07/12/2015 8:38 AM IST | Updated 15/07/2016 8:25 AM IST

Can Big Tech Still Innovate?

Idea Conceptual Drawing on Blackboard
phototechno via Getty Images
Idea Conceptual Drawing on Blackboard

One of the most interesting concepts I learned in my Strategy class at Kellogg was "skunkworks". Loosely defined, it refers to a set up where a group of highly talented and motivated employees are placed in a small setting away from the company's regular organisation and given the task to ignore rules and innovate. The concept and the term were pioneered by Lockheed Martin which used this set up to build the P-80 Shooting Star plane during WW-II. Lockheed placed its engineers in a circus tent next to a plastics factory in Burbank, California. It is said that the foul smell from the factory reminded the Lockheed engineers of the "Skonk Works" factory in Al Capp's Li'l Abner comic strip and hence was born the term.

In modern times, skunkworks is the method that large companies in the technology sector routinely use to innovate. It allows them to place employees in a set up where routine activities, constraining bureaucratic boundaries and budget limitations do not hinder radical innovation. It is also meant to provide a safe environment to fail and offers a chance for new ideas to flourish and be blessed by leadership. Intel used something similar to develop its Centrino processor in the mid-2000s amidst strong opposition from within the company to the program's need and viability. Steve Jobs took 50 people and developed the Macintosh computer in a skunkworks located in Cupertino behind a restaurant.

"All big tech companies have been disruptive start-ups in their infant years. It is only natural, as they age, for the risk appetite to wane..."

I raise skunkworks and ask the question in the header of this post because of two recent developments. A few weeks back Dell announced that it would be acquiring enterprise storage and security giant EMC for $67 billion in what is the largest M&A deal in tech history. Financial analysts and observers have commented on the pros and cons but one reaction had me interested. Vinod Khosla, founder of Sun Microsystems and now perhaps Silicon Valley's most famous venture capitalist, said the merger would "distract the companies from innovation" . He further went on to add that old and established tech firms like Cisco, IBM and Dell had "not introduced a single new idea in the last 30 years" and that he only saw half of the large tech firms surviving in the future.

It is perhaps easy to dismiss Khosla's views as coming from the biased lens of a VC that is aggressively promoting start-ups. His comments do raise a question though -- in an era where unicorns are the flavour of the day and every business wants to be the "next Uber of its category", how can large technology firms, catering to a mass base of enterprise and consumers, claim the innovation mantle? And beyond that lies the larger question -- is the trade-off between growth and innovation always a losing one?

Skunkworks perhaps proves so -- big companies need to isolate their incubators to prevent them from being swallowed into the hazy swamps of committee-based decision making that inevitability arises when that first big tech campus is set up. A company that tried something different here was Cisco. John Chambers started the concept of "Spin-Ins", allowing his star engineers to innovate new products within the company and then buy them out as if they were a start-up. It meant that he was able to retain his best talent and Cisco was able to launch cutting-edge products. The process though, also had its downsides.

You had to be chosen to participate in a Spin-In and those employees who weren't were left grudging the millions earned by the person sitting in the next cubicle. Chambers' successor Chuck Robbins moved away from this approach and returned R&D to the traditional in-house role it occupies across industries. Cisco, of course, has been the eternal shopper in the tech industry with its multitude of acquisitions. In recent times, even relatively newer tech firms such as Google and Apple have had to resort to acquisitions to add to their product portfolio as demonstrated by the buy-outs of Nest and Beats respectively.

It is easy to understand how the pace of innovation slows down as scale increases, in tech or any other sector. Management focus shifts towards maintaining their cash cows and "keeping the lights on" (apologies for the consulting jargon here!) while investor pressure keeps a hawk eye on the bottom line. Before we blame big tech for being lazy and settling all too easily into a trough, we must remind ourselves of the start-up failure rate. That "sexy" tech start up that truly disrupts has only a 10% chance of succeeding. We focus on the peaks of the start-up mania and ignore its long and heavy tail of failure. All big tech companies have been disruptive start-ups in their infant years. It is only natural, as they age, for the risk appetite to wane and for them to want a steady pace of growth.

"Can big tech find individuals who pacify analysts every quarter and still look kindly towards their skunkworks that churn crazy ideas?"

Vinod Khosla is right in claiming that the bulk of innovation will come from start-ups. That is their role in the tech ecosystem. However, he is a bit unfair to big tech. The likes of Cisco and IBM have been powering the engines of connectivity and helping businesses add value to their operations over the years. A lot of their innovations perhaps are no longer visible products but channel or go-to-market based. They owe as much to the market as to their shareholders to test the risk threshold of their innovations. For the riskier bets, they always have skunkworks -- though as my professor at business school put it, having an in-house incubator is no use until there are executives that let it run its due course and take a punt on its ideas.

The challenge then comes down to culture and, crucially, like all areas in life, to individuals and their leadership skills. Can big tech find individuals who pacify analysts every quarter and still look kindly towards their skunkworks that churn crazy ideas? Keep watching this space.

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