "Metaverse" can be a Platform

What are the odds connectivity providers can create sophisticated 3D gaming platforms including virtual and augmented reality features that provide immersive experiences? 

Now called a metaverse, such platforms provide a shared virtual 3D world, or worlds, that are interactive, immersive, and collaborative, says Nvidia. Others might note that such a potential platform also includes e-commerce and social media features. 

What are the odds that the same technology also can be the foundation for hologram-based and three-dimensional digital twin experiences for communications or learning?

Telcos want to find out. 

SK Telecom has launched “ifland”, a new metaverse platform.  SKT’s ifland is a communication-focused platform that supports audio communication and file sharing (pdf and mp4) with up to 130 participants. 

China Mobile and Verizon also have initiatives in the metaverse area. 

DoubleMe’s Holoverse, a proof of concept project, is supported by Telefónica, Deutsche Telekom, TIM, and MobiledgeX.

As with any effort to create a “platform,” success will happen not only because the technology works, but because many business partners find the platform useful. 

source: Bloomberg

As always, there are issues about which participants in which parts of the ecosystem end up driving most of the value. Will such telco or mobile metaverse platforms become commercial successes? 

Or will others, such as  Epic Games and other gaming content suppliers, emerge as the driving forces? It is possible Nvidia or other chip suppliers emerge as leaders, though less likely perhaps than Facebook and other hyperscale app giants emerging as the eventual platform winners. 

To be sure, these telcos will be hailed as major innovators if they succeed, criticized as once again wasting effort in areas where they have no natural advantages, if they fail. 

If the pattern with edge computing holds, success will come when telcos partner with platform suppliers, accepting some incremental role but without trying to create their own brands. Already there are too many other logical suppliers in the value chain staking a claim to becoming the platform of choice. 

You might liken the metaverse to an even more immersive experience than telepresence, itself defined as the experience of “being there.” It is a work in progress. 

Actually, AT&T Did Quite Well in Content and Video Subscription Businesses

Many will criticize telco failures to "innovate." Many will pan diversification efforts such as that made by AT&T into content ownership and entertainment video services. By one reckoning, AT&T actually did quite well.

Many will criticize telco failures to "innovate." Many will pan diversification efforts such as that made by AT&T into content ownership and entertainment video services. By one reckoning, AT&T actually did quite well.

It actually took only a handful of attempts before AT&T was able to emerge as a significant provider of video content, video subscriptions and internet access. In fact, it did not actually take many tries before AT&T and Verizon actually created roles for themselves in content and video. 

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984. 

Having spent about two years amassing a position in local access using resold local Bell Telephone Company lines, AT&T wanted a facilities-based approach, and believed it could transform the largely one-way cable TV lines into full telecom platforms. 

That move was but one among many made by large U.S. telcos since 1994 to diversify into cable TV, digital TV, satellite TV and fixed wireless, mostly with an eye to gaining share in broadband services of a few different types. 

By some accounts, TCI was at the time the second-largest U.S. cable TV provider by subscriber count, trailing only Time Warner. TCI had 33 million subscribers at the time of the AT&T acquisition. As I recall, TCI was the largest cable TV company by subscribers. 

For example, in 2004, six years after the AT&T deal, Time Warner Cable had just 10.6 million subscribers. In 2000, by some estimates, Time Warner had about 13 million subscribers. That undoubtedly is an enumeration of “product units” rather than “accounts.” Time Warner reached the 13 million account figure by about 2013, according to the NCTA. 

Since 1994, major telcos had been discussing--and making--acquisitions of cable TV assets. In 1992 TCI came close to selling itself to Bell Atlantic, a forerunner of Verizon. Cox Cable in 1994 discussed merging with Southwestern Bell, though the deal was not consummated. 

US West made its first cable TV acquisitions in 1994 as well. In 1995 several major U.S. telcos made acquisitions of fixed wireless companies, hoping to leverage that platform to enter the video entertainment business. Bell Atlantic Corp. and NYNEX Corp. invested $100 million in CAI Wireless Systems.

Pacific Telesis paid $175 million for Cross Country Wireless Cable in Riverside, Calif.; and another $160 to $175 million for MMDS channels owned by Transworld Holdings and Videotron in California and other locations. 

By 1996 the telcos backed away from the fixed wireless platforms. In fact, U.S. telcos have quite a history of making big splashy moves into alternative access platforms, video entertainment and other ventures, only to reverse course after only a few years. 

But AT&T in 1996 made a $137 million  investment in satellite TV provider DirecTV. 

Microsoft itself made an investment in Comcast in 1997, as firms in the access and software industries began to position for digital services including internet access, digital TV and voice services. In 1998 Microsoft co-founder Paul Allen acquired Charter Communications and Marcus Cable Partners. 

Those efforts, collectively, are well within the “one success in 10” rule of thumb, for any single firm, and close to it for the entire industry. More significantly, the amount of revenue generated by those efforts come well within the “one in 100” rules of innovative success for “blockbuster” impact. 

AT&T, remember, continues to own 70 percent to 80 percent of its former Time Warner content assets. It continues to benefit from the cash flow of DirecTV and its fixed network video services. It continues to drive cash flow from HBO Max.

And all that was achieved with far fewer than 10 attempts. By standard metrics of innovation, that clearly beats the odds.

What most will miss is the difficulty of making successful change in any organization, on a routine basis. As a rule of thumb, only about one in 10 efforts at change will succeed. Quite often, only about one in 100 successful innovations is truly consequential in terms of organization performance.

source: Organizing4Innovation 

That means we must tolerate a high rate of failure before we can hope for successful change. And we must fail quite a lot before we encounter a successful innovation with the power to change a company's or a whole industry's fortunes.

Of all the innovations connectivity providers have attempted--and been criticized for--how many have had industry-altering implications? Not many. Fixed network voice; mobile phones; internet access and possibly entertainment video subscriptions have been transformative.

Deregulation, privatization and competition have been historically transformative. But one might argue that was something that "happened to" the connectivity business, not necessarily an innovation of the industry itself.

Yes, we have seen many generations of business data networking services and business phone systems and services. But few have revenue magnitudes so great they change the fortunes of the industry or whole firms. In 150 years, only mobility and internet access have had clear industry-altering implications.

We all are familiar (even when we do not know it) with the sigmoid curve, otherwise know as the S curve, which describes the normal adoption curve for any successful product. We are less familiar with the idea that most innovations fail, whether that is new products, new technologies, new information technologies or business strategies. 

S curves apply only to successful innovations.

Most new products simply fail. In such cases there is no S curve.  The “bathtub curve” was developed to illustrate failure rates of equipment, but it applies to new product adoption as well. Only successful products make it to “userful life” (the ascending part of the S curve) and then “wearout” (the maturing top of the S curve before decline occurs). 

source: Reliability Analytics

Though nobody “likes” to fail, there is good reason for the advice one often hears to “speed up the rate of failure.” The advice is quite practical. 

Only about one in 10 innovations actually succeeds. Those of you who follow enterprise information technology projects will recognize the pattern: most efforts at IT change actually fail, in the sense of achieving their objectives. 

source: Organizing4Innovation 

“We tried that” often is the observation made when something new is proposed. What almost always is ignored is the high rate of failure for proposed innovations. About nine out of 10 innovations will probably fail. Most of us are not geared to handle that high rate of failure. 

Unwillingness to make mistakes almost ensures that an entity will fail in its efforts to grow, innovate or even survive. 

Those of you who follow startup success will recognize the pattern as well: of 10 funded companies only one will really be a wild success. Most startups do not survive. 

 

source: Techcrunch 

Connectivity providers are not uniquely free from the low success rate of most innovations. Innovation is hard. Most often efforts at innovation will fail. Even smaller efforts will fail nine times out of 10. An industry-altering innovation might happen only once in 100 attempts.

The more failure, the more the chances for eventual success. Many would consider telco initiatives in content and video subscriptions to have "failed." It is more accurate to call them an innovative success, given the relative handful of attempts to lead that business.

AT&T continues to own 70 percent of its former Time Warner content assets. It continues to benefit from the cash flow of DirecTV (about 71 percent ownership) and its fixed network video services. It continues to drive cash flow from HBO Max.

And all that was achieved with far fewer than 10 attempts. By standard metrics of innovation, that clearly beats the odds.