This week, my former co-worker Mike Davidson announced what he has been up to since leaving Disney nearly five months ago: building Newsvine. Newsvine is a news company that harnesses collective intelligence to determine story importance, facilitates conversations about news stories, and incentivizes hyperlocal journalism by paying writers the ad revenue that their stories generate.

It's a great idea, one executed in part by a variety of sites already. Rob Goodlatte puts it perfectly when he writes:

It's a general, but amazing idea, with awesome, yet easy-to-reproduce technology behind it. In other words, Google, MSN, or any other web news source could easily create a product similar to Newsvine or digg. The key is to grow a user base, which has become the most valuable commodity on the web today.

Mike pulled two of the Disney Internet Group's best engineers with him to start Newsvine, which got me thinking: Disney lost three great people to Newsvine, in order to build a company that, if successful, will disrupt Disney's news properties. So why didn't Disney keep Mike and his crew, and have them build Newsvine in-house?

It sounds like a ludicrous question. The obvious answer, given by Mike himself in his goodbye Disney post, is that of opportunity cost. He was missing out on potentially large returns and learning a ton about entrepreneurship by staying at Disney. Innovation doesn't happen in big companies, right?

Right... mostly. Google is the shining example of a big company that innovates, because they do some interesting things to balance out the opportunity cost of staying with a big company versus striking out on your own. More about that in a bit.

Before I talk about ways to innovate in big companies, I want to describe the three qualities of a big company that make it an environment that stifles innovation.

The first reason a big company stifles innovation is because of a common "can don't" attitude.

Let's say you come up with a wildly cool idea that has potential to be lucrative and disrupt an established industry. I guarantee that if this idea is proposed in almost any big US company, the first thing you'll hear is "that's a good idea, but let me play the devil's advocate for a moment..." In big companies, people look for reasons why something won't work, rather than figuring out how it could work.

The design firm IDEO, which has helped create products like the Palm V and the Steelcase Leap, writes about how devil's advocates stifle innovation in a new book. Shooting holes in an idea won't make it successful, but it will discourage people from sharing new ideas.

Instead of telling people why their idea won't work, take a page from Paul Graham's playbook and ask whether an idea can be done:

Instead of saying that your idea is to make a collaborative, web-based spreadsheet, say: could one make a collaborative, web-based spreadsheet? A few grammatical tweaks, and a woefully incomplete idea becomes a promising question to explore.

This subtle reframing shifts focus from whether a new idea is a good one, to whether it can be done. Asking whether something "can be done" is critical to experimentation, and critical to success: it's often the prolific who are also successful (note that this relationship is correlated, not causal: it's not certain that Shakespeare and Mozart were successful because they were prolific, but history is littered with examples of successful people who threw tons of stuff at the wall to see what stuck).

At the macro level, big companies have a disincentive to change the status quo, especially if it means cannibalizing an existing business. As Mark Cuban is fond of saying, the primary goal of a general manager is to keep his job. If you're an executive, is it easier to ride a cash cow, or is it easier to explain to shareholders why money is being spent on new, unproven ideas that might kill the cash cow?

So, big companies look for reasons to kill innovative projects because, at both the micro and macro levels, maintaining the status quo is the easier short-term option. Google does a great job of institutionalizing a "can-do" culture. You can see this from their prodigious product output, their 20% time, and from the words of co-founder Sergey Brin:

A lot of our successes don't have anything to do with anything our executives thought were a good idea.

Which brings us to the second reason why you can't innovate in big companies: they have too many stakeholders. It's incredibly important to get buy-in from folks across functional groups when their team is affected by a new product. But in the early product design stages, stakeholders kill greatness. Too many stakeholders lead to trade-offs in product design to appease business development, engineering, or the janitor, which means the product tends towards average. And average product design means it is unlikely that your product will appeal to customers who will adopt it and spread the word about it. It's the difference between building an iPod and an iRiver. If you don't have an executive mandate, the only way to build something the right way in most big companies is to do it under the radar, where you are accountable to your skunk works team and nobody else. Exploratory R&D; teams can't be beholden to multiple stakeholders.

Finally, the third reason big companies don't innovate: they don't provide the proper financial incentives for innovation. People are incredibly quick to learn which behavior is rewarded in any system. If you want to innovate, there are two options: remain in a system that pays out an annual salary and a relatively meager bonus for your awesome product. Or, strike out on your own, and build a product that might have a significant pay off, while living off savings or investment. This choice doesn't even consider lifestyle (going for a hike on a beautiful day, or going to watch your kid's soccer game) or autonomy (not having to deal with politics to get stuff done).

Lifestyle and autonomy aside, there's very little financial incentive to put the big ideas to work in a company. Even if you successfully shut the devil's advocate up (which is almost impossible to do with an innovative idea), and can somehow maintain autonomy to develop your product, and assuming you manage to build your product and it becomes a raging success that brings in millions of dollars for your company, what's the reward? In most big companies in America, you likely get a slightly fatter-than-usual bonus and possibly a promotion.

To combat the financial disincentive to innovate, Google has created the Founders' Awards. In February, the company awarded $12M in restricted stock to about 24 employees for lucrative projects they delivered. The Times quotes Brin:

"Grads coming out of school now might want to go to Google, but want to be rewarded based on the success of their project," he said. Google already offers bonuses and options, he said, "but not to the scale where you can legitimately claim it's comparable to doing a start-up."

Google is more closely aligning employee motivations with its own by providing commensurate compensation for high achievement. I don't think the money is a prime motivator for most people at Google (working on cool projects with other smart people is a bigger draw), but the Founders' Awards provide a healthy incentive for innovating at Google rather than starting up a company. The Awards are a small price to pay and have an undoubtedly high return on investment in the form of disruptive products and low employee turnover. Google is demonstrating they have a clear understanding of the incentives and that their best employees could easily leave in pursuit of freedom and a big payday.

So, to recap, the reason big companies don't innovate are:

- overcoming the "can don't" attitude is hard

- multiple stakeholders make great product design difficult

- there's a financial disincentives for employees to innovate

Some might say that it's easier for companies to purchase and integrate innovative startups, rather than investing in R&D.; It might even be an economic wash to do so. I contend that there are two main benefits to institutionalizing innovation over buying innovative companies. The first is the people factor: I'd bet that 8 out of 10 knowledge workers would much rather own and build a new product, than to maintain and integrate one. This obviously isn't fact, but it's based on anecdotal evidence (Google's 20% time, for example) and the observed human need for newness. Keeping employees happy is a theory espoused and practiced by successful and interesting companies like Google and Virgin (among others), and management thought-leaders like the late Peter Drucker.

The second benefit of institutionalizing innovation is that a company can foresee sea change in an industry. A company no longer has a small team of executives looking out for interesting changes, but now has every single person in the company doing so. If information flows quickly and transparently through the company, this enables a company to more quickly change strategies and build products to meet customer needs before less responsive competitors can.

So how can you fix the situation? Google is a good model--they encourage idea generation, insulate potential innovators from naysayers, and reward their employees financially for big successes. Off the top of my head, here are some ways to build a culture that encourages and rewards innovation in a big company. Allot time for teams to self-assemble to work on fun stuff that they want to work on. Make people accountable to no-one but themselves for the time they spend working on fun stuff. Create a new product development team with members that rotate in for several months at a time. Spend a couple of days every month building prototypes. Let your people know that you will pay successful project teams commensurate with the success of their product, and then do it. Institutionalize the practice of funding new startup projects, with the promise of big returns for the "founders" if it's successful (Paul Graham's Y Combinator provides $2k per founder per month for living expenses. Some executive transatlantic flights cost more than that!) Create an intranet that doubles as a project-tracking system, where people can get insight into any project that's being built at your company. Encourage cross-pollination of ideas by encouraging comments on your intranet, and by facilitating brainstorming sessions between people from different functional groups who don't normally work together.

My buddy Tim tells the story of how, as a 16 year old entrepreneur, he and his partner Bant devised a system call "Yes, Of Course, Certainly" for generating new ideas. Let's say Bant comes up with what he thinks is the greatest idea for a new dog food commercial, and starts telling Tim about it. It is Tim's responsibility to let Bant get the idea out, and say nothing but "yes", even if he thinks it's the worst idea he's ever heard. Once the idea is out there, Tim must add something to the idea to make it better ("of course"). And once it's better, Tim and Bant have to figure out how to actually get it done ("certainly"). If it passes the third stage, Tim and Bant are probably looking at an idea that will probably make Purina quite happy. If it doesn't, the worst thing that happened is that Bant received positive reinforcement for sharing his idea, and the two of them spent some time creatively attacking a problem. If two 16 year olds could devise this system and have the discipline to stick to it, why not a company full of adults?

Maybe if some of these structures were in place at Disney, Mike and his gang wouldn't have left. I don't know, and I suspect they don't either. But the upshot is that Newsvine was no doubt conceived of in the halls of Seattle's Smith Tower, and not only is Disney not reaping the potential reward, they've lost a few bright, motivated, curious employees and are now looking at a company that could very well eat part of their lunch someday.

Given the benefits of keeping and motivating good people, and being able to more rapidly responding to change, it behooves companies to think about how to incentivize their people to innovate to better serve customers. It is a big challenge, as changing organizational culture is never easy, but one that will yield benefits as the rate of technological change continues to accelerate.

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