Private and public sector innovation: What are the differences?

Innovation, it seems, is the buzzword du jour. Australia is in the midst of an “ideas boom”. The Commonwealth Government has invested $1.1 billion dollars in the National Innovation and Science Agenda to stimulate innovation and entrepreneurship across the economy. There has been an acute focus on tech start-ups and other market disruptors, and increasingly, boards across the listed, not-for-profit, private and public sectors are seriously considering ways to innovate their approach to governance in response to these changes.

But what does it all mean? Whose responsibility is it to drive innovation? Under what circumstances does it occur? What leads to its success? And, what are the red flags for failure?

The Australian Institute of Company Directors’ (AICD’s) Governance Leadership Centre’s latest research series conducted by Dr Robert Kay and Dr Chris Goldspink of Incept Labs, addresses these questions and highlights the differences in approach, development and implementation of innovation.

Innovation research series

In 2012 and 2014, Kay and Goldspink conducted three separate studies involving interviews with the following:

• 100 chairs of listed, private, public and not-for-profit boards
• 25 CEOs from listed and private sector organisations
• 25 departmental secretaries and directors general drawn from the federal and state public sectors

Three of the five papers in the series have been now been released. The research draws attention to differences between the public and private sectors, and highlights that innovation is a primary means of responding to an organisation’s challenges, and is one of the least understood activities to come under the purview of the board.

Private sector innovation

When it comes to the governance of organisational innovation and its management by the executive, very little guidance exists. In The role of the board in innovation, the researchers sought to understand what CEOs of private organisations mean when they said they want to innovate and their favoured approach.

The study identifies three main “innovation styles”:

• Revolutionary innovation - This often involves a strategic imperative to disrupt an entire industry or market’s operations by establishing a fundamentally new business model. Success or failure of this innovation style is based on the personality of the CEO and their ability to manage stakeholder relationships effectively without being perceived to dominate the process.
• Evolutionary innovation - This involves large organisation transformation initiatives. For example, the introduction of a significant technological change, a repositioning of the product portfolio or market expansion. The sample interviewed identified the success of this type of innovation as being linked directly to the involvement of the CEO. Somewhat contrastingly to the “revolutionary” style, this type of innovation relies on the CEO to protect, support and drive an idea, and an absence of this will often lead to failure.
• Incremental innovation - This innovation style is primarily of cultural concern and its success relies heavily on an enabling organisational culture and the internal know-how to develop and implement innovative ideas. Failure of this innovation is often attributed to the CEO’s lack of knowledge and the perception that innovation solely comes from the ideas of the executive of the organisation, rather than those of its people.

Kay and Goldspink found that CEOs will most likely use the same basic approach to innovation, regardless of the circumstances. However, for innovation to be successful, they should adapt their innovation style to fit organisational circumstances. For innovation activities to be successful in private organisations, the board has a tangible and critical role to play. The primary focus of the board should be alignment; the alignment between the style of innovation of the CEO and the type of innovation needed to address organisational challenges, and alignment of the views of the board and the executive.

Public sector drivers

There is an abundance of literature on innovation in the public sector. There is a preconceived notion that innovation is difficult to achieve and the sector is not as innovative as it should be.

Public sector innovation: Why it’s different is a critique of common misconceptions of innovation in the public sector.

Should public sector innovation adopt private sector management principles to improve its ability to deal with a changing and more uncertain environment? Are these ideas applicable in the public sector?

According to Kay and Goldspink, this move is counterproductive to innovation and a different (public sector specific) approach is needed. The research findings highlight the oversimplification of today’s diverse public sector. The complex and unique environment in which innovation is developed and nurtured means the public sector faces significant structural and cultural challenges that are in stark contrast to the private sector.

From conversations with participants, the researchers ascertained that success and failure of innovation in the public sector is characterised by how the department head deals with two factors.

• The first is the level of uncertainty held by the department head about their organisation’s situation and the political environment in which it is operating
• The second is the level of proactivity, that is whether the innovation activity is part of planned strategy – and therefore proactive – or whether it is in response to an external trigger, for example, the directive of the minister

Perhaps unsurprisingly, the study found that the large majority of innovation activities failed when reactive. It was also found that the sector had more successful innovations involving high uncertainty than failures, suggesting a well-developed innovation capability when the circumstances are right.

The study also identifies the players involved in innovation and the roles they can play: the minister, the department head, and the board. In the public sector the tone of innovation and change is set by the minister and by the department head. Participants remarked that the role of the minister has shifted over the past decade. Today, they more frequently set the “what” and the “how” of policy and the tone of innovation. A reactive call made by a minister is a unique political dynamic only experienced in the public sector.

Similarly, the role of the board is far more complex than in the private sector. There are clear limits to the board’s level of influence. Boards often find themselves in the middle, between the minister and department head. Ultimately, the role of the board in the sector is to moderate the forces pushing for innovation – both supporting department innovation with the minister’s office and moderating ministerial-driven innovation, political pressure and any uncertainty caused in an effective way.

Kay and Goldspink’s study into the drivers and guiders of innovation shows that there is no silver bullet answer or a sure-fire way to ensure the success of innovation every time in any organisation. However, an understanding of the roles and ways of working around the innovation process, and an established set of values that underpin all innovation efforts, contribute to the board and executives’ innovation literacy.

The Governance Leadership Centre is a resource centre that champions new thinking with the aim of driving organisational performance. Visit AICD’s website for the latest news and more information.