Majeure Alert for Business Culture

Many pithy statements have been attributed to Jack Welch, the American business legend who passed away earlier this month. One of my favorites is, “if the rate of change on the outside is greater than the rate of change on the inside, the end is near”. It goes almost without saying that the rate of change on the outside is increasing: the ‘clock speed’ of business, in terms of product cycles, new technology roll-outs, and social media stories, seems higher than ever.

“If the rate of change on the outside is greater than the rate of change on the inside, the end is near”. The late Jack Welch, former CEO of General Electric.

If we’re to pay close heed to Welch’s words of caution, are we seeing a comparable growth in responsiveness within firms to the increased pace of change and the speed of external shocks? Do firms have the internal capacity to mobilize and adapt quickly in the face of disruptive challenges? For the most part, the answer is no. The recent outbreak of Covid-19 highlighted how poorly equipped firms are to deal with one-off shocks, and I would argue that many established firms aren’t even able to keep up with broader shifts in demand and customer expectations.

It’s useful to take a closer look at what firms are doing to increase their internal ‘clock speed’ and what is holding them back.

Considering the positives first, IT systems are increasingly configured in a way that permits a real-time response. For example, most airlines and hotels use dynamic pricing systems to adjust prices on a daily or hourly basis, according to changes in supply and demand. Similarly, most logistics companies provide real-time tracking services for customers, and there are IT service providers offering real-time accounting systems that keep financial statements updated daily. Today In: Leadership Strategy

However, as is so often the case, high-tech computer systems are changing far more rapidly than high-touch human systems. While small start-ups are generally good at hustling and responding quickly, most large firms have organizational structures and internal processes that are anything but agile. Consider your budgeting process, which likely operates on a quarterly or annual basis. Alternatively, think about individual performance evaluations, again usually done once a year. If you run an operating unit, chances are you have a weekly management meeting to update one another on what’s happening, and to address any emerging issues. 

The clock speed in large organizations is measured in weeks, months, and years, but your customers are operating on a clock speed measured in hours and days, which makes it hard to stay relevant. So what’s the solution? 

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First, it’s important to be clear that human intervention often slows things down for good reason. There have been experiments with ‘smart contracts’ implemented by computers, and some were disastrous precisely because there were no checks and balances in the system. There is value, in other words, in pausing and reflecting before expensive or irreversible courses of action are pursued. If we take the response to Covid-19, most organizations were ill-prepared and moved too slowly. Equally, it is inconceivable that something as unprecedented as this could have been dealt with automatically.

In a fast-changing world, we need our decision-makers to make good judgments, and this involves giving them the time to pause and reflect. It also means giving them rapid access to the relevant information, and this is where things go awry. In most organizations, decision-makers receive prompt data on some things such as whatever the IT systems were designed to report on. Equally, they collect hopelessly poor information on other things, which might include customer feedback and employee engagement. Decision-making, therefore, goes at the speed of the weakest link.

There are two ways forward to consider because it is useful to reflect upon and work with both.

First, build a dual clock-speed organization, where you match the internal decision-making cycle to the business need. You may have heard of this using the metaphor of a fleet of speedboats operating alongside a cruise ship. Consider the Italian utility, Enel, which provides electricity to 70 million customers around the world. It has a core infrastructure business – a cruise ship – that provides these services through a finely-tuned operation that seeks to be 100% reliable. It uses high-tech sensors, smart meters, and AI-based analytic tools, all of which operate in real-time, but it avoids ad hoc human intervention as much as possible. At the same time, Enel is moving into emerging areas such as e-mobility (servicing electric vehicles) where user needs are evolving quickly, so it operates these businesses as speedboats: they are housed in a separate unit, Enel X; its managers are given much greater degrees of freedom, and the management systems are more fluid and free-wheeling.

Consider also how to respond to a crisis such as the Covid-19 outbreak. Creating a CEO-led task force to monitor the situation is a good first step. But this task force also needs to have the authority to act quickly – so that the organization can keep up with what is happening outside its boundaries. Unfortunately, many of the task forces created during the Covid-19 outbreak found themselves reporting to committees of well-meaning but ill-informed managers, thereby slowing down the whole response plan.

Second, work on increasing your real-time organizational intelligence. This means building the systems and capabilities that enable people across the organization to know what’s going on at all times so that they can make smart decisions about how to act. This information should be multi-faceted – it is about market conditions and competitor offerings, but it is also about internal things, for example, who is doing what, how are people responding to various internal initiatives, where are the hotspots (and the coldspots) in terms of energy and engagement.

An example of what real-time responsiveness looks like is an agile team. They have stand-up meetings every morning, they work in an open-plan setting, they have a board visible for all to see, showing who is working on what and where the priorities are. A fully-functioning agile team is dramatically more productive than a traditional one, and this is made possible by the amount of intelligence-sharing that goes on within it. 

This logic of real-time feedback has been applied in many successful companies. For example, Carlos Brito, CEO of Anheuser Busch Inbev has spoken about the importance of open-plan offices for sharing information quickly and gaining alignment through impromptu 2-3 minute meetings when issues arise. At Bridgewater Capital, the world’s largest hedge fund, people are encouraged to provide feedback to their colleagues in real-time through a simple app. In most companies you get feedback on your performance quarterly or annually; at Bridgewater, you get it every day. Its part of founder Ray Dalio’s philosophy of radical transparency: an accurate understanding of reality, he argues, is the essential foundation for producing good outcomes.

These examples are the exception, not the rule, and it’s no mystery why. People in large firms are comfortable with the slow-and-steady internal rhythm of the business, the weekly or monthly cycle of updates, and the annual budgeting process, and they don’t really know what else might be possible.

This isn’t a reason to leave things as they are because there is always scope for experimentation in order to help your firm stay responsive and relevant. Moreover, one-off shocks like the Covid-19 virus are sometimes the impetus we need to shake things up and try something new. 

Julian Birkinshaw, Professor of Strategy and Entrepreneurship and Deputy Dean at the London Business School