PayPal and MIT Sloan Luminaries in Conversation on Digital Innovation

Two men havng a conversation holding digital tablet with city buildings in the background
A subject debated with increasing vigour on the Business Value Exchange is how to nurture and execute on innovation. In an initiative designed to promote discussion and to offer insights to our community, BVEX invited two luminaries on innovation, from industry and academia respectively, to engage in conversation.

Editor Helen Beckett put the same questions to CIO of PayPal, Bradley Strock, and academic at Sloan MIT, Professor Christian Catalini, and the result is a nuanced view of how innovation can and does work within large enterprises. Common themes are to be open to experimentation and tolerant of (managed) failure, and for leaders to corral sources of innovation both within and outside the organization.

Having a crystal clear mission against which to benchmark ideas, and successfully maintaining a culture of continuous learning, which redefines the nature of success and failure, are essential tasks for enterprise-scale innovators. You can read the thoughts of Bradley Strock and Christian Catalini below and please do feel free to join and participate in the follow-up discussion on BVEX LinkedIn.  

Culture, context and connecting the dots help PayPal identify the ‘innovative problem’

PayPal, the biggest online payments provider in the world, occupies the enviable sweet spot of a recent heritage as a start-up and also the clout of an incumbent. As such, innovation is part of its DNA and it is simultaneously highly pragmatic, sourcing fresh ideas and capabilities from partners. A quest for ‘impactful innovation’ is part of everyone’s everyday mission, while a spin-off from parent company eBay last year provided PayPal with fresh impetus to channel its creative flair.

Q1: What are the levers and tools for incubating entrepreneurism and innovation?

Bradley Strock: There are no silver bullets. You have to start with the importance of creating a culture of innovation, and at PayPal innovation is one of our core values. The need to innovate is a factor in every facet of how we do business, develop talent and evaluate performance. It’s multifaceted and there are a lot of things involved to make it successful.

Another lever for innovation is to be extremely close to the customer, and another of our core values is to be their constant champion. To do that you need a deep understanding of customer needs and their problems, and the ability to translate this into products and services with great design. So we spend a lot of mental energy and bandwidth on understanding our 192 million active customer accounts, which includes our 15 million active merchant accounts.

There are other supporting mechanisms that reinforce the culture of innovation and getting the organization to understand its importance. We tend to have a big focus on external product-facing elements of innovation, and this has been a huge success for PayPal.

We are also hugely committed to open technology and crowdsourcing efforts to find solutions, but the reality is we use both open source and closed source, and you can be innovative in both domains. Our company has a pedigree of innovation, but you can’t create everything from scratch – there’s an open ecosystem out there and the option to contribute to that. Ultimately, innovation doesn’t depend on one or two levers, but a multitude of little things.

Q2: How can an organization recalibrate itself for innovation?

Bradley Strock: Recalibration is probably the wrong word for an organization that is only 15 years old and one of Silicon Valley’s most famous start-ups and success stories. However, a business restructure for PayPal when it was spun off from parent eBay has been an impetus for innovation. It has allowed us to pursue innovation in a way we couldn’t before, including business deals, for example.

The other major benefit of the divestiture was that PayPal had to build a Fortune 500-standard corporate infrastructure from the ground up in less than nine months. It was a huge challenge – we didn’t have time to ‘blue-sky’ concepts, but had to rethink and reimagine core principles on the move. There was a principle around failure that also has to be redefined to let the team to do their best work. I went to every senior executive and explained that we were starting up a brand-new company in less than nine months and there was a possibility some things would break – we would fix them as soon as we could, but we needed the company’s good grace. The executive team was incredibly supportive and this was very liberating for the team, as they knew they had air cover for the risks they had to take to accomplish the goal.

lightbulbAnother factor encouraging recalibration is the speed of change everywhere – the pace of change in FinTech has been so rapid. Fifteen years ago no one was interested in mobile payments, now everyone wants to crack the code. We are operating in an environment where the pace of change is so great, the only way to be successful is to accelerate the rate of innovation. That is an impetus for us to innovate.

 

Q3: Is innovation within corporations more effective when conducted in silos or embedded in everyone’s mission?

Bradley Strock: There is a wealth of innovation within the company. A lot of people here are focused on how to become nimble and effective as a company. We want to have an environment that is innately innovative and not depend only on external partnerships for creativity. Everyone has an opportunity to be innovative in thought and we have a notion of ‘impactful innovation’. That’s a phrase we use for our regular hackathons, for example, and also a way of describing the tough problems out there that we need to solve. We invite all our people to come up with new ways to think about those.

I am a great believer in the value of identifying innovative problems. As corporate enterprises, we tend to always think about innovative solutions and encourage those, but we’ve not always recognised the value of identifying unique problems. I’d argue that many of the technologies that are changing the foundations of business models were first about identifying the problems that others had overlooked. With Uber, the problem was a set of bad experiences with taxi rides. That’s a pain point that was around for decades.

One of the things that helps is getting people to take a broader perspective on understanding context and start connecting the dots. If you operate outside your silo and responsibility, see what’s happening with the customer and other functions, you can start to think end-to-end and it leads to some really interesting observations.

Q4: How important is permission to fail in innovation? How do you keep this latitude pegged to risk and aligned to business goals?

Bradley Strock: When you’re doing business experimentation, ideally, you want to create an environment where people want to identify the small steps, test the idea and convert these into value. Not every idea lends itself to that process, although it is possible to test ideas on a smaller scale. In this way, it’s not just about a binary outcome of either success or failure but about setting up cycles of learning. This sort of thinking, along the lines of “if we adjust 10% to the right, then that’s where we need to go”, is good for the business. It moves you away from the Big Bang and expensive be-all or end-all projects, and towards incremental steps of learning.

Setting up criteria for success in advance of any pilot is critical, otherwise projects can go on forever with no outcomes. But these parameters can also be a double-edged sword. If you over-engineer, you risk squashing the seed of an idea where an outcome is not immediately apparent. You don’t want to instrument to the point where it throttles innovation. Absolutely, you need to measure the outcome, but this should always be based on what is the customer outcome you are looking for.

Q5: What are the best incentives for innovation?

Bradley Strock: We have a number of rewards and recognition tied into innovation. Rewarding teams is really important, but personally I believe one of the most powerful incentives is to give people recognition for what they have accomplished and shining a light on them. Recently a group of our engineers got kudos for solving a problem no one else in the world had done. They were able to present their work at an international conference. The experience of presenting to several thousand people to hear what they did was huge.

The story behind this is our operations product team relied on a product that did not lend itself to continuous integration and the DevOps model – we weren’t able to be as agile and meet new customer need as fast as that department wished. Our team developed the tools to create that capability – we were the only people in the world with that capability.

Q6: What kind of leadership is needed in the innovative organization?

Bradley Strock: Sometimes in Silicon Valley there’s this overemphasis on pedigree. Which start-ups were you at? Where did you go to school? To me, a more important ingredient is leadership. A great leader will recognise their own blind spots and build a team that compensates for this. Strong technical backgrounds are important, but not enough. We tend to underweight the importance in leadership of culture, context and connecting the dots.

Even within those technology businesses that are leaders in digital innovation, you’ll find an instinct and attitude that says, “I want to focus on my group or project alone”. People perk up and appreciate context. I spend a lot of time with leaders at PayPal, discussing what goes on in the business and a lot of time is spent on the ‘whys’.

For me, a key challenge is about the need to continue to be a leader of innovation and finding opportunities to apply some new concepts. Ultimately, we are a large company and one of the big challenges is how to operate with the agility of a start-up when you have thousands of employees and people all over the globe. I believe the right culture and technology can help us solve that problem.

With over 25 years of experience as a seasoned technology executive, Bradley Strock has held senior executive positions at Bank of America, JP Morgan Chase and First USA/Bank One. At PayPal, he held several roles before being named CIO in 2014, including VP of Global Operations Technology. Strock has a deep expertise in product development, IT, operations, and strategy and has two patents. He holds a BS in Mechanical Engineering from Purdue University as well as an MBA from the Krannert School of Management at Purdue.

 

Recruit innovators outside organization as well as within, counsels MIT Sloan academic

The MIT Sloan School of Management, based in Cambridge, Massachusetts, is one of the world’s leading business schools and devoted to its mission: to develop principled, innovative leaders who improve the world and to generate ideas that advance management practice. Professor Christian Catalini is active in the groundbreaking work of the faculty in the areas of innovation and entrepreneurship, and believes that a portfolio approach to innovation yields the best results for corporations.

Q1: What are the levers and tools for incubating innovation?

Christian Catalini: At a high level, all organizations care about ideas. Their first source of innovation is often intrapreneurship, which is cultivated in-house. Staff have expertise, know the customers, and throughout the organization they can interface with interesting sources of data and information.  

So the first thing an organization can do is to tap into its own human capital. But there needs to be incentives for this to take place. Economists say that entrepreneurs require big incentives – if they hit it big time, they can really win big, too. But if you ask employees to be entrepreneurial, it’s not same – they may end up directing their own unit, but not building and scaling a multi-billion dollar start-up. It’s hard when you have the safety and surroundings of a large organization to act like entrepreneurs who have to attract capital from outside. The challenge is once you identify talent and the ideas inside to incentivize to execute on experiment as though it were a start-up.

Slack time can be an important lever for incubating creativity and a meaningful way for executing ideas employees have had in mind for some time. We think of the Google ‘20% rule’ as a way to ideate and come up with breakthrough ideas, but more often than not, in corporate settings, people already have ideas because they are exposed to them all the time. It’s just that their day-to-day requirements do not allow them to execute.

Q2: How can an organization recalibrate itself for innovation?

Christian Catalini: The key element is accepting failure and cultivating tolerance. Inventive outcomes are extremely skewed – most Kickstarter ideas fail, most venture capital funded deals won’t return capital. So you have to take a portfolio view. What matters is the home run. The few outcomes that are really successful repay the whole portfolio, and bring disproportionate number of researchers to the firm. For example, Gmail and Google Maps were supposedly developed during the Google 20% era, but if you dig deeper it wasn’t just 20% of people’s time – it took a lot more.

Many incumbents who today appear to be treading water were innovative at some time in their history. Usually they are not now because of government or regulatory intervention. Bell Labs was once a really crazy set of experiments and research ideas that brought us everything from transistors to downstream innovations. Stock market and other issues may make such companies more conservative, so the challenge is to keep the DNA while scaling.

A restructure may jump-start the recalibration – Google has nested its brands under the parent company Alphabet, and is now a large conglomerate of many different companies. It’s a way to incentivize companies – there’s not just one CEO of Google, but also of Alphabet, YouTube and Android. It makes those companies at the beginning more like start-ups.

Q3: Is innovation within corporations more effective when conducted in silos or embedded in everyone’s mission?  

Christian Catalini: Some companies create a separate entity [when scaling innovation]. For example, when you go back to IBM when it was trying to innovate with PCs, a separate division was created because it would never have survived within a large organization that earned business from mainframes. Of course there is always difficulty for a large incumbent to cannibalise its own product. It’s an interesting dynamic: in the short term an innovation may be seen as a competitor and not developed further; in the long run, it may mean the survival of the firm.

From an organizational perspective, firms can learn a great deal from university accelerators. In the last few years, I was involved in the design of the Creative Destruction Lab at Rotman School of Management, Toronto University. At MIT we have Global Founders’ Skill Accelerator where we get students with good ideas to scale businesses. The interesting thing about the Toronto accelerator is that students who have no experience of entrepreneurship (they may have PhD in physics or biotech) get feedback and advice from a set of seasoned entrepreneurs. Similarly, an enterprise may have skills and expertise on the tech side, but no track record of taking an idea and scaling it to a multi-billion project. The challenge is how to recruit entrepreneurs to train employees with the good ideas to take them to the next level.

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A crowdsourcing contest is a way of engaging with the employee base and generating innovative solutions among staff – when the prize is well designed. You may want everyone to think about new ideas, but you have to keep the business running, too. So there’s a tension between how much creative freedom to give or not, or under what conditions.

Q4: What are the best incentives for innovation?

Christian Catalini: In terms of nurturing innovation within the staff, on the employee side there needs to be a competition or a prize, so winners earn the right to contribute. Not every employee is able to be in that zone, but the winner could get six to 12 months to try and develop their idea. In later stages, the company has to decide whether it sees it as a strategic investment and the company founders could get equity to try and replicate the conditions and incentives of the market – and the outside world. Some [in-house] influential inventors are able to get royalties or something that resembles equity.

But it’s important to think about the fact that many people have good ideas that just won’t pan out. Internal capital markets are more imperfect than external ones. If someone is well respected internally and has a new project, even if the signals are negative, the company may keep investing. A company doesn’t want to reward failure but mustn’t be intolerant of failure either. So the enterprise has to think about how to incentivize and how to strike a balance between doing a lot of experimentation, while keeping the quality high. Perhaps the biggest organizational change is to think like a small start-up.

Q5: What is the role of crowdsourcing in innovation?

Christian Catalini: Crowdsourcing is a way to resource ideas, and crowdfunding platforms are sensors of where demand will be. Both can help enterprises determine where the money goes next. Pebble Watch is a case in hand – at the time its founder went on Kickstarter, people were taking their watches off. The project raised $10 million in two weeks. Suddenly everyone started paying attention to the new device – it’s what probably triggered the Android ecosystem to push for the smartwatch.

Crowdsourcing can also be a useful tool for killing off bad ideas. If there are five different products in contention, one way to select is to get a massive focus group online.  Large firms don’t always want to expose their brand – the failure would be public. Many have a white label brand at first to conceal their brand; if it works out, it gets endorsed and scaled.

Crowd management does need risk mitigation and there are intellectual property and PR issues that could emerge. For example, what direction the contest takes and the way that comments and ideas are filtered can have an impact on perception. Often, the problem is that no one engages and that is embarrassing, and so a form of failure. It’s also controversial to invite – and then not reward – the crowd for contribution.

Q6: What kind of leadership is needed in the innovative organization?

Christian Catalini: Leadership in innovative organizations must bring in new ideas, but also think about trade-offs. It needs to think hard about how to design a culture and system of incentives that nurtures innovation. It needs to think about how to make boundaries permeable and the challenges this brings. To learn is to collect data along the way, to bring in a culture of experimentation.

Personally, a good leader of innovation needs to be open. Often ideas and innovations evolve rapidly – what is true today is not necessarily true tomorrow. Is it necessary for a leader to be an innovator themselves? Tim Simcoe, [Associate Professor of Strategy and Innovation, Boston University] did some research on the relationship between CEO overconfidence and innovation. A leader that will explore more than usual will necessarily be overconfident; that may be part of the correlation.

Critically, the leader has to convert innovation into real things, and often the best ideas are not the things that a company focused on – it depends on short-term or long-term viewpoint. This is where a CEO can make a difference – executing on all good ideas, allowing for experimentation. At a high level, a company cannot assume the best ideas come from within. You need a mix.

Christian Catalini is the Fred Kayne (1960) Career Development Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management. Catalini’s main areas of interest are the economics of innovation, entrepreneurship, and scientific productivity. His research focuses on crowdfunding and online entrepreneurial finance, how proximity affects the recombination of ideas, and the adoption of technology standards, science and technology interactions.

 

 

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Helen Beckett

Author: Helen Beckett

Helen Beckett is the Community Manager of the Business Value Exchange. She has been a writer and editor for over 20 years and takes a particular interest in the challenges facing the CIO in today’s business climate.