The Nordstrom Innovation Lab became a lean-startup sensation with a 2011 YouTube video that depicted the team using lean/agile techniques to create an iPad app that helped retail customers choose eyeglass frames. Lab personnel — working for a company that was founded in 1901, employs 50,000 people, and generated $8.5 billion in revenue in 2013 — conceived, designed, and coded the app right in a Nordstrom store while customers watched, critiqued, and demoed their work. Under the direction of JB Brown, the lab fulfills strategic mandates and seeds entrepreneurial culture throughout the rest of the company.
Brown, a University of Iowa software engineer who drove a pickup truck to the west coast to join the dot-com boom, explains below how he runs a classic corporate innovation lab.
How did the Nordstrom Innovation Lab come about?
Brown: About three years ago, our board of directors looked deeply at the topic of innovation, and the Innovation Lab was born out of that discussion. They established the governance and funding model for a multi-year plan. I had been a developer and architect on our web site for four or five years, and during that time, I’d done subversive agile coaching to increase the rate of learning and remove waste in the waterfall process. I wanted to show how technology could be used in a more aggressive manner in retailing and to show the value of a lean development process. When I heard about the lab opportunity, I hooked in and got the opportunity to start it.
Tell me about your funding, structure, and process.
Funding is modeled after a venture capitalist approach. We have a fund set aside at the beginning the year. Anyone in the company can pitch for use of that money, but you have to have validated proof of your idea. You’re not pitching a business case. You’re pitching an emergent opportunity that you didn’t plan at the beginning of the year. Our innovation committee, which includes our executive management team, says yes or no. They decide whether to invest seed capital to validate your idea enough to take it further. The key factor
is whether a project has the potential to improve our customers’ shopping experience.
How big is the lab?
It’s roughly 15 people, but it fluctuates in size. People are allowed to move out of the lab temporarily to freelance internally on a project that the lab either started or takes an interest in. We have designers, developers, ethnographers, and an industrial designer.
How would you describe your approach to innovation?
I take my definition of innovation from Ideo and Stanford Design School. Innovation is discovery at the intersection of what’s desirable, viable, and feasible. Desirable is whether customers want it, viable is whether it’s good for business, and feasible is whether we can deliver it. In that way, innovation is a virtual product, not a good, not a physical thing. The thing you build as a result of your discovery is innovative, but innovation is the discovery that made it possible.
Innovation labs and intrapreneurship programs face hurdles in overcoming legacy corporate structures, politics, and culture. How does Nordstrom manage those factors?
It can be a struggle, but it’s less of an issue for us because of the decisions we made at the beginning about our funding and structure. We have dedicated funding to find new opportunities that no one realized were possible or didn’t exist before. The company has various channels — mobile, stores, web — but there’s space in the market for us to find new opportunities.
How do you organize the experimental process?
The lab is broken up into studios. Each studio has a body of work and people volunteer based on the challenges they’re interested in. We start with a business challenge that has been given to us by the innovation committee, a problem or an area of growth to focus on. We get to know customers and their needs, including latent needs they may not be able to describe. We observe them, and based on what we learn, we form a hypothesis about how to solve their problems. Then we brainstorm solutions, pick a couple that we think are compelling, usually with the line-of business sponsor. If it’s a mobile solution, we might get the mobile VP involved to tell us how this relates to his strategy. Then we identify areas of risk and mitigate them via MVP testing and careful innovation accounting.
We view risk as volatility in the outcome, not the chance of a bad return. So we tackle the most volatile areas first by learning from each MVP attempt or experiment. We reduce volatility until we our outcomes are certain enough that our leadership team get behind them. It takes a number of iterations before we have a prototype of a solution.
What does volatility mean in this context?
Volatility in the outcome. Customers will either love it or not. The technology either exists or doesn’t. Our salespeople will either want to use it or not. If we feel like either outcome is equally likely, that’s a big risk, and we want to remove it immediately.
How do you identify your riskiest assumption?
At the beginning, we find that the greatest risk is almost always in desirability, so that’s usually the place to start. The people on cross-functional squads are knowledgeable about technology, product development, and retailing, plus we have the ethnography we’ve done at the beginning. Put all that together and you can make an educated guess about where volatility is the highest. The team collectively comes to a point where they feel like they know which risks are biggest and which are the easiest to remove.
What role does innovation accounting play in your projects?
We use it from the beginning. Usually, we’ll pick what we think is the business model and identify the key measurements of success. At the beginning, it’s a simple manual process.
When we get to the point where we’re trying to remove risks at a bigger scale, before going widely public, we’ll use free open-source, cloud-based solutions that allow us to record metrics easily. If we get into something really complex, we’ll lean on the data science lab, which is seated only a couple of feet away.
When would you call in the data science lab?
As a multi-channel retailer, we face a challenge evaluating the impact of in-store experiences on sales. We may think we did well with a new product, where the business model is a marketing funnel and conversion happens in-store. Then we’ll use the data science lab to correlate uplift in sales with our corporate data.
Do you worry that MVPs might hurt the Nordstrom brand?
We pay attention to that. Usually our experiments start out internal and private. But at some point you have to be live, real, in public, to know whether you’re getting a valid market response. Instead of going from completely private to completely public, we find ways to do semi-pubic experiments with small groups of customers. Sometimes we leverage our stores because we have local communities. Then we can test a small group of people compared to a bigger market. That also helps with innovation accounting because you can move from community to community, and each experiment produces a fresh cohort.
How do you decide whether to pivot or persevere?
This is where the art of entrepreneurship comes in. People who want to be successful have a natural tendency to persevere. It’s part of our culture to make sure we’re serving the customer in a way that leaves them delighted. So we’ve had a hard time, in the past, killing things that we thought could be successful with additional investment. I don’t have a hard answer other than to gather plenty of outside perspective, watch innovation accounting,
and make sure you’re feeding qualitative information into your decision-making process. At some point, you have to decide where to put your money. You’re never going to know the perfect answer before you do it.
The video of your 2011 one-week, in-store app development project is a classic demonstration of lean-startup techniques. Can you give us a broader sense of the scope of your projects?
That video has a life of its own now. It was a great event in our lives and an important thing for our internal success, but we don’t do one-week projects any more. We still focus on getting answers as fast as possible, but most of the time our objectives require us to go deeper. In late November 2013, we launched an app that we started working on a year ago. It’s a texting app that protects the privacy of salespeople and customers mutually.
The law requires that texting for business use is opt-in, as opposed to email, which is optout, so it has been difficult to put it to use. Working with our privacy and legal departments, we’ve come up with an app that lets customers and salespeople text one another without being able to see one another’s phone numbers. We’ve heard from customers and salespeople that they wanted to communicate by text, so we think this solves a real problem
Do you develop physical products?
We’ve done physical design of our in-store infrastructure. A couple of stores in California have a new beauty department design that we helped develop in response to customer feedback that our cosmetics area could be challenging to shop in. That involved physical prototyping and testing of a beauty concierge desk. Our first prototype was a table made of foam-core panels. We visited sororities here on the University of Washington campus and observed customers in a retail experience that was different from what we previously offered. We made sure that we understood the interaction between the salesperson and the customer before we spent a lot of time designing the actual prototype.
We feel strongly that innovation team members should have a portion of ownership in their projects. How do you handle compensation?
The lab is part of the information technology department, and it’s compensated and graded for performance the same way all other technology teams are. There’s an element of truth in what you’re saying, but I find fulfillment of purpose to be more important. If colleagues feel like their purpose is fulfilled, like they have the drive and autonomy to achieve it, I find that they’re happy about their work. Ownership can be helpful with recruiting, but when we find people who appreciate the opportunity and the challenge, they usually accept offers that support their lifestyle, no equity needed.
What are your proudest accomplishments so far?
My proudest accomplishment right now is that our mindset, our way of being, has extended beyond the lab. A small team has a built-in constraint. You’re always going to have more ideas to test than one little team can do, and anything that’s new and different will have its naysayers, even if they’re well intentioned. It’s great to get through that stage and affect the bigger organization in a positive way.
How have you proliferated the lab’s mindset throughout the company?
We offer innovation lab tours where we talk about our practices and process. We have our own version of the Lean Startup Machine, a two-day innovation boot camp that’s open to anyone at the company, where we come up with a challenge and form crossfunctional teams. Each team has an innovation coach from the lab who knows design thinking, lean startup, innovation accounting, ethnography, and some other things. We get people out of the building so they can talk to customers, validate ideas, and bring them to the point of being able to pitch to some senior leaders in the company. Some good ideas come out of that, but the real benefit is learning about the process and becoming comfortable with thinking in a new way. A few members of the Innovation Lab started the People Lab, and they’re now separately managed to do that type of work full-time.
What are the most important guidelines for enterprises to keep in mind to increase their innovation capability?
The innovation effort needs to be a well supported, well protected venture inside the company. You’re asking for cultural change, which is not easy no matter what kind of change you’re trying to achieve. While it’s rewarding, it’s not for the faint of heart nor those looking for another silver bullet of the month.
JB Brown, director