At Collective Next, we obsess over how to make organizations more innovative. We’re not the only people doing that, and it’s useful to check in with smart people with similar goals to keep up with what they’re seeing and thinking. Michael Schrage, a research fellow at MIT Sloan School’s Center for Digital Business, tracks how businesses work and helps some of them work better. His books include Shared Minds (first published in 1989; he wrote about collaboration before collaboration was cool) and Who Do You Want Your Customers to Become? He’s also a regular contributor to Harvard Business Review. Michael’s latest book, The Innovator’s Hypothesis, investigates how businesses can get the most out of their innovation investments. The book is built around Michael’s “5X5” framework: give diverse teams of five people five days to come up with five business experiments that cost no more than $5,000 each and take no longer than five weeks to run. We talked to Michael about how he sees serious innovation cultures work.

How did you come up with the 5X5 framework?
The 5X5 was more happy accident than a product of careful thought and design. In both my executive education classes and my advisory work, lectures were unappealing and small team exercises seemed too disconnected from reality to really get people engaged. We didn’t have either the time or materials to do the sort of modeling, simulation, and/or prototyping work that had defined much of my own research and advisory work. So the notion of business hypotheses and business experiments as the organizing principles and challenges for design value and valuable design emerged.

The rise of digital networks and mobile devices made the real world economics of such design experiments not just plausible but compelling. We iterated from there. I’m proud to say I learned a lot from my students and my clients about how small cross-functional teams could, should, and would collaborate to create portfolios of lightweight, high impact business experiments. We iterated our way to success. But getting people to think in terms of experiments — as opposed to plans, programs, projects, and analyses — proved more a cultural challenge than a technical one. Cultural, organizational, and operational inertia is almost always a bigger challenge than brains and money.

How can constraints encourage innovation?
That question misleads. The real question is: What kind of innovation matters most to us and our clients/customers? The constraints are a means and medium to that end. The reason why I emphasize really fast, really frugal, and unambiguously high impact business experiments is that I want to remove cost, schedule, and incrementalism as sources of resistance to innovation. If you don’t have a lot of money, you have to be ingenious about allocating known or existing resources. If you don’t have a lot of time, you have to think about designing a process that gets to the point of value in swift and immediately graspable way. If you’re gunning for high impact, you get rid of anything and everything that might generate nuance, distraction, or ambiguity. Constraints liberate you because they make absolutely clear what you are or are not allowed to do.

I call this the “Katalina’s Dog” phenomeon. I once had a girlfriend who had to move but she had a huge dog, a German Shepherd. Most places she looked at didn’t want that kind of a dog in the apartment complex. The dog was the constraint. That constraint narrowed the search and made it easier for her to find a place for her and Mookie. She had to be ingenious about it but it worked.

What are good ways to manage competing experiments?
That’s a trick question. The best way to manage competing experiments is to let them compete fair and square. But pay close attention as to why and whether those business experiments — and the business hypotheses than underlie them — are truly competitive. Do the differences and distinctions matter more than the similarities? Why? What assumptions might be complementary or contradictory? Why do these groups or experiments want to or need to compete? The best way to manage competitive experiments is to make sure the rules are fair and insist that people take accountability and responsibility for sharing what they learn as their experiments compete. What makes world-class science work is what makes world-class innovation inside the enterprise work, too.

What is the biggest misconception about what makes innovation possible?
There are two big misconceptions about innovation that I have come to learn and accept over the past 25 years. The first — which surprises and upsets many smart people — is that good ideas are the key to innovation. They’re not. Good ideas are bad. Indeed, good ideas are demonstrably a bad-to-awful unit of analysis for assessing and evaluating innovation potential. I did a couple of chapters about this in my book and it made a lot of people crazy because they think of themselves as idea people and they are insulted by my argument. But testable hypotheses are almost always more useful, usable, actionable, and more valuable than good ideas. Want to productively transform your innovation culture? Ban good ideas and insist your people think, communicate, and design around testable hypotheses.

A second misconception also upsets a lot of people. Money is overrated. Innovation quality and impact doesn’t depend on budgetary resources. Yes, money becomes important when you want to execute rigorously and relentlessly each and every day. Money becomes important when you seek to attract and retain the best talent. But money isn’t important at all when it comes to defining a portfolio of business hypotheses and running a portfolio of 5X5 experiments to learn an awful lot awful fast. Running the right experiments and learning from them “derisks” innovation and makes targeted and better focused investment possible. You can get to the right kind of budget questions faster, better, and cheaper. Whenever arguments about money haunt the innovation conversations, I know something is measurably wrong with the innovation process and culture.

What have you learned about how teams work in the quarter century since Shared Minds?
I would need another book to answer that question. But the most important takeaway since doing those books and testing them day in, day out, year in, year out, in real world environments is that people — especially top managers — need to have the discipline and courage to emphasize three things:

1. What are our innovation objectives? What do they want their innovation impact to look and feel like? What does innovation success look and feel like? This needs to be explicitly discussed and defined and shared. Everyone needs to understand this.

2. What are the innovation behaviors we are trying to create and encourage? Do our incentives reflect that? Innovation isn’t just the ideas and hypotheses in people’s heads; it’s the experiments and prototypes and interactions we have with our customers and each other. What are our commodity innovation behaviors? What are our unique behaviors?

3. What innovation capabilities are we cultivating in our people and our customers/clients? Are we training people to design experiments and hypotheses, not just educating them? We need to view innovation not just as a business process but as a collection of individual and social capabilities. The more capable our people and customers, the more innovative they will be. That means more value.

Learn more about Michael Schrage and his work.