A significant report was released last week on Australian public sector innovation. It’s called “Empowering Change” and I think it represents a blueprint for an important sector that has traditionally had a very fragmented approach to innovation. In Australia it represents 30% of the economy and delivers services that are vital to the well-being of the nation. Future challenges such as education, health, water, indigenous reconciliation, the digital economy and energy will have to be met by public sector innovation in some way and often in partnership with the private sector. On the blog we talk about the net present value of innovation being survival and perhaps this holds true for public sector innovation as well. But we are not talking about the survival of the public service itself but rather the survival of the nation.

I think that Empowering Change succeeds because it is quite programmatic in its recommendations. Rather than delivering some vague statements on innovation that could apply both anywhere and nowhere, the document sets out how managers could start an innovation program with the crucial elements of idea generation, selection and execution. In may ways it is more like an innovation handbook than a report. Many of the tools that we talk about on the blog such as stage gate, three horizons, innovation jams and linking innovation to strategy all feature in the toolkit that is recommended in the document.

Something that I find interesting is the apparently huge negative impact that risk and failure have on the willingness to engage with innovation. Statements such as the following are common, particularly from more senior managers. Empowering Changes takes this quote from a US study, but there is no reason to believe that the problem isn’t universal.

Challengers, legislators, and the media concentrate almost exclusively on failure. Failure is news. It generates controversy, particularly about who was responsible, and can be portrayed as scandalous. (Altshuler, 1997, p. 48).

However, according to an Australian Public Service Commission survey over 80% of respondents agreed that they liked to try new ideas at work and less than 40% felt that they wanted to try new ideas but the public sector discouraged risk taking. This sounds like a lot, but its actually pretty low when you think about organizations in the private sector where a risk with a bad outcome can cost you your job. The public sector wants to be innovative but I suspect that the gradual politicization of the public service has brought it closer to the orbit of the party machine with the obsession with the news cycle and the short-term thinking of the Australian three-year election cycle. Here in Brisbane, our public service colleagues talk about the “Courier Mail” test, referring to the local newspaper that loves a good scandal to prop up its steadily declining sales. Tim’s advice to this ‘test’ goes something like “who cares- nobody reads the thing anyway”, which is probably correct.

Innovation means accepting the possibility of failure. As we have said before, ideally this means failing quickly and on a small scale with staging and experimentation, but it is failure nonetheless. The problem with politicization and risk aversion is that all failure becomes bad and the important concept of successful failure turns into an oxymoron. An example of what I am talking about is currently being played out in the Australian media.

When the magnitude of the global financial crisis became apparent after the collapse of Lehman Brothers, the advice of treasury officials to government was to spend big and spend on households, who were more likely to inject the money into the economy. Rapid action was required with a range of innovative programes. Nearly two years later, Australia enjoys one of the best economic positions of any developed country with an unemployment rate below 6%, rising consumer confidence and a projected return to budget surplus within a few years rather than the possibility of several decades faced by the US and many European countries.

However, some spending programs have failed and in some consequences, the failure has been catastrophic. When the goverment announced a scheme for free roof insulation to save both energy and trade jobs, it seemed like a good idea. What eventuated was poorly intalled products that were often a fire hazard and in some cases caused electrocution of the untrained installers who put staples through wires in the ceiling. Even in this tragic instance there is the possibility of good failure. By this I mean an analysis of what happened and the possibility of shared learnings for the future rather than persecution and public embarassment. Even with my limited knowledge it seems that there are two key factors behind the failure that have implications for any future program.

One of these is that there were examples of failed schemes like this in other countries – even as close as New Zealand. Looking outside to see what others are doing before trying sometng yourself is always a good principle of innovation. The other is that generating an idea is easy, but executing is a major part of risk and needs to be handled by experienced people who are well resources. The insulation program was handled by the Department of Environment who had no experience in building codes and accreditation. These are important notes for future public sector innovators but I fear that without the imperative to learn from these failures we will be making the same mistakes in the future AND perpetuating risk aversion.

Good failure requires courage and leadership. As “Empowering Change” suggests, strong leadership is vital for embedding innovation in the public sector.

Leaders, especially agency heads and SES staff, set the tone – they have a big influence on the culture and attitudes within an organization. Through their actions, leaders can make clear that innovation is an issue of some priority and is valued and rewarded within an agency. If agency leaders show no interest in innovation, that also sends a clear message to staff. If we want a more innovative public sector, it is incumbent on public sector leaders to encourage the generation, adoption and implementation of new ideas.

Last week I ran an executive education course called “Strategy In Action“. It’s an intensive full-week course and we try to equip managers with ideas and processes that will help them to develop and execute strategy. As part of the course, I also arrange guest speakers who have examples of good strategy in their business or are interesting because of the way that they have overcome challenges in executing strategy. This execution focus matters. Like innovation, most strategies fail because they aren’t executed very well. Strategy analysis and development is where we tend to put the most effort but this is hardly ever where the problems occur.

I was very fortunate to have two guest speakers who are running companies and dealing with genuine strategy challenges. While they are both large companies with more than a billion dollars per year in sales the challenges that these executives were facing were quite different. Brett Clark, Managing Director of Chemist Warehouse has a very clear cost-leadership strategy. This business has grown quickly and is now among the largest retailers in Australia. Tom Maguire is general manager for innovation and corporate affairs at the Teys Group, a meat processing business that has been operating as a family owned business since 1946.

I asked both Brett and Tom to talk about their experiences with strategy and they both gave excellent presentations with very insightful messages about successful strategy. However, what I didn’t expect was such a clear link between innovation and strategy. In both companies, there were clear examples of innovation being used to execute strategy. Given that execution is a make-or-break part of the strategy process, I thought it would be worth discussing these examples in more detail on this blog.

Chemist Warehouse is a successful retailer of pharmacy (drug store for US readers) goods, including consumer items like perfumes. Like other low-cost retailers such as Costco (UK) Home Depot (USA) and Bunnings (Australia) they have used scale economies and purchasing power to drive down the cost of doing business. Chemist Warehouse get further scale economies from its online sales through ePharmacy. Scale is central to the business model so a key driver of the business is both number of customers and sales per customer.

Having a lot of people in the shop is great for most discounters but when there are a lot of people waiting for prescriptions then things can look a little bit chaotic from the customer’s perspective. Even in a small pharmacy, I don’t enjoy standing around waiting for my prescription to be filled out – particularly when I have two bored children waiting with me. Chemist Warehouse were able to execute their ‘big-box’ store model and maintain the customer prescription purchasing experience in a very ingenious way.

According to Brett, the story goes like this. One of his managers was at a large restaurant with the little alarms that tell you to collect your meal from the counter. The manager thought that this might work for prescriptions and it the system was tested in one store. Not only did the system stop the congestion around the prescription counter but it also resulted in increased sales. Obviously what was happening is that people were browsing the store while waiting for their prescriptions.

The competitive situation with Teys Brothers is different although it is also a very successful business. Traditionally, Teys has been a bulk processor of meat with a business model based on commodity products with high volume and low margins. Managing costs is central to the success of this business. Teys has been developing a new business based on a very different business model of customized products in small volumes and higher margins. Understanding the needs of customers such as supermarkets and restaurants and tailoring solutions is central to creating value for the buyer. Obviously, the operation and management of this business is very different from the core commodity business and Tom has been using collaborative research partnerships to develop technology to enable the flexible and specialized processing required to make the business work. Once again, this is an example of innovation being used to execute the strategy.

What I learned from Brett and Tom was that there are two key points for using innovation to execute strategy:

1. Be clear about the strategy of the business and the customer value proposition that you are trying to deliver.

2. Once you have a focussed value proposition, use innovation to improve the most important business activities to support that proposition. In Brett’s case the value proposition was ‘lowest cost’ but he needed to innovate to support customer numbers. In Tom’s case, the customer value proposition was ‘customized food solutions’ and the processing technologies enable the handling of small batches of product.