Accelerating Innovation in a Regulated World
This article originally appeared in Outsource Magazine Issue #23 Spring 2011
How can regulation and innovation – frequently considered to be opposing forces – combine successfully? And what roles should policymakers and companies respectively play to ensure the success of this combination?
For many people, the terms “innovation” and “regulation” don’t sit easily together. Regulation is thought to discourage innovation because it incurs significant additional development risk, time and money.
Yet innovation and regulation do not have to be opposing forces. For example, the air travel industry is both regulated and, by most measures, highly innovative. It has achieved this because the constituent parts of the industry value chain (jet engine suppliers, aircraft manufacturers, airline companies, airport operators and air traffic control agencies) have been able to adopt what we call a “systems approach” to innovation. They have been able to form structures and relationships in ways that recognise disincentives and bottlenecks for innovation at each stage in the value chain, and enable joint actions to be taken to overcome these barriers.
In encouraging innovation, both policymakers and companies have a role to play.
- Ensure there is suitable systems leadership
A prerequisite for innovation in complex systems such as rail or aerospace is that there is a suitable mechanism for the exercise of overall technical leadership at a system-wide level. This is necessary to establish long-term technology strategy, to enable system-wide innovation benefits to be identified and incentivised, and to resolve constraints and barriers at interfaces.
Governments may need to accept that they have to be the “owner” of a public service system, on behalf of the public, at the overall system level. For example, in most countries the air traffic control service provider is usually within government control or the government maintains a significant influence.
- Evolve better safety and environmental regulation that promotes innovation
Governments and policymakers can do much to ensure that regulation acts as a driver for innovation rather than a barrier preventing it. For example, a number of studies have shown that good regulation: sets outcome-based ‘stretch’ targets that are technology-neutral; uses sufficiently long phase-in periods to allow industry to react; and provides incentives or risk mitigation to support early adoption.
- Address key innovation barriers caused by commercial regulation
Policymakers need to recognise and address how commercial regulation may be acting as a block to innovation. This means, for example: breaking monopsonies up into less powerful parts or taking key system functions back into government; finding ways to overcome the negative impact of short franchises and planning periods, adding flexibility to the ways in which franchise provisions are developed; imposing contractual mechanisms between different players in the system to enable originators of innovations to be adequately rewarded for their investment.
- Avoid accretion of standards
In some public service systems there is a tendency to build ever-greater numbers of standards with increasing complexity, usually as a response to an unwanted event, although also more recently in order to pursue greater global standardisation.
Promoting standards that focus on key requirements places greater demands on specifiers, authors and users of standards, but the benefits to industry can be considerable: innovation is enabled, markets are opened up and the different participants within the industry are better able to procure, commission and implement the most appropriate technology, processes and systems for their purpose.
- Articulate a clear benefit for the system as a whole, and your part in that benefit
Companies that fail to understand the system of which they are a part often fail in their innovation efforts. For example, a manufacturer may develop an innovation that it believes its main customer wants, only to find that the specific targets the customer has to meet through regulation mean that the innovation scarcely provides commercial benefit to the customer.
By developing a deeper understanding of the system, including the drivers and constraints affecting their customers, the innovator can then articulate the benefits of his or her innovation much more clearly to the customer, whilst at the same time building in appropriate contractual provisions to ensure that they retain a substantial share in those benefits.
- Engage early with customers on innovation development
Companies that tend to have the most innovation success in regulated systems are those that have early and close engagement with their customers on innovation development. This means embracing the principles of “open” or “co-“ innovation and being prepared to form partnerships with customers and others at an early stage in the innovation cycle.
- Seek greater influence on technology strategy through partnerships
Developing strategic partnerships, either with other parts of the supply chain or even direct competitors, is an effective way for companies to increase influence. As globalisation progresses further in industries such as rail, global alliances and partnerships will be even more essential.
The aerospace industry has a long record of building collaborative partnerships up and down supply chains and even among competitors for pre-competitive research and development. The integration of knowledge transfer partnerships and networks enables the early emergence of technologies and innovations to be identified and for a coherent vision of the future to be disseminated to key stakeholders in government.
- Lobby constructively for better regulation
Companies need to understand how regulation, especially commercial regulation, affects the system and the behaviour of those within the system. Once understood, companies can devote more time to lobbying and ensuring the development of constructive dialogue with regulators about how key aspects of the regulatory regime could be improved.
Like many challenges involving multiple stakeholders, there are no easy or instant solutions. But understanding the dynamics of the system – rather than just bemoaning the behaviour of the other players involved – is the starting point for sustainable improvement.
About the Authors
Rick Eager is Director, UK Technology & Innovation Management Practice for Arthur D. Little.
Charles Boulton is Senior Associate in Arthur D. Little’s UK Technology & Innovation Management Practice. He has over 25 years’ experience of consultancy across the public, private and not-for-profit sectors.
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