These days, it seems to me, every company wants to own a digital lab. This is a good sign for their employees – they get a chance to play around with ideas in a sandbox-like environment. No-failure culture, adieu.

The main purpose of such labs is to encourage innovation. And digital transformation, or any other transformation, relies very much on it.

Yet, rushing into leasing new office space – preferably far away from its headquarters – and equipping it with bean bags and PlayStation consoles is certainly not the way to go. There are topics that require attention upfront.

Before the era of digital labs as seen today, we had corporate units, which served as showcase labs, aka “PR” labs. They acted as a showroom for all the cool and futuristic stuff – often in the form of a neatly polished prototype. Executives loved to tour these units, frequently together with their well-paying customers. Communicating the company’s ambitious vision in such a way had a more ornate touch than, say, PowerPoints.

However, they had a short lifespan. Two, maybe three years. Visions are good, but tangible results are better. Investors expect them sooner or later. Preferably sooner. Yet, beyond the prototyping, there was not much delivered. So they ceased to exist, at least many of them did.

Let’s have a look at some of the measures that your company needs to take to set up a digital lab that works for everyone. At least, for the majority.

The list is by far not exhaustive.

Decide on the Degree of Innovation

The design of a digital lab varies from company to company. It depends on the type of innovation the organization pursues. And its urgency. This is a topic you should have at the top of the list to consider first.

Innovation comes in many forms. Looking at the degree of the change they carry, we distinguish between disruptive or incremental innovations. Some articles I found on the Web use different naming. e.g. radical or sustaining.

How do these types affect lab design?

Disruptive innovations work best when the lab is separated from the business core, exploring the unknowns and looking into potential new business models. Here, however, a longer financial commitment is necessary (ten years or more). These ideas tend to be more visionary and a product may not hit the market for a long time.

By contrast, if the business seeks incremental or adjacent innovations, the digital lab should be closely tied to the core business model. The time horizon for these innovations is usually shorter, and the owning company expects ideas to be deployed within the next year or two. Here, the lab is working on smaller improvements of the company’s existing products.

Select the Right Form

Digital labs can have different forms depending on their focus and operating model. These are innovation lab, accelerator, incubator, and company builders.

Innovation Labs are company-owned labs that provide creative spaces and flat organizational structures for their employees. Their aim is to promote innovation culture and creativity. These labs usually target challenges related to their own products or markets and the innovation needs of the host organization. Teams can ditch ideas quickly, without having to worry about their existence.

Accelerators offer programs, for which teams can apply by pitching their idea. The selected ideas receive funding and support in the early stage of development. The support framework often includes training and coaching. But more importantly, the teams get access to software and product development teams, with broad experience in launching new products. The teams usually need to “graduate” with their idea within a set deadline (e.g. three months) and present their product at the Demo Day to the investors. Speed is here the driving force.

Incubators, in contrast to accelerators, invest in existing startups. There are no hard deadlines. Teams are expected to work on their ideas and collaborate with other startups within the incubator, mostly in an open-space environment. Similar to accelerators, they also get mentoring and general support (legal, marketing, or accounting), but usually no product development help. Here, the focus is on hatching, not speed.

Company Builders specialize in setting up new companies and guiding them in all the stages of their growth. Where incubators or accelerators “only” escort the startups, mostly as investors, company builders act as co-founders and accompany the startups up until they exit the venture. They offer creative premises, access to expert knowledge and partner network.

In some cases, you may see a mix of these types.

For example, Lufthansa Innovation Hub, the airline’s lab experimenting with technologies around travel and mobility, has recently added to its portfolio company building by establishing a travel platform startup Yilu. In doing so, it became a company builder, too.

Another lab I find interesting is run by SAP. Last year, I visited the SAP’s Innovation Center in Palo Alto. It is part of a larger network of innovation centers around the world (10 at the time of writing). Their focus lies on disruptive innovation. Ideas pass through different development stages, starting with prototyping and ending with market-ready products. SAP gathers these ideas by talking to its customers. Whenever they see a greater interest in a particular area, they take it up and form teams around it. And they prefer to work on products, which solve a specific – and narrow – problem, not a general one.

SAP Innovation Center in Palo Alto
The Garage at SAP’s Innovation Center in Palo Alto

Form Strong Relationships With the Host Organization

Digital labs operate at higher speed than their host organization. They embrace methods such as design thinking, agile development, POC’s, MVP’s, or lean startup. In their endeavor to be disruptive, they often end-up as units completely separated from the reality, delivering mainly front-end applications that look nice, but add no value. This is because digital labs tend to ignore completely the heritage of the mother organization, such as integration with legacy software, the security and compliance regulations, or the internal guidelines and standards.

To avoid some of these pitfalls, lab developers should start from the top. One of the most important tasks is to hire the right candidate to run such a lab. Now, many will be tempted to hire someone from the outside, with a fresh and different mindset – a Silicon-Valley-raised tech guy or girl. But they often find that the host company rejects the “foreign object”, as he or she is too detached from the core business. This results in a communication breakdown – the lab’s worst scenario.

Strong ties between the executives of the host organization and the digital lab are one of the most important success criteria. A relationship is mostly about trust, and building trust does not happen overnight.

Thus, you have two options.

The first one is to make sure your lab is run by someone who has the necessary trust, which he built over the years and is a well-respected and well-connected person within the organization.

Or – option two – hire someone from the outside who has the skills to do it super fast.

Both options have their reasons for and against.

Make Innovation Everyone’s Job

In the past, organizations tackled innovation behind closed doors. Well-funded R&D departments with a high density of Ph.D.'s delivered patents one after another.

Today, organizations take a more open approach to innovation. And digital labs are one form of it. In many areas, an open approach to innovation pays off, as an interconnected company can achieve more than a siloed one. After all, it’s all about discovering ideas, no matter where they come from.

Innovation does not have to happen on the product level. Many great companies innovate on various levels. Apple’s success, for example, is not only the effect of product innovation, but also their approach to retail, packaging, or agreements with their business partners. And Toyota’s growth is not only the result of its innovative cars but also management systems, inventory control, or manufacturing practices.

Organizations have to make sure that everyone is involved in the process of innovation. It’s not a monopoly neither of R&D or a digital lab. Every employee must be encouraged to participate. Yet, management practices and doubtful fads often discourage people from doing so. They impose on their organization rigid procedures and standards that do not allow any experimenting. And failing is often not welcome.