Innovation is the driving force to stay competitive in the free marketplace. A lot of companies struggle to stay innovative once they have created their first cash cow. Let us just look at Blockbuster. The film and video game rental company went from an unchallenged empire in 2000 to bankruptcy in 2010. Eventually, Blockbuster was killed off by on-demand streaming sites like Netflix, a new entrant that they saw coming from miles away.

Systems and processes that benefit the company to scale the product are the same that will make it too slow and rigid to be innovative. To overcome the inertia that goes along economies of scale, companies are opening innovation labs. These are semi-autonomous safe-spaces, formed by an organization, with a culture that is more conducive to innovation and informed risk-taking. The German car manufacturer Volkswagen alone has seven innovation labs worldwide.

To break out of the shackles of corporate processes, more and more companies are looking into opening innovation labs. The idea is to have an independent structure of intrapreneurs that can, free from corporate life, move faster, break things, and spark innovation.

At the same time, many of them do not succeed. Capgemini quotes a Senior executive at a leading global bank that up to 90% of innovation labs are failing and suggests it is “extremely challenging” to make innovation labs work.

They are doing what Steve Blanks calls “Innovation Theater”:

“A competitive environment should drive a company/government agency into new forms of organization that can rapidly respond to these new threats. Instead, most organizations look to create even more process.” — Steve Blanks

After working with big clients, there seems to be a common theme about how big corporations go about innovation and most of them are making similar mistakes. Here are 5 rules to make sure that you do not fall into the innovation theater trap with your innovation lab:

1. Make the innovation lab truly independent

Independence of the mothership is the core principle of an innovation lab. At the same time, many companies are not ready to go through with it and still want a measure of control over the new structure. However, these teams need to be able to operate separately from the main company. It is not enough to put them on one floor of your corporate headquarters. Move them to a separate location. The physical distance is needed to break out of the habits, processes, and controls that hold back innovation.

Then make the lab a separate legal entity with a new name, which can function independently and does not have to go through your established procurement or hiring processes. You will also see that you can attract more entrepreneurial talent if you set up another company with different branding for the innovation lab. Making it independent also frees up the innovation lab from the pressure to achieve the same level of financial success that is expected of other departments in the company. This means they can focus on smaller markets which are not very lucrative to the main business yet but could develop into one in the future. Similar to how Kodak undervalued the small digital film market because of its dominating market share in the analog film industry.

Next, define one person in your company to be the sponsor of the innovation lab. Do not set up a committee. Ideally, choose someone as high in the corporate hierarchy as possible — maybe even the CEO — to be the main contact person of the innovation lab.

How can you make sure that the innovation lab will work on the right things and provide insights and develop products that are relevant for your company? Let us take a look at rule number 2.

2. Give the team clear goals and a problem to solve

It is crucial that you align the efforts of the innovation lab with the overall company vision. Formulate a clear problem statement that the innovation lab can focus on. You can have several teams working on the same or different problem statements. But be careful that you have identified the right product problem to solve. Once you have a goal and problem clearly defined and they are clear, specific, and broadly understood you are one step closer to what Netflix proposes as one of their core aspects of culture — being highly aligned but loosely coupled.

But how can you measure that your innovation lab is coming up with the right solutions?

3. Measure “number of learnings”

Big corporations are stuck in political infighting where success is brutally exploited for political gain and failure will be used as ammunition to throw someone else under the bus. In an environment where making mistakes can have serious consequences for your career the more risk-averse process-oriented people climb to the top of such organizations. However, this right and wrong mentality goes against all the principles of innovation, where you need to be able to fail fast, make mistakes in order to learn.

Albert Einstein said it nicely:

“A person who never made a mistake never tried anything new.”

To move away from right and wrong thinking in your innovation lab, set up a metric that focuses on the speed and quality of new learnings generated by the innovation lab. You want your innovation lab to try a lot of new things. Only then you can truly know if something works or not. You want to make sure your intrapreneurs are more out validating hypotheses instead of having lengthy discussions in meeting rooms.

You want to make sure you are measuring the right KPIs to gauge your innovation lab’s effectiveness. I argue the best KPI for an innovation lab is “number of learnings per week”. In order for the innovation lab to function this way, these metrics need to be championed by the people leading the innovation lab.

Then focus on beacon projects to apply those learnings and solve high-priority problems for the company.

4. Invest in the right culture

It’s often said that company culture starts at the top — that in order to effect meaningful change in your organization, you need buy-in from the leadership. Make sure the person you put in charge of the innovation lab embodies the values that drive innovation and collaboration.

People who are great at scaling great ideas have a different mindset from people who are excelling at creating new products. Hence, you should look at people outside of the current structures who are not entangled in the current processes or political infighting.

Give the team the resources to hire great talent and design their creative space that they feel comfortable in.