You may not know the design firm IDEO (pronounced EYE-dee-oh), but chances are you know its work. If you’ve used an Apple mouse (IDEO fashioned the company’s first, in 1980), swept with a Procter & Gamble (PG) Swiffer (it collaborated on the hit), or even stood in line at an airport recently (the firm has worked with the Transportation Security Administration to make the process friendlier), you’ve felt the legacy of David Kelley. He founded IDEO in Palo Alto in 1978 and built it into a global operation with 600 employees and $130 million in revenue (he declines to divulge profits). IDEO brings a human-centered approach to products, services, and organizational concepts for the likes of Samsung, Eli Lilly (LLY), and Bank of America (BAC). Kelley, 62, is also Stanford University’s resident design Yoda. The avowed “variety junkie” is proud that IDEO does everything from designing the ideal home for wounded soldiers to helping Elmo teach kids good behavior via a mobile app. His story:
I grew up in Barberton, Ohio, where my father was an engineer at Goodyear and my mother was a housewife. It was a typical Midwest upbringing, and I wasn’t really into college preparatory stuff. What was exciting to me was taking apart the car or the washing machine.
In 1973, I got a BS in electrical engineering from Carnegie Mellon University and went to work for Boeing (BA) in Seattle, designing things for the interior of the 747. When I found out about the Stanford Product Design Program, I became interested in the human-centered side of technology, but didn’t think I’d get into the program. So I moved to Dayton and worked for National Cash Register (NCR), designing new banking terminals, until I found out I was admitted.
Going to the Stanford program was a perfect fit. I love trying to understand what people want, what they value, and designing something for them. I graduated in 1977 with my MS in engineering and product design, and discovered that I really liked teaching. In 1978, I went to my mentor, professor Bob McKim, and said I wanted to keep teaching and I wanted to start my own company. He introduced me to Dean Hovey, who was studying at Stanford, and we started a company called Hovey-Kelley Design. A couple of professors who had their own companies in Silicon Valley gave us our first projects — designing a reading machine for blind people and a medical device called a differential [blood] cell counter.
Soon after Dean and I started our company, another Stanford colleague introduced us to Steve Jobs. We ended up doing a lot for Apple (AAPL). They were technologically focused, and we focused on the human side. We’d ask [with the first Apple mouse], should you use the mouse with your fingertips or slide it like a bar of soap? Once we started doing Apple products, people wanted to know who we were.
MORE: Samuel Adams’s Beer Revolutionary
Back then, we were paying about $300 a month for three offices. I remember flinching when I signed a 10-year lease because I still owed on student loans and I had a negative net worth. I had no interest in calculating revenue, and still don’t. We charged $25 an hour and had six employees. Half the time we worked, and half the time we didn’t. All I cared about was how much we were paid per hour, and if we had enough to keep everybody busy.
In 1980, Dean decided he didn’t want to be in the consulting business anymore, so we changed the name to David Kelley Designs [DKD] in 1981. To me, the thing that’s cool about the consulting business and design is you learn so much from working with different companies. I was so interested in designing things and had no idea business would be driving the bus. For example, in the beginning, we’d design a chair and not think about how it would have to be repaired or serviced until later. Now we look at the whole picture.
Like everybody, we had our failures. In 1984 we started a company called Enorme, and got Ettore Sottsass, an Italian designer, to design a telephone that we’d then sell. We got investors to give us hundreds of thousands of dollars. The design was admitted to the Museum of Modern Art, but we picked a distributor that sold only through museums. So we had a business idea but didn’t understand the value proposition to the consumer. I ended up with a lot of unsold telephones. You can still find them on eBay once in a while.
During the days of DKD, we had the good fortune of working with both the best VCs in the Valley and the most exciting up-and-coming entrepreneurs. We got the idea of raising seed venture capital so we could fund the early stages of projects and then introduce the ideas to funding sources. We called this incubator Onset. Although I’m no longer involved, it’s still quite successful today.
MORE: Banana Republic – khaki into gold
By 1991 our clients were asking for an integrated offering of design and engineering, and we were collaborating with two firms to fulfill that demand. Merging with them was the best way to help our clients. We had an all-company contest to come up with a name, and we all resonated with the word “idea.” “Ideo” was a prefix, and we toyed around with calling ourselves Ideo-Space, and other words that sounded like ideology, but IDEO stuck on its own.
We have a methodology called “design thinking” that results in innovation from a human point of view, and the companies that were willing to take risks gave us a chance. One of the IDEO designs I’m most proud of is the Heartstream portable defibrillator, which we did in 1996. We designed it so that a naive user could pull it off the wall and listen to instructions on how to save a patient’s life.
As time passed, we moved from product work to what I call services, experiences, and environment. In the early ’90s companies started asking us how to help transform and design their organizations to foster greater innovation. We call it organizational design. Our biggest project now is transforming the education system of the country of Peru. We’re designing new schools, the curriculum, and making sure the finances work.
Our real impact on the business world is that the design-thinking process helps companies innovate. We try to instill in our clients the belief that they can routinely innovate. We hold their hands, and pretty soon they see they can do it themselves.
MORE: How Panda Express brings Chinese food to the mall
I stepped down as CEO in 2000. I was 50 and decided it was time to let someone else run things. I’m now the chairman, which allows me to concentrate on the d.school [the Hasso Plattner Institute of Design] at Stanford, which was founded in 2005. I can ride my bike between IDEO and the campus. I’m more in charge of the general strategic direction and culture at IDEO, and I teach five classes a year, which requires detailed involvement.
I was at my daughter’s school in 2007 when the doctor called and said I had throat cancer, with a 40% chance of survival. It was a year of chemotherapy and surgery. When I got through the whole thing, I decided that helping to unlock the creativity of individuals and organizations is my life’s focus. I’m doing this through the d.school, IDEO, and a book that I’m writing with my brother [Tom Kelley, a partner at IDEO] called Creative Confidence: Unleashing the Creative Potential Within Us All, which will be published this October.
In 2007 we also started the process of changing the ownership of the firm so that senior leadership had greater ownership. We now have completed that process.
I’m happy that I’ve been able to build this stage and let other people perform on it. Nothing in life is done with one side of the brain. Everything has an emotional content and a pragmatic aspect. CEOs may think they’re opting out of being creative, but all decisions have a human element to them. So we teach that the most important thing in business is to be human-centered.
Do stuff rather than plan. Experiment, let it fail, and do it three or four times. You can see our human-centered design kit online, so everyone can adopt it and make an impact in their worlds.
Play, and look at things with a child’s mind. Adults do things out of habit. If one of our teams gets a project about nostalgia, the team might get an Airstream trailer and live in it outside the company while working on the project to inspire people.
Find your fit in life. So many people have jobs that look good but feel bad. They did it because of their parents or because it looks good to society. People who are happiest in life fit day to day. Don’t stop until you find that.
This story is from the April 29, 2013 issue of Fortune.