You are on page 1of 28

th

M
an
ag
em In
en as
t I soc
nn ia
ov tio
at n
io wi
n
La th
b

M
an
In ag
no em
va e
tio nt
n

Special
report

62 Organisational thunderbolts
When a management innovator is set loose inside
an organisation, watch out! Management innovation
can have thunderous results.

Management
Innovation

66 From R&D to Connect + Develop at P&G


Challenged by its CEO to source ideas from
outside, Procter & Gamble decided to blaze a new
path for its research and development function. In
pursuit of inspiration, its R&D became
turbocharged by using insourcing to expand
P&Gs horizons.

70 Perfectly in balance
Art Schneiderman pioneered what later became
the concept of the balanced scorecard while a vice
president of quality and productivity at Analog
Devices. We talked with Schneiderman to find out
more about the early evolution of a management
innovation.

72 Making the firm flexible


How companies operate has been established over
two centuries. Is it possible for a firm to break the
established rules of organisation? Eden McCallum
did just that.

76 Death to budgeting
Its considered one of the basics of management.
If you dont have a budget, you arent really
managing. But, UBS has made budgeting
secondary to performance and customer
satisfaction.

79 Designing the culture


Special report

When the design firm, IDEO, opened for business,


its three founders designed an organisation low on
hierarchy, big on communication, with a minimal
amount of ego. Forty years on, it still works.

82 Employees first
Innovation is often focused on products. Yet the
leader of one Indian company is shifting the
business model of a 30,000-employee company.
HCL Technologies reveals how innovation can
apply to organisational systems as well.

Written by Julian Birkinshaw, Stuart Crainer and


Michael Mol.

2007 The Author | Journal compilation 2007 London Business School

Business Strategy Review Spring 2007

61

Organisational
thunderbolts
Management innovation the implementation of new management
practices, processes and structures that represent a significant departure
from current norms has transformed the way many functions and
activities work in large organisations. When a management innovator is
set loose inside an organisation, watch out, management innovation can
have thunderous results.
ost people consider
management a tool of the
status quo. They consider
the good manager as someone who
keeps things running smoothly; or, if
theres a problem, as someone who
restores the status quo so that the
business can keep humming along.
Consequently, when a manager
shakes up the status quo and actually
improves the way things run, the
impact (especially in large
organisations) can be thunderous.
Boeings Debbie Collard shares the
story of the manager who thought the
C-17 jumbo transport plane could be
built in a radically different way.
Collard tells of the revolution
created by Koz (most likely, Don
Kozlowski), the executive newly
charged with leading the production
of the C-17, a plane so gigantic that
its tail is four stories high. Planes
that huge require hundreds of people
to assemble them, and the tradition
is that such a plane is built in
stages, by moving it from one
position to another as the successive
work is completed. The norm in the
industry was for movement from
position to position to occur per the
set timetable, whether every
production detail was attended to or
not. At least in the case of the C-17,
prior to Koz, thats the way it always

Special report

62

Business Strategy Review Spring 2007

was. Everyone thought, thats the


way its supposed to be.
But, as Collard told John Kotter
and Dan Cohen, in Heart of Change
(Harvard Business School Press,
2002), everything changed when Koz
rattled the status quo. We are not
going to move an airplane, she
remembers Koz saying, until it is
complete in position. Quality is
number one, so thats what we are
going to focus on. Until the plane is
done and done right, no movement.
Period.
Collard then relates how workers
and managers alike responded to Koz
and his revolutionary way of doing
things:
Everyone thought he was off his
rocker. You didnt do things this
way. I think some of his direct
reports, in particular, thought he
was crazy. They were convinced
that we would never be able to
deliver on time if we did it this way.
Never. Wouldnt happen, anybody
knows that. Something would
always bring everything to a halt.
Youd have employees twiddling
their thumbs at great expense to
the company. You might as well
expect cars to be made by
secretaries on the fifty-ninth floor
of the Sears building in Chicago.

As you probably surmise, Koz


changed not only the company but
the rest of the industry. Collard
completes her story by attesting that
this one management innovation
transformed the place, and, as a
result, quality has gone up and all of
our aircraft have not only been on
time, theyve been early!
Its rare for management to hurl
an organisational thunderbolt, but its
impact can be enormous.
Management innovation the
implementation of new management
practices, processes and structures
that represent a significant departure
from current norms has
transformed the way many functions
and activities work in large
organisations. Fords introduction of
the moving assembly line in 1913
and Western Electrics invention of
statistical quality control in 1924
changed businesses forever. Every
managerial process we now take for
granted was created by inventive and
far-sighted individuals: double-entry
book-keeping was invented by Luca
Pacioli in 1494, and the limited
liability company was created in
1856.
But management innovation
remains poorly managed and poorly
understood. It is typically left to
occur in an ad hoc fashion, and

2007 The Author | Journal compilation 2007 London Business School

successful management innovators


like Boeings Koz have to work very
hard to get others to understand
what they are doing, or why they are
doing it. While academic studies of
the diffusion of existing
management innovations are
common, there is virtually no
literature on its origins, that is, on
the generative processes through
which management innovation first
takes shape.

In search of... a process?


Management innovation has some
obvious commonalities with
technological innovation as a
process: it involves key individuals
pulling together ideas and resources
in novel ways, championing their
ideas inside their organisation,
building coalitions of senior
executives to support them and
using their political skills to

Distant horizon The second point of


difference was the amount of
uncertainty and ambiguity in the
process. Most management
innovations took several years to
implement, and in some cases it was
impossible to say with any precision
when the innovation actually took
place. To some degree this can also
be the case with technological
innovations, but the subtle nature of
the process was particularly acute in
the management innovations we
studied.

How it happens
Our research suggests management
innovations occur in five stages.
Dissatisfaction with status quo In
cases we studied, the internal
problem that management innovation
addressed was always some level of
dissatisfaction with the status quo.

Wealth Management has been


growing rapidly ever since (and the
full story is explored on page 76).
Inspiration from outside
Management innovators need
inspiration examples of what has
worked in other settings, analogies
from different social systems or
unproven but alluring new ideas.
Managers with thunderbolts revealed
a breadth of thinking that allowed
them to strike out on their own path,
rather than just adopt a proven
model applied by a competing firm.
For example, Dee Hock founded Visa
with a unique cooperative
organisational model that drew more
from the principles of Jeffersonian
Democracy than from traditional
hierarchical thinking.
More generally, we observed that
many management innovators had
unusual backgrounds or they had

Its rare for management to hurl an organisational thunderbolt.


Why so?

Change agents The first distinction


was a much more significant role for
external change agents. These
individuals were a mix of academics,
consultants, gurus and exemployees. They often provided the
initial source of inspiration, and they
frequently helped to shape and
legitimize the management
innovation as it took hold. While
external agents rarely developed new
practices themselves, they offered
important inputs at all steps along
the way. The process thus had a
highly interactive quality. It typically
took place on the fringes of the
organisation rather than in the core
through the relations between
conceptually oriented managers and
managerially oriented external
change agents.

We use the word dissatisfaction


because it covers a multitude of
situations, from a nagging operational
problem through a strategic threat to
an impending crisis.
One classic example: in 2003 UBS
Wealth Management, the private
banking arm of the Swiss giant, was
looking to grow after several years of
painful cost cutting. The executives
started looking into the blockers
the things that were standing in the
way of the growth agenda and they
realised that the budgeting process
was a key problem area. As CFO Toni
Stadelmann notes, Budgeting is
highly defensive it is cumbersome,
and it is fundamentally against
growth. It is about negotiating down
the targets that are proposed by the
centre. And it causes people to talk
about numbers, not about clients
and market opportunities. This
realisation led to a complete rethinking of how individual client
advisors worked and the elimination
of the traditional budgeting process.

2007 The Author | Journal compilation 2007 London Business School

worked in a wide variety of different


functional areas or countries. Art
Schneiderman, the manager at
Analog Devices who in 1987
developed the prototype for what
became known as the Balanced
Scorecard, was strongly influenced
by Jay Forresters system dynamics
concepts during his MBA training at
MITs Sloan School, then spent six
years as a strategy consultant with
Bain working on quality management
projects in Japan before joining
Analog Devices. This background
gave Schneiderman insight into
continuous improvement techniques
that were being used in Japan plus a
system-wide perspective on the
functioning of the organisation. So
when asked by CEO Ray Stata to
develop a quality improvement
process for the companys
manufacturing, he quickly developed
a set of metrics that included both
financial and non-financial
components. (Art Schneiderman is
interviewed on page 70.)

Business Strategy Review Spring 2007

Special report

overcome internal resistance. But


our research suggested there were
also two important points of
difference that made management
innovation a distinct process.

63

Invention It is customary to
assume that every innovation has a
eureka moment when the
inventor makes the key conceptual
breakthrough or proposal that
everything else follows from. 3Ms
Art Fry famously came up with the
Post-it Note concept at his local
church as he sought to keep track of
multiple pages in his book of hymns.
And people at Boeing still tell the
Koz C-17 story because eureka
moments are legendary. However, our
evidence suggests that such eureka
moments are rare. Invention is a
process in which the innovator brings
together the various elements of a
problem (dissatisfaction with the
status quo) with the various elements
of a solution (which involves some
inspiration from outside plus a clear
understanding of the internal
situation and context), but the

and your peers could give you


rewards for participating on a webbased innovation model.
Then in 2000 my boss said we
want you to create the new
business model of innovation.
Building on my earlier work I
started to create the conceptual
positioning for connect and
develop. A lot of it starts with
experiments, making concepts and
storyboards and films, just like you
would do if youre making a
product. People just think this
stuff falls to the ground: they dont
realize that these big management
systems are constructed, and you
have to be smart about it; it takes
a lot of skill to do that.
Internal validation In one important
respect management innovation is
just like every other form of

resource allocation system built


around self-organised project teams
and an entirely open-plan physical
layout. This new model helped
Oticon to achieve dramatic increases
in profitability over the rest of the
decade. Lars Kolind, the CEO of
Oticon and architect of these
changes, got his inspiration for this
new model from his deep
involvement in the scouting
movement:
The scouting movement has a
stronger volunteer aspect, and
whenever scouts come together,
they cooperate effectively together
without hierarchy. There is no game
playing, no intrigue; we are one
family brought together through
common goals. My experiences in
scouting led me to focus on
defining a clear meaning for

We found that there were also two important points of difference


that made management innovation a distinct process.

Special report

manner in which these elements are


brought together is typically iterative
and gradual.
Consider the case of Connect &
Develop, Procter & Gambles radical
approach to building an external
network of scientists around the
world as a means of turbocharging
its internal R&D. This major
organisational innovation (analysed
in our article on page 66) took the
best part of 10 years to put together.
Larry Huston, the key architect of the
model explains:
Back in the mid-1990s I was
interested in how to develop a new
organisation form where people
would be fluid and could swarm to
the good projects, yet protect the
base business. We spent time
actually thinking through the
detailed, entire organisation
design and I actually made a
concept video. I then tried to get
one company off the ground,
called Company Way, where you
would get rewards for participation
64

Business Strategy Review Spring 2007

innovation: it involves change and


uncertainty, and as a result it
encounters resistance from people
who dont understand or dont value
the proposed innovation. And it is
impossible to accurately predict
whether any innovations benefits will
exceed its costs. A critical stage in
the process, then, is for the
management innovators to generate
validation for their new idea. We
describe the process of validation to
external parties below; but the more
important step, at least in terms of
the initial implementation, is for the
innovation to gain internal acceptance.
Management innovation is even
trickier to validate than technological
innovation because the innovation
itself is less easily codified, requires
the willing participation of many
people for it to work and often
delivers its results only several years
after implementation.
Consider Oticon, which in the early
1990s developed a radical
organisation model with no formal
hierarchical reporting relationships, a

Oticon employees, something


beyond just making money, and to
build a system that encouraged
volunteerism and self-motivation.
Kolinds experiences at Oticon were
typical. His first challenge was to
persuade the owners of the company
(primarily a foundation) that a
radical change was necessary to
confront the challenge posed by
giant competitors like Siemens and
Philips. Once that had been
achieved, he embarked on a massive
internal selling programme to
explain the nature of his proposed
changes to the employees. He used
radical slogans such as think the
unthinkable and visual symbols,
such as a large transparent chute in
the middle of the building down
which all shredded documents fell.
Inevitably there were some
employees who chose to leave
because they were not comfortable
with his changes, but most were
quick to see the benefits and
became involved in implementing

2007 The Author | Journal compilation 2007 London Business School

External validation One of the


distinctive features of the
management innovation process that
emerged during the research was
what we came to call external
validation essentially a stamp of
approval from an independent
observer, such as an academic, a
consultancy, or a media organisation.
Again, the reason why external
validation proved to be so important
had to do with the uncertain and
ambiguous nature of most
management innovations. Because
of a lack of hard data to prove that a
particular innovation was working,
companies frequently sought
external validation as a means of
increasing the level of internal
acceptance. This process of
validation also typically increased
the visibility of the innovation to
competitors or companies in other
industries, which tended to reinforce
the innovation further. Four types of
external actors were identified during
the research:

So what can you do to improve your


companys capacity for management
innovation? A number of common
themes emerged from the research
that should serve as useful pointers
for a company that would like to take
its management innovation efforts
more seriously.

The business school academic


who typically acts as a thoughtful
observer of the emerging
innovation and who sees his/her
role as codifying the practice in
question for use in research and
classroom teaching.
The consulting organisation that
sees its role primarily in terms of
codifying and documenting the
innovation so that it can then be
used in other settings.
The media organisation that sees
its role as broadcasting the story
of the innovation to as wide an
audience as possible.

The industry association that


seeks to develop improved
practices across its member
organisations. Remember that
Total Quality Management came
about when W.E. Deming and
other quality experts gave a series
of lectures before the Japanese
Union of Scientists and Engineers.
Various member companies of that
Union then started taking up TQM
and sharing their experiences.

Making thunderbolts

Become a conscious management


innovator Every company today
knows that it needs to continuously
create new products and services to
meet customers evolving demands.
And these firms have all set up some
sort of innovation function, whether
it is in the form of a physical R&D
lab or a new venture division. If you
want to become a management
innovator, selling the importance of
management innovation to your
organisation is a crucial first step.

Create a questioning, problemsolving culture When you or your


employees are faced with an unusual
challenge in your company, look
deeper into the problem: see the
problem in new ways and start to
hypothesize about new ways of
solving it. Only the latter path can
take you towards management
innovation, so you need to encourage
employees to explore the unexplored
and to avoid the easy answers.

Seek out analogies and exemplars


from different environments
Depending on the problem you are
trying to solve, the types of solutions
you might want to consider will vary.
Exposing your employees to many
different types of environments and

2007 The Author | Journal compilation 2007 London Business School

different ways of operating is also


invaluable as a means of opening up
their minds to new alternatives.

Build a capacity for low-risk


experimentation In one company we
know, there is a sustained effort to
encourage individuals and teams to
come up with management
innovations to tackle everyday
problems with the existing
bureaucracy and processes. But
each innovation must be tested with
a limited number of people and for a
limited period of time. This has
ensured that every idea gets a shot
at implementation without crippling
the ability of the organisation as a
whole.

Make use of external change-agents


to explore your new ideas Outsiders
fulfil three primary roles. They
represent a source of new ideas and
analogies from different settings,
they can act as a sounding board for
making sense of your emerging
innovations, and they can help to
validate what you have done.

Become a serial management


innovator The real success stories in
management innovation are not the
companies who have innovated once
or twice. The serial management
innovators (like GE, which has been
a pioneer in many new approaches,
from strategic planning to executive
development to divisions observing
boundarylessness) are the ones to
emulate.
These six points are certainly not a
recipe for management innovation.
The process of developing radical
new ways of working will always have
some dose of luck and randomness
to it. But you can certainly tilt the
odds in your favour by working on
these points and by creating a
greater understanding in your
company of how management
innovation happens. To be sure,
thunderbolts seldom happen in
companies in which managers
worship the status quo.

Business Strategy Review Spring 2007

Special report

the transition to what became known


as Oticons spaghetti organisation.
The management innovator may be a
brilliant inventor initially, but it is
equally important for that inventor to
then build a support coalition to
carry the invention into the
organisation. Effective management
innovation requires determined
individuals as much as it does the
creation of a fertile breeding ground
for their ideas.

65

From R&D to Connect + Develop at P&G


Challenged by its CEO to source ideas from outside, Procter & Gamble
decided to blaze a new path for its research and development function.
In pursuit of inspiration, its R&D became turbocharged by using
insourcing to expand P&Gs horizons.

n 2000 Procter & Gamble (P&G)


was at a crucial point in its long
history. One of the worlds bestknown corporations and creator of
some of the worlds most famous and
successful brands was at a
crossroads. Its CEO, Dirk Jager, had
left after a mere 18 months in the
job. In March, the company
announced it would not meet its
projected first quarter earnings. The
stock price was spiralling downwards
falling from $116 in January to
$60 per share by March. The massive
loss of $85 billion in market
capitalization was matched by the
loss of confidence within. It provoked
a media frenzy. Perhaps most
poignantly, Ad Age headlined its front
page story: Does P&G Still Matter?
It was one of many column inches
devoted to the apparently impending
demise of the company.
P&Gs new CEO, A.G. Lafley,
provided an instant dose of reality:
We werent delivering on goals and
commitments to analysts and
investors. Major P&G businesses
were underperforming only three of
them accounted for 80 per cent of
the total value created inthe 1990s.
Competitors were swooping in and
gobbling up market share. We were
overinvested: we overbuilt capacity,
hired too many people, funded too
many aggressive introductions of new
products and expansions of existing
brands. P&G brands were not
delivering good consumer value: we

Special report

66

Business Strategy Review Spring 2007

werent consistently leading


innovation, and prices were too high.
We had priced-up big established
brands to pay for new products and
aggressive geographic expansion. Our
costs were also too high. We had
frayed relations with important
customers who were frustrated with
incompatible strategies, poor service
levels, and P&Gs inability to create
value for them. We were too
internally focused. Consumed with
the massive reorganisation, and with
so many people in new jobs, we were
all spending too much time
managing internal transactions.
In addition to this litany of internal
problems, P&G had the abiding
corporate challenge of achieving
growth. A mature company, such as
P&G, is usually expected to deliver
organic growth rates of around four
to six per cent every year.
Historically, this growth had been
delivered by the companys
formidable research and
development resources thousands
of researchers spread worldwide. But
with the proliferation of new
technologies and intensifying
competition, P&Gs standard
approach to R&D was under threat.
Only 35 per cent of its new products
met their financial objectives. R&D
productivity was stagnant.
Lafleys prescription for the ailing
corporate patient was wide-reaching.
Estimating that it would take three
years to get P&G back on track, he

focused the company on four core


businesses (accounting for 54 per
cent of sales and 60 per cent of
profits); its big, established leading
brands; and P&Gs top 10 countries
(80 per cent of sales and 95 per
cent of profits). Costs, which had
rocketed under Jager, were cut.
Capital spending had leapt to eight
per cent of sales and was trimmed.
Nearly 10,000 jobs were lost around
the world as underperforming
businesses were closed and the
company left businesses now
regarded as non-strategic. Some
product lines were discontinued,
investments were written off and
brands, such as Comet, Crisco and
Jif, were sold off.
And, perhaps most boldly of all, in
the midst of establishing the new
P&G order, Lafley announced an
entirely new approach to innovation.
P&Gs corporate innovation fund had
increased seven-fold in four years.
Two-thirds of these projects were
cut. Lafley announced that, in the
future, instead of relying on its
internal research and development,
P&G expected that 50 per cent of its
innovation would come from outside
the company. R&D numbers would
remain the same, but the onus
would be on maximizing ideas
internally and externally.
The logic was simple. For every
one of the companys researchers,
P&G calculated there were 200
people scientists or engineers

2007 The Author | Journal compilation 2007 London Business School

outside the company who had


talents the company could utilise.
Instead of 7,500 people in corporate
R&D, P&G recalculated that there
were 1.5 million worldwide whose
knowledge they needed to tap into.
Research and development was
reincarnated as Connect + Develop
with an organisation of 1,507,500
people.

Green lights; new dawn


For Larry Huston, then 26 years into
his P&G career, Lafleys
announcement was a crucial
moment, a green light for his work
stretching back much of the past
decade. He told his team: Were in
business, things are going to start
happening.
Hustons state of readiness was
understandable. Tracing back the
idea that became Connect +
Develop, he goes back to the mid1990s and draws parallels with
artists. Its just like the way some
artists will develop models and
sketches before they commit to
creating the final painting, says

deliver high-performing results, yet


be adaptive. He spoke, among
others, to Dee Hock at Visa, who had
instigated a unique organisational
form labeled the chaordic
organisation. His attention then
developed to embrace chaos theory.
Huston sought to understand
whether there was a way to attract
the best people to projects with a
greater chance of success and to
allow bad projects to die because
they would go unstaffed. I wanted
to create an organisation where
people would be fluid and move
around and could swarm to the good
projects, yet protect the base
business.
Huston made contact with Stuart
Kauffman at the Bios Group and
spent time thinking through and
developing a detailed organisation
design. This was captured on the
walls of a large conference room in
Santa Fe, and Huston was then
filmed giving a guided tour to the
organisation design of the future
with Kauffman following with his
own commentary.

create a new R&D model for the


company?
This was a moment in time that
allowed us to really consider a whole
new operating method, Huston
summarizes. I had run six years of
experiments, and went out and
started studying real world
innovation networks and how value
could be created. Then we created
the conceptual positioning for
Connect + Develop, around the idea
of turbocharging our already strong
base organisation. I had the
rationale and some ideas about the
tools and how to get it off the ground
and created a new role called
technology entrepreneurs. Lafley
announced that we were going to get
half of our innovation from the
outside. That was a major
intervention and so we were off and
running.
Importantly, Lafleys
announcement was a very public
one. He put the stake in the ground.
Reactions were decidedly mixed,
Larry Huston recalls: Some peoples
first reaction was, wow, P&G is

The Connect and Develop model of innovation is nascent and


likely to become the dominant innovation model of our times.
By way of further experimentation
Huston then worked with a start-up
software company to launch a
company to facilitate a flow to the
best opportunity model. This webbased investigation lasted a year
while Huston and his team studied a
handful of innovation projects that
had been brought in from outside
P&G. External connections created
about twice as much value as
internal initiatives when factors such
as success rates and time to market
and after costs were fully
considered. Huston extrapolated that
a connections model of innovation
could create a breakthrough in
driving P&Gs business and its
productivity.
Gilbert Cloyd, P&Gs Chief
Technology Officer, approached
Huston with a challenge: could he

2007 The Author | Journal compilation 2007 London Business School

getting rid of its R&D. Should we


sell the stock? This is a sciencedriven company, what are they
doing, have they lost their minds?
They didnt realize that what we
were doing was substantially
strengthening our R&D capability.
Special report

Huston. Thomas Hart Benton, for


example, a US-based social realist,
would create clay models and then
more models of what he was
eventually going to paint and then
he would start working on the
perspectives with all kinds of
sketches. He would work on the
concept for a long, long time before
he ever actually created a successful
painting. Thats the way most artists
work; look at all the study pieces
that everybody does. And, in the
case of this new innovation model,
we worked, probably, five or six years
on creating the studies that led to it
coming together, ultimately, in the
year 2000.
Huston, along with colleague
Nabil Sakkab, was initially interested
in how to develop a new organisation
form that combined the ability to

Reality and development


The positioning of Connect +
Develop was important. First, it was
made clear that Connect + Develop
was not a matter of outsourcing
P&Gs research and development
capability. Connect + Develop was
about finding good ideas and
bringing them in to enhance and
capitalize on internal capabilities. In
essence, an insourcing strategy.
The second point was that
Connect + Develop was not a
transformation programme.

Business Strategy Review Spring 2007

67

Special report

I think transformation is a dirty


word, says Huston. If you go and
say to a company, Im going to go
transform you, theyll say, its going
to be impossible and well never
finish. In the case of Connect +
Develop we were careful not to
position it as transformation even
though now it is. We said, we have a
strong, powerful, global organisation,
weve built outstanding capability all
over the world, we have world class
people, what were going to do is
take this already strong capability
and turbocharge it. And so the core
idea is based upon how do we
turbocharge? And then, what are the
accepted beliefs that people have
about this kind of thing? How do we
create its credentials?
Connect + Develop focused on
three areas: the needs of consumers
(each business and the company as
a whole identified the top 10 needs
of consumers); adjacencies (products
or services which could help P&G
capitalize on existing brand equity);
and, what the company labels
technology game boards (a
planning tool which enables P&G to
evaluate how technologies in one
area impact elsewhere in the
business).
At the heart of Connect + Develop
is using networks to gain connections
to new ideas. In the old invention
model know-how was key and
really this is what was focused on the
most. In the new connections model
know-who would become critical.
The networks P&G keys into are
varied. Among the most notable are
proprietary networks developed
specifically for Connect + Develop.
For example, P&Gs leading 15
suppliers have around 50,000
people employed in R&D. P&G built
an IT platform to share technology
briefs with suppliers. Closer working
relationships and the sharing of
information have brought a 30 per
cent increase in projects with staff
from suppliers and P&G working
together.
Even competitors offer sources of
inspiration. Huston recalls meeting a
competitor from Japan. He said,
Are you comfortable with talking? I
68

Business Strategy Review Spring 2007

Larry Huston: well connected

said, Of course Im comfortable


talking. I consider your 2,500 R&D
people to be my R&D lab. And this
really blew his mind.
P&G also created a network of
what it labels technology
entrepreneurs. They are senior
experienced people who have seen
everything, done everything. They are
focused on being the growth
provocateurs for the organisation,
Huston explains. The technology
entrepreneurs number 70 worldwide.
They are effectively the eyes and
ears of Connect + Develop making
contacts within industry and
education, with suppliers, and with
local markets. To date, the
technology entrepreneurs have
brought over 10,000 products, ideas
and technologies to the attention of
P&G. Each is then evaluated.
Elsewhere, P&G taps into a
number of open networks. It is
involved with YourEncore, which
connects companies with high
performing retirees from over 350
companies; InnoCentive, which deals
with more specific technical

problems; and Yet2.com, an online


intellectual property marketplace.
Once ideas emerge through the
networks they are rigorously
evaluated by P&G before deciding to
proceed with further development.

The innovation dividend


P&G accomplished its goal. Over 50
per cent of the companys
innovations now originate outside
the company. When Lafley first
announced his bold target in 2000,
the figure was under 15 per cent.
Connect + Develop has helped
turbocharge more than 250 products
into the marketplace, and has
generated billions of sales.
Now Procter & Gambles vice
president for innovation and
knowledge, Huston believes that
Connect + Develop offers broader
lessons on how to develop
management innovations. The one
thing that is really important is to
get the concept right, says Huston.
P&G is a concept-driven company.
A concept for us is how the products
going to make the consumers life

2007 The Author | Journal compilation 2007 London Business School

this thing out. But, it is trite to say


that this is all about starting with the
CEO and changing the rewards
system. For me, it starts with an
idea, one that is proven, one that
can be scalable. Then it moves to
the top leadership for support. Then,
on to making the necessary changes
in the culture, like rewards, to
enable adoption at scale.
Second, its about building a lot
more muscle. Connect + Develop is
about muscle, its about giving us
many more hearts, minds, hands and
feet to do the work. And the third
thing is, it is about equipping people
and mindsets. For the most part our
people have good ideas. We dont
really have an idea problem. We have
people who are smart and motivated,
but mostly organisations are underled around innovation. Its the top
officers that have to really create a
growth culture based on innovation
rather than just acquisition.
There are also cultural challenges
involved in moving any organisation
from an emphasis on finding
solutions internally to tapping into
brilliant minds elsewhere. Most
senior managers at P&G have been
with the company for the vast
majority of their careers. You rely
on people outside, to some extent, to
help challenge you and put ideas in
your head about what might
happen, Huston admits. In
refining your ideas and ideas of
whats possible, you have to expose
yourself outside. Whether its going
to see Dee Hock or Stu Kauffman or
some little entrepreneurial company
or studying the movie industry or the
toy industry, or whatever it might be,
you have to. The problem is people
dont know the right questions to
ask. And if youre inside a company
the only questions you know to ask
are those within your frame of
experience. Its hard to ask a
question outside your frame of
experience so you have got to be
moving to other frames of experience
to come up with good questions.
Huston believes that the Connect
+ Develop model of innovation is
nascent and likely to become the

2007 The Author | Journal compilation 2007 London Business School

dominant innovation model of our


times. It is like developing the
telephone system. If Procter &
Gamble developed the telephone
system and only we had it in the
world, yes, it would benefit our
operations. But, if the world has the
telephone, look how much more
effective we are and whats most
important with the telephone system
is not the utility but the
conversations. So weve been telling
our potential partners, heres the
utility, heres how you do Connect +
Develop, because fundamentally we
believe that our competitive
advantage is knowing the
consumers, leveraging the strength
of our brands, and the quality of the
conversations that we have. Its not
whether or not there are networks
out there or people know that we are
linking to scientists, its the quality
of the conversation.
Today, for many companies, the
innovation phone system, the
innovation phone book, and the idea
of innovation conversations barely
exists. For Procter & Gamble,
management innovation has been an
important driver of its enduring
success. It pioneered brand
management in the 1920s, it was
one of the first companies to
implement a transnational
organisation in the late 1980s in
R&D (also led by Larry Huston), and
it is now leading the world in its
approach to open innovation. And
the beauty of such innovations is
that they are sufficiently deep-seated
that competitors take a long time to
catch up. As Huston observes,
Connect + Develop is a long-term
investment: I think P&G will run on
this model for 20 years, and one-byone many other companies will
embrace it.

Special report

better and providing strong reasons


to believe in it. So we practice
concept development here every day,
because we have to move hearts and
minds. We have to win the battle at
the store shelf and getting the
concept right is enormously
important. In fact, most product
failure, 75 per cent of product
failure, is not because the product
doesnt perform, but because it was
the wrong idea. It didnt provide
desired consumer benefits at the
offered price. Many organisation
failures are due to both a poor
concept and poor execution.
For a number of innovations that
Huston has been involved in, he
went through the formal concept
development storyboarding process,
applying what P&G does for products,
to management concepts and
businesses. One of the new business
ideas tested was called YourEncore
(www.YourEncore.com). The concept
was to take the experience and
expertise of people who have retired
and to utilize it in organisations.
Huston and his team created
storyboards for the concept and then
took them to 21 prime prospect
companies. They commented on and
critiqued the idea, how it would work,
and the value proposition. Huston
next ran financial models to see if
the desired concept was capable of
making money. YourEncore now links
over 1,800 retired scientists and
engineers drawn from 350
companies to organisations in need
of their experience and expertise.
Its all about bringing in new
innovation DNA to create new
sources of growth. Thats the core
idea, says Huston.
Clearly, Connect + Develop offers
further lessons on how companies
can utilize external expertise and
maximize internal resources. The
commitment of the companys
leadership was important. Says
Huston: This is all about
leadership, number one, being clear
about where to play, how youre
going to win and where you want to
grow. Thats the job of the CEO and
the top management to really figure

Resources
Larry Huston and Nabil Sakkab,
Connect + Develop, Harvard
Business Review, March 2006.
A.G. Lafley, Getting Procter &
Gamble Back on Track, speech at
the Rotman School, April 21, 2003.
www.pg.com

Business Strategy Review Spring 2007

69

Perfectly in balance
Arthur M. (Art) Schneiderman pioneered what later became the concept
of the balanced scorecard while a vice president of quality and
productivity at Analog Devices. We talked with Schneiderman, now an
independent consultant, to find out more about the early evolution of a
management innovation.

Special report

How did you come to a scorecard


point of view?
I was an aerospace research scientist
for 15 years and decided that I
wanted to change careers. So I quit
my job, attended B-school, and
worked in a strategy consulting firm.
Ultimately, I became aware of Total
Quality Management (TQM) on a trip
to Japan. And thats when I became
so interested in it that I decided I
really wanted to focus attention on
TQM rather than strategy consulting.

70

talked about TQM and it made for a


great dialogue. It seemed to me right
away that Ray and Analog were
blessed with an innovative culture.

Were you also interested in


innovation at this point?
Yes. I wanted to make sure that I
worked in companies that had a
record of innovation and were
particularly responsive to innovation at
the management level, because TQM
is a kind of innovation. As I searched
for American companies that would
meet the test of being both innovative
and receptive to TQM principles, I
increasingly focused on Analog
Devices, and I wrote to Ray Stata.

Did you say culture?


After years of working with
innovation, there is no question in
my mind that the number one
ingredient is to have an innovative
environment. You cant innovate in
an environment that is not open to
innovation, and that means from the
very top, from the CEO all the way
down through the organisation. And
it was clear that Ray was interested:
he recognized that TQM was an
important thing, that it had an
impact on any and every industry,
but that it would acutely affect the
semi-conductor industry, of which he
was a part. Theres no question that I
immediately liked and respected Ray
Stata and so that ended up being the
chemistry of my going to Analog. It
was the right environment for me
and it was the right time for him.

Why that company?


Ray was and is one of the rare CEOs
who is really curious and interested
about management innovation. I
remember when I first went to see
him, it turned out that it was quite
timely because he had just gotten off
the phone with one of Analogs major
customers who was irate because a
key shipment was late. And so I

Was everyone inside Analog as


committed to TQM and innovation?
No. And, in time, Ray was succeeded
by someone who has more of a
traditional approach to management,
the kind of executive who makes
doable promises to Wall Street and
then tries to deliver on them. The
lesson here is that the leader of a
company is essential to innovation;

Business Strategy Review Spring 2007

yet, after a company has become


innovating and if the industry does
not demand that you innovate
further someone of a different
temperament can lead the company,
with a much more status quo
demeanour.
When you worked on being
innovative, what kind of time horizon
was in your mind?
One of the first assignments that Ray
gave me at Analog was to develop
five-year strategic plans.
Traditionally, once every five years,
they would develop a strategic plan.
Curiously, they would not revisit that
plan until the five years were up. So
I started to think of innovation with
at least this kind of time horizon.
But five years ...does that work in
todays marketplace?
Obviously in todays world thats not
a viable approach, and it did change
even while I was at Analog more
toward a continuous strategic
planning model. Thats whats
needed now. If the market demands
constant innovation (and just about
every market does), you have to
focus on innovation constantly.
Whats most relevant to note here is
that innovation is not something that
is always defined by numerics. Even
at Analog, I came up with something
that was called the Corporate
Performance Audit, an annual audit

2007 The Author | Journal compilation 2007 London Business School

that used what I called a half-life


method. The plan we devised used
an annual context and focused on
seven or eight non-financial things
that we needed to manage in order
to get to where we wanted to be in
five years, numerically and
otherwise. In fact, one of my tasks at
Analog was to manage the agenda
for the monthly business meetings.

originally created. Is there one right


scorecard?
Some of my colleagues over the
years have concentrated on creating
the perfect scorecard, but Im not
sure its helpful to insist on just one
form of scorecard. The big problem
that organisations have is in
implementing the scorecard; they
dont have tools in place for

any time you come up with an


innovation in management that has
numerical targets as its basis, it is
unlikely that it will ever be accepted
with enthusiasm throughout the
organisation. The lesson is that you
should focus on rate of improvement
rather than specific end results.
Second, I believe the scorecard is
probably somewhat less important

I cant put my finger on where or when it happened, but I


suddenly realized the best thing to do was to try and combine the
two items in what became the overall scorecard for the business.

How did you resolve this battle?


I cant put my finger on where or
when it happened, but I suddenly
realized the best thing to do was to
try and combine the two items in
what became the overall scorecard
for the business. In trying to meet
the demands of the hard number
execs, I agreed that we would have
no more than three financial
measures at the top of the scorecard
and then non-financial measures for
the rest. So that is how the Analog
Devices scorecard was born. The
general manager urged that we
abandon the fancy name of
Corporate Performance Audit and
call our performance tracking,
simply, the Corporate Scorecard. And
guess what? Divisional Scorecards
soon followed, which gave us a
weighted average of each divisions
online performance. What would
change over time are the things that
went on the scorecard, not the
financials but the non-financials. At
the time, as far as I know, no other
company was doing it this way.
The balanced scorecard has evolved
over time, and it seems that there
are variants of the concept you

achieving the goals. And so they fail.


They have a scorecard but they dont
achieve the results they desire, so it
never makes any strategic
difference. In the end, they waste a
lot of effort and a lot of energy that
could be spent elsewhere. Some say
the scorecard itself is the big thing; I
say the real power of the scorecard
concept is in how youre going to
implement the changes. Thats the
key thing.
Along those lines, if its important
how you implement the scorecard, is
it also important to think about how
you develop the scorecard?
Absolutely. The process by which
you develop the scorecard is of
critical importance. Most of the
time, measures that people add to
the scorecard are politically chosen
measures, not strategically chosen.
So you have to have a welldocumented, well-understood
process that you refine each cycle.
This means that you not only have to
work on the scorecard, you also have
to work on how you are going to
create it and how youre going to
ensure that it is widely known and
thoroughly understood, which leads
you to how you are going to achieve
the goals that you come up with.
So having worked with scorecards for
so long, do you have any favourite
lessons learned?
Let me offer three. First, I think that

2007 The Author | Journal compilation 2007 London Business School

than the half-life method: you have


to test everyones sense of making
solid progress and thus you have to
establish sound improvement
processes in the organisation. And
then the third thing is to cultivate
the mental process for process
management. On my website,
www.schneiderman.com, I list 7Steps of Process Management. I do
this for a very important reason: its
vitally important how you approach
innovation or the end results will be
far less than optimal.
Are your seven steps the same as
TQM?
My 7-step model for process
management encompasses TQM, but
it also tells you when, if necessary,
to redesign a process, to re-engineer
it. It also has control built into it,
which basically says that it doesnt
do you any good to improve a
process if it has random applicability
or otherwise is out of control. In
terms of the steps I recommend, I
dont care where you start, but I do
care that you have an open process
that allows you to ask questions from
time to time, questions like: How are
we doing? Are we on course? If not,
why not? A scorecard is an essential
component to running a business,
but only if you know how to play the
game very well. In the end, the
scorecard tells you whether the
structure and processes inherent in
your business are helping or not.

Business Strategy Review Spring 2007

Special report

There was always a battle with other


senior managers whether we should
discuss, first, the non-financial
parameters of the business or the
hard numbers. Many companies fight
that same battle today.

71

Making the firm flexible


How companies operate has been established over two
centuries. Is it possible for a firm to break the established
rules of organisation? Eden McCallum did just that.

he origins of the modern firm


can be traced to the 19th
century. Yet the nature of
business enterprises remains a
constant work in progress. Over the
last decade, in particular, technology
has opened up a wide range of
opportunities to change the
fundamental shape of the traditional
firm. This potential has been
enthusiastically charted by
commentators and academics alike.
In 1998, Thomas W. Malone and
Robert J. Laubacher of the
Massachusetts Institute of
Technology (MIT) looked at how a
new kind of organisation could form
the basis of an economy in which the
old rules of business are overturned
and big companies are rendered
obsolete. Drawing on their research
at MITs Initiative on Inventing the
Organisations of the 21st Century,
Malone and Laubacher heralded the
dawn of the e-lance economy a
world where freelance workers would
come together in temporary or virtual
constellations rather than as
traditional employees. Malone and
Laubacher were not alone in
predicting that technology would
change the shape of organisational
life. There has been an array of
variations on the theme of creating
and managing virtual and networked
organisations. Yet, despite
continuing technological strides, the
predictions of revolutionary change
remain largely unfulfilled.

Special report

72

Business Strategy Review Spring 2007

In parallel, the 1990s saw


increasing interest in professional
service firms as a uniquely fertile
area for discussions of organisational
structures. For example, Tom Peters,
a former McKinsey consultant turned
management commentator,
celebrated the multi-functional
global teams speedily assembled by
the consulting firm to tackle client
problems. Their speed and flexibility,
coupled with their strongly defined
culture and their ability to manage
and maximise knowledge, convinced
Peters that it provided a partial
blueprint for how business firms
could be constructed and behave in
the global economy.

Inspirations
The London-based consulting firm
Eden McCallum provides an
innovative take on the nature of the
firm as well as potential future
scenarios for the organisation of
consulting firms.
Launched in 2000 by Liann Eden
and Dena McCallum, Eden
McCallum is a network-based
consulting firm. Rather than having a
large headquarters and all the
overheads associated with a
conventional consulting firm, Eden
McCallum retains a minimal central
staff and utilises a network of
freelance consultants. Eden is a
former McKinsey consultant who also
held international marketing roles at
Unilever and Siemens. McCallum

was formerly an international vice


president and director of planning
and strategy for the publisher Cond
Nast as well as being a former
McKinsey consultant.
The inspiration for the firm began
when McCallum was working at
Cond Nast and Eden was working at
McKinsey. McCallum realized that
her budget did not stretch to hiring
one of the big-name strategy
consulting firms McKinsey & Co.,
Boston Consulting Group, Bain or
Booz Allen Hamilton but she still
needed that calibre of support. Eden
observed that many strategy
consultants, particularly in the dotcom era, were reassessing what they
wanted from their work and
flexibility and control were key. Soon
after, the former INSEAD MBA
classmates came up with the idea of
creating a pool of experienced,
independent consultants.
Six years later, turnover of the
company is over 10 million and it
has delivered more than 300
projects. The firm has grown by more
than 80 per cent per year. It now has
24 full-time staff and around 200
freelance consultants, making it the
second biggest strategy consulting
company in London after McKinsey.

Trends and opportunity


As with many other businesses,
Eden McCallums evolution was
based on the benign convergence of
a number of factors. In hindsight, a

2007 The Author | Journal compilation 2007 London Business School

Liann Eden and Dena McCallum: flexible friends

minds. With MBA graduates and


former strategy consultants now
commonplace among the senior
echelons of multinational firms,
there is a resistance to formulaic
consulting products and neatly
packaged solutions. Instead,
companies want consulting advice
that is genuinely tailored to their
situations. Companies are
sophisticated buyers. They can pick
and choose and shape. Clients want
the same flexibility as consultants,
says Eden.
The second trend Eden McCallum
happily tapped was among
consultants themselves. Many
consultants were bitten by the new
economy bug and left consulting
firms in search of entrepreneurial
excitement and the opportunity to
make a lot of money. When the new
economy fizzled from rocket to damp
squib, many one-time consultants
had reassessed what they wanted out
of their careers and were loathe to
re-enter the corporate world on the
same terms as before. At the time
when Eden McCallum began life,
many experienced consultants were
contemplating their next career
moves. At one point everyone

2007 The Author | Journal compilation 2007 London Business School

wanted to be partners, then they all


wanted to be entrepreneurs, recalls
Eden. The dot-com thing created
demand for flexibility. People left
their traditional careers and then
didnt come back.
At an operational level, too, Eden
McCallum recognized an
opportunity. Large consulting firms
typically focused on high-level board
issues at FTSE 50 companies. For
their part, client companies often
wanted continued consulting support
on specific strategic issues or
implementation but were put off by
continuing high costs. Eden
McCallum offered a market-breaking
alternative: consultants with the
same high-level skills and rigorous
approach at approximately half the
cost. After the dot-com crash, this
combination of quality at lower cost
was particularly alluring as many
firms had scaled down their
consulting budgets.

Special report

lot of things came together at once,


explains McCallum. First and
foremost we wanted to create a
business. So, we looked at the
marketplace in a business we knew:
management consulting. And we saw
a couple of major trends the
maturing of the consulting market,
and professional people wanting to
take more control of their careers.
These then led us into our unique
business model. And in creating this
business, we also ended up coming
up with an entirely new organisation
model. Business innovation begets
management innovation.
The first change was the maturing
of the management consulting
market, with clients seeking more
control and value in their consulting
spend. The dominance of the big
players in the business was and is
largely unquestioned. It has
spawned an entire generation of
companies and senior executives
who are comfortable with the notion
and value of management
consulting. They are aware of its
potential value to the business. In
the past, companies hired top
consulting firms to tap into their
bright, business-school-educated,

Innovative solutions
Eden McCallums proposition was
simple but scary: a consulting firm
without any consultants on the
payroll and without any proprietary
methodologies. Instead, they

Business Strategy Review Spring 2007

73

would employ consultants on a


contract basis as demanded by their
clients, and they would use whatever
methodologies were appropriate to
solving their clients problems. As
one former Bain consultant observed,
this approach appeared to challenge
everything consultancies held dear: it
was like the sky falling in.
To make this model work, Eden
McCallum had to rethink many of the
standard precepts of management
thinking:
Tailor the offering Eden McCallum
focuses on tailoring the consultants
experience, skills and personalities
to the clients needs. The firm makes
it clear that it is not in the business
of creating its own distinctive
intellectual capital and that it is
agnostic when it comes to particular
methodologies, despite the fact that
novel ideas and tools are the
lifeblood of most big consulting
companies. We rely on what our
consultants bring to the table and let
our clients choose their preferred
approach by interviewing and
selecting the consultants, reflects
McCallum. Clients want to work
with a person they trust; they dont
necessarily want a particular
methodology. They just want the
project to succeed.
Outsourcing the delivery channel
Eden McCallums core delivery
mechanism is effectively outsourced

built on relationships rather than


transactions. Relationships are
between clients and Eden McCallum,
and the firm endeavours to retain
control and oversight over the
relationship with the client. Says
Eden: If we structure the project up
front and we have a long-term
relationship with the client, then we
dont have to own the delivery
mechanism. The keys are trust-based
relationships, clear problemstructuring and careful selection of
consultants.
Involve the competition The standard
organisational model is to start small
with the intention of emulating or
overtaking an industrys big players
over time. Not so in the case of Eden
McCallum. From the start, Eden and
McCallum were clear that their
livelihoods, and the future of their
business, depended on what was
ostensibly the competition: big-name
consulting firms. We exist because
they exist, says Eden. Companies
like McKinsey, Bain and BCG create
the market on both the client and
consultant side.
Before the firm was launched,
Eden McCallum began a dialogue
with the big players in the market.
This alerted them to the potential of
working with Eden McCallum rather
than regarding the company as
another upstart strategy consulting
boutique with eyes on their own
markets. And this symbiotic

a great deal of the value lies.


Indeed, in a business without its
own consultants and without its own
intellectual property, this is the heart
of Eden McCallums value-added.
Consequently, about half of its
full-time staff are fully employed
ensuring that its consultants are the
right people in the right jobs. The
other half of the full-time staff are
totally dedicated to developing and
nurturing client relationships. Our
full-time employees are either
working on the supply side so they
are consultant-facing or on the
demand side which is client-facing,
explains McCallum. And it is the
skills of these individuals, and their
ability to match top-quality
consultants with the right projects,
that define Eden McCallum. Every
consulting company works hard to
match its consultants to the right
projects; reflects Eden, the
difference is we dont have to worry
about capacity management, so we
can always make a good match.
Initially, to build awareness among
potential consultants, Eden
McCallum placed advertisements in
the Financial Times and The
Economist a statement of intent as
much as anything. The ads
emphasized that the company was
looking for consultants who were
independently minded with
experience in a top consulting firm
and who had an MBA from a leading
business school. These basic

Special report

Eden observed that many strategy consultants, particularly in the


dot-com era, were reassessing what they wanted from their work
and flexibility and control were key.
to freelance consultants. On the
surface, at least, this appears to be a
dangerous strategy. The company is
clearly reliant on the quality of the
service offered by the consultants. To
make it successful, Eden McCallum
works hard to ensure the quality of
these people. Only one in 10
applicants makes it into the
companys talent pool. The second
safety element is that consulting is
74

Business Strategy Review Spring 2007

approach has worked. Eden


McCallum has referred business to
big-name consulting firms, and they
have returned the compliment.
Elevate the process behind the
network The idea of a networked
organisation is not new. Brokers and
agents are commonplace. What
marks out Eden McCallum is that the
process behind the network is where

recruitment benchmarks remain in


place. In addition, Eden McCallum
consultants are evaluated against
five core competencies, their CVs are
screened, all references are checked,
and they go through multiple rounds
of partner interviews. The people
who recruit the consultants are,
themselves, former consultants who
understand the dynamics and
demands of the business.

2007 The Author | Journal compilation 2007 London Business School

When they actually go to work,


Eden McCallum puts two to three
consultants from its talent pool in
front of a client. The client then
evaluates with whom they think they
would work best. On the completion
of projects there is an extensive
feedback process focused on the
individual consultants and Eden
McCallums performance. Big
consulting firms put forward a team

letting their consultants choose their


own terms of employment, Eden
McCallum has a much more
dedicated and committed workforce
than would have been possible with
a traditional hierarchical
organisation structure.
Create transparency Eden McCallum
works very hard on creating
transparency in its management

dont anticipate using a lot. We tell


them that we anticipate using them
once a year. Our interviews actually
provide great career coaching for
them and the network offers them a
lot of information. Often they will tell
us what their targets are in terms of
working with us. Some will work for
six months and then go travelling or
do something else others are
working full-time on back-to-back

Eden McCallums experiences help to shed light on the age-old


question: What is the real raison d tre of the firm?

Redefine the employment


relationship Eden McCallums
network of consultants are not
employees in a traditional sense, nor
are they entirely freelance
contractors. They lie somewhere in
between: they have considerable
loyalty to Eden McCallum, and they
get most of their work from the
company, but they define their own
terms of engagement. This includes
choosing which sectors they will
accept projects in, how many days
per week and how many months per
year they work, the logistics around
travel and many other elements as
well. We are constantly putting
together a new puzzle for each
project, explains Eden. To be sure,
this arrangement requires constant
balancing to keep everyone happy,
and it is not for everyone. But, by

model so that everyone knows where


he or she stands. This ensures that
there is a good relationship between
network members and avoids the
sense that some people may be
getting favourable treatment ahead
of others.
One complication lies in financial
arrangements. To avoid this, Eden
McCallum is very open about its fee
structure. For around 100 of its
consultants, the firm is their main
source of income. Another 100 work
on about one project a year. Initially,
fees were put forward by the
consultants. Then the company tried
to allow clients to determine fees.
Now, how much consultants are paid
depends on a banding system in
which consultants are paid
according to their seniority and
consulting skills.
Another common concern in
network organisations is how the
available work gets shared. So the
firm tries to be clear about the likely
levels of demand for people with
different skills sets. It is about
calibrating expectations, says Eden.
Were honest with consultants we

2007 The Author | Journal compilation 2007 London Business School

projects. There is no exclusivity in


the relationship.

Reinventing the firm


Eden McCallums experiences help
to shed light on the age-old
question: What is the real raison d
tre of the firm? In an era of
outsourcing and virtual working,
what are the minimum few things
that the firm has to do to justify its
existence?
The answer is three things. First,
the Eden McCallum brand
represents a particular value
proposition to its clients and its
consultants, and for the founders a
key part of their job is to continue to
nurture and sustain that value
proposition. Second, Eden McCallum
is a nexus of relationships: it gains
value from the social capital that
builds up over time in that set of
relationships. And third, it is a
mechanism for structuring the work
and managing projects. These are, in
essence, the core competences of
Eden McCallum and are the things
the company has to sustain as it
grows and evolves.

Business Strategy Review Spring 2007

Special report

and the client generally doesnt have


a say about who is on it, says
McCallum. Because our clients are
involved in choosing the consultants
they work with, they have a vested
interest in making it work with those
people.

75

Death

to budgeting

Its considered one of the basics of management. If you dont


have a budget, you arent really managing. Not true: UBS made
budgeting secondary to performance and customer satisfaction.

ost large firms are victims


of their own enthusiasm for
new ideas and new
practices. Whatever the latest
management idea knowledge
management, re-engineering, sixsigma, 360 feedback it is quickly
noticed. Soon, a working group is
formed to evaluate its potential; and,
straight away, the idea is being tested
in a pilot project.
But, once brought to life, projects
are hard to kill; new ideas, once
discussed openly, are hard to
suppress. So whats new is usually
piloted on top of an existing set of
processes and alongside the vestiges
of several earlier projects, none of
which really succeeded or failed.
Much like the sandwich made with
dozens of bread slices stacked ever
higher, the result is an organisation
in which multiplied processes create
staggering complexity, limiting the
ability of any one initiative to deliver
on its potential. The end result is an
enterprise choking on innovation
with widespread scepticism among
employees.
So the biggest challenge facing
most large firms is not how to
embrace the latest thinking; it is how
to cast off the old. We need to create
ways of working that are fit for the
future, but we also need to become

Special report

76

Business Strategy Review Spring 2007

more effective at identifying and


jettisoning the old ways of working
that had value only in the past.
UBS Global Wealth Management &
Business Banking (UBS Global
WM&BB), the private banking, retail
and corporate banking division of the
giant Swiss bank, offers a fascinating
insight into how change can be
facilitated by getting rid of a
redundant and value-destroying
process. But the bank did not focus
on just any process; it picked one
that is considered core to almost any
business: budgeting. One issue that
every big-company manager can
agree on is that the annual
budgeting process is an enormous
waste of time and effort. The UBS
executives didnt just bemoan the
futility of budgeting, however; they
decided to abolish the whole
process. In doing so they achieved
dramatic changes in the culture of
the organisation and helped to reach
record levels of growth.

Building a platform for growth


UBS was the product of a mega
merger of two of Switzerlands oldest
banks (Union Bank of Switzerland
and Swiss Bank Corporation) in
1998. As Dominik Ziegler, controller
of the Wealth Management
International business recalls, At

the time of the merger, we were not


in the best shape. Morale was low,
and our cost base was too high. We
went through a long period of
rationalisation and cost cutting. And
during that time we had a very strict
budgeting process with very tight
numbers and strict accountability.
By 2002, the cost-cutting
measure had created huge savings,
and the company had integrated
itself around its single global brand.
And with the financial services
market recovering from its post-dotcom hangover, UBS was well
positioned to move back into growth
mode.
UBS Global WM&BB is the biggest
and (together with UBS Investment
Bank) the most profitable business
group of UBS and the world leader
in the private banking industry. With
only about four per cent of a highly
fragmented market, the potential for
growth is enormous. So the business
group executive team, led by Marcel
Rohner, began in 2003 to shift the
emphasis away from cost control. As
Toni Stadelmann, CFO for the
business, comments, Our strategic
challenge at that point was to shift
the focus on costs to a focus on
growth and efficiency. And that
required a different culture, a
different attitude.

2007 The Author | Journal compilation 2007 London Business School

The 20 top executives of the


business group held an off-site in a
windowless room in London at the
end of 2003. They developed a clear
agenda for growing the business,
and then they started looking into
the blockers, the things that were

Swedish bank Svenska


Handelsbanken had pioneered a
no-budgeting model back in the
1970s, so a couple of UBS
executives took a trip up to
Stockholm to compare notes. But as
Ziegler recalls, It was not what we

revenues, net new money,


cost/income ratio. And then we
ranked all the desks (groups of
client advisors) in the cluster. In
essence, we created performance
league tables, and we made the
results available for everyone to see.

One issue that every big-company manager can agree on is


that the annual budgeting process is an enormous waste of
time and effort.

Out with the old


Following the off-site, a working
group was set up for enabling and
driving growth, with the abolition of
the budgeting process as one topic
on the agenda. This was easier said
than done, however. The process
could not just be thrown out without
replacing it with something; client
advisors still needed to be motivated
to grow the business.
And most tricky of all, there were
no role models for UBS to follow. A

thought it would be. Handelsbanken


were in different business models.
So we could not learn as much as we
had expected.
Were they aware of the Beyond
Budgeting Round Table, a UK-based
group that had been looking at
alternatives to budgeting since the
mid-1990s? Stadelmann is almost
apologetic in his response: No, this
was not driven from a theoretical
angle at all. This was driven by pure
business logic if we want growth,
then budgeting gets in the way of
what we are trying to create.
Interestingly, UBS (the parent
company) had been part of the
Beyond Budgeting group until 2002.
So while there was some awareness
of the round tables activities, it was
not a primary driver of UBS Global
WM&BBs initiative.

In with the new


The new model was built from the
ground up, and according to the
particular needs of the UBS Global
WM&BB business in all countries
except the US, which wasnt part of
this business group at that time.
Rather than comparing the
performance of client advisors with a
budget number, Stadelmann and his
team evaluated them against
themselves (their previous years
results) and against their peers. As
he explains, We set up a carefully
formulated internal benchmark. We
defined various clusters within the
bank to make sure we were
comparing apples with apples. We
created monthly measures of actual
performance on the usual criteria

2007 The Author | Journal compilation 2007 London Business School

The league tables were designed


to serve two purposes. The first was
to fuel the competitive instincts of
the client advisors and to push them
to deliver higher levels of
performance than they would have
ever done under a traditional
budgeting process. The desks
ranking was fed into the annual
bonus process.
The second function of the league
tables was, paradoxically, about
encouraging higher levels of
cooperation between desk heads. As
Ziegler explains, We use these
results to drive our coaching and
best-practice transfer processes. We
are a learning organisation, and the
primary purpose of the forced
ranking is to help us to improve.
Why would desk heads choose to
share their success formula with
their peers? Isnt it like asking
Chelsea Football Club to reveal its
secrets to Manchester United?
Stadelmann laughs at the analogy.
Actually, no, it isnt. There are two
key differences. First, this is not a
zero-sum game: if we all do better,
we all make more money. And
second, bonuses are not calculated
on a formula yes, results are the
biggest single component, but we
also factor in all the soft stuff,
including coaching skills, openness
to sharing, and so forth.
But we are not so naive,
Stadelmann continues, to think
these discussions will happen
spontaneously. We know a
competitive system is likely to create
competitive behaviours that go
against our philosophy. So we

Business Strategy Review Spring 2007

Special report

standing in the way of the growth


agenda. The usual suspects were all
there centralized structures and
processes, not enough scope for
initiative taking and budgeting. As
Stadelmann notes, Why do we do
the budgeting process when we are
looking for growth? Budgeting is
highly defensive. It is not just
cumbersome, it is fundamentally
against growth. It is about
negotiating down the targets that are
proposed by the centre. And it
causes people to talk about
numbers, not about clients and
market opportunities.
Ziegler takes an even more
emotive position: The old budgeting
process was basically about
withholding information. I go in to
the process arguing that I can make
30 per cent less than what I think I
can; and my boss pushes for 30 per
cent more than he thinks I can do.
Then we have some kind of a
bazaar and the one who can
negotiate more convincingly wins.
How does this help us achieve our
growth targets in any way?

77

Why would desk heads choose to share their success formula


with their peers? Isnt it like asking Chelsea Football Club to
reveal its secrets to Manchester United?

Special report

have had to institutionalize a set


of processes for coaching and bestpractice improvement. Every week,
the desk heads get together to share
their experiences. It is a sales
meeting of sorts, but with a strong
coaching element. And every month,
there is a meeting of the desk heads
in a cluster where the league table
results are compared. People talk
about what has made them
successful or why they are lagging.
And this process is repeated up the
ladder to business sectors, business
units, business areas, and even at
the executive committee level.
There is no naivet about bonuses
either. The annual performance
evaluation also includes a quality
component: is this individual willing
to pass on his knowledge, to help out
with the development of other
colleagues? This evaluation is made
at all levels from executive
committee level down to the
individual client advisor.
One further point of clarification is
in order: no budgeting does not
mean there are no estimates of
future performance. Marcel Rohner,
deputy Group CEO and CEO Global
WM&BB, needs to have his finger on
the pulse of the business, and he
needs to know how the results are
shaping up over the coming months.
As Karin Wyss, head of planning in
UBS Global WM&BB, observes, We
still have to plan: there is a system
of high-level rolling forecasts for the
next five quarters. Ziegler adds,
These are best-estimates only,
performed by a small group of
central people, and for the

78

Business Strategy Review Spring 2007

executives only to discuss future


options otherwise this would be
considered a hidden budget. But it is
remarkable how accurate these
estimates are.

Putting the new system


in place
The new system represents a massive
change for employees across the
bank. How was it implemented?
Wyss explains: First, the new model
was demonstrably better than the old
one. Second, we engaged in a huge
communication effort, led from the
top by Marcel Rohner. We had to
show this was not just the flavour of
the month, so we had a series of
roadshows across the bank, using
Alingi, the winning UBS-sponsored
Americas Cup yacht, to evoke
images of teamwork and flexibility.
And third, we rolled out our leading
for growth seminar across the bank,
which gave senior managers a
language and a rationale for the
change of paradigm. UBS Global
WM&BB also invested in a state-ofthe-art management information
system that was just coming online
in 2004, making it possible to create
the detailed and transparent league
tables that are needed for the new
model to work.
The abolition of budgeting was, of
course, part of a broader shift in the
culture of UBS Global WM&BB a
shift towards greater levels of
personal accountability and
entrepreneurial leadership across the
bank. For the first time, desk heads
were free to hire new people and
increase their marketing spend

without having budgeted for them.


And as Ziegler recalls, it took some
time for this new level of
accountability to sink in. Some desk
heads would still call head office to
ask for permission to invest in a
marketing campaign.
The changes also led to a new role
for the controllers department in the
corporate centre. Rather than spend
all their time monitoring behaviour
and performance, they became more
like an in-house consultancy. As
Karin Wyss explains, My job today
is to support the business rather
than monitor its performance. We
have a sophisticated Intranet system
for comparing performance across
markets, we share ideas, and this
helps us to understand why some
markets are stronger than others.
And what about the overall results
of UBS Global WM&BB? Has the
abolition of budgeting helped? The
results are certainly at record levels
in 2005 UBS Global WM&BB
achieved profits before taxes of more
than 6.6 billion Swiss Francs,
compared to just 4.4 billion in
2003. But as Ziegler points out, It
is difficult to say how much of this
has come from the performance
management system. What is clear,
though, is that the new system had a
very positive impact on the
atmosphere in the bank. As
Stadelmann comments,
Discussions on the sales process
are of a much higher quality than
before. We spend our time
discussing clients and market
opportunities, rather than
negotiating figures.

2007 The Author | Journal compilation 2007 London Business School

Designing
the culture
When the design firm, IDEO, opened
for business, its three founders
designed an organisation low on
hierarchy, big on communication, with
a minimal amount of ego. Over forty
years on it is still working.

office and declaring yourself well


and truly plugged into the zeitgeist.
There is another way. Take the
approach of the design company
IDEO. The company emerged from a
business begun by Bill Moggridge in
London in the 1960s. As British
industry hit the rocks in the late
1970s, Moggridge looked elsewhere
for work. He found himself in Silicon
Valley where things were just
beginning to get interesting.
Moggridge hooked up with another
designer, the American David Kelley.
Before long Moggridge and Kelleys
companies were supplemented by a
spin-off company run by another
British designer, Mike Nuttall. The
companies then combined as IDEO.
IDEO has quietly thrived. Along
the way, it has survived being
labelled as one of the worlds coolest
companies to work for and has
survived eulogies from the American
guru Tom Peters. Its finally
happened. Ive seen a company
where I can imagine working,
pronounced Peters on visiting IDEOs
Palo Alto office for the first time.
The Clerkenwell, London-based

2007 The Author | Journal compilation 2007 London Business School

company is different not because of


its designs innovative though they
are but because of its culture.
While it is largely pointless and
potentially illegal to copy IDEOs
designs, seeking to emulate its
culture may make a great deal of
sense while being, of course, the
most demanding thing to copy.

Just the way it is


IDEO practises grown-up
management. Its management
innovation is the way it works and
the way it is.
The first notable thing about the
company is that it has not expanded
at breakneck speed. Indeed, by most
measures, it has hardly expanded at
all. Despite being internationally
lauded and profitable, IDEO has
fewer than 500 employees worldwide
up from 140 people in 1991.
Nice and steady does it. Keeping
it small is a conscious decision says
IDEOs Mat Hunter: We know that
so much of this is about human to
human contact and we keep our
team small. A typical project team
might be three or four or five

Business Strategy Review Spring 2007

Special report

esign is the height of


corporate chic. It is endorsed
by management gurus as the
new thing. Car advertisements
feature designers rather than
glamorous men and women. People
know who Tom Ford is. Design
superheroes, such as Alberto Alessi
and Philippe Starck, glitter on the
pages of magazines. Their Midas
touch is applied to everything from
kettles to hotels.
But, in the business world at
least, the suspicion is that the
current gushing enthusiasm for
design is as superficial as was the
managerial enthusiasm for reengineering or any other fad. As a
result, the embrace of innovatively
designed Parmesan graters and
hotels with no nameplates and
exquisite atriums is likely to be
short-lived.
Unquestionably, design is
important; but companies that really
understand the power of design
recognize that it is more than an
aesthetically pleasing get-rich-quick
scheme. There is more to design
than placing a funky computer in the

79

Picture: IDEO
IDEO at work

people at the core, bringing in


experts as needed. We have 50
people based in London and that
may reach 60 or 70 in the next few
years. Beyond that size we know that
sometimes you do begin to fracture a
bit but, at the same time, we need
critical mass.
IDEOs Palo Alto office has 280
people. All other locations have fewer
than 60. In an age of corporate
behemoths anxious to gorge on the
latest prey, IDEO is hardly
expansionist. It has four locations in
the United States as well as branches
in London, Munich and Shanghai.
The second key to grown-up
management is that IDEO is based
around projects. In keeping with its
unwillingness to embrace growth for
its own sake, multi-skilled project

is that brilliant, problem-solving


design makes money for the
company and its clients. It is userbased design. At the heart of the
business is using design thinking to
help clients be more valuable.

Open studio
Another core of the IDEO culture is
the concept of the studio. The studio
IDEO-style is not a production line
with an all-knowing, all-seeing font
of creativity standing at one end. The
star designer does not breeze in and
out while a tribe of assistants labour
over his latest creation. Most design
companies are based on a single
individual and fail when the
individual moves on. Others are
based on confrontation. IDEO works
around open critiques of peoples

human factors. Now what you got


was designers, engineers, and
consideration of the human element.
This was not the usability police as
ergonomists and psychologists were
sometimes viewed, but an inspiring
connection between the designers
and engineers and the consumers
they were serving.
The power of IDEO was to take
what otherwise might have been
quite a siloed issue designers
dont talk to engineers and none of
them will talk to human factors
people and create a culture in
which team members respect one
another.
To this has been added a final
element: business acumen. IDEO is
now hiring MBA graduates. We have
people in IDEO who know the way
business is thinking about issues we
encounter. Its still relatively few,
perhaps one per cent of the team,
but its growing very fast. These
people are highly entrepreneurial
and inspiring and will work with
teams. All of our ideas have to be
desirable, feasible and viable
translated as humans, technology
and business, says Hunter.

The experience
IDEO now brings its design expertise
to a wider marketplace. Its work is
increasingly focused on improving
customer experiences and, even more

Special report

There is more to design than placing a funky computer in


the office and declaring yourself well and truly plugged into
the zeitgeist.
teams change from project to
project. Projects are its culture.
The companys folklore (captured
in Tom Kelleys book, The Art of
Innovation) is brimming with stories
of supermarket trolleys being
redesigned in a week and how the
company developed the first Apple
computer mouse. Amid stories of
developing the first single-use
instant camera, all-terrain eyewear
and reinventing the light switch,
there is no mention of costs and
profits. The unspoken understanding
80

Business Strategy Review Spring 2007

work. Its belief is that part of being a


studio is defending what you believe
to be true.
The make-up of IDEO staff has
subtly evolved, particularly over
recent years. It started off with one
cluster, Hunter explains. IDEO was
formed, basically, in order to bring
designers and engineers together.
David Kelley ran the engineering
company and Bill Moggridge and
Mike Nuttall each ran design
companies and so IDEO was formed.
To this was added what we call

broadly, on transformation. This, it


says, is actually a natural development
from its early design work.
Our approach is all about going
out into the world and looking at real
people. Hypothesis number one is
that companies dont understand
their consumers well enough and
they dont go out and observe their
actual behaviour. Its all down to the
things that you notice; youve really
got to sharpen your eyes and ears,
says Hunter. What we now see is
that the level of disruptive innovation

2007 The Author | Journal compilation 2007 London Business School

required is greater. Its a much


blanker canvas and to navigate this
blank canvas youve got to come up
with slightly more powerful insight
techniques about how the world is. It
is not just a matter of saying weve
got the opportunity here to change a

And those that do, tend to stick


around. This, of course, is highly
unfashionable. In the age of the free
agent, spending more than a couple
of years with one employer smacks
of complacency or lack of ambition.
They want to spend their career

hallmark of all IDEO employees).


And these practice areas provide the
focus for knowledge sharing. Were
constantly monitoring things and
seeing how, for example, we can get
thought leaders in food and
beverages in California over here to

The power of IDEO was to take what otherwise might have been
quite a siloed issue designers dont talk to engineers and
none of them will talk to human factors people and create a
culture in which team members respect one another.

Pegs in holes
In many ways the design studio, as
practised at IDEO, is an
organisational model in tune with
our times. It is small and creative for
a start. It is also low on hierarchy,
big on communication and requires
a minimal amount of ego. IDEOs
designers may take the starring role
in a particular project and then find
themselves back in the chorus on
the next project.
Sustaining this culture requires
dedication rather than innovative
wackiness. It starts in the
recruitment process. In comparison
to many other organisations, IDEOs
recruitment process is long and
drawn out. There are three or four
interviews. Applicants then show
their work and discuss it with a
group of IDEO people. Then they get
to meet everyone and look at the
projects underway to see how they
interact. Time consuming, but
essential, says IDEO. It wants to
know how well people will fit. The
teams have a say. We rely on each
other. Its a human business and you
have to know how to work together
and respect each other. People who
are egotistical wont make it,
reflects one.

here, said Colin Burns when he led


IDEOs London operation. People
who have been here a long time have
often reinvented themselves and
changed over time. Sometimes staff
need new challenges and might
move to another office to satisfy
their curiosity. Its a good thing. It
means you could work on very
diverse projects a service project
one day, a retail space or a product.
Its important to have variety to stay
enthusiastic.
The rigour that IDEO brings to
recruitment is increasingly matched
by the attention it pays to evaluating
performance. It has annual formal
reviews based around a matrix of five
elements: content, culture (team
working and team leadership),
client, commerce, and mentoring
and leadership. Hunter distils the
essence: Its not just what you do,
its the style in which you think.
Another key element of IDEOs
innovative culture is its approach to
knowledge sharing. Everyone
participates in the IDEO 101
induction course when they first join
the company, to help develop a
common language and an
understanding of the companys
modus operandi. And cutting across
the seven locations are seven
practice areas that focus on
particular client offerings and
encourage the development of
specific expertise (in addition to the
breadth of perspective that is the

2007 The Author | Journal compilation 2007 London Business School

London so that they can share


information with the London team,
explains Hunter.
There are also ad hoc mechanisms
such as the all-IDEO e-mail.
Somewhere up to 10 times a week
you will see an individual or a
project say, Hey, were just about to
try and understand baby nutrition,
what do you know? Or one that
came last week was: What are your
thoughts about DIY [do it yourself]
versus GSI [get someone in]? Over
the years, employees have become
smart about how to use the all-IDEO
e-mail. People use it selectively to
ensure that inboxes are not flooded
with ill-thought-out requests. And ad
hoc rules emerge, such as the sender
summarising all the findings and
sending them round for review, rather
than everyone copying everyone.
IDEO has built a justifiably strong
reputation for innovation ranking in
the top 20 in BusinessWeeks list of
the worlds most innovative
companies. Much of the power of
IDEOs model comes from what one
might call its small-company values:
its dedication to a proven business
model, its informal culture and the
strong personal relationships that
hold its cross-disciplinary teams
together. And IDEOs leaders
recognise this. Despite the
temptation to grow rapidly or to
diversify into new business areas,
the company has stuck to its knitting
and reaped the rewards.

Business Strategy Review Spring 2007

Special report

few features on a product or service,


youve got to create more
comprehensive frameworks for
understanding what consumers want
from a particular industry.

81

Employees first
Innovation is often focused on products. Yet the leader
of one Indian company is shifting the business model of
a 30,000-employee company. The work of HCL
Technologies reveals how innovation can apply to
organisational systems as well.

he trouble with seeking out the


future of management is that,
even when you find it, it looks
to most casual observers
suspiciously like the past. Most truly
radical management models are
either highly situation-specific (Linux
would not have happened without the
evil empire, Microsoft, threatening to
take over the world) or they dont
survive (remember Volvos
experiments with team-based car
assembly?). The management
innovations that matter are usually
more prosaic in nature and typically
build on ideas that have been tried

Special report

82

Business Strategy Review Spring 2007

out in other contexts. As a result, the


sceptic could be forgiven for
dismissing them as more of the
same.
But it is worth remembering that
human DNA and dinosaur DNA are
97 per cent the same. What matters
is the three per cent of DNA that
separates the two species, not the
vast majority of things that are
common. And its the same with
management practices: the losers
and the winners have many points of
similarity but a few key differences.
We need to focus on those points of
difference, particularly on their

source. New management practices


are emerging all the time, but you
often have to look quite hard to see
them.
HCL Technologies, the fifth largest
IT services provider in India with
close to $1 billion in annual
revenues and 36,000 employees, is
a case in point. To the outside world,
HCL is just another big Indian IT
company, and on paper its structure
and its processes look remarkably
similar to everyone elses. But
scratch the surface and you see the
beginnings of a new model of
management. Through the

2007 The Author | Journal compilation 2007 London Business School

Special report
Vineet Nayar: the scarce resource is not customers
2007 The Author | Journal compilation 2007 London Business School

Business Strategy Review Spring 2007

83

pioneering efforts of its president,


Vineet Nayar, HCL Technologies is
putting in place a series of
apparently small changes that will
potentially have a dramatic effect on
how people in the company work.
And already these innovations are
starting to get noticed. As Fortune
editor David Kirkpatrick observed
after talking to Nayar, I have seen
the future of management, and it is
in India.

The drivers of innovation

Special report

Vineet Nayar joined HCL in 1985 as


a management trainee and worked
his way up through the company,
becoming president of HCL
Technologies (there is also a sister
company, HCL Infosystems) in 2005.
So he has lived through the boom in
IT investment, the shift to
outsourcing and offshoring, and the
gradual maturation of the IT services
industry. As he recalls:
The history of HCL is a bet on the
growth of technology services. Back
in the late 1990s, 45 per cent of our
revenues came from technology
development. We were very good in
what we did. But when the
technology meltdown happened in
2000, technology spending vanished
overnight. So we had to reinvent our
business model.
We took a look at our market
space, and the key trend was that
there was too much emphasis on
volume and people had forgotten the
concept of value. Everybody was
rushing to India, but no one was
asking, Am I getting value? I
believed that down the line clients
would get frustrated: I have got my

and creating value for them, Nayar


explains. And we announced this in
a global customer meeting. We said,
We will surrender our existing
customers if they dont feel we are
important partners for them. This
meant giving up $35 million in
revenues, but it allowed HCL to
focus on the customers that were
aligned with its strategy.
The second strand of HCLs
innovation-led strategy was the allure
of uncontested market space the
blue oceans in Chan Kim and
Rene Maubourgnes phrase where
margins are high and competitors are
non-existent. We have to create
market space either in the way we
deliver the service or what we deliver
this is what makes us unique and
makes us big. HCL was the first
mover in remote infrastructure
management (managing data centres
and network services out of India)
and became leaders in that market
space. And now the company is
pushing a new offering in the IT
outsourcing market in which the
customer generates major cost
savings while retaining control. By
offering flexibility and transparency
to the customer, HCL avoids head-on
competition with the big players like
IBM and EDS (whose approach is to
take the entire system off the
customers hands). Major deals,
including those with Dixons,
Terradyne and Autodesk, attest to the
potential in this new market space.

Building an innovative
organisation
To deliver on the promise of a
distinctive market position, Nayar

to happen. His objectives in doing


this were not unusual he wanted to
invert the pyramid and put the power
in the hands of his employees, and
he wanted to make managers
accountable to their employees,
rather than the inverse. But his
methods are original, radical, and
perhaps even a little risky.
Nayar has a few overriding
principles that shape all the changes
he is putting in place at HCL:

Employee first, customer second.


The scarce resource is not
customers, it is great employees,
so if we spoil them and make
them realize that HCL is a great
place to work, they will deliver
value.

Transparency reduces the gap


between the manager and the
employee. Many traditional
organisations create problems by
restricting the flow of information
and setting up artificial
boundaries between people. By
increasing transparency these
boundaries are removed, and
employees are more likely to act
responsibly and creatively.

There are no half measures. You


cannot change a 30-year-old
company culture without extreme
measures. Dramatic changes are
needed to get the pendulum
swinging.

So what are the management


innovations Nayar has implemented?
Three in particular are worth a closer
look:
360-degree feedback HCLs annual
survey of 20,000 people across the
company rates 1,500 managers on

HCL decided to position itself as a value-centric company rather


than a volume-centric company.
30 per cent, 40 per cent cost saving,
now what?
HCL decided to position itself as a
value-centric company rather than a
volume-centric company. We
decided to chase deals where we
were both important to the customer
84

Business Strategy Review Spring 2007

realized he needed to make some


fundamental changes inside the
company. We were creating an
innovative company, but you cant do
that unless your internal organisation
structure is innovative. If you dont
perpetuate innovation, it is not going

20 aspects of their performance


strategic vision, ability to
communicate, problem solving skills,
responsiveness, and so on. There is
nothing unusual in running such a
process. But what is unusual is that
the results of the survey the

2007 The Author | Journal compilation 2007 London Business School

He wanted to invert the pyramid and put the power in the hands
of his employees, and he wanted to make managers accountable
to their employees, rather than the inverse.
gets negative feedback. Most
managers take the feedback very
seriously and make changes; a few
choose to move on. As Nayar
observes: This system is important
because it shows the manager is
accountable to you, the employee,
not the reverse. We are trying to add
a new definition to the word
accountability. And importantly, the
360-degree feedback is not linked to
the annual appraisal or to the
compensation package. It is open for
everyone to see, and that is enough
to encourage changes in behaviour.

HCLs new Gurgaon home


2007 The Author | Journal compilation 2007 London Business School

Service tickets Any employee with a


question, a problem, or a gripe is
encouraged to open a ticket with
the relevant department. If there is a
problem with the air-conditioning,
she opens the ticket with the
facilities service desk; if she doesnt
like her new salary, she opens the
ticket with the HR service desk.
As soon as the ticket is opened,
people start running around trying
to solve that problem. And,
importantly, the only person who can
close a ticket is the employee who
opened it in the first place. Service
desks, such as HR, are measured on
their ability to resolve tickets, and
the expectation is that tickets will be
closed within two days. Daily reports
list the number of open tickets, and
how long they have been open, for
the 15 service desks.
When the service ticket system
was introduced, there were 30,000
tickets per month being opened, on
a whole range of issues from broken
chairs to travel policies to
compensation matters. Gradually
this number has dropped as big
areas of concerns have been sorted
out, but there is still a steady stream
of tickets. For example, the HR
manager in the UK has closed 234
tickets in 2006 and has zero
unresolved tickets.
So what has the introduction of
service tickets done to the HCL
culture? First of all it has improved
the hygiene factors in the
workplace. The environment has
become extremely conducive for an
employee to work in, because he
Business Strategy Review Spring 2007

Special report

numbers and the comments are


aggregated and published online for
every employee to look at. For
example, according to his
employees, Nayars overall score was
7.8 on a 9-point scale. The
employees can see his scores and
see that he has a higher score on
motivating employees compared to
getting resources together to get
things done on time.
This is a simple change in
practice, but one with profound
consequences. For the manager,
there is nowhere to hide if he or she

85

is seeing the organisation as


being responsible to him.
Second, it underlines the concept
of reverse accountability the idea
that managers and support functions
are serving the employees, not the
other way round. And this is all part
of the employee-first mentality. We

Recognition for added value Nayar


developed a clear point of view on
compensation and recognition during
his 20 years with HCL. The industry
used to pay 30 per cent variable
compensation to the employee linked
to the companys performance. We
found the idea quite ridiculous,

problem. In Nayars words: We said,


the guy who wants innovation the
most is the customer, so why dont
we make the customer the judge? So
we created a simple tool: whenever
an employee thinks he has done
something that goes above and
beyond the contract, he logs the

HCL Technologies is a work-in-progress, but with some clear


signs that it is heading in the right direction.

Special report

are spoiling the employees, says


Nayar. It is like five-star treatment;
they are getting used to a certain
level of service, and they have
trouble going to other companies
where they cant even raise these
issues. So we are creating a unique
experience for the employee.
A third benefit of the service ticket
system is it acts as a barometer of
ill-feeling or problems in the
organisation. As the companys UK
Human Resource manager
commented, Whenever we
introduce a new HR policy, the
volume of tickets goes up. We know
from the volume of tickets whether
we have communicated effectively or
not.
There is a risk that the service
tickets create the wrong sort of
behaviours: what if employees start
raising tickets on trivial or silly
issues? What if they start raising
tickets on the online system rather
than talking directly to their
managers? Nayar is conscious of
these risks. We want to let
employees choose when to raise a
ticket. If it is important enough to
them, they should raise it, even if I
think it is trivial. We dont want
people to be scared of speaking up.
But we are also trying to push a
change in behaviour here: we are
now looking for a department who
can give me one day without a ticket.
This doesnt mean suppressing
issues: it means you need to be
proactive with your employees so
that they have no need to open a
ticket on you.

because if you are a software


engineer you have no meaningful
influence on the performance of the
company. So we said we will turn all
that into fixed pay trust pay as we
call it. Now, having established that,
we switched to value: we said now
we will start measuring you on the
value created for the customer.
So far, so good. But every
company wants to measure and
reward its employees for creating
value for their customers, and most
struggle enormously with how to do
it. Again, HCL has developed a
simple but innovative solution to the

value created in the value portal


which shoots off a note to the
customer describing what he has
done perhaps unexpected cost
savings, perhaps increased server
utilisation and the customer is
asked how much he values this. The
customer responds on a one-to-five
scale, the results are fed back into
the system, and at the end of a
quarter we count up how many
innovation points each person has
received. These innovation points
can be cashed in for a gift, perhaps
a bike or a holiday.
Again, it is important to think

HCLs Belfast sales floor

86

Business Strategy Review Spring 2007

2007 The Author | Journal compilation 2007 London Business School

through the implications of this


innovation. Getting the customers
input is a brilliant move, but it is
still highly subjective and it has to
be handled in a non-intrusive
manner. So the innovation points
and reward system have enormous
symbolic value, but they are
deliberately not linked directly to
compensation to avoid game playing.

Putting it all together


The three innovations discussed are
just the most visible manifestations
of the unique organisation Nayar is
trying to create. A glance at the
company Intranet reveals a host of
other neat twists, including a direct
Q&A link with the president himself
(Vineet replies) and a lot of
investment in employee-focused
resources (such as practical guides

for Indians who are moving abroad


for the first time). Indeed, it is not
incidental that all the management
innovations HCL has introduced are
IT-enabled. While they would all
have been possible in an earlier era,
technology increases their
transparency and responsiveness by
an order of magnitude.
HCL Technologies is a work-inprogress, but with some clear signs
that it is heading in the right
direction. Revenues in 2006 are
expected to top $1 billion for the
first time. Employee turnover, always
a big problem in the IT industry, is
down to single digits. And major new
customers are coming on board all
the time recent additions include
Celestica and Skandia.
So whats next for HCL
Technologies? Does Nayar have a few

more tricks up his sleeve? He laughs.


Yes, we are still making changes to
the organisation. But I have a deep
conviction that this is the right thing
to do. Fundamentally, where we are
coming from is right. The method is
not finalized, but the direction [in
which] we are going is right.
And rather than keep his
management innovations secret,
Nayar would like to spread the word.
I am frustrated by how companies
have approached innovation and
change. Everyone knows how to
come up with a new product. But
how to fundamentally shift the
business model of a 30,000employee company, I think there are
very few who have done that.
Hopefully by the time we are
finished, people will have a better
understanding of how to do this.

Julian Birkinshaw (jbirkinshaw@london.edu) is Professor of Strategic and International Management at London


Business School. He is a Senior Fellow of the Advanced Institute of Management Research.
Stuart Crainer (scrainer@london.edu) is the editor of Business Strategy Review.

Special report

Michael Mol (mmol@reading.ac.uk) is a Senior Lecturer at Reading University Business School.

London Business School


Regents Park
London NW1 4SA
United Kingdom
Tel +44 (0)20 7000 7000
Fax +44 (0)20 7000 7001
www.london.edu
A Graduate School of the University of London

2007 The Author | Journal compilation 2007 London Business School

Business Strategy Review Spring 2007

87