As an organisation, Telefónica stands out for its ability to continuously transform.
Since its foundation, the business has grown with many of society's most impactful innovations, including commercial telephony, computer networking, cellular communications, the internet, and the smartphone. It stands today as a €50 billion communications giant with operations around the globe. Its services include mobile, fixed-line and broadband, as well as a wider range of digital solutions, covering video, data analytics, the Internet of Things (IoT) and connected home, cloud, and communications services.
Innovation has long been a part of Telefónica’s DNA. In 2011, Telefónica created a separate digital unit with the goal of protecting its operating businesses (OBs), driving new value through digital products, and building capability and positions of power in digital markets. Back then, this was a groundbreaking move. The digital unit has since been re-integrated into the core Telefónica business, but the organisation maintains its focus on disruption and innovation.
With a background in entrepreneurship, David del Val joined Telefónica over ten years ago. He now leads Core Innovation for the global business and has played a significant role in developing groundbreaking solutions across the network, IoT, and cloud. We sat down with him to discuss Telefónica’s innovation strategy and the impact of the COVID-19 crisis, current trends in innovation, and how to build a culture of innovation.
Q: What does innovation mean to you?
A: Innovation is the process of taking new ideas and creating new products and services to generate sustainable revenue and drive growth. Companies typically go through three phases of maturity on their innovation journey:
- Learn: In this phase, innovation is seen as a solution to particular business challenges, or even as a PR activity with little impact on the business. It is not well understood, and there is a good chance that your mature, more established business will kill early-stage innovation before it develops, either accidentally or deliberately.
- Develop: Innovation is a top priority for the business. To help incubate it and give it the freedom to operate and grow under distinct governance with a unique way of working, companies often establish a separate unit with dedicated resources and a ring-fenced budget. It’s during this phase that partners can help drive innovation, and companies often launch start-up incubation programs.
- Embed: Innovation is everywhere and ingrained in what you do. There is no need to separate the unit because it is embedded in every department across the organisation.
Q: At Telefónica, you’re looking at both incremental innovation and more radical, transformational innovation. What is your short, medium, and long-term innovation strategy?
A: At Telefónica, we innovate in five main ways.
We innovate to deliver revenue in the short term (zero to one year) in the local Operating Businesses and the global Enterprise and Consumer units. We have a Core Innovation function that works for the medium term (one to three years), and a third unit called Alpha that focuses on the long term (three to five years). We also have two core functions that support innovation: Wayra, our global start-up incubator, and Telefónica Ventures, which makes strategic investments in external businesses to support our value chain.
Five Areas of Innovation at Telefónica:
Operating Businesses (OBs) and Global Enterprise and Consumer Units:
In the OBs and the global units, we are focused on attacking the open issues in our industry and having a material impact in the current year. It is about ‘jam today and not jam tomorrow.’ You could see this as our ‘business as usual’ innovation.
In the global units, our focus is on creating products and services around four key areas:
- The home
- IoT and big data
Delivering innovation within the OBs requires continuous transformation.
To go ‘above and beyond’ for our customers, we need to do more than merely improve the speed and capacity of the network. Core Innovation is focused on innovating products and services around our core assets. We are building the pillars for future growth and significantly changing Telefónica’s ecosystem.
Our strategy is focused on innovating where we have the ‘right to play.’ This strategy means going after innovations where we have differentiation based on our assets and our people.
We innovate by applying our existing competitive edge. This involves leveraging a number of our key assets, including our network and infrastructure, our customer relationships, and our data.
The outputs of this unit are blueprints of new businesses with product-market fit that can be readily scaled by the global units across our geographies.
This is our ‘moonshots’ division that looks beyond three years. It has the potential to disrupt the entire industry. Yet, given the timeframe and the pace of change this is, of course, highly uncertain.
Here, we work on projects that are on the edge of what is technically possible but have the potential to pose massive-scale societal impact and grow into new businesses worth hundreds of millions of Euros.
The focus of Wayra is ‘turning start-ups into scale-ups.’ Wayra is our global start-up programme that focuses on scouting and investing in small companies that can provide innovative services to Telefónica, or add their product to our portfolio of solutions that can generate new sources of short-term revenues. We have more than 600 start-ups in Wayra.
We are increasingly selective about the start-ups with which we collaborate. Previously, we might have partnered with a start-up based on the novelty of its products, but now our focus is on partnering with businesses that align well with our core business strategy. The key metric we use to assess a partner is ‘the fit,’ the amount of revenue, and the number of efficiencies we can generate by partnering with that start-up.
One of our industry’s biggest issues is a combination of flat revenues and costs that are not coming down because we are dependent on a handful of suppliers for the end-to-end network infrastructure and related services. This combination means that driving profit growth is very difficult.
Given the size and scale of our current suppliers, it is challenging for new competitors to enter the market as they lack end-to-end solutions and simply cannot compete. In response to this challenge, we are trying to split the network into its component parts by using general-purpose hardware and open-source software. This approach breaks up demand and allows smaller suppliers to provide different components. It gives us access to the latest innovations for each element, and the flexibility to replace any supplier with any new competitor that offers better performance.
We then look to scale these smaller suppliers, which signals demand and encourages other telcos to invest, thus driving the price down.
We’ve invested in firms like Altiostar, Quantena, and other Wi-Fi suppliers, who serve us all over the world.
Q: How has the COVID-19 crisis changed your innovation strategy and related priorities?
A: The COVID-19 crisis has shocked society and forced us to enter into a new world. Whether we end up better off or worse than before depends mostly on how we react as a society. Working at Telefónica, we realise that we can be a positive actor for change. While other businesses will take care of the health and economic challenges, we can use our expertise in communications to help build a new world. Today’s climate creates a massive opportunity because in just a few months, consumers have needed to master all kinds of digital tools. Businesses that lacked digital maturity before the crisis have been forced to get up to speed quickly.
We are now focusing on the new themes that are here to stay. In the home space, we are exploring entertainment-centric connectivity, technologies to live safer lives, the future of (tele)work, and virtual social lives. In the enterprise arena, we are looking with new eyes at industry X.0 and remote manufacturing, data residency, supply chain resilience, and the remote operation of critical systems. And, across business and consumer segments, we are intrigued by new forms of media production that don’t require the entire crew to be physically located in the same place.
All these trends pose great challenges that require ingenious connectivity solutions. It is a privilege to work for a company where we can contribute meaningfully and positively to this time of change.
Q: What do you see as a crucial area for innovation within the next three to five years?
A: I’m very excited about edge computing and the potential we have to innovate around our core assets to deliver it. We have the opportunity to provide better internet to our customers, generate significant revenue, and become a key player in the space, given the importance of our networks in the value chain. Location data, cloud, and network infrastructure are key enablers for edge computing, and we already own these assets. In other words, we have a strong right to play.
Q: Do you see greater telco innovation opportunity in the Enterprise or Consumer space?
A: There is a compelling opportunity to innovate in the Enterprise space for two key reasons:
- First, businesses are increasingly dependent on the cloud. Artificial intelligence (AI) and robotic process automation require higher quality wireless networks to operate effectively. Our 5G network and our play in the edge computing space will enable us to provide a more stable and effective network for businesses.
- Second, in the Consumer space, regulatory constraints often block innovation. The current regulations favour the major technology firms which largely fall outside of these constraints. This pressure limits our rate of innovation and, in turn, our ability to scale.
Even with these factors at play, we can still leverage our strong position in mobile and the home to invent new services that combine our network capabilities and create meaningful consumer experiences. For instance, TV is a great place to create new services when you own the network, as it covers the gaming space.
Q: How do you inspire a culture of innovation in an organisation built on an ethos of low risk? And how did you manage to bring people on the journey?
A: As an innovation function, we are like the rest of the business in that our goal is to increase revenue and drive efficiencies. The only difference is the subject matter. To establish a successful innovation function, you need to have:
- A dedicated team: Your team should be full of people who are open to innovation. The team must function like an oasis that nurtures a ‘fail fast’ culture.
- Support from business leaders: Support is crucial to ensure the rest of the business rallies behind the innovation function and sees it as a valuable entity that contributes to business growth. At Telefónica, we are extremely lucky to have fantastic sponsorship from the top.
- Patience: As soon as a company faces any share price pressure, innovation is usually one of the first departments that has its budget questioned. Resilience in the face of this pressure is key.
Once you have these three elements in place, it’s all about taking the business on a journey. There are two ways to approach this kind of transformation. The first is a top-down approach where change is delivered through major programmes. The alternative is to kick-start transformation at the grassroots level through a ‘point of light.’ We took the latter approach with Lean Start-up. As a small group, we began to transform our ways of working to deliver innovation more effectively. People across the organisation noticed this point of light and became interested in what we were doing.
The cultural chasm is the greatest barrier and threat to innovation. The teams launching innovation projects must collaborate as early as possible with the business teams that will eventually deliver their products to the market at scale. You can’t produce a brand-new product and expect a sales team to immediately take it to market, as they’ll inherently be unsure of the product and its return.
Q: What skills do you look for in your innovation teams?
A: I look for five key characteristics in my teams:
- Intellectual curiosity: This is very important to me. My team members need to be curious about more than just their area of expertise.
- Finding comfort in risk: The level of risk we deal with every day is extremely high. Innovation feels like you’re running towards a cliff edge, faster every day. My team members need to be comfortable with that feeling and thrive under pressure.
- People who think and deliver: On my team, you can’t just be a futurist. When we are developing a product, you need to see it, build it, and then be able to deliver it.
- Smart, passionate, and expertise-led: I look for people who are experts in their field, be it technology, business, or customer insight. I also seek those who are passionate about what they do.
- Collaborative by default: This may seem to be an obvious trait, but most people are accustomed to working in businesses that are divided by functional areas, so it’s not always second nature to collaborate across functions.
These traits are complementary, yet diverse, so finding them all in one person is incredibly difficult. Fundamentally, you need to have a team full of people who are focused on the future, but who create products that perform in today’s market—in other words, you need to find entrepreneurs.
Q: Can you build a culture of innovation with homegrown telco people, or do you need to hire in digital genius?
A: You need a blend. At Telefónica, we are passionate about using our internal expertise to innovate. When we are looking to innovate around a particular area, we run ‘innovation calls’ and ask people from across the organisation to pitch their ideas in front of a jury. This approach has been incredibly successful as we can leverage expertise within the business to innovate on new products. Anybody within our firm can be an innovator, yet the key to success is shifting the mindset of the people in the organisation from ‘achievers and performers’ to ‘pioneers and explorers.’
However, one of the obstacles to innovating with homegrown talent is that these employees are the product of the siloes that the organisation reinforces. To encourage people within your organisation to innovate, you need to help them break free of these structures and embrace collaborative working.
While we build and leverage internal expertise as much as possible, it’s essential to keep fresh thinking within the team. Hiring digital genius is part of that. We have made several critical leadership hires from the market in recent years to supplement the talent we already have internally.
As an aside, our team’s current attrition rate is 15 percent (compared to one percent when I joined 12 years ago), which is a healthy balance for us.
Q: To quote Ian Small (former Chief Data Officer, Telefónica), ‘If you’re a company the size of Telefónica, you can’t be better at being a start-up than a start-up can be.’ What aspects of start-up culture do you embody within your innovation function?
A: We are not a bank, and we ruthlessly prioritise. I get the most out of my team when team members are competing with one another.
Product teams are given a limited amount of funding and resources. They are then tasked with generating proof points and evidence of market traction needed to prove the case for further investment. They compete against each other for this funding.
At each stage gate, we tend to see significant pivots in the product’s development because the teams have learned a vast amount, and with very little cash and time investment.
North Highland’s Innovation Cycle:
Scaling a product requires integration between product development and innovation scaling teams. Our approach drives customer and commercial focus at every stage of the product lifecycle.
However, a balance is required. Apply too much commercial pressure, and you risk losing the richness of research and product development; not enough, and you risk developing a product function focused on academic research with limited ROI.
The best way to ensure you are taking a balanced, holistic approach to product development is to embed key stage gates during the development of emerging products. These stage gates should be sequenced every six to 12 weeks to ensure failing products are identified and either pivoted or killed with the decision-making process at each stage gate.
Q: How would you design an innovation function if you were building it from the ground up?
A: First, define your strategy. This strategy will be your North Star to ensure that you are driving towards a defined objective.
Second, consider your operating model. When you design your operating model, think about what you do best. Think about your key assets and the skills and capabilities required. This effort will help define where you have the right to play. You need to design an organisation that enables effective innovation.
Third, put the processes and governance in place. Your innovation function may need to be ring-fenced or segregated as it will require a different way of working than your core business—or at least in the early days before it becomes part of everything you do.
And finally, you need to bring your innovation function to life with the right people and blend of internal and external talent.
Leaders across the media, entertainment, and communications sector are under increasing pressure to embed innovation as a core component of their organisations. David del Val’s insights suggest that while the telecoms sector shows tremendous potential to innovate, competing in this saturated market requires the right structure, culture, and people to drive sustainable growth.
North Highland believes that businesses made up of people with the right blend of capabilities and conviction can do amazing things. North Highland’s People & Change practice looks at all areas of people-centric transformation, from strategy and operating model development, through to change, process automation, culture, high-performing teams, and employee analytics. Let us help you perfect your organisation, stimulate talent potential, and inspire transformation through innovation.
About David del Val Latorre
CEO - Telefónica Research and Development
David del Val Latorre is Director of Core Innovation at Telefónica and CEO of Telefónica Research and Development. He is responsible for the creation of new internal products and services for the group. In this role at Telefónica, he has pioneered the introduction of new paradigms such as artificial intelligence, edge computing, IoT, and big data.