[Leadership laws] The innovation law of the underpants gnomes

Don't be like the underpants gnomes. Figure out how you'll earn money alongside everything else.

[Leadership laws] The innovation law of the underpants gnomes
Earning money doesn't happen as magically as the underpants gnomes would like to think.

The Innovation Law of the Underpants Gnomes

In innovation, money comes last, not first. But even then, only if you consider it coequally from the start.

Quick description

Wait, who are these "underpants gnomes?"

Cartoon show South Park beautifully illustrates one of the easiest-to-make mistakes in innovation.

One of the show's episodes features "underpants gnomes," i.e., "those little guys who come around late at night and steal your underpants" (note: South Park-style R-rated language).

Late in the episode, the South Park characters learn about the three-step business model that the gnomes pursue:


And how does this relate to us?

Exactly how the underpants gnomes might earn profits is nothing but a "?".

Sadly, this is also a problem on many innovation teams.

The problem is easier to see in corporate innovation than in startups, where VC funds can mask that the team has no idea about how they will earn money. But fundamentally, this problem applies to both contexts.

Teams often recognize one version of the problem, but there are actually two of them:

First, there's the underpants gnome problem of bosses and operators:

Bosses and other stakeholders often just “want” money from innovation. But they magically ignore the realities of achieving that outcome.

They offer no guidance on what kind of money they might want but later are surprised if you find them a different type of money than they implicitly expected. Maybe they wanted high revenues and you offered them high profitability. Or maybe they wanted immediate revenue, and you offered them longer-term revenue.

They also ignore that money is a lagging indicator in innovation, not a leading one. First, we must create value for someone. Only then can we capture value for us from those users. Revenue and profits are the outcome rewards after having done a good job.

Of course, it's reasonable for bosses to act that way. In the org's operations, value creation is already happening. So value capture is often the only thing that's left. But in innovation, we also must create value. So it's still impossible for us to produce money first.

Second, there's the underpants gnome problem of "front end" innovation teams:

Classic “front end” teams, often ones who describe themselves exclusively as Design, Foresight, or scientific R&D teams, often magically think they can create perfectly Desirable solutions but never need to think about Viability.

In effect, they see money topics as an afterthought that business people can just ”execute” after they themselves are done with having created a solution (and, by implication, have done the "true," creative innovation work).

Problem? When you ignore a topic, then what you create won't accommodate the topic either. In this case, ignoring how your solution might earn money means that it might not be able to earn any money at all, at least not without massive re-work.

How to apply the law

Since there are two versions of the underpants gnome problem, we also need two different solutions:

Bosses must accept that money ("value capture") is a lagging indicator, not a leading one, in innovation work.

How you break this news to them depends on how direct your org culture allows you to be. But at the end of the day, it's simply arrogant to assume that you can get money without delivering any value first. The fact that you would like to earn money is totally irrelevant to the rest of the world.

Front-end innovation teams must accept that (1) "creativity" and "innovation" can relate to any function, not just theirs and that (2) any topic they ignore to start will be one that their solution can't satisfy later.

Again, it's your choice how directly you want to confront people with this truth. A host of psychological biases and blindspots work against you here. Even if you let people "see" rather than "hear" that their orthodoxy doesn't produce results, they may still explain it away. In other words, this is not easy. But if you can get them to accept a more expansive view of what work is valuable even in the early days of innovation efforts, you'll achieve much better results in the long run.


Further reading

South Park video clip about the underpants gnomes' business model (YouTube) - Note: South Park-style R-rated language

Related Wikipedia post