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Viral Innovation

Can companies still be innovative once all the low-hanging fruit has been plucked? The answer lies in the right incentives for management — rewarding actions one level up.

Recently I spoke with Chet, a senior executive who operates a restaurant chain. Under Chet’s leadership, the company made great strides over the last two years, and profitability spiked. But finding further improvements won’t be as easy. The low hanging fruit has been picked.

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So this year, Chet’s launching a campaign to spur innovation. I had the opportunity to help Chet prepare for a senior leadership team meeting meant to launch a new innovation offensive. Like most of the executives I work with, Chet was primarily focused on finding ways to generate powerful new ideas. Indeed, some creative brainstorming became part of the plan. But the real leverage in Chet’s organization was not in creating new ideas. It was in maximizing old ones.

Chet described how in seemingly every restaurant visit, he was finding something new and unusual, some innovative practice that could be utilized elsewhere.

There are tens of thousands of people in Chet’s company. Chet could not visit every restaurant, and could not possibly be personally aware of every innovation that had taken root across his vast chain. In truth, an organization doesn’t have to be nearly so large before it becomes impossible for the leadership team to be aware of every unique insight that has improved performance somewhere. Innovation is probably right under your nose, if you take the time to look.

But Chet doesn’t have time to look everywhere. If he is the only transmission mechanism to spread great ideas, they won’t spread far. Thus, Chet’s innovation challenge is not to plant one thousand seeds and hope for a few blooms. His challenge is to make the reproduction of seeds that have already bloomed automatic.

But how?

Look first to incentives. In Chet’s company, restaurant mangers are driven primarily by incentives that are based on measures of performance of their individual restaurants. That is, restaurant managers get bigger bonuses when their restaurants look better than the rest. There is even a formal, much sought after annual award for managing the most outstanding restaurant.

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This approach, no doubt, motivates hard work. But it certainly does not motivate sharing winning ideas. Doing so would only raise the expectations that you have to beat if you want to be a standout.

Chet’s company also gives its managers a portion of their compensation in company stock, so there is a direct reward for improving the overall performance of the company. But to an individual restaurant manager, the possibility of having an impact on the stock price of a mammoth corporation feels abstract. Any incentive tied to stock price is likely to be far less powerful than incentives tied tightly to activities that managers directly control.

The incentives that are best at spreading innovative practices reward performance neither at the individual level or at the company level. They operate one level up from the level of greatest individual control. In Chet’s case, that means shifting the weighting in the restaurant managers’ bonus formula from single restaurants to districts. That way, managers not only have an incentive to innovate, they have an incentive to help spread those innovations to sister units. All the better if every unit is assigned to two overlapping districts, so that practices spread not just within districts but between them.

It is not possible in every company, but these incentives become even more powerful if the performance of each individual unit is transparent. Frequent reports highlighting easy to understand measures are best. That way, it is abundantly clear where the performance leaders are, and all other units will be motivated to replicate their best practices. To further accelerate the spread of good ideas, Chet must constantly reinforce the virtue of sharing best practices — and the virtue of adopting best practices that were “not invented here.”

I’m sure there are breakthrough new ideas in Chet’s company that deserve some study. But the more immediate impact will come simply from mobilizing what is already there.

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