A simple question: Is All Innovation Good?

The simple answer to this is: No.

Which poses a bit of a problem – we know that innovation is an essential part of long-term success – as Andrew Howlett says, “The ROI on innovation is survival.” And yet, because innovations create change, and the outcome of change is always uncertain, there are innovations that destroy value rather than create it. How can we know what to do?

I thought of this question today while reading an article in UK Wired about High Frequency Trading (HFT). Here is the description of HFT:

The goal: to analyse historical financial data and spot and exploit fleeting opportunities in the market. “With algorithms and fast computing, even small firms can now buy and sell as fast as the biggest ones,” Afshar says. “Technology lets you compete with firms having billions of dollars.”

When Afshar says fast, he means very fast. What have become known as high-frequency trading (HFT) systems can execute transactions in milliseconds without human intervention — basing their decisions on information they have received electronically. Joined by high-speed data links to the trading exchange, they draw on huge databases of historical data to test algorithms offline and then quickly use that knowledge to spot market opportunities and likely profitable trades.

The algorithms identify very small variations between the expected value of a stock and the actual one, and places very quick buy or sell orders to take advantage of the discrepancy. In other words, no actual value is being created by these transactions – just a transfer of wealth to the firms doing the HFT. They argue that they provide liquidity to the market, but the actual evidence of this is pretty skimpy, and there’s also evidence that this practice amplifies swings in the stock market as a whole, particularly crashes.

HFT is clearly an innovation – the amount of creative work and intellectual effort that goes into creating the algorithms is enormous. But if, over the long run, HFT destroys value rather than creates it, should we do it?

This is a good illustration of why it is important to think of innovation as a process. Think of innovation taking place over three steps – generating great ideas, selecting and executing the best ones, getting your executed ideas to spread. Idea selection is the point where we can apply some screens to try to ensure that we execute positive innovations as much as possible.

The first screen is to make sure that our new ideas support our strategy. But if our strategy is built around some variation of “maximise shareholder value”, that might not help. Our strategy needs to be built around something worth doing. As Russell Ackoff said, we have to be doing the right things:

Most large social systems are pursuing objectives other than the ones they proclaim, and the ones they pursue are wrong. They try to do the wrong thing righter, and this makes what they do wronger. It is much better to do the right thing wrong than the wrong thing right, because when errors are corrected, it makes doing the wrong thing wronger but the right thing righter.

Here’s one way of thinking of this – what is your Purpose-Idea? This is a concept developed by Mark Earls – he explains it in this interview with Hugh MacLeod:

Put really simply, the Purpose-Idea is the “What For?” of a business, or any kind of community. What exists to change (or protect) in the world, why employees get out of bed in the morning, what difference the business seeks to make on behalf of customers and employees and everyone else? BTW this is not “mission, vision, values” territory – it’s about real drives, passions and beliefs. The stuff that men in suits tend to get embarrassed about because it’s personal. But it’s the stuff that makes the difference between success and failure, because this kind of stuff brings folk together in all aspects of human life.

Here’s another angle – from Umair Haque’s From Business Models to “Betterness” Models:

…betterness asks how you’re making better stuff, creating better jobs, or better value — value that makes people and society, not just shareholders, better off.

Betterness models are deceptively tough to create, because most companies have only ever conceived of themselves as being in business.

Betterness, in contrast, means: 21st century companies exist to make people, communities, and society as better off as possible. They’re not just here to make money, but to make meaningful money.

So we need a strategy based on creating genuine value for people – and we use this as a filter for deciding which ideas to pursue. To do this, we need to understand what people need – we need to use empathy-driven innovation. If we do this well, that is one way to reduce bad innovation. We need to be doing the right things.

(image from The Brokers With Hands on Their Faces Blog)