I wanted to share a conversation that took place recently in the InnoLead members-only Slack channel between myself, Alex Slawsby , and a few of our members. It's about what we see as a big problem, illustrated by the image up top: your innovation pipeline may be working wonderfully, but how much do we talk about, measure, and monitor the organization's capacity to accept what's coming out of it? (I've edited it a bit for length and clarity.)

Scott: Hey Alex, one thing I would love to hear your take on is the idea of “absorption capacity.” I was talking last week with one of InnoLead’s newer members… a company based in the EU…and the idea of absorption capacity came up. Basically, how do we create that in our organization, so that new ideas (whether from our team or from startups or partners) can actually be brought into the business units. I wonder if that’s a term you have heard a lot in your career? It seems to me like something that isn’t really discussed or worked on enough… 

Alex: So, I’ve never used that term, but I can immediately see how it could be helpful. We talk all the time about the challenge of the “hand-off” (e.g., innovation teams struggling to move new ventures into business units, outposts struggling to get the core organization to embrace the new ideas / approaches they discover etc…), but I’m not sure we’ve ever articulated the “ability of the existing thing to successfully take the hand-off from the new thing” in a productive way.

Perhaps we should use “absorption capacity” (or “innovation absorption capacity”) to describe, discuss, analyze, improve etc… the ability of an organization to successfully take the hand-off?

It was clear that [Google] didn’t actually have enough absorption capacity to test or launch most of what engineers were doing with their 20% time. So is that a good way to spend engineering time? 

Scott: It does seem like it would be interesting to quantify. It's great to know how many ideas you have in the pipeline, but how do you think about creating the time, putting in place the right resources and relationships, and generally “paving the way” to have those ideas eventually launched?

I remember seeing Marissa Mayer, when she was still a senior exec at Google, talking about how great “20% time ” was for their engineers. But it was clear that they didn’t actually have enough absorption capacity to test or launch most of what engineers were doing with that 20% time. So is that a good way to spend engineering time? 

Alex: Excellent, excellent point. If the organization can't absorb the stuff in the innovation pipeline or the insights / ideas / potential partnerships coming out of an outpost — and so that pipeline / output stuff is going to die eventually — wouldn't you want to know that and try to triage that upfront?

I bet we could all come up with a great list of "absorption capacity" (AC) diagnostic questions that innovation leaders could answer to figure out the extent to which AC or "innovation absorption capacity" (IAC) is a rate limiter.

It's ultimately a big change management challenge and perhaps we could draw on change management readiness assessments for inspiration.

Scott: I feel like it might be an assessment for CEOs to do or see. Just had lunch today with a former CEO of a media company. One thing that came up was the “how is my organization really doing when it comes to innovation” — not just what the pipeline looks like. It feels like assessing IAC should be part of that.

Do you have thoughts on what a couple of the questions would be? “How many new SKUs are your businesses committed to launching each year (in a product-oriented company)?” “What incentives are in place for the core business to introduce X number of new offerings per year?”

Alex: I completely agree that CEOs should seek to understand their organization's IAC level because low IAC will lead to low innovation ROI.

Here's a thought. Not enough organizations carefully analyze why ideas stall or get killed at each stage of their innovation pipeline processes. If such post-mortems reveal a high percentage of stalls / kills due to internal organizational dynamics (e.g., couldn't get enough resources or support), that might suggest that the organization has a low IAC. Conversely, if the percentage of stalls / kills due to external market dynamics (e.g., in the end, the customer wouldn't pay for it etc...) is high, that might suggest a high IAC.

So, to answer your question about questions  I think there might need to be some questions uncovering:

1. Organizational commitment to innovation like you suggest (e.g., new revenue or new cost savings from new initiatives; incentives to generate quantifiable returns from innovation activities etc..)
2. Business unit / functional leader support for innovation (e.g., participation on innovation councils; current commitment of human / financial resources to innovation projects etc...)
3. ...and the reasons why innovation initiatives stall or get killed to figure out the "internal organizational dynamics" vs. "external market dynamics" catalyst balance, so to speak

Scott: Would you elaborate a bit on #3?

Alex: To elaborate, you can easily ask folks to report if the organization has set the right expectations, has put the right processes in place, has hired the right people etc...to make hand-offs happen / to make the IAC high, but that doesn't mean those things are actually delivering.

So, you'd really want to focus on what is actually happening. Why aren't we meeting or exceeding our goals? Why aren't promising projects (with lots of market validation) making it out of the pipeline and to market or into BUs? But, if IAC is low, the reasons will be individual / cultural / political, and people rarely want to be honest / transparent about those things.

Scott: I wonder if we could lay out four or five categories of things to assess…

1. Goals & Results. Based on the CEO’s growth/transformation/digitization expectations, what are we seeing every year?
2. Connectivity and relationships. Are the right people in the business units and functions communicating regularly with innovation groups.
3. Capacity and resources. Have you set aside the time and resources to enable people to hit the goals in #1? This would include not just people’s time in business units and functions, but things like marketing and sales support, shelf space, etc.
4. Learnings & post-mortems. When new things fail, do we use that as an opportunity to learn about and improve our absorption capacity.
5. Is there a match? How well matched are the number of high-potential projects you develop and would like to launch, with the organization’s capacity to support and launch them?

I think you could ask people to score “how well are we doing” on all those things above, from 0-5. But the key would be discussing on a regular basis where things are working and where they are not.

Alex: One of the really intriguing — but also challenging — things about this is that you really want to focus the questions on understanding what's actually happening in the organization and not what's been put in place to make things happen.

InnoLead Member: Following your discussion, I can report of an innovation center of a European pharmaceutical company that consciously manages the output of the innovation funnel, so as not to overload the operating businesses with innovations. In my discussion with the people from this center, the term absorptive capacity was actually coined (perhaps we're talking about the same company).

IAC was referred to here as both the mental capacity of the organization to implement new things (instruments, software, processes) as well as the available (human) resources to take on those projects. The owners of the innovation funnel had regular discussions with business executives about the amount, magnitude and timing of innovations that could be released from the funnel.

I like the very practical notion of “dialing down innovation” as needed to match the level of organizational absorption capacity, while trying to “dial up absorption capacity” as much as possible to inhibit innovation as little as possible.

Scott: I'm curious if the challenge in that case was building up the business’ absorption capacity, dialing down innovation output - or a combination to get everyone on the right wavelength…

InnoLead Member: The discussion was not so much about building the organisation's absorption capacity, although that definitely would be of interest. In this case, it was more about dialing down innovation output or timing the release at the right moment.

Alex: I like the very practical notion of “dialing down innovation” as needed to match the level of organizational absorption capacity, while trying to “dial up absorption capacity” as much as possible to inhibit innovation as little as possible.

Scott: I think there is probably a match you want to achieve between the output of your innovation pipeline, and the ability of the organization to do something with it... and most organizations are not there yet. The CEO says "we need more growth, we need to innovate more," but there isn't a close enough look at the IAC, and resources, that you need in place to really create value.