Innovation and Leadership

IBM Study of Innovation in Enterprises of the Future

On March 8, 2006 in New York IBM provided a summary of learnings from its investigations into the “intersection of technology, business, and societal innovation.”  Two senior IBM executives, Nick Donofrio and Ginni Rometty, distilled discussions conducted on this topic with international thought leaders from multiple disciplines in business, government and academics, including personal interviews with more than 750 CEOs.  Open, multi-disciplinary, andcollaboration were identified as hallmarks of innovative organizations, and “external collaboration” was found to be highly correlated with business success.

“The Future of the Enterprise,” was the primary focus of this particular session. In the summary of findings and panel discussions, the points made included:

• The traditional definition of enterprise is being challenged. Ms Rometty asked the audience to think about the possibility that the Enterprise of the Future might be a network of one billion individuals.
• The power of people networks is realized by individuals who know how to leverage such networks.
• Innovative businesses organize around “endeavors,” not around company objectives.
• The difficulty of getting horizontal thinking out of vertical silos is a major inhibitor to innovation.
• Today’s MBA programs teach you how to think vertically, not horizontally
• Having the CEO identify innovation as a priority, and replacing/renaming committees with/as teams are ways for large companies to encourage innovation.
• People at the top and the bottom of the organization understand the importance of innovation
• Middle managers are the problem.

Although the term was not defined at this session, innovation obviously means more than “having new ideas.” Some might define it as the process by which new ideas are transformed into organizational outcomes that advance its purpose. Others might consider innovation to be any organizational output that creates a non-incremental effect on some external entity.  Either will suffice for this discussion, as long as “process” is understood to include improvisation.

Networks have been touted as the organization form of the future for two decades. But even though the Internet and other technologies are indeed making the world “flat” again (to use Thomas Friedman’s term), thinking of a large enterprise as a network hasn’t seemed to help a lot. This is because, while a network provides connectivity between its nodes, it doesn’t bestow them with interoperability or coherent behavior.  Coherence requires a common purpose (endeavor), and interoperability requires a standard way of exchanging outputs. Therefore, a better candidate definition of the enterprise of the future would be:

a network of capabilities architected into a purposeful system of roles  and accountabilities.

An architecture expresses enterprise strategy as a structure for action, vs a plan of action. The transition from capabilities into roles and accountabilities is necessary because human organizations are social systems, not mechanical, biological or ecological systems. This distinction is necessary because human beings are the only entities that can be held accountable for consequences.

It follows that competition between alternative value-producing architectures will become the strategic game of the future.  Architects who design enterprises as value-producing systems  of roles and accountabilities will be the “individuals who leverage the power of people networks.” And this implies a new competence and role for future organizational leaders: enterprise architect. (see http://www.research.ibm.com/journal/sj/423/haeckel.pdf)

The last four items listed above will be very familiar refrains for almost anyone who has worked in a large organization at some time in the past 35 years. How many of the following perennial litanies also sound familiar?

• It takes forever to get anything through the system. Bureaucracy is killing us.
• Technology transfer from R&D to the product divisions is almost impossible in this company.
• We’ve got to get our act together in front of the customer.
• By the time we have everyone on board, the opportunity is either gone, or we have compromised so much our bid is non-competitive.
• Even my CFO couldn’t price a deal for his partnership account that involved multiple product lines.
• Nobody can make a decision of any consequence without clearing it with everyone in the matrix.
• Those guys in development created a monster. No way we can afford to manufacture this beast.
• Those guys in manufacturing and development created a monster when it comes to maintenance. We can’t afford to service this thing.
• It takes 10 months for the recommendations of our multi-functional development, manufacturing, service, and sales teams to run the gauntlet of our multi-functional middle management approval teams.
• The multi-functional senior executive decision-making team doesn’t understand the impacts their fast-track decisions have as they trickle through the business. Then they wonder why we miss our plans.
• I wish I could spend as much time with the client as I do trying to referee turf wars about who gets credited with the revenue, and who gets gored on profit.
• Everyone is accountable, so no one is accountable.

Vertical silos and thinking; bureaucracies with layers of middle managers empowered to say no, but rarely yes; single-point objectives and  incentives to suboptimize are generally accepted as bad ways to run a business these days. But they still flourish like kudzu, and every one of them is a creature of the legacy management paradigm and its monster child, Matrix Management.  Why don’t more executives and MBA schools acknowledge and do something about that? Do they disagree with Peter Drucker’s 1992 assessment that the old theory of management doesn’t work anymore?

Maybe it’s because executives don’t know what to do. Drucker pointed out that no new theory had yet emerged to replace the old. As long as that was the case, perhaps piece-meal managerial innovations were to be expected. But most large organizations have found good ideas like empowerment, simple rules, external collaboration, and internal teams fiendishly difficult to implement, harvest and sustain. There are two major reasons for this. First, innovation means change, which is disruptive, which is inefficient, which is anathema—not necessarily to the individuals involved, but most definitely to the logic institutionalized by the management system. Think Fumbling the Future, perhaps the classic demonstration that innovation, like all non-incremental change, is systematically and relentlessly discouraged by still extant and deeply embedded legacy management system practices.  The second reason is that good ideas such as empowerment and teams are piece parts and not elements of a coherent system of management that accepts dynamic, unpredictable change as the new given.

Who should be held responsible for fixing this problem? Since the management system, like water in a fish tank, provides context within which inhabitants must work and live, accountability for making sure the context is nourishing rather than damaging logically resides at the policy-making level. Alfred Sloan thought that the creation and maintenance of a coherent set of managerial principles was his most important responsibility, and the principles he established at General Motors became the template for industrial companies.  But we are now in the post-industrial age, and 21^st century executives must adopt a new managerial model. (This is not the same thing as a business model, which is concerned with how a business translates customer needs into revenues and profit. A managerial model, or framework, establishes organizational purpose, policies, strategies, structure and governance. It provides the context within which people make decisions and act.)

Again, every bulleted complaint on the above list can be traced back to an underlying principle or practice embedded in the industrial management paradigm—either directly, or as a consequence of trying to ignore it without a replacement paradigm. A framework that addresses the underlying causes and proposed remedies for the complaints listed above is treated elsewhere on this site—in fact, it is the subject of the site.  Sense & Respond, like its predecessor, is a scalable and internally consistent set of concepts and prescriptions for strategy, structure and governance. But it is conceived for adaptability and effectiveness, rather than stability and efficiency. The role of leadership is to articulate:

• enterprise purpose as an effect on some primary external constituency (it’s reason for being)
• enterprise policy as a set of global constraints on behavior — including the outputs the enterprise must produce (in order to exist) for other constituencies and

• enterprise strategy as a decomposition of enterprise purpose into an architecture of roles and accountabilities whose relationships are defined by as exchanges of deliverables, or outcomes

As Architect in Chief, the leader provides people in the enterprise with the context within which they can adapt and innovate coherently. Because the environment is assumed to change dynamically, the Architect is also accountable for adapting the context; so adaptation occurs at two levels.

Populating enterprise roles with competent people, and providing a common protocol for negotiating and renegotiating inter-role commitments are the final accountabilities of enterprise leadership.  Context, role population and the coordinating commitment management mechanism are the only things the leader controls. Operational responses to current requests and threats can now be improvised and locally self-synchronized without sacrificing  enterprise-level coherence. Capabilities, regardless of where they are housed, are bound into action sequences in response to current events, rather than at plan time in the form of process and procedural designs. Because the role and accountability architecture is created by successive decompositions of the enterprise’s purpose, alignment and suboptimization issues are dissolved.

What about efficiency? In most enterprises, there will always be a number of roles that operate in local environments that are sufficiently stable to benefit from the use of repeatable process designs. Whether to design a given role for efficiency or adaptability is decided by the occupier/architect of that role. Since all roles relate to one another in terms of commitments to outcomes, the way in which those outcomes are produced need not be specified, or even known, by other roles.

Time will tell whether Sense & Respond or some other paradigm will replace the now dysfunctional industrial model. But it is clear that without a significant managerial innovation — one attuned to a highly networked, unpredictable and dynamically changing environment — realizing the benefits of innovative ideas will continue to be the exception rather than the rule in enterprises of the future.

[Original Posting March 22, 2006 Stephan H. Haeckel]