Just in case you are in any doubt, we are definitely at the start of a long and deep recession. The consensus from the recent American Economic Association annual meeting in January is that it may be late 2010 before the recession bottoms-out and growth starts to return. Many companies have already responded by slashing costs, cutting out swathes of staff and conserving cash as though their lives depended upon it.

In the short-term, business survival probably does depend on making deep cuts. In the longer-term, companies may already have gone too far by making indiscriminate cuts in key capabilities that drive long-term business success. Like their ability to innovate winning new products, services and experiences.

In the longer-term, companies may already have gone too far by making indiscriminate cuts in key capabilities that drive long-term business success.

Paradoxically, it may be possible to cut half of most companies' innovation budgets and still double their innovation success. The "$64,000 question" is how to decide what innovation activities to cut, what to maintain and what to invest in to double innovation's success. Understanding customer needs in innovative new ways provides us with a big part of the answer to this question. Cutting out non-value-adding costs is the other.

Innovation Drives Success in a Recession

That innovation drives success in a recession is hardly in doubt. McKinsey has followed over 1,000 US companies over the past 18 years, including during the last two recessions. This longitudinal study highlights the fact that companies that successfully weathered the last two recessions significantly increased their spending on their sales and marketing activities, and particularly, on their innovation activities in comparison to their less successful peers.

Companies that emerged in the top 25 percent of companies after the recession increased their spending on innovation from 8 percent more than their less successful peers before the recession, to 22 percent more than their peers during the recession. The payoff from these targeted investments in innovation was a 25 percent greater market-to-book ratio in the post-recession period. Innovation clearly drives success, even in a recession.

Innovation, Not Just Invention

The problem with what passes for innovation in many companies is that it is not innovation at all, but "invention." Innovation is all about creating new products that meet customers' important unmet needs and companies' commercial objectives. In contrast, invention is all about having new ideas, developing them internally and then pushing them out to the market with a fanfare. The problem with the latter approach is that it doesn't work!

In a study of 200 new products, Lehmann and others looked at the origin of new product ideas and how they correlated with market success. They found that the least successful new products originated from mental inventions. These products failed three times for every success, a 75 percent failure rate. This isn't far from the apocryphal 80 percent failure rate widely acknowledged for new products. Or from the 60 percent failure rate for re-introduced products.

The most successful new products were originated from sensing customers changing needs and rapidly responding to them with appropriate solutions. These products succeeded over ten times for every failure, a greater than 90 percent success rate. It isn't very difficult to see that if you can only cut out those new products destined for failure—those that don't meet customers' important unmet needs or your commercial objectives—you can easily cut the more than half of your innovation budget that is currently wasted. Understanding customers' needs is the key to doing this.

Harnessing Your Best Customers to Drive Innovation

If successful innovation starts with understanding customers' needs, the obvious question is which customers? Most companies have thousands or even millions of customers. This is far too many to involve directly in innovation. Fortunately many companies know who their best customers are. They are the customers who have the highest profitability, the highest loyalty and who use the broadest range of the company's products. These customers are the backbone of any company's success. They are also the ones whose needs they need to understand if they are to innovate successfully.

Once they know who their best customers are, they can get to grips with understanding their needs by looking at the jobs customers are trying to do and the outcomes they are trying to achieve by doing them. Customers' lives are dominated by everyday jobs and desired outcomes. They hire products to help them get the jobs done. By looking at jobs and desired outcomes, you can get to the heart of what customers really need and use these insights to innovate around their important unmet needs, the so-called 'sweet-spot' of innovation.

You can also avoid the "inventors curse" of focusing on solutions to customers' needs too early in the innovation process. Often this results in much of a company's scarce innovation's resources being wasted on the wrong products.

Cutting Out the Waste in Innovation

Knowing what your best customers' need drives successful innovation. It also provides a foundation for cutting non-value-adding costs out of the innovation process itself. Experience in reengineering innovation in many companies suggests that more than 20 percent of the activities in the innovation process don't add any value to customers and don't directly support the innovation process either. These activities are non-value-adding costs that should be cut out, particularly during a recession.

Experience in reengineering innovation in many companies suggests that more than 20 percent of the activities in the innovation process don't add any value to customers and don't directly support the innovation process either.

This can be done by systematically applying the "lean principles"—so successfully developed by Toyota—to your innovation process. Applying the lean principles greatly increases the effectiveness of innovation by simplifying the innovation process so that if flows more quickly, by getting the customer to pull innovations through the process and by continuously improving the process. One service company who applied Toyota's lean principles to its marketing innovation process found that time to market for new marketing products was reduced by 50 percent and that marketing process costs were reduced by 50 percent, too.

The Payback from Outcome-driven Innovation

Today, many companies are wasting 80 percent of their innovation budgets on unsuccessful inventions. If "Acme Invention" spends $1,000,000 inventing 10 new products, that would mean that the eight products that fail in the market waste the company $800,000. By using their best customers' needs to drive successful innovation, the company can reverse this, so that 80 percent of its budget creates successful innovations. Even if the company halves its innovation budget to $500,000, the "New Acme Innovation" will still innovate four successful products at a cost of only $400,000. Double the number produced previously.

And, by applying the lean principles to its innovation process, the company can probably reduce its innovation costs by a further 20 percent to only $400,000, or $80,000 per product. The saving of $100,000 is enough to fund an additional new product, bringing the total to five successful new products. As you can see, by focusing on innovation's sweet spot and by reducing non-value-adding costs, you can halve your innovation budget and double your innovation success.

Are You Ready to Double Your Innovation Success?

You can halve your innovation costs and double your innovation success, too. But doing so requires you take a hard look at how you innovate and how to use your scarce innovation resources better.

Answer these five questions to get a feel for where you should look closely to reduce your innovation costs and increase your innovation success. If you answer 'NO' to most of these questions, maybe you should call us to have a chat about halving your costs and increasing your success in innovation.

Question 1: Do You Know Who Your Best Customers Are?
You need to concentrate resources on your best customers, not on those who are marginally profitable or worse still, those who are unprofitable.

Question 2: Do You Know What Your Best Customer Need?
You need to know what jobs your best customers are trying to do and what outcomes they are trying to achieve, so that you can innovate around solutions that help them get their jobs done better.

Question 3: Do You Know How You Deliver Value to Your Best Customers?
You need to ensure that new products can be delivered to your best customers, at the right time, through their preferred channels and that you can support customers whilst using them.

Question 4: Do You Know Where Non-Value-Adding Costs are in Your Innovation Process?
You need to reduce the costs of innovation by stopping inventing products not driven by your best customers' needs and by cutting out non-value-adding costs in your innovation process.

Question 5: Are Your Prepared to Make Changes to How You Innovate?
You need to bring together all the right people to make the changes necessary to halve your costs and double your innovation success. Innovation is everybody's responsibility. Good luck.