Despite the upheaval caused by the COVID-19 pandemic—and partly because of it—innovation and digitization have been happening at a record-breaking pace. A McKinsey survey of top executives around the world found that companies accelerated their digitization of customer, supply chain, and internal operations by an average of three years.
Indeed, over the past two years, countries around the world have set records for new business formation, new patents issued, venture capital invested, and more. The US Census Bureau’s seasonally adjusted business formation statistics data show that through 2021, a record 5.38 million applications had been filed to form new businesses—an increase of more than 50 percent over prepandemic 2019. 1 1. “Business Formation Statistics, April 2022,” US Census Bureau, May 11, 2022. The brisk pace meant there were roughly 409,000 more US filings in 2021 than at the same point in prepandemic 2019. The World Intellectual Property Indicators also showed that aggregate global filing activity across 150 authorities grew in 2020, even amid the global health crisis. 2 2. World Intellectual Property Indicators 2021, WIPO, 2021. Venture capital flows have also boomed: in 2021, global venture capital more than doubled from 2020, rising 111 percent. 3 3. Jordan Major, “Global VC funding hit a record $621 billion in 2021, a 111% increase YoY,” Finbold.com (Finance in Bold), January 13, 2022.
This article is a collaborative effort by Federico Berruti, Gisele Ho, Phil Kirschner, Alex Morris, Sophie Norman, and Erik Roth, representing views from McKinsey’s Operations, Digital, Growth & Innovation, and Real Estate practices.
What’s striking about these dramatic advances is that they largely entailed people collaborating remotely, leveraging technology in different ways, and being bolder with innovation, automation, and digitization than ever before. For decades, physical proximity has been considered essential to successful innovation. In an influential 1977 book, management professor Thomas Allen described a strong negative correlation between physical distance and frequency of communication, finding that people are four times as likely to regularly talk with someone six feet away from them as with someone 60 feet away, and people almost never communicate with colleagues on separate floors or in separate buildings. 4 4. Thomas J. Allen, Managing the Flow of Technology, Cambridge, MA: MIT Press, 1977.
This proximity mantra guided everything from office layouts to urban planning. Cities such as Boston (with many counterparts around the world) have tried to fuel innovation by establishing districts where academia, research organizations, start-ups, and investors work side by side in purpose-designed “innovation ecosystems.” 5 5. Carmelina Bevilacqua et al., Place-based innovation ecosystems: Boston-Cambridge innovation districts (USA), Joint Research Centre, 2019. Locating problem solvers together to encourage creative collisions of ideas, experimentation, and informal collaboration is also core to one of McKinsey’s original eight essentials of innovation.
It’s likely that flexible work and workplaces are here to stay, especially for organizations seeking to maintain or accelerate this elevated pace of innovation. More than half of corporate and government employees say they would like to work from home at least three days per week, and the number is even higher for innovation talent, such as programmers. 7 7. “For programmers, remote working is becoming the norm,” Economist, August 11, 2021. Location flexibility has become a de facto expectation for the latter group. Rather than seeing this as an obstacle, organizations seeking to innovate are doubling down on the benefits that new approaches to innovation present.
Diversity and inclusion
Innovators recognize that increased diversity and greater inclusion, both within teams and at the leadership level, produce more and better innovation results. A recent McKinsey study found that more ethnically and racially diverse companies outperform their less-diverse peers by 36 percent when it comes to financial targets. As a result, innovators are tapping virtual work to attract more specialized and diverse talent and are building more inclusive workforces. One recently launched start-up that rapidly achieved unicorn status shifted to a virtual-first model, recognizing that the specific innovation talent its business required wasn’t available in any single major city.
Innovators have also recognized that virtual teams, especially when managed effectively, can avoid unnecessary distractions, experience more effective and uninterrupted workflow, and achieve productivity gains. In a 2021 study, 83 percent of employees working remotely agreed that their homes enabled them to work productively—a higher proportion than the average office (64 percent) and even outstanding workplaces (78 percent). 8 8. “Workplace 2021: Appraising future-readiness,” Leesman, 2021. One innovative technology company recently started “time zone stacking,” the practice of strategically structuring virtual teams to positively leverage time differences and further accelerate innovation efforts.
Perhaps paradoxically, an adjustment made because of the COVID-19 pandemic has enabled many organizations to get physically closer to their customers, as hiring is no longer tethered to geographic location. One global payment platform, for example, launched a remote engineering hub during the pandemic, hiring engineers from a range of locations and cultures. One year into the initiative, the company reports feeling “closer to customers—because we literally are.” Similarly, a government agency now describes being more citizen-centric thanks to hiring employees who live and work across the country, not just in the capital city.
Proximity to the customer, instead of to a physical office, can help organizations’ innovation talent avoid the corporate echo chamber and identify and test new ideas faster. Getting closer to target communities is also easier than ever thanks to the proliferation of coworking sites and other “third places” to work and connect.
Proximity to the customer, instead of to a physical office, can help organizations’ innovation talent avoid the corporate echo chamber and identify and test new ideas faster.
The pandemic has made clear that lack of physical proximity need not hold back innovation—in fact, it can fuel it—but this is not a new phenomenon. Although it may come as a surprise to some, boldly innovating through remote collaboration has been a fixture in the scientific community for decades. In the 1980s, researchers adopted a way of working called the “collaboratory,” a virtual space where scientists interact with colleagues, share data and instruments, and collaborate without regard to physical location. Breakthroughs achieved through virtual collaboration include the Human Genome Project and the ATLAS project at CERN, which involved 1,800 particle physicists across 34 countries.
More recently, innovators outside the science sphere have embraced the approach. Cryptocurrencies and metaverse platforms were largely developed through decentralized collaboration involving people around the globe. Pandemic-related changes simply expanded on the model rapidly, notably in the record-breaking development of the COVID-19 vaccines and a slew of new company and product launches over the past 24 months.
If the age of assuming that innovation requires physical proximity is behind us, with innovative companies’ full embrace of virtual teams and the role of technology, what comes next? One executive who leads a 50-person innovation group as part of a 15,000-employee organization said, “The pandemic made us realize that we never needed a swanky and costly innovation studio to do our work. What we want is community.” His plans are to make virtual work permanent, with monthly or quarterly in-person gatherings to strengthen trust, friendship, and connection.
How many more innovators will adopt this approach? Will bringing together the best of remote practices and the best of in-person experiences accelerate innovation even further? Let’s start experimenting to find out.
This content was originally published here.