Innovation the Right Way

"Innovation in business," says Ed O'Boyle, Gallup senior brand consultant, "is simply risk management." O'Boyle should know -- at Gallup, he assists Fortune 500 companies with their innovation strategies. And before coming to Gallup, O'Boyle was a director of innovation for companies in three different industries.

It seems, however, that too many businesses have yet to appreciate the truth behind O'Boyle's sobering observation. A November 2006 Booz Allen Hamilton report found no clear link between R&D investments and financial performance in most of the 1,000 companies included in the report. A 2006 study by Boston Consulting Group found that 72% of executives intend to increase spending on innovation, but only 52% are "satisfied with the financial return on their investment." Worse, 9 out of 10 new products are financial failures, according to O'Boyle.

But no matter how difficult, expensive, or frustrating innovation can be, it's essential for business success. Many of the most successful businesses of the recent past -- notably Apple Computers, Google, and Toyota Motors -- institutionalized innovation as part of their long-term business strategy, and their innovations are legendary. They invest in creativity and accept short-term financial loss because they're willing to bet on future long-term profit.

But many companies, especially small ones, don't or can't budget for trial, error, and failure. Those businesses are the most vulnerable to the successful innovations of their competitors.

When those businesses do start the process of innovation, they face more than their share of problems because they don't have a history of innovation to draw from or a big budget to fund it. They don't know how to manage the risks because they don't have the experience to recognize them. And when those businesses are in manufacturing -- which is still rife with the culture and assumptions of the industrial age -- they face an uphill battle. So when a smallish manufacturing company is wildly successful in innovation, every other business leader should sit up and take notice. And that brings us to Fabcon.

Turning away work

Fabcon is a family-owned business that makes precast concrete wall panels. Fabcon's $200 million in revenue comes primarily from making walls for commercial buildings, and a lot of that business comes from big-box retailers -- the kind that build 50,000-square-foot buildings in a couple of weeks.

Fabcon's panels are 12 feet high and as long as the builder wants; the company can pump out a mile and a half of concrete wall every day. Though its sales territory covers the upper Midwest and Northeast, Fabcon has relatively few employees -- all those walls are made by 1,000 or so people in plants in Indiana, Pennsylvania, Ohio, and Minnesota. And before Fabcon's great innovation, the plant workers used tools that the builders of the pyramids would recognize -- they cut the walls to order by way of tape measure, chalk, and saws.

And it worked fine. So well, in fact, that in 1999, Fabcon built the Pennsylvania plant to keep up with orders. "In the 1990s, we were turning away more work than we were taking," says Michael Le Jeune, Fabcon CEO and president. "The '90s were a boom for industrial construction, an absolute boom which had not happened before and probably will never be repeated again. So we didn't know that we weren't competitive. We figured we must be, because we were turning away work."

But the boom ended at the turn of the century. No one was beating down Fabcon's door anymore, and that fourth plant started to look like a bad idea. "When the party ended," says Le Jeune, "all of a sudden we were getting beat, and people were bidding below our cost. We knew we were in trouble, and we had to do something."

A feeling of near-desperation is extremely uncomfortable, but it's also motivating -- it's often the impetus that drives innovation. It certainly was at Fabcon. Getting beat on its own turf spurred two major innovations. The first defied the laws of physics; the second saved the company.

Defying physics

Concrete walls aren't always solid concrete -- many have a channel of gravel in them. The gravel is an insulator, and it reduces weight. But the walls are still enormously heavy, expensive to ship, and they can't be created to spec at the plant, so windows and doors have to be sawed out on-site.

Engineers had kicked around the notion of filling the walls with something other than gravel -- Styrofoam, for instance, because it's light and cheap, and molds can be fitted for openings. No one had ever managed it, though, because it was considered to be physically impossible. Wet concrete is a liquid, and foam floats.

Le Jeune knew this, but still the idea nagged. Then one day, inspiration struck, as it often does, when it was least convenient. "I was driving with two other Fabcon employees on I-71, and we had an idea. The more we talked about it, the more excited we got," Le Jeune says.

The idea was to tie strips of Styrofoam together, like a raft, and anchor them into the concrete. "We pulled into the parking lot and raced into the office and started calling foam suppliers, asking, 'What would you charge for a piece of foam five inches by twelve inches and two thousand miles [long] a year?'" says Le Jeune. "We pretty much sat by the phone waiting, because we had already figured out what the price needed to be. If it was under that number, this could be a winner. And it was."

So Fabcon's engineers delved into the "I-71 project." The raft idea proved unworkable, but the engineers plugged away until they got it right, eventually creating a product they called VersaCore. It quickly became a hit. Fabcon beat the competition to the product (Le Jeune asserts that the competition had grown fat on all the work Fabcon turned away during the boom years). VersaCore established the company as an innovator in building products.

This, says O'Boyle, is a brilliant example of doing innovation the right way. "VersaCore proves, among other things, that Fabcon really understands the market and the need. Never start a project unless you know there's a market for it," he says.

What's more, success couldn't have come at a better time. "If we hadn't come up with VersaCore, we would not be in business right now," says Le Jeune. "What it did really was address our enormous competitive disadvantage."

Not only did the VersaCore triumph create a new revenue stream for Fabcon, it also established the company as the leader in the industry -- and made the fourth plant look like a good idea. But it also brought about a more important change: VersaCore transformed the corporate mindset.

"Our ability to make [VersaCore] work really was the beginning of a change in the culture at Fabcon," says Le Jeune. "If we hadn't achieved that, we wouldn't have attempted the other project. And if we knew then what we know now, we'd never have tried."

This is where the Fabcon story takes a turn for the worse. "The other project" -- automating the plant by synchronizing concrete beds, computers with specs, and a laser while allowing for the concrete's expansion, which changes from hour to hour -- was a two-year nightmare. It sucked down thousands of dollars, uncountable man hours, and the peace and well-being of several engineers. Nothing about the project -- the way it was conceived, commenced, and undertaken -- set it up to succeed.

"Innovators need two documents in their hands before they start," says O'Boyle. "The first is a complete diagram of the finished product, and the other is a list of everything that could go wrong, with solutions." For the automation project, Fabcon had neither, and they paid for it. It was all but doomed from the beginning. But Fabcon, without realizing it, did a few crucial things right. And those few things saved the project -- and perhaps the company.

The "other project"

The concrete wall panel production process was -- and still is, for most manufacturers -- anachronistic. Fabcon's crew worked from spec sheets, which told them how long to cut walls for specific clients. If a wall needed to be 10 feet long, workers would measure 10 feet with a tape measure, mark it with chalk, and cut it with a saw.

This allows for a certain amount of human error, but worse, it permits errors of physics. Concrete expands and contracts with temperature, up to four inches a day. The chalk mark could be several inches off by the time the wall was cut. Though such mistakes rarely happened, this process guaranteed slight inaccuracies that would have to be corrected onsite. And, because a crane and crew to assemble the walls cost about $600 an hour, even slight inaccuracies are expensive.

The Fabcon leaders knew this, and the thought rankled them. What they wanted were wall panels that fit like Legos, all exactly right when delivered from the factory. It would save customers a fortune and make Fabcon indispensable. "If your quality's the best, and your cost is the least, you win. Game over," says Le Jeune. "And we knew we couldn't possibly achieve it with a tape measure and chalk."

The only way to get perfect wall panels was to automate the process, which was far outside of Fabcon's area of expertise. The idea lingered until 2003, when a vendor came to Fabcon and said he could create a laser, the track it ran on, and the mechanism to accurately measure concrete on a moving bed -- and do it quickly and for much less money than Fabcon was willing to pay.

Two mistakes

This is where Fabcon made its first of two mistakes, which leaders now ruefully admit. "We shouldn't have hired that guy," says Le Jeune. What Fabcon should have done, says O'Boyle, was to call in two or three vendors -- more than that and vendors know they've got such a slim chance of getting the job, their efforts will be fairly halfhearted -- and let them come up with the brilliant ideas.

"Vendors help you in your development process," Le Jeune says. "Having several bids makes it easier for both you and the eventual winner to execute the idea. It also takes some of the burden of cost out of your profit and loss and puts it into somebody else's." But the automation process was such an original idea that it would have been impossible, Le Jeune thought, to simply put it out for a bid, as one would a roofing job.

Meanwhile, the board gave the idea a green light; the vendor set up his equipment in the Minnesota plant and got to work. The project's leaders promised it would by done by Christmas. And almost immediately, the project was in the way, slowing both production and innovation.

That was Fabcon's second, and more serious, mistake. "Fabcon really should have built a test facility," says O'Boyle. "It would have saved them a lot of money, time, and stress." But no one at Fabcon expected the board to okay a skunk works too.

After about a year, the board got antsy about the money already spent on the automation project, which was not showing any sign of ever working. "The board was pretty gun-shy because the Pennsylvania plant, built right before the recession, was basically hemorrhaging money for two years," says Le Jeune. "So our credibility wasn't at a high point."

Thus the project lost a purely psychological, but hugely important, benefit: Board- or executive-approved test facilities create long-term investment in the project and in innovation as a whole. They also diffuse blame. If the board "owns" the test facility, it "owns" the project. This makes the project leader less of a target when things go wrong, as they inevitably will, and creates the feeling that everyone is in it together. Solidarity like this can pull tricky projects through the rough patches.

But there was a bright spot, found in an unlikely place. The automation project had one real champion on the board and a few in the sales and marketing department. "Getting a champion is probably the most important thing that you do," says O'Boyle. "It's usually the person who has the most vested in the outcome that you're going for, and I'm not surprised Fabcon's champions came from sales."

Sales and marketing are good places to look for support for innovative ideas because salespeople have quotas to meet and often have commissions on the line. In any industry, solutions sell, and the people responsible for sales are the likeliest to push for innovation. "They have less invested in the status quo and more invested in a bold new future," says O'Boyle.

Nonetheless, Fabcon was caught in an intractably bad situation -- reduced productivity caused by a difficult project that was designed to increase productivity. What's more, the project kept going wrong.

Diminishing returns?

Jason Hensley, Fabcon's R&D manager, who was the R&D department at the time, spent the day trying to do the job he was paid for while fixing the glitches on the automation project. The laser system was always almost done -- but not quite. The bed/computer synchronization was always just about to work, but it never did. "There were times that the phrase 'Two steps forward, three steps back' got so old, I was ready to throw my hands up and say, 'When is this ever going to end?' That was tough," says Hensley.

All the while, Fabcon was losing money on the project, during a building recession. Le Jeune found himself cheerleading a project he wasn't entirely sure would succeed. "But we had to make it work," says Le Jeune. "We had no choice, because automating was the only way to save the company. I kept asking Jason [Hensley], and he kept saying it would work -- eventually."

How long did "eventually" take? Two and a half long years. "We were testing and testing and testing, trying to prove different things," says Hensley. "We kept going around and around while making no progress whatsoever. Finally, we all realized that we were going to lose board approval on this thing if we didn't make some serious progress really fast."

At this point, most companies ask themselves if they've reached the point of diminishing returns. This forces an agonizing decision, because it's impossible to see the future, but the breakthrough might be right around the bend.

According to O'Boyle, however, there's a way to simplify the decision. The first step of determining the point of diminishing returns is also the first step in any innovation -- risk management. "You have reached the point of diminishing returns when you have answered all the questions to the best of your ability on the risk mitigation list, and you still have no idea what you're going to do," he says. "But if you're in a fight for your life, there's no such thing as the point of diminishing return. That was Fabcon's position."

Eventually

It wasn't a comfortable position. "I'd be lying if I said quitting never crossed my mind," says Hensley. "But I kept coming back to the fact that I knew I could make it work. We'd figure it out -- eventually."

"Eventually" was closer than Fabcon knew. In October 2004, another vendor came to call at Fabcon. By now, it was clear that the original vendor would never be able to finish the automation project. Nonetheless, huge advances had been made, and Hensley and his engineers finally knew what they didn't know before. "We told [the new vendor], 'You have three weeks to get this thing working to an acceptable level so we can present it to the board,'" says Hensley. "And then we said, 'If you can do it, you have the potential to build nine more of these systems.'"

It worked. The new vendor got the system working -- glitchy, but running. Finally, Hensley told Le Jeune that the whole miserable process was almost done -- just a few more bugs to squash and the automation project would be online. "I was instantly on the phone with everybody and their sister telling them to come look at it," says Le Jeune. "We thought we had it. We got the employees together for a dinner, which is now infamous. We even made a movie of the new system churning out walls, and we presented it to the board."

Shortly thereafter, they realized the bugs were more like goblins, and it took more time than they thought -- a now familiar feeling -- to squash them. No one felt good about that dinner anymore. Nonetheless, the new vendor had made so much progress that the end was finally, finally in sight. The board was so impressed, they authorized nine more beds. The project's members smelled like roses.

There was only one problem: The line workers hated it. In fact, they would look for any excuse not to use the new system. "They'd say, 'Oh, we wanted to use it, but something went wrong, so we had to lay it out by hand.' Or, 'It was raining, so we had to lay it out by hand.' There were all kinds of weird excuses why they had to lay it out by hand," says Hensley. "When we started forcing the issue by saying, 'You don't have the option; you are going to do it this way,' the equipment would break."

The crew resisted the automation project for a very good reason -- it added to their labor and reduced their productivity. "They were already working long days; they want to go home, and they didn't want to spend time doing R&D," says Le Jeune. Furthermore, advances in technology tend to reduce the need for labor -- a historical fact not lost on the men laying out concrete by hand.

Finally, the project's leadership figured out the way to find a champion on the floor: They got the foremen on their side. Responsibility and authority reside with the supervisor, so if he or she can see how the innovation will save time and effort, the rest of the crew will too. And if the company can make the case that the innovation will keep the company operating -- that the innovation may jeopardize some jobs, but all jobs are threatened without innovation -- it's much easier to obtain the goodwill of the crews.

The happy ending

In the end, it was the crews' buy-in that was the final key to turning Fabcon's second innovation into an enormous success. The automation process increased the plants' capacity and efficiency.

Soon, Fabcon realized it could use the system in the patterning process that stamped the concrete with a variety of designs -- something no other company could do as inexpensively or accurately. Those advances, plus a vastly superior product, earned the automation project the board's acclaim. And it earned Fabcon the mark of a highly innovative manufacturing company.

"The construction industry is not very creative, not very innovative," says Le Jeune, "and when it tries to be innovative, it's not very good at it." The inability to innovate played a significant part in the demise of many construction companies when the building boom of the 90s ended.

And it's not just the construction industry. Lack of innovation has killed off companies in every industry. Innovation is a survival skill, and every company needs it to thrive. That's why so many organizations, including all the smart ones, are investing so much in creativity.

Sadly, doing innovation the wrong way can be more dangerous than not doing it at all. Fabcon survived a miserable innovation process because, as O'Boyle says, the things Fabcon did wrong were outweighed by the things they did right.

"More than anything, Fabcon knew its market. It wasn't inventing things just because it could, but because it knew exactly what its customers wanted," says O'Boyle. "New products fail when they're introduced for the buzz, not for the market need."

In the end, success is judged not by the process, but by the result. In this case, the results speak for themselves: a 50% increase in profits over three years, plant crews competing to introduce productivity innovations, and other manufacturers so far behind that some are pooling innovation efforts to mount a challenge to Fabcon.

This is all good -- the board is happy, the company is robust, the employees are busy, and the customers are delighted -- but it isn't self-sustaining. The real happy ending is that Fabcon's successful innovations set them up for more.

"Innovation allowed us to stay viable," says Le Jeune. "It changed our culture. Now we're an innovative company. I think that was the most important result."