Is Your Organization Diverse Enough to be Truly Innovative?

Ambitious Leadership
workplace diversity innovation

Can labor laws affect innovation?

Many people would shrug off this question as frivolous. Why on earth would such a dull thing like a labor law have anything to do with the exciting act of creating something new and disruptive?

Have you heard about employment nondiscrimination acts (ENDAs)? These are U.S. state-level laws that prohibit discrimination based on sexual and gender identities. A 2016 study showed a significant increase in the number and quality of patents at firms headquartered in U.S. states that have passed ENDAs compared to firms headquartered in states that have not. The result was more pronounced for states with a large LGBTQ population and for firms in human capital-intensive industries, such as technology and finance.

The above study does not necessarily suggest that LGBTQ communities are intrinsically more innovative. Instead, it implies that innovation requires a certain degree of individual freedom, including the freedom to live and work openly and safely without being discriminated against for any reason.

It also highlights an important point: having a diverse and inclusive workforce that reflects the rapidly changing social fabric of our society is not only the ethical and socially responsible thing to do; it is also good for organizations’ bottom lines.

The Importance of Diversity: Only Facts

The idea that a group of people with diverse professional experiences would be better at solving complex problems than a homogeneous group is nothing new. However, a growing body of evidence now shows that socially diverse groups (that is, those with a diversity of race, ethnicity, gender, and sexual orientation) are more innovative than socially homogeneous groups:

  • Boston Consulting Group (BCG) surveyed the innovative potential of 1,700 American firms of different sizes and locations. As the indicator of innovation, BCG looked at the portion of a firm’s revenue from products and services launched within the last three years. BCG found that firms with above-average diversity produced a greater proportion of revenue from innovation (45%) than firms with below-average diversity (26%).
  • A study of 4,277 companies in Spain showed that the more women they had on staff, the more likely they were to introduce innovations into the marketplace.
  • Data collected at 7,615 companies in London, U.K. demonstrated that businesses run by culturally diverse leadership teams were more likely to develop new products than those with homogeneous leadership.
  • According to a 2013 report by the Center of Talent Innovation, having a member of an innovation team of the same ethnicity as a client increased (by 150%) the team’s ability to understand the client’s needs, a scenario that could make the difference between winning and losing a new business.

Not surprisingly, the diversity-driven improvement in innovation outcomes translates into better overall financial performance. Consider this:

  • A 2015 McKinsey report on 366 public companies in the U.S., Canada, U.K., Brazil, Mexico, and Chile found a statistically significant correlation between the number of women and minorities in companies’ upper ranks and their financial achievements.
  • Another analysis performed by McKinsey shows that the benefits of diversity in the workplace originate at the very top of the corporate world. McKinsey analyzed the composition of executive teams in more than 1,000 firms across 12 countries and found that those in the top quartile for ethnic and cultural diversity were 33% more likely to outperform those in the bottom quartile. The analysis also showed that firms in the top quartile for gender diversity were 21% more profitable than firms in the bottom one.
  • Credit Suisse Research Institute found that firms with one or more woman board members had a higher average ROI and better average growth than firms with male-only boards. Of note: 77% of S&P 500 company boards are more than two-thirds male, and only 2% have more than 50% women members.
  • Research by Deloitte shows that organizations with inclusive cultures are six times more innovative and agile, eight times as likely to achieve better business results, and twice as likely to meet or exceed financial targets than organizations with less diversity in the workplace.

Why Diverse Teams Are More Innovative?

What are specific mechanisms by which diversity affects innovation? A 2014 article in Scientific American, “How Diversity Makes Us Smarter,” by Katherine W. Phillips began unraveling this fundamental issue.

It’s easy to understand how the diversity of expertise and experience would spur innovation. In today’s business environment, meaningful innovations happen at cross-borders of different disciplines. Having teams composed of experts in several relevant fields becomes a key prerequisite for any successful innovation project, be it a new product or a new way to deliver healthcare.

But why is the diversity of race, ethnicity, gender, and sexual orientation equally important? Because people who are racially and gender diverse bring to the table their unique information, perspectives, and experiences. This diversity of information creates a positive tension and increases creativity within a group. Moreover, simply interacting with individuals who are different from them, forces group members to reassess their own assumptions and those of others.

That said, working in diverse groups isn’t easy. It requires individuals to adjust their own behavior and working styles, something that doesn’t come easy to many. But a better innovation product will eventually emerge from this hard work. Who said that innovation was easy anyway?

Are There ‘Shortcuts’ to Diversity?

Building diverse organizations takes time. However, there are a few approaches organizations can test to leverage the existing diversity of their employees.

  1. When entering a new segment of an existing market or a completely new market, create a market research/innovation team with a demographic composition closely resembling the one of the target client population.
  2. Maximize the benefits of so-called cognitive diversity by bringing together people with different styles of thinking and different viewpoints. Adding the element of cognitive diversity to more traditional approaches to diversity can bring organizations to a new level of innovation power.
  3. Master the technique of approaching large and diverse groups of people through crowdsourcing. Crowds assembled by established open innovation platforms, such as InnoCentive or HeroX, represent people of varying ages, genders, educational and professional backgrounds, geographies, and cultures. Crowds are as diverse a workforce as one could only dream of having in any organization – and they show the value of diversity and inclusion by providing superior solutions to the world’s most pressing problems.

Talk to Change Logic consultants to learn more about how your organization can maximize its innovation capabilities.