De Paoli - No Innovation without Co-Creation

Isabel De Paoli has been Chief Strategy Officer at Merck since October 2016. She started her career at the Darmstadt-based chemicals and pharmaceuticals company in August 2006 and, after holding several positions, is now responsible for the entire corporate strategy and the topic of innovation. She spoke with our colleague about the importance of innovation in the digital age and the establishment of a culture of innovation at Merck.

Marc Wagner: Ms. De Paoli, when people hear of digitalization and innovation in the pharmaceutical industry, they immediately think in terms of very long innovation cycles and a high level of risk for investments. What role do digital trends play here?

Isabel De Paoli: First of all, Pharmaceuticals, along with our corporate divisions Life Science and Performance Materials, is only a part of Merck. Digitalization has a major role to play in the pharmaceutical sector in particular. The first order of importance is the topic of research. How can we analyze large quantities of data today to generate more effectively hypotheses and findings that will accelerate innovation cycles? That goes hand in hand with personalized medicine. How small will patient populations become at some point, and to what extent will highly specific medications be developed for highly specific disease profiles? If we are to generate these findings, we need access to large data volumes from patients, including real-life data records.

This is not a simple matter from either a practical or an ethical viewpoint. When we conduct studies today — e.g., a classic oncology study — then we have at most 1,000 patients available for a limited time. This is a long way from big data — more like small data. So one of our great challenges is to find a way to collect large volumes of data in a secure, ethically acceptable form over a longer span of time. And no pharmaceutical company can solve this alone. Presumably it will not even be possible for hospital operators. We will need new partnering approaches.

So there are three aspects: ethics, technology, and the realization in strong partner networks. How do you define the topic of ethics in your industry, in your company?

This is an extremely important topic. We even have a Bio Ethics Board that cooperates closely with representatives of other organizations; Deutsche Telekom is one example. One of the issues under discussion here is the extent to which it is ethically acceptable to collect data and what the consequences of such actions are. This discussion is extraordinarily important with respect to digitalization. How can we ensure that the data are in compliance with general as well as our own standards for data protection?

You brought up the topic of partnering. So a shift in focus away from your own company and in the direction of ecosystems. What does this look like at Merck?

We are currently entering into very open partnerships with a diversified group of players with the aim of creating such ecosystems. Typically, there is always a link to one of our corporate divisions, e.g., to the Healthcare or the Life Science division.

In the course of our study on “Innovation Culture in Germany”, we observed that German companies in particular are highly averse to taking risks and struggle when it comes to the topic of innovation. Their emphasis is still always on efficiency and less on ambidexterity, i.e., the ability to bring old and new together under one roof, with a leadership team that can not only tolerate contradictions, but actually encourages them actively. How do you deal with this?

This is a highly interesting question. I deliberately do not use the term ambidexterity, but it is nevertheless similar to what we are doing here. The organization that is under my direction is the one hand — the explore hand. Our goal here is to generate ideas outside of what is already a part of Merck’s activities, supplementing the highly successful research and development in the corporate divisions, and to develop these ideas quickly into sustainable new business. Our decision as the Board was to not include many corporate processes in this newly established organization; we want to have a completely different way of working. I have the full commitment from the Board for this concept, and our pool of resources is shielded from the rest.

One of our observations is that digital or innovation labs, mergers and acquisitions, and the founding of startups are not necessarily sensible steps for a corporation to take. Ninety-eight percent of all startups fail. And digital labs frequently do not execute and scale. Everyone uses design thinking, and it ends with the prototype and never goes beyond that to realization. To exaggerate: we are frequently fantastic when it is a question of thinking up creative scenarios, but then we never get them out onto the streets. How do you see this from your perspective as the person in charge of innovation at Merck?

We recognized this issue at a very early stage. The practical realization of ideas is a major challenge. I would say that, since the start of the organization one and a half years ago, we have reached the first milestone and created an innovation ecosystem where the various competences along the full length of the innovation process have been brought together. We have here both highly creative minds who drive the ideas forward to a proof of concept and employees with extensive experience in implementation of such ideas. These are typically colleagues who themselves have guided a startup to viability or who bring with them the required commercial and/or technical competence.

Besides the concrete realization of innovation projects, scaling is of decisive importance. How do you secure this?

We access the comprehensive know-how of the group along the four dimensions of market, technology, organization, and resources. From this foundation, hypotheses are developed and the topic of scaling is given intense consideration at the same time. The ideas are then developed and tested up to the next great value reflection point. At every one of these points, we ask the question whether adequate scaling of the business model is assured.

Do you follow a classic Stage-Gate process?

No. In my opinion, this would not be suitable. Every topic or product is unique and presents highly specific challenges in terms of required assets and skills. So it would be wrong to lump everything together in one pile and force it into an artificial process. Of course, we also have formal holding points where the decision to continue or to end a topic is made. However, this decision is made more in terms of the question: What is the topic’s level of maturity in the direction of the customer? What is necessary to take the topic to the next stage and to scale it? This ultimately determines what resources we appropriate to this purpose. The way the whole procedure works is more similar to a classic venture capital process.

And does this mean that ultimately independent units that can assure value generation all the way through to realization arise?

Our company builder approach does just that with the aim of accompanying innovation projects along their journey and ultimately building up independent business for Merck.

At Detecon, we speak about Company ReBuilding in this context. We call it ReBuilding because we draw on existing resources and employees in the company and not primarily on external sources. The hypothesis is this: The capabilities required to give rise to completely new business models already exist within the company itself. You simply have to create a suitable environment. What do you think about this?

This is exactly what is happening in our company. We draw on the inexhaustible pool of skills and ideas of our employees. In the beginning, it was not so easy to win over the workforce for this process and to convince them to participate actively in our various initiatives. In the meantime, however, the number of people taking part has risen strongly. Being a part of our innovation projects is regarded as a kind of quality seal for entrepreneurship.

In the beginning is the finding of ideas. We work with think tanks and other entities for this purpose. We bring together four to five employees (who may come from all around the world) for three months; they take charge of a specific, pre-defined topic, analyze it, and generate initial ideas related to it. They never lose sight of the goal of developing the best of these ideas into a sustainable innovation project. Initially, we had ten to twelve people worldwide who applied to be members of a think tank. In the meantime, there are 170 applicants who are interested in two think tank topics that are running parallel.

Very impressive. And the employees then transfer permanently to your division?

Not quite. These colleagues are on loan to us for the first three months. This is classified as a business trip in accordance with German law for our international colleagues. Three months is a good time period to become oriented. Depending on the results of the think tank and on their personal motivation, the employees can then decide if they want to transfer permanently to us or not and from where they want to continue to drive their innovation project that has come from the think tank.

Let’s talk about an aspect that our study on the topic of innovation culture has also shown to be critical for success: the topic of leadership. In this context, people like to talk about a culture of learning from mistakes and doing away with hierarchical leadership. What form does this take in your organization?

We certainly still have a couple of hierarchies. The organization cannot be mapped without them. Nevertheless, we strive to deal very openly with mistakes. For instance, we have established F**k Up Nights during which senior management share their most egregious mistakes with the employees. I myself have already won a F**k Up Award. Naturally, it is important to learn something from these mistakes. A culture of learning from mistakes also means that we encourage employees to take reasonable risks. Our structures, which are similar to those of venture capitalists, help in this sense. In some ways, we have freed ourselves from normal corporate processes so that we can characterize opportunities and risks differently. One example is the special remuneration model that was implemented last year and that is an option for employees in the innovation projects. This functions in a similar way to what happens in a venture setup: the employees can decide themselves if they are prepared to participate in the upsides and downsides of their projects in the form of a suitable variable.

One final question concerning the key word creativity. In the long run, this is exactly where the potential for innovation is slumbering. How do you foster creativity on your teams?

We have a number of completely different ways for employees to create an environment in which they can give their creative potential free rein. A genuinely classic method is for employees to take part in official idea generation campaigns. For example, idea competitions on specific topics are launched throughout the company; everyone can submit his or her idea and is then guided and supported during concretization and realization. This is backed by a long tradition in our corporation and produces good results. Or the think tanks mentioned above, which first analyze and explore a topic within three months and then develop and pitch ideas for innovation projects. In addition, there are more informal campaigns or grass roots initiatives. One example is the Innovation Ambassador Network, which has become established as a loose network across all our sites of people who are enthusiastic about innovation. Such networks are decisive for us because the interaction and co-creation between local and global innovation activities and the linking of our R&D centers with our innovative ecosystem are secured by these ambassadors. These are only some examples of activities that aim to promote creativity and innovation capability. As you see, the topic of innovation is written in capital letters for us. We are very aware that at the end of the day it secures our ability to survive in the digital age.

Ms. De Paoli, thank you for this interview and your fascinating insights. Good luck to you as you continue your journey into the future.

The interview was conducted by Marc Wagner.