Innovation in infrastructure – pairing possibility with return

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A question was recently put to me by everyone’s favorite futurist – Thornton May: “Most people don't put innovation and infrastructure in the same sentence. They simply tend to view savings derived from optimized infrastructure as a funding source for “other” innovation investments. My thoughts?”

My thoughts initially circled in on the maxim that there are three primary ways to innovate: product, process or business model. 'Product' is the one that gets the most attention and $, while 'business model' generates the most “why didn’t I think of that” statements. 'Process' innovation tends to play third string to the other two, but still manages to get some playing time, and is the most closely tied of the three to infrastructure innovation.

We’ll get to intra/endo-firm infrastructure momentarily, but first let's consider some of the broader scale, economy-wide inter/exo-firm infrastructure innovations of the past and present. The ones that come immediately to mind are:

  • The Transcontinental Railroad and the Interstate Highway System
  • The telegraph, telephone, broadcast, cable and optical fiber communications networks
  • The ATM, and now, the more complex internet banking over mobile phones / cell towers

If I had to pick a recent innovation in infrastructure for the major impact it has had, I would choose containerized shipping, and all that entails, from the ships themselves to the marine terminal cranes to the railcars, the trucks and the warehouse logistics. Without containerized shipping, Walmart is nothing like the retail behemoth we see today – there is just no way we could keep the cost reasonable on all those imported unnecessary plastic objects without the improvements and cost savings provided by containerized shipping.

Sticking to this grander scale and looking out into the future, other possible infrastructure innovations might include:

  • Electric vehicle charging (or battery-swapping) stations
  • Hydrogen dispenser stations for fuel cell powered vehicles
  • Pervasive on-line, degree-granting higher education
  • Distributed 3D printing

For an exciting tour of the 100 most significant on-going infrastructure projects on the planet see this terrific “Infrastructure 100” presentation from KPMG, or projects like Denmark’s Oresund Bridge and Sweden’s almost too successful recycling program.

What these seem to have in common includes:

  • A significant public policy role
  • The ushering in of not just incremental improvement, but an entirely new paradigm and related business models that obsoletes the old way of doing things
  • In a similar vein, they are not driven by a cost-saving mentality, but rather by a mission-driven mind-set.
  • It solves a significant problem in a rather spectacular way (the Transcontinental Railroad cut coast-to-coast travel time from six months to two weeks), often with a literal war-like approach to mission and implementation
  • The infrastructure is an enabler of not just one immediate solution, but multiple possibilities as yet unimagined
  • Dependence on an underlying product/technology innovation
  • Critical mass
  • Experimentation; often the first attempts were, if not failures, less than spectacular successes

Large scale public infrastructure innovation, however, does come with its associated struggles, especially the inertia and active resistance of large, powerful entrenched special interests. Comparatively, endo-firm innovation should be a simpler process to execute; a CEO doesn’t need to conduct a poll and gain approval from both houses of Congress to initiate change.

I can immediately think of three obstacles to internal, intra/endo-firm innovation. The first is that, unlike product innovation, which enjoys at least 17 years of patent protection, innovative business processes are easy to copy and the competitive advantage can be short lived, so we tend not to allocate scarce investment resources to them. Secondly, we typically evaluate the ROI on our infrastructure investments based only on the hard numbers, the hard $$$ savings. Unless someone in sales is willing to sign in blood for increased revenue and market share, these “soft” benefits remain as footnotes in the appendix.

Lastly, it generally takes a portfolio approach to make internal infrastructure investment pay off. Too often an infrastructure project or investment that could subsequently support multiple other business solutions must be 100% cost justified by only the immediate business solution/problem at hand. The best practices of the best companies take the long view and piggyback their projects together so that they can all make maximum use of the initial infrastructure build-out.

IT infrastructure innovation is of course the one nearest and dearest to my SAS heart, and there are a number of cutting-edge, IT-driven innovations that likely will be game changers once they come to fruition, such as vision and speech/text recognition, and tactile / remote sensing capabilities. Then there is of course the digital nervous system of Brian Arthur’s “Second Economy” , which holds much promise and possibility, especially when analytics is incorporated to serve in a decision support capacity, similar to the “big data” sensory and memory processing that goes on in the human brain just below the level of consciousness.

In the end, my thoughts regarding Thornton’s insightful conjecture are still split. On the one hand, contrary to Thornton’s stated assumption, there is much investment in innovative infrastructure going on; in fact it seems that large classes of infrastructure investment are inherently innovative by definition. On the other hand, infrastructure innovation at the level of the individual firm is constrained by risk and lack of scale that tend to steer the investment focus away from business processes and into only product innovation.

The trick for the individual firm looking for innovative business processes, it would seem, would be to pair return with possibility; to not just tolerate some soft money benefits in the ROI justification of major investment projects, but to mandate them, along with the associated project plan milestones that might lead beyond just current cost savings to new and innovative business processes and models; to use those pioneer projects and infrastructure investments as kickstarters for the future. Most importantly, it requires always evaluating your solution and infrastructure investments not in isolation but as a portfolio where the sum of the parts can lead to the enablement of possibilities not yet imagined.

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Leo Sadovy

Marketing Director

Leo Sadovy currently manages the Analytics Thought Leadership Program at SAS, enabling SAS’ thought leaders in being a catalyst for conversation and in sharing a vision and opinions that matter via excellence in storytelling that address our clients’ business issues. Previously at SAS Leo handled marketing for Analytic Business Solutions such as performance management, manufacturing and supply chain. Before joining SAS, he spent seven years as Vice-President of Finance for a North American division of Fujitsu, managing a team focused on commercial operations, alliance partnerships, and strategic planning. During his 13-year tenure at Fujitsu, Leo developed and implemented the ROI model and processes used for all internal investment and commercial decisions. Prior to Fujitsu, Leo was with Digital Equipment Corporation for eight years in financial management and sales. He started his management career in laser optics fabrication for Spectra-Physics and later moved into a finance position at the General Dynamics F-16 fighter plant in Fort Worth, Texas. He has an MBA in Finance, a Bachelor’s in Marketing, with a Masters in Analytics currently in progress. He and his wife Ellen live in North Carolina with their three engineering graduate children, and among his unique life experiences he can count a singing performance at Carnegie Hall.

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