For years, a global soda company struggled to perfect the bubble size in its carbonated drinks.

Despite significant internal R&D efforts, the breakthrough came from an unexpected source: a metals expert in India specializing in industrial foaming techniques. By reframing the challenge and seeking external expertise, they found a solution they would have never discovered on their own.

This story highlights a common issue for corporate innovators. Despite having smart people and vast resources, organizations often get stuck. They define challenges too broadly, solve the wrong problems, or stay within their comfort zones.

Real breakthroughs emerge when we define challenges clearly and invite fresh perspectives. That’s the essence of Challenge-Driven Innovation (CDI): a structured approach that breaks down ambitious goals into solvable problems and invites the right people to contribute.

At a recent Innov8rs Learning Lab, Bea Schofield, an innovation leader at Lloyds Banking Group, shared a practical, experience-based guide on running effective, challenge-driven innovation within large organizations. 

Bea Schofield

Chief Technology Office Innovation Lead at Lloyds Banking Group

What Is Challenge-Driven Innovation (CDI)?

Challenge-driven innovation (CDI) is a structured method for solving complex problems by reframing big goals into specific, actionable questions.

As Bea explains, “Challenge-driven innovation is about taking what we think of as pretty lofty goals and breaking those down into more portable units of work that are more specific, focused challenges that we can actually solve.”

Rather than diving into solutions too quickly or staying within the usual circles of expertise, CDI encourages teams to take a step back and carefully define the problem first. This process makes innovation more repeatable, scalable, and impactful, especially when diverse perspectives are brought in to tackle clearly framed challenges.

The real power of CDI lies in its focus on clarity. “If you ask a very broad question,” Bea notes, “you’re going to get a very broad spectrum of ideas. Most of them will be irrelevant to what the organization actually needs.” By contrast, well-defined challenges create a foundation for effective ideation, evaluation, and execution.

A useful example comes from the UK Ministry of Defence. Instead of asking the broad question, “How can we become more sustainable?” they focused on a specific issue: the waste created by old military uniforms, which policy dictated could not be recycled. By reframing the challenge around uniform reuse and recycling, they enabled practical solutions aligned with policy change and environmental goals.

In short, CDI helps organizations cut through the noise of vague ambition by asking sharper questions that the right people, inside or outside the organization, can actually answer. It’s a step-by-step process that helps organizations move from problem identification to real-world implementation.

CDI follows a structured process. It begins by identifying a meaningful goal, such as a strategic priority, an operational inefficiency, or an emerging trend. From there, teams define the challenge as a clearly solvable problem statement.

Once the challenge is framed, they determine whether to source ideas internally, externally, or through a combination of both. Ideas are then evaluated against defined criteria to identify those that are both feasible and have a high impact. Finally, selected solutions must be integrated into the organization and implemented with measurable outcomes in mind.

By following these steps, organizations can create a robust innovation framework that evolves in line with their strategic needs.

From Lofty Goals to Solvable Challenges

Many organizations fall into the trap of asking grand, vague questions that invite noise instead of insight. CDI identifies high-impact goals and translates them into defined problem statements that guide ideation and decision-making.

At Lloyds, for example, a broad strategic goal around supporting net-zero initiatives for SMEs became a focused question: how might we provide tools that help SMEs make better decisions about investing in a net-zero transition? That level of clarity matters for inspiring ideas and implementing them.

Bea uses the McKinsey Horizons framework to identify challenges. Horizon 1 addresses immediate problems, Horizon 2 tackles strategic objectives too large to solve in one go, and Horizon 3 explores emerging trends and transformative technologies. Balancing challenges across these horizons ensures a comprehensive innovation strategy.

Finding and Framing the Right Challenge

For CDI to deliver results, it starts with identifying the right problems and framing them in a way that makes them solvable.

Bea emphasizes that some of the best challenges come from places organizations often overlook: failed projects, stalled initiatives, or areas where strategic ambitions haven’t translated into action.

“Some of the best challenges come from failed projects. People are usually happy to tell you what didn’t work,” she notes.

Listening closely to those informal signals can uncover pain points worth solving.

Research and internal insights can also provide a goldmine of challenge opportunities. At Lloyds, one study revealed that most UK SMEs lacked a net-zero plan. Not for lack of interest, but because they felt overwhelmed and underinformed. That insight helped shape a focused challenge: how might we provide tools that enable SMEs to make better decisions about investing in a net-zero transition?

To find high-value problems, Bea recommends scanning across time horizons:

  • Immediate operational issues (Horizon 1)
  • Strategic priorities that feel too big to tackle all at once (Horizon 2)
  • Emerging trends and shifts that signal future relevance (Horizon 3)

Once potential challenges are identified, the next step is to prioritize them. Not every problem is worth turning into a CDI initiative. Bea suggests asking:

  • Is this challenge aligned with strategic goals?
  • What is the potential impact if we solve it?
  • Are competitors already acting in this area?
  • What happens if we don’t address it?

High-impact, strategically relevant, and time-sensitive challenges should rise to the top of the queue. However, it’s not just about what seems urgent. The organization must also be willing to act. “You’re going to get ideas that are completely unrelated to what the organization actually needs if your challenge is too broad,” Bea warns.

Once the right challenge has been selected, careful framing becomes critical. Bea uses three key questions to guide the early definition phase:

  1. “What could we do?” to explore broad possibilities
  2. “How can we…?” to refine feasibility and constraints
  3. “Who can we do this with?” to identify potential partners, both internal and external

Writing a good challenge, however, is more than posing an interesting question. It’s about packaging the problem in a clear, motivating, and solvable way.

Bea applies the LASSO framework to ensure every challenge is well-designed:

  • Limited scope: Challenges must ask for one clear outcome, not five. “Narrow challenges yield better solutions,” Bea says. Broad, unfocused challenges lose engagement. “It needs to be focused and time-boxed (ideally, a month) to keep momentum.”
  • Actionable: The organization should be ready and able to act on the solutions. Challenges should align with the organization’s capabilities and be realistically solvable.
  • Specific: There must be enough context and constraints to guide problem-solvers. “Participants need clear requirements to develop meaningful solutions,” Bea emphasizes.
  • Supported: Challenges must align with strategic goals to maintain momentum and be tied to a priority area with stakeholder buy-in.
  • Owned: Finally, they must be owned by someone who’ll see them through implementation.

In practice, well-framed challenges also explain what has been tried before, what is in or out of scope, and what success looks like. And especially when engaging external participants, the language must be accessible. “You’re writing for someone who’s not in your industry,” Bea reminds us. “Cut the jargon.”

Ultimately, the challenge definition is where many innovation efforts either take off or stall. It’s the moment when clarity replaces confusion, and vague ambition becomes a problem someone can solve.

Internal vs. External Crowds

Internal teams know the organization and its constraints, but they may still succumb to groupthink. External solvers, however, bring novelty and objectivity. They are free from internal biases, allowing for more creative solutions. Bea calls this “long-tail problem-solving,” where unconventional contributors, such as gig workers, retirees, and even teenagers, bring fresh insights. In fact, 80% of the people who solved challenges through Bea’s open innovation platform didn’t fit the hiring profile of the company that posted them.

Running parallel internal and external challenges can be illuminating. John Lewis, for example, once asked staff and customers the same question and compared results. Differences helped reveal bias and blind spots.

The key is understanding incentives. Internal employees may be motivated by recognition or aligning with the mission; external participants often want to learn or test their skills. But they all need to know their contributions will be taken seriously.

While financial rewards attract participants, Bea notes that many solvers are drawn to intellectual stimulation and learning opportunities.

Managing Intellectual Property

Sourcing ideas externally raises valid concerns about IP. Bea’s advice is simple: set expectations upfront. CDI terms should outline submission requirements and IP transfer processes.

Be explicit about what happens if a submission is selected, whether you use a third-party platform or your own. “You need a clear challenge contract,” she says. “And don’t forget that you can often anonymize the challenge. If it’s written well, the solver doesn’t need to know who’s behind it.” Bea emphasizes addressing all considerations upfront to build trust and streamline collaborations.

Making CDI Sustainable

What makes challenge-driven innovation stick isn’t the novelty of crowdsourcing. It’s the discipline of turning ambiguous goals into questions people can actually answer and building a repeatable process to do it again and again.

That means cultivating a culture where unsolved problems aren’t hidden. “You wouldn’t believe how many organizations won’t let people use the word ‘problem,’” Bea says. “But that’s where the real opportunities are.”

It also means ensuring challenges don’t die after ideation.

“Don’t use this just for employee engagement,” she warns. “You’re going to deter people from ever submitting ideas again if they spend time on something that no one intended to solve.”

Challenge-driven innovation provides a practical and repeatable way to tackle complex problems and drive meaningful change. To make the most of CDI, organizations should focus on asking better questions, fostering diverse participation, and creating transparent processes for turning ideas into action. Bea sums it up nicely: “Innovation thrives on diverse perspectives and well-defined problems.”

Challenge-driven innovation helps organizations unlock both. Just make sure someone is ready to act when the answers come.