A recent Harvard Business School study documented that “leading digital companies generate better gross margins, better earnings and better net income than organizations that have not adopted a digital-first business growth strategy.
A recent IBM study concluded that “no business can remain relevant by making tweaks. The only way to stay ahead of disruptive change is to embrace it, which means being able to develop and release new products and services within weeks or even days.”
One of the major implications of the unprecedented level of digital disruption is that companies must find ways to get a 10x compression in their product/application development release cycles. Simply put, how can they go from 6 to 12 months to 6 to 12 weeks to 6 to 12 days. Granted, not all releases have to get churned out in days, but those products and applications that are essential to delivering compelling and enduring customer experiences must find a way to meet this new compressed time standard.
Many companies have begun using different development processes and tools including Agile, Lean or DevOps to increase their time to value. While there have certainly been some improvements, there has also been continued resistance from long term developers who still prefer the more methodical waterfall approach. One would be tempted to “vote them off the island” only to discover that they are the only folks on the IT team who actually know how the systems of record work.
Using frustration as a motivator to change
Many CIOs I’ve talked with have complained at how frequently project priorities are changed in mid-stream leaving their developers angry and frustrated. One CIO who I work with has met this challenge head-on by limiting product development timelines to 90 days or less. He readily acknowledges that he will soon need to reduce it to 60 days and then to 30 days.
A core element of this new approach was to get everyone on his team and their internal end users comfortable with developing a minimum viable product (MVP) in that time frame and then make upgrades and changes based on end user feedback. He also has his developers go out on the shop floor and perform the work of their customers to see firsthand if the product or service is doing what it was designed to do, and, if not, what changes need to be made.
While he initially got some push back from his developers, they soon came to appreciate the fact that by taking this time compressed approach and making a fundamental commitment to rapid iteration, they could actually complete something they started rather than engaging in a series of false starts.
A 10x change requires new ways of imagining what’s possible
Most well-established companies have invested tens of millions of dollars in developing, installing and maintaining the systems of record necessary to operate their businesses. In many cases, these investments have served them well and enabled them to sail the competitive seas like the Queen Mary whose three to four-day trip from New York to Liverpool was the standard.
The new digital disruption from systems of engagement and systems of intelligence is not only turning the competitive landscape on its head but it is also forcing companies to reimagine how they engage with their customers, employees, supply chain partners, and other key constituents. Until the Hyperloop was recently conceived of, no one thought it would be possible to go from Los Angeles to San Francisco in 30 minutes.
The best 10x change example I’ve seen recently is the difference between NASA and SpaceX. When NASA launches a rocket into space, they have 450 people in their control room monitoring the flight. When SpaceX launches a rocket, they have 45 on their way to two – a pilot and co-pilot. NASA imagines itself as a space exploration company while SpaceX sees itself as a technology company in the space exploration business.
To compete in this new world of digital disruption, companies across all industries have to start to reimagine who they are, what they do and how they do it.
Organizing and prioritizing for maximum speed and throughput
Early adopters of the 4 Zones framework and tools as shown in the chart above have found it helpful to segment their new product and application releases in the following way:
Each zone has its own time to value cadence and metrics but all of them require IT to be fast, adaptable and bring an enterprise wide perspective to the priority-setting process.
One way to move toward a 10x improvement in time to value is to strip away the multiple levels of decision making governance that bog down most IT project approval processes.
By example, one company I’ve talked with has a three level governance model that includes:
Contrast that with another company I’m working with that has one Executive Product Prioritization Committee that meets once a quarter and agrees on:
Moving at the speed of trust
Another way to get step change improvements in time to value is to breakdown hierarchical, silo-based decision-making processes and convert them into horizontal cross-enterprise decision-making processes. In order for CIOs to facilitate this shift, they need to establish or regain a high level of trust with their internal business partners that IT merits a seat at the business growth discussion table. Once this level of trust is in place, speed to market goes up and costs go down.
What does it take to make this new trust based process work? Here are some criteria to consider:
Early practitioners of this process have significantly increased their time to value and have greatly reduced the costs of do-overs or extended release schedules driven by unclear or changing requirements. These results suggest that moving at the speed of trust is one way to achieve sustainable competitive advantage in the new digital world.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
“How much value is IT adding to the business?”
This is the one question that most CIOs I talk with struggle to answer. For many organizations, IT’s value is only measured by its ability to reduce costs and optimize the capital expense depreciation of large hardware and software licenses. For others, it’s based on their ability to provide applications and services that enable employees to be more productive. In some cases, IT is seen as valuable resource and contributor to enabling business units to meet or exceed their revenue and profit targets.
Regardless of where your IT group falls across this spectrum of business value there is one unifying theme – IT is not very good at telling its business value story. Part of the problem is that much of today’s story was built on the old Plan, Build, Run model complete with its time consuming requirements process and waterfall development cycles which are now completely out of cadence with the fast-cycle marketplace. This approach has resulted in a large percentage of the annual IT budget being allocated to run the business activities, with a much smaller percentage allocated to change the business activities. This imbalance is only exacerbated by the typical 2% annual budget increases.
How to change the narrative about IT business value
CIOs and their senior leadership teams must make creating and communicating IT’s business value story a mission critical priority. It all starts with a solid framework that defines the multiple ways IT contributes value to any organization. The framework should be realistic, but also simple and capable of being expressed in language that business leaders will recognize and support. The new 4 Zone IT Investment Portfolio is one framework that meets these criteria.
The 4 Zone model enables CIOs to construct an IT Investment Portfolio that apportions the business value of IT in four investment categories. It depicts IT’s spending allocations and provides a clear visual aid for discussing changes to those allocations. For example, based on your organization’s 2016 strategic and operating goals and deliverables, is the weighting of the IT investment allocation aligned with those goals? In this context, most if not all business executives will not only understand the type of value IT investments are targeting, but they will appreciate the challenge and imperative of making smart IT investment choices going forward.
A four zone business value story
Not unlike a personal investment portfolio where risk and return are spread across multiple investment options, the IT investment portfolio is designed to deliver value and returns in four different categories.
Productivity Zone value is created by providing secure and stable operations and maintenance of the company’s systems of record. While most of the ROI from investments in these SORs has been realized, they are still an important and necessary component to the successful operation of any organization. CIOs can deploy our trapped value audit tool to periodically review and identify opportunities to optimize the costs of maintaining and modernizing SORs while also reducing the amount of technical debt. These resources can then be redeployed against new value creation opportunities in the performance and transformation zones.
Performance Zone value is created by delivering a series of user-centric tools, services and solutions e.g. Social, Mobile, Cloud and Data Analytics that enable the company’s businesses to better engage with customers, supply chain partners and other key constituents. CIOs can use our Collaborative IT Governance model to better align future IT investment priorities with critical business outcomes. By contributing directly to creating valuable and enduring customer experiences, IT can demonstrate its ability to help accelerate customer adoption and utilization resulting in new revenues and profits.
Incubation Zone value is created by IT’s help in identifying, testing and validating next generation product, service and business ideas and leveraging technology enabled innovation to deploy them. This zone also acts as a staging area for all IT projects and provides a prioritization process to determine which of the other three zones would benefit the most from the ultimate value of the project. A rapid agile development approach will enable IT to significantly increase its speed to market and throughput for all IT investments.
Transformation Zone value comes from ITs ability deploy new disruptive technologies to enable the company to launch and scale a material net new line of business. An organization’s ability to leverage technology enabled innovation is becoming a critical source of competitive advantage with the emergence of digital enterprises.
This 4 Zone investment portfolio approach provides a structure and common vocabulary to resolve risk reward discussions between IT and its internal business partners across multiple investment options. It also enables the CIO to characterize and justify IT’s investment recommendations, whether at the C-Suite or Board level, augmented by specific business cases that highlight the ROI from each one.
An investment approach that is aligned with the new consumption economy
In today’s subscription-based consumption economy, the value of IT’s products and services are measured by customer/end-user adoption and utilization. To deliver the maximum business value of IT, CIOs need to effectively articulate how each investment will directly contribute to the successful deployment and utilization of each product or service its supports. As such, IT investments must be able to generate immediate returns which accelerate with increased usage. This means that IT has to significantly increase its speed to market and throughput.
The fast cycle cadence of the consumption economy will require IT to replace the old Plan, Build, Run development process with a new Co-Develop, Assemble and Consume process. This new process puts a premium on making a series of investments and getting market feedback on them quickly so leaders can make the needed changes that will drive further adoption and utilization.
Get started with a current state investment assessment
As a first step, CIOs can use the 4 Zone model to do an assessment of how their budget and resources are allocated across their current pipeline of projects and deliverables. This assessment would allocate each project into one of the four zones and create a baseline of where you are making your IT investments today. You can then ask questions like:
Creating and effectively communicating a compelling IT business value story is not an easy task. Overcoming legacy mindsets about the role and value of IT requires a strong framework; a well-balanced risk vs. reward investment strategy aligned with corporate goals and deliverables; a new development process that is in sync with the fast cycle market cadence of digital enterprises and a new set of consumption market metrics.
Armed with those tools and that approach, CIOs should be well prepared to make the business case for the value of IT.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com
From Strategy to Implementation: Common Drivers & Expected Outcomes
Like any new strategic framework and set of tools and processes, the 4 Zone Model’s value can only be realized through implementation and execution. I have outlined below how some early adopters of the model have deployed different elements of the playbook to address critical issues and opportunities.
The 4 Zone Model is built upon several drivers common to enterprise information technology functions:
The motivation to adopt the Four Zone Model playbook encompasses a number of expected outcomes:
To respond to these drivers and expected outcomes, the Four Zone Model playbook affords technology teams’ processes and tools which enable them to maximize the business value of IT across all three levels of their organization.
The Starting Point: Mission-Based Teams
In order to move expeditiously, the 4 Zone Playbook begins at the “starting point” with mission-based teams specifically assembled and empowered to attack prioritized desired outcomes. These mission- based initiatives all start from the “Incubation Zone” and seek an exit path to one of the three other Zones depending on the desired outcome.
IT Executives leading mission-based initiatives begin the process by asking three key questions:
Mission-based teams are appointed for work which has been identified as a priority for movement from the Incubation quadrant to another Zone within the Model. Expectations for success can be high given the following critical elements:
The Outcome is Worth the Journey
What we have learned over the past 12 months is that to successfully introduce and deploy this playbook is a leadership challenge not a management challenge. This is not about just doing what IT has always done better, faster and cheaper. This is about transforming the role of IT from a cost center/support function to a business enabling strategic partner. This is about changing outcomes by changing legacy attitudes, behaviors and actions.
As always, I am interested in your comments, feedback and perspective on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
Everywhere you look technology-enabled innovation is the driving source of new competitive advantage for companies of all sizes across all industries:
From Uber redefining the taxi user experience by utilizing the GPS function on your smart phone to find you rather than you finding a cab and then billing you afterward so you don’t need cash or a credit card
To AirBnb redefining the lodging user experience by letting you “rent a room” through your PC or phone at far less than standard hotel rates
To major pizza chains significantly increasing their market share by letting you order and pay for your pizza delivery or pick up by phone
Technology-enabled innovation is not only disrupting the competitive landscape, it is redefining the user experience value proposition across a multitude of industries. It is also putting companies on notice that if you can’t successfully engage your customers in this new “digitally mediated world” you are on your way to your very own Kodak moment.
SMAC – Social, Mobile, Analytics, Cloud
These four disruptive models are completely altering how people connect, communicate and discover information. What these individuals are looking for are “friction-free” user experiences that delight and inspire them. These new tools affect how customers make decisions which affect their entire “customer journey” which ultimately affects their customer lifecycle. Simply put, it defines the differences between the traditional customer and the new connected customer.
Redefining IT as a source of innovation rather than a constraint to innovation
In a recent study on IT innovation, 90% of CIOs said that technology-driven innovation is crucial for achieving competitive advantage. Yet, on average, just 14% of IT budgets are earmarked for innovation and only 23% of companies report very positive results from their IT innovation efforts. Why the disconnect?
Historically IT has been viewed as a constraint to new ideas and innovations as CIO’s primary focus and responsibility was on building and maintaining secure and stable platforms and tools that “keep the lights on.” While it is still essential to securely maintain these systems of record, it is now a competitive imperative that IT evolves to a business enablement role that leverages technology innovations which deliver new revenues and profits for the company.
A Framework for Organizing and Implementing IT Innovations
In his recent book, Escape Velocity – Free Your Company’s Future From The Pull Of the Past, my brother, Geoffrey Moore, put forth a three part innovation framework that is designed to significantly increase the ROI on innovation investments. At the core of this framework are three distinct innovation playbooks (see chart below) that clearly define the mandate and desired outcome for each one. Here are the key diagnostic questions that clarify those mandates and outcomes:
Two Rules of Thumb
There are two key rules of thumb that can keep you from making the mistakes most companies make and result in most innovation initiatives not achieving their desired goals and outcomes (see chart below ).
Some compelling examples
Here are some recent examples that caught my attention of how companies are trying to get better returns from their portfolios of technology-enabled innovation investments:
Burberry – When Angela Ahrendts took over as CEO in 2006, she envisioned how Burberry could remake itself into a digital brand. Her initiatives which tripled revenues during her tenure included:
-A new website (Art of the Trench.com) that featured customers as models
-A more robust e-commerce catalog that matched the company’s in-store inventory
-The digitization of retail stores using RFID tags
@Walmart Labs – Walmart set up a separate “idea incubator” as part of its eCommerce division in Silicon Valley which helped the company increase its online revenues by 30% last year.
P&G Decision Cockpit – To improve the “clock speed” for new innovations at P&G, they set up a single analytics portal called Decision Cockpit. This tool provides real time data across brands, products and regions to more than 50,000 employees globally.
Starbucks optimizing back-office functions – In 2013, 1/3rd of the 100 active IT projects at Starbucks were focused on customer or partner facing initiatives; 1/3rd were focused on improving efficiency and productivity away from the retail store; and 1/3rd were focused on improving resilience and security.
As always, I am interested in your comments, feedback and perspective on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
As I have discussed in earlier blogs, the Evolution of Enterprise IT from Systems of Record to Systems of Engagement is the kind of transformative shift (disruptive innovation) that has already started to rearrange the competitive hierarchy across multiple industries from advertising to financial services to health care to retail. In fact, from my vantage point, I cannot see any industry that will not be significantly impacted by this game-changing shift.
That said, there are a large number of companies whose senior leadership teams and Board of Directors still think they are not in harm’s way from this change. What they are missing is the opportunity to figure out how they can get ahead of this transformative shift, and thereby, gain the competitive advantage of that head start.
I think there are a number of reasons why it is so hard for successful, well-established companies to act earlier rather than later to address a change of this magnitude and why the role and value of an outside facilitator can help expedite this process:
1. Most successful, well-established companies have developed very strong and well- defined functional/operating silos. These “working silos” also cause the people within them to develop “thinking silos” as to the company’s priorities and how they can best be achieved. In times of major market flux, these individual silos can create a significant barrier to the breakthrough thinking that is required for cross-enterprise success. An outside facilitator can be of great help in breaking down those disparate silos and in enabling cross functional teams to “co-construct a new way of thinking” about what they want to do together.
a. High performing management teams often have a hard time facilitating their own discussions as extreme politeness and other interpersonal dynamics prevent participants from structuring discussions that focus on the right issues and allow them to make the tough prioritization decisions that favor one idea/business over another. Simply put, companies suck at being Darwinian.
2. When confronting a major change like “The Consumerization of Enterprise IT”, many companies take an “inside out” approach to figuring out how best to deal with it. In this case, early evidence of success suggests that an “outside-in” approach is much more effective. This requires subject matter experts from IT, Marketing and Business units to let go of their current beliefs and perceptions and utilize well-developed frameworks, models and tools to help them start thinking differently about how employees and customers want to change how they engage with the company. An outside facilitator who is not burdened by existing beliefs and perceptions can help internal leadership teams “let go” of their current mindsets and thereby utilize the new frameworks to re-conceptualize opportunities/problems and generate a diversity of ideas to address them.
a. With Systems of Engagement, you actually start with the user experience and ask the fundamental question: What is the user trying to accomplish in the moment? Then you ask yourself: How could IT systems (typically communication and collaboration systems) intervene in that moment to make the transaction or interaction more valuable and enduring?
3. Jeff Bezos, CEO of Amazon, says that “left to business as usual, people tend to come up with incremental ideas.” In order to achieve exponential growth, “people need to adjust their aspirations so they can focus on bigger ideas.” An outside facilitator can be the catalyst to help drive these bigger idea discussions by raising key questions such as:
a. What are we willing to give up in order to get better?
b. What core elements of our business must be preserved in order to create sustainable competitive advantage?
c. What new skills, resources and capabilities do we need that we don’t have now?
4. Many companies in their haste to address emerging opportunities and threats that they’ve delayed confronting deploy a ready, fire, aim approach. An outside facilitator can play a strong role in making sure that the decision making process is designed in this order – “right view, right intention, right action.”
5. Finally, the ability to have an outside resource present and socialize a major transformative shift of this magnitude along with the models and tools to address it, provides a broad strategic framework in which to organize a series of discussions and projects that will help expedite the company’s ability to get out in front of this shift sooner than its competitors and thereby gain the competitive advantage of that head start.
As always, I am interested in your comments, feedback and perspective on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
Short term performance vs. long term power
As I’ve written in earlier blogs, the single biggest challenge facing CEOs and other C-Suite leaders in well-established companies is how to find the right balance between funding the businesses they have versus making significant enough investments in next generation businesses so they can deliver material revenues and profits to the company. Said another way, this challenge pits the demand to deliver short term quarterly earnings against the desire to create long term market power. This framework and concept has been one that my brother, Geoffrey, and I have been developing together and sharing with senior leadership teams for the past several years. Even after numerous discussions and use case examples, it still tops the list as the toughest set of decisions they confront year in and year out.
Power generates performance but performance consumes power
The big aha moment for senior leadership occurs when they realize that while power generates performance, performance consumes power. This means that if the company continues to overweight investments in current businesses so as to deliver short term performance, it will eventually liquidate the company’s long term power to grow.
Then how should senior leaders make those internal investment decisions to enhance competitive performance on both fronts?
First, by understanding that decision making that optimizes short term performance and quarterly earnings is about management, while decision making that increases the company’s future power to grow is about leadership.
And second, by understanding the different skills and capabilities necessary to move from a management mindset to a leadership mindset.
Deciding between knowns and unknowns
In most cases, all the necessary data for a manager to make a performance-based decision is available and it’s a matter of assessing and comparing “known options” and selecting the one that has the best potential to deliver the desired short term results. By contrast, in many cases all the necessary data is not available to a leader who is trying to decide what new business opportunity has the greatest potential to improve the company’s long term growth prospects.
Leadership development is really management development in disguise
Most well-established companies have put together elaborate leadership development programs designed to identify their high potential managers and develop them into future company leaders. These programs include everything from:
While a number of these programs help aspiring managers acquire broad skills and knowledge, in most cases all the practical examples and exercises are designed to help them make better management decisions not leadership decisions. Some of you reading this may be thinking – “so what’s wrong with that?”
What’s wrong with that is that the emphasis on management training, under the guise of leadership development training, only reinforces a silo based organizational structure. And silo-based decisions are primarily made within SBU’s and major support functions rather than across the enterprise. This results in management decisions that favor short term results trumping leadership decisions that favor long term growth.
I’ll give you an example of that in one word: Microsoft. For thirteen years they’ve been making these silo-based decision tradeoffs, and for thirteen years they’ve failed to launch a material next generation business and the market has kept the company’s stock flat during that time period.
How does a company break out of this management decision-making stranglehold?
The easy answer would be to say that the CEO is ultimately responsible for all major leadership decisions. In some cases, such as Apple’s extraordinary performance in the last decade (they successfully launched 3 next generation businesses that all delivered material new revenue and profits to the company), the primary driver of that performance was the company’s CEO, Steve Jobs. But in most organizations, the CEO needs to rely on input from a number of senior leaders who bring industry, market and customer experience and expertise to the table.
The hard answer then is to improve the quality of the decision-making process and not rely on the illusory promises of leadership development programs.
Based on our work with clients, here are four suggestions for how companies can change their leadership decision making processes:
1. Review and evaluate all next generation business opportunities the quarter before the company begins its annual planning and budgeting process. The reason for this is that if you allow next generation business opportunities to compete directly for resources with established businesses, the former always loses out to the latter.
2. Launch only one new business at a time. The biggest mistake well-established companies make in this arena is they spread their resources over multiple opportunities ensuring that no one will have sufficient support and funding to produce material returns.
3. Run each next generation business like a startup with a dedicated business development SWAT team who are compensated solely for getting the business to scale. The reason for this approach is that most well-established companies’ ability to support a new business opportunity that hasn’t produced material revenues and profits will stop after 24 to 36 months.
4. Allocate a significant portion of all the discretionary bonus of each member of the senior leadership team to the success of the new business. If not, they will have no incentive to provide resources and support for the new effort.
Following these four suggested process steps for leadership decision making is no guarantee of success, but it sure increases the odds of success over trying to develop leadership decision making skills and capabilities in a classroom or an executive retreat.
As always, I am interested in your comments, feedback and perspective on the ideas put forth in this blog. Please e-mail them to me at pdmoore@woellc.com.
A Little History:
In 1991, my brother Geoffrey wrote his first book called Crossing the Chasm which provided a framework along with models and tools to help technology startups successfully launch and scale new products and services into the high tech market. Twenty two years later, it is still the bible for most startups in Silicon Valley and elsewhere and is taught in many of the major business schools around the country. Who says longevity doesn’t count for something in this always on, always frenetic, 24/7 world we live in today?
Back in 1991, the primary challenge for hi-tech startups was to “break into” established markets that were populated by well entrenched competitors with long standing customer relationships. But as Clay Christensen taught us in his seminal book, The Innovator’s Dilemma, the skillful introduction of disruptive innovation ( products, services and technology ) could be used to get into established markets, mostly at the low end of the price/value scale, and then move up from that beachhead into higher price, higher margin offers.
Today the challenge for well-established companies is to fight their legacy cultures and behaviors to “break out of” mature, slow growing markets and get into higher growth, higher margin next generation markets.
Some Lessons Learned:
So what you may be asking has all this history taught us? Besides the obvious confirmation that:
Well, from my perspective, one of the most interesting things we’ve learned over the past decade is just how challenging it is for well-established companies to successfully deploy market tested models and tools for startups to onboard and scale next generation businesses within their organizations and cultures. We call this challenge “Crossing the Chasm in the Belly of a Whale.”
One only needs to look at how painful and time consuming it has been for large companies to successfully adopt and integrate large ERP and CRM software tools into their organization. I have personally heard from numerous C-Level executives how those experiences caused their “will to live meter” to go to zero more times than they could count. Simply put, cultural habits and behaviors good or bad are very hard to break unless you can identify and adopt some “new rituals” to change them.
New Rituals to Help Successfully Launch New Businesses:
So here are some suggested new rituals, for you to consider that will enable your company to successfully launch and scale next generation businesses that can deliver material new revenue and profits to the mother ship?
1. Identify who are the “early adopters” within your company’s senior leadership team and deploy them as the “next generation business champions.” There is nothing harder than trying to get a senior executive whose business unit is responsible for delivering a substantial portion of the company’s current earnings and profits to divert his or her attention away to starting a new business.
2. Separate all the strategic discussions and resource allocation decisions about next generation business opportunities and have them the quarter before you start your annual planning and budgeting process. Bring the senior leadership team together and ask them to address this fundamental question: “Is it possible for us to onboard a net new earnings engine into this enterprise this year or not?”
3. Since there is no definitive data about the future, you will need to use frameworks and vocabulary to clearly define what the most promising new business opportunities are and what level of resource commitment is necessary to get them started. Believe it or not, the fundamental models, tools and vocabulary from Crossing the Chasm are still one of the most effective ways to work through this process and achieve the desired outcome while still residing in the belly of a whale.
4. Like the whale, any large, well-established company has embedded behaviors and actions that have been developed to survive and prosper at the expense of smaller competitors. As such, there is “massive internal resistance” to moving resources away from current well-tested businesses to fund the launch of new untested businesses. As such, you need to re-assess how you incent and motivate your key business leaders so you can move from a “consumption comp plan to a replenishment comp plan.”
5. Lastly, you will need to have the courage of your convictions in order to stay the course as you drive your new business to its “tipping point.” This means that you cannot apply short term business performance metrics to your new business, and you need to stand firm in the face of both internal and external opposition when it doesn’t deliver immediate returns. If you can successfully drive the business against the market’s resistance to its tipping point, when it flips to embracing your offers, it will literally pull you into a market leadership position.
I am in no way suggesting that the process of installing and embracing “new rituals” into a well-established company is easy or a guarantee for success. But I am suggesting that it beats the daylights out of sticking with old habits just because that’s the way the whale has always behaved.
The old adage that people do what they get paid to do is never more true than in today’s business world. Most incentive compensation programs at major corporations are designed to support the current year’s performance objectives from the company’s established lines of business, which makes perfect sense over all, but which creates problems for leaders of next generation business growth initiatives that are not designed to pay off in the current year.
When the new business growth initiative is still in its R&D stage, most companies believe that MBOs are an acceptable set of metrics, but when the initiative gets into a go-to-market stage even though its revenues are still not able to deliver any material impact on the company’s top line, the current year’s performance metrics get applied. The problem with this approach is that these metrics incent the wrong behaviors and, in fact, they undermine the potential of the next generation business ever making a material contribution to the company’s revenues and profits.
Overcoming Current Compensation Constraints:
Basing the majority of business unit leaders’ comp on either the company’s overall revenues or its overall earnings per share (EPS) is normally great for uniting executive behaviors but in the case of driving a new business to scale, they are actually dividers. In order to successfully launch a next generation business, companies have to make tradeoffs in go-to-market resource allocation to drive the new business, trade offs that, at the margin, can put the current performance metrics at risk which is not easy to do. But, that is the price a company must be willing to pay in order to get a new franchise successfully on-boarded so that it can deliver material new revenue and profits.
To overcome these compensation constraints on next generation business growth initiatives, a company must give top executives the leeway to override the standard comp program metrics, specifically at the division leader level, and to introduce performance metrics that correlate with birthing a new business and driving it to scale. Next generation business growth metrics do not correlate with traditional company performance metrics like earnings per share or short term margin growth. Instead, they correlate with rapid revenue growth driven by expedited customer adoption, accelerated shortening of sales cycles, and at the appropriate time, rapid and effective integration of one or more acquisitions. Since these types of metrics are not part of any standard EPS system, the company must use the MBO framework as a flexible vehicle for framing “proxy metrics” that incent the right behaviors and outcomes.
New Compensation Incentives:
In fact, a company with a total commitment to delivering a successful next generation business growth initiative must actually advocate and put in place compensation incentives that would comp all executives from the CEO on down on the success of any new business achieving its materiality metrics during the compensation period. The reason is that it takes a bit of sacrifice from everyone to achieve “escape velocity” on these efforts.
A compelling example for new compensation incentives:
A very compelling example of the benefits of aligning your compensation incentives with your next generation business growth initiatives can be seen by comparing the actions of Apple and Microsoft over the last decade. From 2000 to 2004 both companies were primarily engaged in supporting their established businesses – for Apple it was the hardware and software to support the Macintosh Computer and for Microsoft it was the software to support Windows and Office.
In mid-decade, Apple broke ranks and launched a whole new next generation business in music with the release of the iPod. That was followed later in the decade by the launch of a second next generation business in mobile phones with the release of the iPhone. As the decade was coming to an end, Apple launched yet a third next generation business in tablets with the release of the iPad. While all this was going on, Microsoft continued to pour the majority of its resources into its existing Windows and Office businesses. During that time the primary compensation incentive for Microsoft business leaders was to keep delivering good quarterly earnings from their current businesses which they did very well. By contrast, the primary compensation incentive for Apple business unit leaders was to make whatever tradeoffs they needed to successfully launch three next generation businesses.
As the chart above illustrates, Apple’s approach was linear in that it launched each next generation business sequentially and not until the prior business had established materiality. It prioritized the new business ruthlessly over the incumbent businesses never allowing fears that the new business would cannibalize the established businesses. Microsoft by contrast was unable to escape the massive internal resistance to resourcing next generation businesses from its two established business franchises that were delivering the majority of the company’s short-term revenue and profits. The market has rewarded Apple’s approach by pushing its stock price up 1500% in the last 8 years while Microsoft’s stock has remained essentially flat over the same time period.
In order to escape the pull of the forces toward short-term performance, a company must free its senior leadership team to disengage next generation business growth initiatives from the current year’s performance and compensation metrics. It may not be easy to break these old habits but as the Apple versus Microsoft example shows if you can do it the rewards are extraordinary.
~ Peter
In 1997, when Amazon went public, its CEO, Jeff Bezos issued a manifesto – “It’s all about the long term.” Over the ensuing 14 years, Mr. Bezos has not only honored that manifesto he has become a leading practitioner of making investments in long term growth over decisions that favor short term earnings performance. The results speak for themselves with the company’s stock soaring 12,200 percent since its IPO.
By contrast, look at Kodak who has acted like a financial contortionist trying to find and deploy multiple short term gimmicks to keep a failed business model alive quarter after quarter and has finally had to throw in the towel. During that period of time, they missed numerous opportunities to capitalize on business growth innovations including the social networking potential of online photos. By staying exclusively focused on the short term, Kodak is in the process of systematically liquidating its entire business franchise.
What Amazon understood and Kodak didn’t is that power generates performance but performance consumes power. As such, when any company makes decisions that favor short term earnings performance they eventually liquidate their long term power to grow. There are two extremely strong forces within well-established successful companies that tilt the decision making scales toward the short term. The first is the company’s annual planning process which favors resource allocations to legacy businesses over new businesses. The second is the company’s incentive compensation plan which holds senior leadership teams accountable for delivering short term performance but not for making long term investments that increase the company’s power to grow.
Another good example of contrasting approaches to investing in the long term versus the short term is to look at Apple and Microsoft. From 2000 to 2004 both companies were primarily engaged in supporting their core businesses – for Apple it was the hardware and software to support the Macintosh Computer and for Microsoft it was the software to support Windows and Office. In mid-decade, Apple broke ranks and launched a whole new next generation business in music with the release of the iPod. That was followed later in the decade by the launch of a second next generation business in mobile phones with the release of the iPhone. As the decade was coming to an end, Apple launched yet a third next generation business in tablets with the release of the iPad. While all this was going on, Microsoft continued to pour the majority of its resources into its existing Windows and Office businesses. As the chart below dramatically illustrates, the market rewarded investments in long term growth from next generation businesses over short term performance from established businesses.
