Strategy with Muscle…page 72 Change Management with Teeth…page 108

www.hbr.org October 2005 Closing the 62 Growing Talent as if Your Business Depended on It Jeffrey M. Cohn, Rakesh Khurana, and Laura Reeves Talent Gap 72 The Office of Strategy Management Robert S. Kaplan and David P.Norton 82 The Passive-Aggressive Organization Gary L. Neilson, Bruce A. Pasternack, and Karen E. Van Nuys 96 Information Technology and the Board of Directors Richard Nolan and F.Warren McFarlan 108 The Hard Side of Change Management Harold L. Sirkin, Perry Keenan, and Alan Jackson

16 Forethought 31 HBR Case Study The Cane Mutiny: Managing a Graying Workforce Cornelia Geissler 45 Big Picture Zeitgeist Leadership Anthony J. Mayo and Nitin Nohria 120 Best Practice Master of the House: Why a Company Should Take Control of Its Building Projects David Thurm …page 62 131 Frontiers Four Strategies for the Age of Smart Services Glen Allmendinger and Ralph Lombreglia 155 Executive Summaries 160 Panel Discussion ©2005 Siebel Systems, Inc. All rights reserved. Siebel, the Siebel logo, and “IT’S ALL ABOUT THE CUSTOMER” are trademarks of Siebel Systems, Inc. and may be registered in certain jurisdictions. LOSING EVEN ONE CUSTOMER IS ONE TOO MANY. So visit www.siebel.com/thecustomer and learn the secrets of managing a customer-driven business from fourteen companies that got it right.

108 Features

72 October 2005

62 Growing Talent as if Your Business Depended on It 62 Jeffrey M. Cohn, Rakesh Khurana, and Laura Reeves With lurid visions of missed earnings targets, fatal ac- counting blunders, and departing CEOs dancing in their heads, boards often pay little attention to an equally dis- turbing picture: the lack of quality leaders coming up through their organizations. Find out how some smart companies are developing their talent and building their bench strength.

72 The Office of Strategy Management Robert S. Kaplan and David P.Norton Your employees can help implement your strategy only 96 Information Technology and if they understand it. Chances are, they don’t. Here’s the Board of Directors a blueprint for setting up a (small) corporate unit that Richard Nolan and F.Warren McFarlan will make sure your strategy is well communicated – Most boards remain largely in the dark when it comes and well executed. to IT spending and strategy, despite the fact that corpo- rate information assets can account for more than 50% 82 The Passive-Aggressive Organization of capital spending. That’s got to change, especially for Gary L. Neilson, Bruce A. Pasternack, and companies whose very survival depends on state-of-the- Karen E. Van Nuys art technologies. Decisions are routinely criticized, often ignored, and even reversed. Is it any wonder that, faced with some 108 The Hard Side of Change Management new directive, employees smile but refuse to budge? Harold L. Sirkin, Perry Keenan, and Alan Jackson There is a way of getting companies with this problem Many change management experts are obsessed with moving again – but it’s a drastic one. “soft” factors, such as culture and leadership. These fac- tors are important, say three management consultants, 82 but they alone won’t bring about change. The hard ele- ments – like project duration and staffing requirements – must also be given due consideration.

continued on page 6

96 COVER ART: LEIGH ART: COVER WELLS

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October 2005

10 FROM THE EDITOR 94 STRATEGIC HUMOR First Things First One lesson of Katrina is that organiza- 120 BEST PRACTICE tions and systems manage interdepen- Master of the House: Why a dencies badly. Company Should Take Control of Its Building Projects 16 FORETHOUGHT David Thurm

Economic models combine mathemat- 16 A big construction project isn’t just ics and imagination…Government by about bricks and mortar; it’s about iden- desks…What’s your product’s platform tity. If you want a soulless, mediocre potential?…Chief diversity officers over- facility, just sign a check and delegate see innovation efforts and generate rev- away. But if you’d rather create a build- enues…Founders should be keepers… ing that reflects your company’s mission A subtle approach helps keep new cus- on the outside and energizes the work tomers…Advice on choosing manage- environment within, read on. ment books from a man who’s read 1,500 of them…Your company might have FRONTIERS more room to grow than you think… 131 How customers’ perceptions of brand Four Strategies for the affect stock price…Are you hiring a 45 Age of Smart Services new COO – or a potential successor? Glen Allmendinger and Ralph Lombreglia 31 HBR CASE STUDY Soon, it won’t be enough just to wrap The Cane Mutiny: valuable services around your products. Managing a Graying Workforce Some companies are building aware- Cornelia Geissler ness and connectivity into their prod- ucts – and deriving more than 50% of A shift in demographics will soon mean their revenues and 60% of their margin mass retirement at Medignostics – and contributions from these “smart ser- too few candidates to fill the empty spots. vices.”Here’s how you can do the same. But executives’ eyes are glued to the bot- tom line. How can an HR manager get 120 LETTERS TO THE EDITOR the top team to see the impending crisis 147 and buy into his strategy to head it off? Companies that add Six Sigma to their pricing analysis tool kits may be missing out on some top pricing opportunities. 45 BIG PICTURE Zeitgeist Leadership Anthony J. Mayo and Nitin Nohria 160 PANEL DISCUSSION Give to Get You may be the right leader for your Don Moyer company today, but will you be able to capitalize on the context in which your Don’t step on heads to get ahead. Help business will operate ten years from superiors, employees, and peers alike. 131 now? A close look at how broad forces played out in the past century could point the way. 8 COMPANY INDEX HBR now includes an index of authors’ affiliations and organizations mentioned in articles. 155 EXECUTIVE SUMMARIES

6 harvard business review

COMPANY INDEX • October 2005

Organizations in this issue are indexed to the first page of the article in which each is mentioned. Subsidiaries are listed under their own names.

ABB ...... 131 Grupo Nacional Provincial...... 72 Starbucks...... 62 AFL-CIO ...... 45 Harvard Business School ...... 45 St. Marys Cement ...... 96 Airbus ...... 96 Heidelberger Druckmaschinen...... 131 St. Mary’s Duluth Clinic ...... 72 Air Liquide Group ...... 131 Herman Miller...... 45 Symantec ...... 82 Air Products and Chemicals ...... 131 Hershey ...... 96 Target...... 131 Alcoa ...... 45 Hewlett-Packard ...... 131 Teledyne Technologies ...... 45 AltaVista ...... 16 Home Depot ...... 96 TLC Group...... 45 Amazon ...... 16, 96 Honeywell ...... 131 Tyson Foods ...... 62 American Airlines ...... 96 Hush Puppies ...... 120 United Auto Workers ...... 45 American Federation of Labor ...... 45 IBM ...... 45, 96 United Farm Workers...... 45 American Machine and Foundry...... 45 IMF...... 45 University of California, San Diego ...... 120 American Radiator ...... 45 J.P. Morgan...... 45 U.S. Army ...... 72 American Tobacco...... 45 Kraft ...... 16 U.S. Department of Commerce and Labor ...... 45 Amgen ...... 108 Krispy Kreme ...... 16 U.S. Navy ...... 96 Apple ...... 16 Lawrence Berkeley National Laboratory ...... 120 U.S. Securities and Exchange Commission...... 45, 96 Armani Group ...... 120 Lutron Electronics...... 120 U.S. Small Business Administration ...... 45 AT&T...... 16, 45 McDonald’s...... 45 U.S. Steel ...... 45 Ball Corporation ...... 45 MechoShade Systems ...... 120 Visa ...... 45 Bank of America ...... 45 Mellon Financial ...... 62, 96 Wal-Mart ...... 45, 96 Beatrice Foods ...... 45 Microsoft ...... 45 Walgreens...... 131 Black & Decker ...... 45 Morgan Stanley...... 45 War Industries Board ...... 45 Boeing ...... 96 MTV Networks ...... 16 War Production Board ...... 45 Booz Allen Hamilton ...... 82 National BankAmericard ...... 45 Warner Bros. Entertainment ...... 45 Canadian Blood Services ...... 72 National Bank of Commerce ...... 45 World Bank...... 45 Canon USA ...... 72 National Labor Relations Board...... 45 Yahoo ...... 16 Caterpillar ...... 45 National Organization for Women ...... 45 Zara ...... 96 Centre Pompidou ...... 120 Nestlé...... 16 Chrysler ...... 45 New York State Energy Research and Development AUTHOR AFFILIATIONS Cisco Systems ...... 96 Authority ...... 120 A.T. Kearney ...... 62 Coca-Cola ...... 45 New York Stock Exchange ...... 96 Balanced Scorecard Collaborative...... 72 Committee for Industrial Organization ...... 45 New York Times Company ...... 120 Bench Strength Advisors...... 62 ConAgra Foods ...... 45 Novell...... 96 Booz Allen Hamilton ...... 82 Curtis Publishing ...... 45 Nucor ...... 45 Boston Consulting Group...... 108 DaimlerChrysler ...... 72 Occupational Safety and Health Administration...... 45 Columbia Business School ...... 16 Deutsche Telekom ...... 31 OPEC ...... 45 Columbia University ...... 16 Diamond Match ...... 45 Otis Elevator...... 96 Concordia University’s John Molson School of Eastman Kodak...... 131 Pan American World Airways ...... 45 Business ...... 16 Eaton Electrical ...... 131 Pathmark ...... 62 Deloitte Research ...... 16 eBay...... 45 Pennsylvania Railroad ...... 45 Deloitte Services...... 16 EDS ...... 96 Pepperidge Farm...... 45 Deutsche Telekom ...... 31 Electrolux ...... 131 PepsiCo ...... 16 DiamondCluster ...... 16 Excite...... 16 Pfizer ...... 45 Harbor Research ...... 131 Federal Reserve System ...... 45 P&G Productions...... 45 Harvard Business Manager, Germany ...... 31 Federal Savings and Loan Insurance Corporation . . . . . 45 Phillips Petroleum ...... 45 Harvard Business School...... 45, 62, 72, 96 FedEx ...... 96 Piggly Wiggly ...... 45 Heidrick & Struggles...... 16, 31 Flack and Kurtz...... 120 Procter & Gamble ...... 96 New York Times Company ...... 120 Ford ...... 45 Quest Diagnostics...... 82 Northwestern University’s Kellogg School of Forest City Ratner ...... 120 Reebok ...... 16 Management...... 16 Fox & Fowle Architects ...... 120 Régie Autonome des Transports Parisiens ...... 120 Prisma Capital Partners ...... 16 Frito-Lay...... 16 Renzo Piano Building Workshop...... 120 Rice University’s Jesse H. Jones Graduate School of Gardner Denver...... 131 Rockwell Automation...... 131 Management ...... 16 GE Energy...... 131 Royal Philips Electronics...... 131 Special Olympics ...... 82 GE Healthcare...... 131 Russell Corporation ...... 16 University of Oregon’s Charles H. Lundquist College of General Electric ...... 45, 131 S.C. Johnson & Son ...... 16, 62 Business ...... 16 General Motors ...... 45 SCO Group ...... 96 University of Washington Business School...... 16, 96 Gensler...... 120 SeaLand ...... 45 U.S. Government Accountability Office...... 31 Gillette...... 45 Sears, Roebuck...... 45 Yale School of Management’s Chief Executive Goldman Sachs...... 16 7-Eleven...... 82 Leadership Institute...... 62 Google ...... 16 Siemens ...... 131 Great Atlantic & Pacific Tea Company ...... 96 Standard Oil...... 45

8 harvard business review

FROM THE EDITOR

First Things First

y mother grew up in New Orleans. I lived there of Katrina, like any event of this magnitude, is that organi- Mone summer, working at the long-since shuttered zations and systems manage interdependencies badly. In Pontchartrain Beach Amusement Park. I operated the mid- Washington and Baton Rouge, there will be mudslinging, way game where customers threw softballs to knock down finger-pointing, and buck-passing. a pyramid of milk bottles. During breaks, I’d take a Coke There’s time for that. The people of New Orleans must and a cheeseburger onto a pier jutting out into the lake. On come first. My mother’s mother – whose grave is in the days off, I’d head into the city, and often found myself hav- city–said that a person’s priorities should go like this: “Your ing coffee by the milewide Mississippi River or looking over health first, your reputation second, and everything else a levee. As Herman Melville said, meditation and water are after that.” wedded forever. • • • Water is the lifeblood of New Orleans. The Mississippi Before Katrina, I had written another editor’s letter for this drains the continent from the Appalachians to the Rockies, issue. In it, I mostly discussed “Growing Talent as if Your mid-America’s water-borne commerce on its back. Soil from Business Depended on It,”a very important article by Jeffrey 10 states is suspended in the river’s eponymously muddy Cohn, Rakesh Khurana, and Laura Reeves. CEOs always list waters, too, soil that used to settle and silt into the Missis- leadership development among their top five priorities yet sippi Delta. Channels and levees – the demands of com- consistently say they don’t do it well. Indeed, you can count merce – have kept that from happening. The great river’s on the fingers of one hand the companies that do a great job delta annually loses some 25 square miles of marsh and growing executive talent. Partly this is because there’s little low-lying land, barriers that would have mitigated the storm rigorous academic work about leadership development. that drowned New Orleans in its lifeblood in late August. As (Business schools don’t study it – they sell it.) Partly it’s be- I write this on September 2, 2005, a chemical facility burns cause companies act penny-wise and pound-foolish about downriver from the French Quarter, patients are dying in this, too, underfunding development, then discovering that hospitals where there is neither food nor electricity, gangs there’s not a leader around when they need one. are raping and pillaging. Soldiers are dropping rations for Leadership pipelines would be fuller if women had more thousands of stranded refugees from helicopters, afraid of opportunity. For decades HBR has shown how corporations being mobbed if they come by land. can change practices that deprive them of women’s talent. Even before the water drains, a couple of lessons are clear. But some obstacles result from national (rather than corpo- Not for the first time, emergency-management services at rate) policies, laws, and customs. We have posted a ground- all levels of government have shown themselves to be mis- breaking report on this subject on our Web site, www.hbr erably unprepared and inadequately managed. Not for the .org.“Women’s Empowerment: Measuring the Global Gen- first time, governments and corporations have shown them- der Gap,”prepared by our partners at the World Economic selves to be penny-wise and pound-foolish, having skimped Forum, is a systematic attempt to measure the economic on funds that would have strengthened levees, improved status of women worldwide. It is our hope that you, HBR’s drainage, and preserved and restored wetlands. The city, readers, will use this document as a map of unrealized when it is finally emptied, will be shut for months. human potential. The nation and the world are learning again about inter- dependence. Goods float down the Mississippi; in return, rivers of oil and gas flow north and east, contained in pipe- lines the way the river is contained in levees. Gasoline prices are soaring: An airline or two might be grounded. North- eastern homeowners brace for a costly winter. One lesson Thomas A. Stewart

10 harvard business review Never Follow audiusa.com

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“Audi,” “Never Follow,” “A8,” “quattro” and the four rings emblem are registered trademarks and “MMI” is a trademark of AUDI AG. ©2005 Audi of America, Inc. editor Thomas A. Stewart deputy editor Karen Dillon executive editor Sarah Cliffe art director Karen Player senior editors senior production Leigh Buchanan manager David Champion Diane L. Coutu Dana Lissy Bronwyn Fryer editorial Ben Gerson production manager Paul Hemp Julia Kirby Christine Wilder Gardiner Morse senior designers M. Ellen Peebles Kaajal S. Asher Anand P.Raman Jill Manca associate Annette Trivette editor production Eileen Roche coordinators manuscript Josette Akresh- editors Gonzales Christina Bortz Tisha Clifford Lisa Burrell editorial Roberta A. Fusaro coordinator Margaret K. Hanshaw Kassandra Duane Andrew O’Connell editorial Andrea Ovans assistant communications Siobhan C. Ford manager contributing Cathy Olofson staff editor for Lilith Z.C. Fondulas business development Amy L. Halliday Susan McCabe John T. Landry Amy N. Monaghan executive editor Annie Noonan and director Kristin Murphy of derivative products Romano Jane Heifetz editor-at-large harvard business school publishing Walter Kiechel a note to readers The views expressed in articles are the authors’ and not necessarily those of Harvard Business Review, Harvard Business School, or Harvard University. Authors may have consulting or other business relationships with the companies they discuss. submissions We encourage prospective authors to follow HBR’s “Guidelines for Authors” before submitting manuscripts. To obtain a copy, please go to our Web site at www.hbr.org; write to The Editor, Harvard Business Review, 60 Harvard Way, Boston, MA 02163; or send e-mail to [email protected]. Unsolicited manuscripts will be returned only if accompanied by a self-addressed stamped envelope. editorial offices 60 Harvard Way, Boston, MA 02163 617-783-7410; fax: 617-783-7493 www.harvardbusinessonline.org Volume 83, Number 10 October 2005 Printed in the U.S.A. It took us 125 years to use the first trillion barrels of oil.

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Energy will be one of the defining issues of this century. One thing is clear: the era of easy oil is over. What we all do next will determine how well we meet the energy needs of the entire world in this century and beyond.

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We can wait until a crisis forces us to do something. Or we can commit to working together, and start by asking the tough questions: How do we meet the energy needs of the developing world andve those energies of industrialized play? What is nations? What role will renewables and alternati the best way to protect our environment? How do we accelerate our conservation efforts? Whatever actions we take, we must look not just to next year, but to thenext50years.

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CHEVRON is a registered trademark of Chevron Corporation. The CHEVRON HALLMARK and HUMAN ENERGY are trademarks of Chevron Corporation. ©2005 Chevron Corporation. All rights reserved. publisher Cathryn Cronin Cranston consumer business marketing director director Edward D. Crowley John Titus circulation manager, director marketing and operations Bruce W. Rhodes business Marisa Maurer manager advertising production Adrienne M. Spelker manager retention marketing Catharine-Mary manager Donovan Christine Chapman circulation fulfillment marketing manager and research manager Greg Daly Jennifer B. Henkus fulfillment coordinator associate marketing Danielle Weber manager Nicole Costa worldwide advertising offices advertising director – worldwide Trish Henry 212-872-9283 New York Maria A. Beacom Michael J. Carroll Denise Clouse James H. Patten 509 Madison Avenue 15th Floor New York, NY 10022 212-872-9280; fax: 212-838-9659 Atlanta 404-256-3800 Boston 978-287-5400 Chicago 312-575-1100 Dallas 214-521-6116 Detroit 248-524-9000 Los Angeles 323-467-5906 San Francisco 415-986-7762 Australia 612-9252-3476 Brazil 5511-3285-2754 France 33-01-4643-0066 Hong Kong 852-237-52311 India 912-2287-5717 Latin America 562-738-4033 Mexico 5255-5081-6838 Sweden 48-8-541-318-37 United Kingdom 44-20-7833-3733 For all other inquiries, please call 212-872-9280. For advertising contact information, please visit our Web site at www.hbradsales.com. subscription service information u.s. and canada 800-274-3214; fax: 902-563-4807 Rates per year: U.S., $129; Canada, u.s.$139 international 44-1858-438868; fax: 44-1858-468969 Rates per year: u.s.$165; Mexico, u.s.$139 subscribe online www.hbr.org reproduction Copyright © 2005 Harvard Business School Publishing Corporation. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission. Don’t fly when you can soar.

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grist Beware of Economists Bearing Greek Symbols by emanuel derman

“In physics, it takes three laws to explain the equations that went with them. And first I was charmed by the resemblance 99% of the data; in finance, it takes more these new mental worlds, miraculously, between the papers I now studied and the than 99 laws to explain about 3%.” S o not only corresponded to the physical physics papers I used to read and write. quipped MIT finance professor Andrew world we inhabit, but also accurately pre- Then, as I read further, I discovered that Lo at a dinner I once attended. Econo- dicted the existence of weird and previ- economists love formal mathematics mists, he added, consequently suffer from ously unobserved particles. much more than physicists do. Many eco- physics envy. How could imagination and mathe- nomic journals encourage – or even de- Now, I was trained as a theoretical matics be so powerful in apprehending mand – a faux-rigorous style with multi- physicist in the 1960s and 1970s, the glory the world outside our heads? tudes of axioms and lemmas in numbers years of elementary particle physics. Our Years later, I went to work at Goldman that tend to be inversely proportional to heroes were Einstein, Dirac, Gell-Mann, Sachs in the field of quantitative finance, their efficacy in the real world. and Feynman – Nobelists all, visionaries the branch of economics concerned with Why are economists trained so for-

who conjured up new mental worlds and calculating the fair value of securities. At mally? It makes sense to axiomatize a GEORGE BATES

16 harvard business review discipline when the axioms are true (or is a substrate of great simplification product development almost so) and have strong predictive and – sometimes – great and wonderful power. That’s the case for Euclidean ge- imagination. That’s not a bad thing – Every Product’s ometry, for example, as well as Maxwell’s financial markets are all about imagina- electromagnetic theory, where many valid, tion. But never forget that even the best a Platform john sviokla and anthony j. paoni useful, and accurate predictions follow financial model can never be truly valid by from applying the laws of deduction to because, unlike the physical world, the When you think “platform,”you probably a few initial assumptions. mental world of securities and econom- think “software”–with Microsoft Windows But economists seem to have embraced ics is much less amenable to the power dominating the pack. But any product, formality and physics envy without the of mathematics. not just software, can become a platform. corresponding benefits of accuracy or emanuel derman (emanuel.derman@ What’s required is imagination. Consider predictability. In physics, Maxwell’s theory mac.com) is the director of the financial en- how S.C. Johnson & Son, the multibillion- and quantum mechanics allow you to gineering program at Columbia University dollar consumer products company, man- predict the way an electron spins about its and the head of risk at Prisma Capital Part- aged to “platform” its way from floors to own axis inside a hydrogen atom to an ners, a fund of funds. He is the author of shaving cream to candles – and much, accuracy of 12 decimal places. Some- My Life as a Quant: Reflections on Physics much more. thing that accurate isn’t just a model– and Finance (Wiley, 2004). Samuel Curtis Johnson started the it’s a law. In economics, by contrast, there Reprint F0510A company in 1886 when he purchased are no laws at all, only models, and you’re immensely lucky if you can predict up from down. business history When people build models to value securities, they make all sorts of imagina- “Bureaucracy” Becomes tive assumptions that are then formulated mathematically. For example, quantita- a Four-Letter Word by william h. starbuck tive strategists at investment banks or hedge funds value currently fashionable There’s a long-standing tension in organizations between innovation and bu- collateralized default obligations (which reaucracy. Excessive layers of management and byzantine processes often shoul- provide default insurance on baskets of der the blame when a promising idea fails to make it to market or a nimble large numbers of bonds) by assuming that start-up thwarts a mature competitor. each bond-issuing company is represented That tension can be traced back at least 340 years, to an inadvertent collabo- by an imaginary variable. That variable ration between two government officials in France. In 1665, with the French evolves randomly through time – like smoke diffusing across a room – until it economy in turmoil, King Louis XIV appointed Jean-Baptiste Colbert as his crosses an imaginary default boundary comptroller general of finance. Colbert prosecuted corrupt officials and reorga- in the future, at which point the company nized commerce and industry according to the economic principles known as will default on all of its debt. It’s an elegant mercantilism. To assure the populace that the government would act fairly in mental construct and not an unreason- monetary disputes, he demanded that officials abide by certain rules and apply able way to model the random chance them uniformly to everyone. of a company doing badly enough to de- Then, in 1751, Jean Claude Marie Vincent de Gournay became France’s admin- fault. But it’s not literally true. It’s still a istrator of commerce. Gournay was outraged by what Colbert had put in place model, a toy, a limited picture–despite the and railed against the multitude of government regulations he believed were fancy mathematics. No wonder the picture suppressing business activity. To describe a government run by insensitive cre- often breaks down and causes havoc, as ators and enforcers of rules, who neither understood nor cared about the conse- happened in credit markets last May. quences of their actions, he coined the term bureaucratie. Translation: “govern- Clearly, then, when someone shows you an economic or financial model that ment by desks.” involves mathematics, you should under- william h. starbuck ([email protected]) is a professor in residence at the stand that, despite the confident appear- University of Oregon’s Charles H. Lundquist College of Business in Eugene. ance of the equations, what lies beneath Reprint F0510B

october 2005 17 enabling Tassimo to track what’s being brewed and when, and (with customers’ permission) to transmit the data in real time over a cell phone connection, Kraft has essentially turned the coffeemaker into a proprietary consumer panel that monitors product consumption. Even automobiles have platform poten- tial: If every car had wireless data trans- mission capability and used today’s peer- to-peer technology, every traffic jam would be a high-speed data network waiting to be born. Thus, cars could be- come the next platform for wireless Inter- net connectivity. Unlike cell phones, cars have power to spare and could bring along their own bandwidths to sustain communications on the road – or from your driveway. the parquet-flooring division of the Meanwhile, Off! led to plug-in insect Ignoring your products’ platform po- Racine Hardware Company. After laying repellents and, through another route, tential is risky. Not only is it difficult to floors, Johnson would finish the wood to DEET-infused candles. Lanterns based create one unique product after an- with a special wax of his own creation, on the candle technology now use Off! other (most fail, in fact), but the speed which became very popular with custom- cartridges as well. In short, S.C. Johnson of product imitation is awe inspiring. ers. Their repeated requests to buy extra advanced from indoor parquet floors to Even with IP protection, the odds are wax led Johnson to develop Johnson’s outdoor insect-repelling lanterns by stacked against long-term value cre- Prepared Wax and move into consumer thinking of aerosol technology as a plat- ation for one-shot products. Just think: products. form rather than simply as a way to put If a floor wax can give rise to insect- Another product – a paste blended wax on wood. repelling candles, what can your prod- with wax that created a spectacular Exploiting platform opportunities, of ucts become? sheen – also looked very promising, but course, isn’t just a matter of being cre- john sviokla (John.Sviokla@diamond there seemed to be no convenient way ative. A company should be smart about cluster.com) is the global managing direc- for customers to use it. Then the com- intellectual property (IP) protection as tor for innovation and research at Dia- pany discovered aerosol can technology well. Consider Nestlé’s experience. The mondCluster International, a consultancy (first patented by Erik Rotheim of Nor- company was one of the first to intro- based in Chicago. anthony j. paoni way in 1927), put the wax and paste mix duce a coffee system in the United States ([email protected]) is into pressurized cans, and launched that used little coffee packs (known as a vice chairman at DiamondCluster and a Pledge – the first sprayable furniture pol- coffee singles) to brew one cup at a time. clinical professor of information technology ish for home use. Kraft Foods, however, was able to seize at Northwestern University’s Kellogg School The company soon realized it could fill 40% of the domestic market for these of Management in Evanston, Illinois. the aerosol cans with anything sprayable: packs because Nestlé had no IP protec- Reprint F0510C Scented liquid became Glade, an air fresh- tion for them. ener now available in more than a dozen And Kraft didn’t stop there. Realizing fragrances; DEET was combined with the coffee system’s platform potential, the innovation other ingredients to create the insect re- company created a competitive system pellent Off!, which is still the category called Tassimo– now sold in Europe and Masters of the leader. Later, company scientists working coming soon to the U.S.– that uses car- on shaving technologies discovered that tridges to create other hot drinks on de- Multicultural gel was a better lubricant for skin than mand besides coffee. Unlike Nestlé, Kraft by frans johansson traditional shaving cream. But how to has a patent on the cartridges, so it can Chief diversity officers (CDOs) prolifer- dispense gel from an aerosol can? They control more of the margin generated ated in the 1990s, as business responded solved this dilemma by introducing an from this creative platform. Ultimately, to litigation and public pressure to show expandable bladder in the bottom of the Kraft realized that its Tassimo platform a more heterogeneous face. But in a few can; when the company launched Edge, could do even more than make hot forward-thinking companies today, the it found a whole new market. drinks – it could collect market data. By diversity officer has assumed a new role:

18 harvard business review overseeing innovation efforts and gener- O’Neale was successful, in part, be- entrepreneurship ating revenues. cause she is knowledgeable about mar- Business leaders know that heteroge- keting and innovation. Most CDOs will Hang On to Those neous workforces are rich seedbeds for need considerable training if they are to by martin l. martens ideas. Yet companies rarely tap employ- assume the innovation mantle – or com- Founders ees for insights and experiences specific panies will have to seek CDOs with richer Company founders are like parents – to their cultures. Furthermore, barriers experience. One smart move is to release essential to their youthful progeny but of language, geography, and association CDOs from the confines of human re- treated as superfluous once the off- may prevent diverse employees from sources and position them to work spring mature. To inspire confidence coming together on innovation efforts. closely with the heads of product devel- among investors, companies preparing CDOs are probably more familiar with opment, business development, market- for IPOs often replace their CEO the cultural breadth and variety of their ing, and sales. This allows the CDO to founders with executives experienced companies’ talent than anyone, and con- more easily spot innovation opportuni- at running public firms. That strategy is sequently they are in an excellent posi- ties throughout the company. That sound for the short term: On average, tion to bring together different groups change is already happening.“Increas- companies with professional manage- to produce innovation. ingly, chief diversity officers report to ment boast higher IPO valuations than For example, Amy George, the vice the CEO, outside of HR,”says Edie Fraser, do entrepreneur-led firms. Research sug- president of global diversity and inclu- founder and president of Diversity Best gests, however, that not only do founder- sion at PepsiCo, works closely with sev- Practices, an organization that tracks led companies regain their luster after eral affinity groups – associations of em- diversity issues. their IPOs, but, over time, their valua- ployees united by gender, race, ethnicity, At Russell Corporation, an Atlanta- tions surpass those of professionally or other traits – within the company. based company that specializes in ath- managed businesses. She can cite several examples in which letic clothing, the human resources Concordia University graduate student employees from those communities gen- function handles traditional diversity Jean-Philippe Arcand and I, aided by as- erated ideas for new products and mar- matters such as affirmative action, re- sistant professor Thomas J. Walker, stud- ket strategies. For instance, the Hispanic cruiting, and legal questions. Meanwhile, ied the short-term and midterm perfor- employee affinity group at Frito-Lay, a di- CDO Kevin Clayton is busy turning a sep- mances of 435 North American high-tech vision of PepsiCo, provided input for a arate diversity department into a profit firms that issued IPOs between June 1996 line of guacamole-flavored potato chips, center. For example, Clayton’s group – and December 2000. We discovered that which became a $100 million product. which is directly accountable for profits founder-led firms received an average val- “The main argument for having a di- and sales – discovered that a large num- uation of $67 million, while companies verse workforce is the increase in inno- ber of Russell employees had graduated vation,”says Rosalyn Taylor O’Neale, the from historically black colleges and uni- former CDO of MTV Networks.“But new versities. The group then used those ideas don’t just happen. You have to find graduates’ input to create products for the connections.”O’Neale launched a the black university market, resulting in companywide program to do just that, an $8 million-to-$10 million deal. (Since with enthusiastic support from Tom then, the CDO has created several addi- Freston, MTV’s former CEO and the tional development groups that combine current copresident of Viacom. One employees of different ethnicities and cross-cultural group, for example, discov- religions – and he is expecting to double ered marketing opportunities in the revenues next year.) congruence of North American country CDOs may have been hired to limit lia- music and Latin American music, which bilities in the past. But now, deployed use many of the same instruments, fea- correctly, they can also expand horizons. ture singers with similar vocal styles, The business case for diversity is finally and – in the U.S. Sunbelt – appeal to becoming clear: With dedicated, informed much the same audience. Similar groups leadership, diversity becomes the tinder have influenced the multicultural con- to ignite innovation. tent of Nickelodeon’s children’s program- frans johansson (johansson@themedici ming.“Those teams are diverse by design effect.com) is the author of The Medici Ef- to generate innovation,”says Freston. fect: Breakthrough Insights at the Inter- “The probability that you will get a good, section of Ideas, Concepts, and Cultures original, innovative idea with that type (Harvard Business School Press, 2004). of chemistry is simply much higher.” Reprint F0510D

october 2005 19 that installed professional leadership and consumer behavior Aggressive, incentive-driven acquisi- moved the founder to another spot on tion marketing may attract new custom- the top management team averaged The Hazards of ers, but often those customers are myo- $72 million. pically focused on the offer instead of paul m. dholakia Three years later, however, the num- Hounding by interested in cultivating a long-term rela- bers told a different story. Stocks of the Companies aggressively offer discounts, tionship with the company. Worse, this founder-led firms had significantly bet- introductory coupons, and other incen- high-pressure approach may turn off the ter returns over that time and were tives to lure new customers – and, often, loyal self-determined customers whom more likely to remain listed than stocks those prospects oblige by making an ini- companies want to keep. In a field experi- of professionally led firms. Founder-led tial purchase. But my research in the fi- ment in an automotive sales-and-services companies had a market-adjusted return nancial services, fast food, and automo- firm, I found that self-determined cus- of 12% over the course of three years tive sales and service industries shows tomers who were sent reminder coupons and a survival rate of 73%, compared how these tactics can backfire. to encourage repeat purchases came with a return of −26% and a survival rate In one study, involving 300 new cus- back less often, spent less on each visit, of 60% for firms that hired a new CEO tomers of a bank, 71% of respondents felt and were more likely to defect during the and moved the founder to a different position on the top management team. (Companies whose founders left alto- gether performed somewhat better than those in which founders remained on the management team, although not as well as companies whose founders stayed at the helm.) Those findings, which hold true for smaller samples of firms in other indus- tries as well, suggest some interesting possibilities. First, the founder – though unproven, in the minds of investors – may in many cases be best qualified to run his or her own firm. Second, the in- troduction of a professional CEO may create troubling rifts between the new management and the old guard and dis- rupt a culture established during the company’s start-up years. Interviews we conducted with executives bear out those hypotheses. Despite these results, the practice of moving founders down a rung has grown. Between 1996 and 1998, just 6% of high-tech firms that replaced their founder-CEOs gave those former lead- that the bank had induced them to join. next three years than customers who ers other roles on the top management I call these members the bank’s firm- were not given any incentives to return. team or on the board; in 1999 and 2000, determined customers. By contrast, only So how do you market to desirable 20% did so. For companies intent on such 29% were self-determined, believing that customers who are hostile to the usual a strategy, the lesson is to act quickly. they had joined the bank on their own ini- aggressive incentives? Try offering incen- Those that made the switch early gener- tiative. A year later, the self-determined cus- tives that reinforce their decision to pa- ally fared better: Just look at Google and tomers were twice as profitable as the firm- tronize your company, such as a package Yahoo. determined customers–and were 80% less of benefits that reward the continuing re- likely to have defected from the bank. Sim- lationship. One bank, for example, offered martin l. martens (mmartens@jmsb ilarly, in another study, I found that self- rewards such as better interest rates, re- .concordia.ca) is an assistant professor determined customers of a delicatessen duced or eliminated fees for various ser- of management at Concordia University’s were more loyal than firm-determined vices, and free investment advice for John Molson School of Business in Montreal. customers and that they gave the store maintaining high balances. A year later, Reprint F0510E a greater share of their fast-food wallets. the profit from the bank’s self-determined continued on page 24

20 harvard business review L]naZiV[Zli]^c\ha^`ZaVc\jV\ZWVgg^Zgh! LZVahdd[[Zgi]ZWZhiigVchedgiVi^dc XjhidbhgZ\jaVi^dchVcYkZcYdgX]VaaZc\Zh hdaji^dch[dgndjgi^bZVcYXdhieVgVbZiZgh# hiVcY^ci]ZlVnd[ndjgXdbeVcnÉh\gdli]4 6cYdjgXjhidbhWgd`ZgV\ZVcYigVYZ AZVkZ^iidJEH# Xdchjai^c\ZmeZgi^hZXVc]ZaendjVkd^Y I]gdj\]djgHjeea^ZgBVcV\ZbZcihZgk^XZh! YZaVnhVcYeZcVai^Zh# lZÉaa]ZaendjZhiVWa^h]hjeea^ZgVXXdjciVW^a^in NdjiZaajhi]ZbVg`Zi0lZÉaa]ZaendjgZVX] VcYbV^ciV^chig^XiXdbea^VcXZbVcV\ZbZci ^i#L^i]hjeeanX]V^cZ[ÒX^ZcXni]ViWg^c\h ÅVaaidZchjgZi]ZfjVa^ind[dgYZghVcY i]ZldgaYidndj# dc"i^bZYZa^kZgn#6cYlZÉaaegdk^YZi]Zdca^cZ igVX`^c\VcYgZedgi^c\XVeVW^a^i^Zhi]Vi]Zae ndjbV^ciV^cXdcigdaVaaVadc\i]ZlVn# JEH#Xdb$hjeeanX]V^c&"-%%",)'"*,',

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f you buy management books online, you have proba- As many management ideas have come to naught, have bly encountered Robert Morris, a Texas-based man- you become more cynical or cautious? agement consultant with a background in business, I am more cautious about extravagant claims, not so much education, and government. Morris is an Amazon because the theories are problematic but because the con- I Top 10 reviewer (so voted by customers who have tent rarely supports them. Also, I keep in mind that the found his comments helpful) and one of very few among biggest ideas are often still wet behind the ears when they that august company who focus almost exclusively on busi- debut. Years after publishing Reengineering the Corpora- ness books. Morris estimates that he has read more than tion, Michael Hammer is still correcting misunderstand- 1,500 management tomes and reviewed more than 900 for ings and clarifying key points. Many other important ideas Amazon and other Web sites. (He says that Peter Drucker such as EVA, the total learning organization, the Balanced once complimented his reviews for not giving away the Scorecard, customer evangelism, and experiential market- plot.) And while such voracious consumption helps Morris ing have spawned cottage industries to refine, improve, and in his business, it is chiefly a labor of love.“I just finished fill in the gaps of the original idea. Juice and Managing for the Long Run,” the critic recently en- thused.“Who wouldn’t get excited about books like those?” Any tips for getting the most from a business book? My favorite strategy is to convert the table of contents into How do you decide which books are worth your time? a study guide. That is, look at the chapter titles: What ques- The best management writers ask an important question tions do they address? Then make sure you get the an- and answer it with solid research. Jim Collins asks,“How swers. So, for example, I created a study guide for Seeing can a good company become a great company?” Jason What’s Next by Clayton Christensen, Scott Anthony, and Jennings asks,“What traits do America’s best-performing Erik Roth. And as I read, I asked myself,“What are the sig- companies share?” When I pick up a book, I expect the nals of change?”“How do you size up competitors?” and introduction to tell me what question the author intends “Which nonmarket forces affect innovation?” Such ques- to answer. Then I look at what is emphasized–usually in tions guide me to the answers. boldface or italics–to see whether the author stays focused on that question. I also appreciate it when the author ex- What are your favorite management books? plains how the book is organized, because that affects how Some books have hit me like a revelation: for example, Jef- easy it is to assimilate the information. And I want to know frey Pfeffer and Robert Sutton’s analysis of the “knowing- which companies were studied. doing gap,”Malcolm Gladwell on intuitive decision-making, and Emanuel Rosen on “buzz.”There are also classics I re- You read so much; isn’t a lot of the material redundant? read every year: Joel Mokyr’s The Lever of Riches, Thomas Yes, but I am constantly amassing pieces of a larger picture. Kuhn’s The Structure of Scientific Revolutions, Peter Drucker’s Jack Welch, for example, has explained why he admires small On the Profession of Management, Eric Drexler’s Engines of businesses: They communicate better internally, they move Creation, and Albert Borgmann’s Holding On to Reality. faster, they are less bureaucratic, and the leaders have less I also strongly recommend that leaders read The Iliad and camouflage–all of which rings true. Then you read in The Odyssey, Antigone, the four Gospels and St. Paul’s letters Michael Gerber’s E-Myth Mastery that out of 1 million U.S. to the Corinthians, Julius Caesar, The Autobiography of small businesses started in 2005, more than 80% will be gone Benjamin Franklin, Walden, To Kill a Mockingbird, Death within five years and 96% in ten. Together, those thinkers of a Salesman, The Crucible, and The Heart Aroused. Books give me two pieces of the puzzle. I better understand the ad- such as these really do change lives! vantages small businesses have. And I have learned that few – leigh buchanan know how to achieve–and then sustain–those advantages. Reprint F0510G

22 harvard business review 2005 Accenture. All rights reserved. e r h aeodases osehwa innovative an how see outlook canhelp youbecomea high To you’ll all oldanswers. and same the way are old get same the things at looking Keep business, visit accenture.com visit business, © - performance xrodnr insights Extraordinary n omnperspectives.uncommon often come from from come often Goon.BeaTiger. customers had grown by 25% and the Holding Back on Growth A simple analysis of your sustainable defection rate had dropped by more Across the S&P 500, companies‘ 2004 growth rate can allow management and than 50%. Interestingly, comparable firm- sustainable growth rates exceeded shareholders to benchmark company per- determined customers did not react as analysts‘ growth forecasts. formance against its potential and lead favorably to these rewards, showing no to better allocation of resources. It is en- increase in profitability and little reduc- couraging that, as the U.S. emerges from consumer sustainable its latest downturn, many of the country’s tion in defection rates. (To market to self- discretionary analysts‘ growth rate determined customers, of course, you growth forecast* largest companies have room to grow. have to find them. One way is to simply consumer rekha sampath staples ([email protected]) ask customers why they started patroniz- is a manager, and ajit kambil (akambil@ ing the company in the first place. An- energy deloitte.com) is a firm director, at Deloitte other is to identify those who paid full Services in Boston, where they work on price for products at the outset, instead financials Deloitte Research initiatives. of reacting to promotional offers.) Reprint F0510H To attract new self-determined cus- tomers, strengthen your brand-building health care programs, such as image and informa- marketing tional advertising, and avoid aggressive industrials recruiting. Although the impact of brand Talk About Brand programs is relatively hard to measure, information technology the customers they attract are, in the Strategy natalie mizik and robert jacobson long run, the ones you want most. by materials paul m. dholakia ([email protected]) is A distinctive brand is good for business, of course. But you’d be surprised how an assistant professor of management at telecom Rice University’s Jesse H. Jones Graduate services important it is to a firm’s overall perfor- School of Management in Houston. mance. We studied how customer per- utilities ceptions of brand differentiation related Reprint F0510F to stock price over the course of 11 years 5% 10% 15% 20% 25% 30% in 275 “monobrand” companies such as growth annual growth rate AT&T,Krispy Kreme Doughnuts, and Reebok. (Customer brand-perceptions data Room at the Top Line *Consensus analyst average three-year annual came from Y&R’s Brand Asset Valuator growth rate, 2004–2007, as of July 12, 2005 by rekha sampath and ajit kambil survey.) Source: Company reports, Applied Finance Group Companies are increasingly focused on the (AFG) data We divided the firms into two groups top line, but do they have the financial for each year: The first comprised those The sustainable growth rate, or SGR, is the maximum capacity to grow? The answer is yes – and pace at which a company can grow revenue without whose brands, customers felt, had be- more than you might think. Our analysis depleting its financial resources. SGR is calculated by come less differentiated. The second in- multiplying return on equity (using beginning-of- of an important forward-looking metric – period equity) by the company’s earnings retention cluded those whose brands had become sustainable growth rates – across U.S. in- rate (1 minus dividend payout ratio). This metric more differentiated. We then looked at represents the growth possible when a company dustries found that the 2004 rates for reinvests retained earnings at existing levels of oper- differences between the companies’ an- companies in the S&P 500 exceeded ana- ating performance (profitability and asset efficiency), nual risk-adjusted stock returns. Curi- assuming the current capital structure and dividend lysts’ average three-year revenue growth policy are maintained over the evaluation period. ously, we saw no effect of changes in forecasts (see the exhibit “Holding Back brand differentiation on stock returns in on Growth”). This reality has powerful First, determine whether growth oppor- the years the changes occurred, but we implications for the managements and tunities are indeed available in the indus- did see a pronounced delayed effect: One shareholders of many of the largest U.S. try. If so, invest in the capital equipment year later, firms whose brands had be- firms: When a company’s sustainable and capacity to capture them. If not, con- come more distinct outperformed those growth rate exceeds its sales growth rate, sider diversification through new invest- whose brands had become less differenti- the company is not fully exploiting its fi- ments in product development or syner- ated. Specifically, the average next-year nancial resources to generate shareholder gistic mergers and acquisitions to buy risk-adjusted stock return for firms with value. In fact, our analysis suggests that growth. If neither approach is attractive, increased differentiation was 4.8%, while there is excess liquidity in the S&P 500. consider returning excess cash to share- the average for those with decreased dif- How, then, can you guard against sub- holders through dividends or share re- ferentiation was −4.3%. optimal growth, while at the same time purchases. This will bring the sustainable That brand enhancements improve maintaining a strong financial position? and actual rates more into line. stock price is not surprising. But the lag continued on page 26

24 harvard business review we identified has important implications Many companies, especially large Expand the talent pool. Look outside for companies. In simple terms, while in- conglomerates, still employ pure COOs your industry for the “best athlete.”Just dividual consumers perceive differentia- with real power and easily attract candi- as the top college lacrosse teams often tion directly and react in real time (buy- dates who welcome the opportunity for recruit outstanding high school football ing more Coke, say, as marketing increases professional growth that a big company players with the expectation that they differentiation), financial markets, it ap- affords. These hires are relatively easy. can learn an unfamiliar sport quickly pears, don’t respond until they see the Surprisingly, it is the possibility of CEO and excel, you can look far afield for the impact on earnings later on. The markets succession that makes finding the right best executive. Make it clear that you will don’t seem to anticipate the future im- COO more difficult. In that case, the com- accommodate the candidate’s need to pact of improved differentiation – or per- pany wants a candidate who is fit to be learn the industry and to build trust and haps they don’t recognize the change in CEO but who can partner effectively with respect inside the organization prior to differentiation in the first place. the current CEO. Meanwhile, the candi- succession. Though managers often think their date needs to be satisfied about potential Reduce the uncertainty of succession. voluntary disclosures have little impact, transition plans, timing, likelihood of the Establish a clear timetable. If a highly it’s been shown empirically that disclo- succession, and the performance expecta- desirable candidate requires further as- sures, ranging from new product an- tions that might determine whether the surance, you might consider guarantee- nouncements to explanations of finan- succession takes place. If the company is ing that the company will incur heavy cial results, affect financial-market reluctant to commit to a timetable, the obligations if succession does not occur outcomes such as share price, trading candidate may prefer the safety of a pre- by a certain date, assuming satisfactory volume, and bid-ask spreads. If companies sent position to the risk of an uncertain performance by the candidate. Such risk- are to reap the full and immediate bene- promise. reducing arrangements make it easier fits of brand differentiation, managers Additionally, the company must com- for the candidate to say yes while leaving need to do a better job of communicating pete for talent not only with other firms the company an out if the candidate does their brand strategy (and its intangible searching for COOs but also with compa- not perform well. outcomes) to the financial community. nies searching for CEOs. As the number Involve the board. The board’s in- natalie mizik ([email protected]) of CEO opportunities rises, the COO tal- volvement signals to the candidate that is an assistant professor of marketing at ent pool shrinks. And potential COO can- the company means business because Columbia Business School in New York, and didates who have the ability to be a CEO the search and hiring process takes place robert jacobson ([email protected] from day one often prefer to wait until that in the broad context of corporate gover- .edu) is the Evert McCabe Professor of Mar- day comes. Despite these challenges, there nance, not merely as an item on the CEO’s keting and Transportation at the University are some things you can do to increase agenda. The candidate feels wanted by of Washington Business School in Seattle. the odds of a successful search for a COO the entire company. who can eventually succeed the CEO: Reprint F0510J anne lim o’brien (alobrien@heidrick Create the position, if necessary. .com) is a senior partner at Heidrick & Many companies have phased out the Struggles International. She is based in the succession COO position, parceling out corporate firm’s New York office. responsibilities to the CFO and operating The Hardest Hire responsibilities to division heads. To Reprint F0510K anne lim o’brien by meet the demands of Sarbanes-Oxley What could be more difficult than find- for greater accountability, they have ing a new CEO? Many companies say it’s also shortened the CEO’s line of finding someone who’s willing to sign up direct responsibility by elimin- for the number two job: COO. ating the COO slot. In those The problem often lies with a firm’s organizations, when a CEO uncertainty about whether it’s looking intends to retire and for a “pure” COO or for a successor to the there is neither a cur- CEO. The board should be clear at the rent COO nor a poten- outset about which role it is seeking to tial successor inside fill and make that goal clear to candi- the company, the dates; there should be no vague, open- board can create an ended promises of succession to poten- interim COO role tial hires unless succession is the goal. and fill it with an Harbor no illusions that hiring a capable outsider who could COO will solve your succession planning eventually assume the if that’s not what you’re setting out to do. top job.

26 harvard business review

The Paradox of Excellence: How Great Performance Can Kill Your Business David Mosby and Michael Weissman (Jossey-Bass, 2005) When a company that provides consis- The Search tently stellar service stumbles, that error How Google and Its Rivals Rewrote the Rules of Business is, to quote Raymond Chandler,“as incon- and Transformed Our Culture spicuous as a tarantula on a slice of angel John Battelle food.”Customers who have taken perfec- (Portfolio, 2005) tion for granted are disproportionately angry over flaws and quick to demand According to Deloitte & Touche, Google’s revenues increased 400,000% compensation. In this entertaining tale set in its first five years of business. A number like that can be only partially in a fictional logistics business, the authors explained by the entrepreneurial prowess of Sergey Brin and Larry Page, explain how companies can simultane- the former Stanford graduate students who are Google’s still-youthful ously exceed expectations and keep them founders. So The Search sensibly concentrates less on personalities than on in check by continually reminding custom- the ingenious and rapidly evolving technology that has rendered the ers of the value they provide. Internet usable by a broad public and that allows companies at last to determine whether their The Ape in the Corner Office: Under- standing the Workplace Beast in All of Us marketing expenditures have produced results. Richard Conniff In briefly recounting the history of search en- (Crown Business, 2005) gines, Battelle – a cofounder of Wired magazine – Alpha males sometimes justify their ag- describes a shift from valuing the number of gressiveness by pointing out that their links from a given site (the model for Alta Vista, ancestors actually were 800-pound gorillas. Excite, and others) to valuing the number of links But gorillas and the rest of our hairy breth- to a given site (the basis for Google’s rankings). The ren are far better behaved than most of us author perceptively notes that Google’s system is think, reports Conniff. Drawing on a wide essentially the same as that of academia. The range of research, the journalist identifies more frequently a Web site is “cited”(linked to), flaws in common analogies between cor- porate ruthlessness and the animal king- the more influential it becomes (the higher it rises in the rankings) and, dom. For example, animals commonly consequently, the more likely it is to be found and cited again. The scholar’s practice altruism and reconciliation. And perspective is perhaps one explanation for the founders’ ambivalence about high levels of testosterone are associated commerce. Until 2001, Google hadn’t figured out a way to make money, with socially confident males who don’t and it never seriously considered banner ads or rankings based solely on need aggression to assert their leadership. fees paid by advertisers. The company now gets paid when a visitor clicks on an advertiser’s link appearing on Google’s site or on another site where Loyalty Myths: Hyped Strategies That Google has placed the link. Will Put You Out of Business – and Proven Tactics That Really Work Although The Search does not fail to relate the oft-told tale of Google’s Timothy L. Keiningham, Terry G. Vavra, IPO, readers are likely to find some of the broader implications of the busi- Lerzan Aksoy, and Henri Wallard ness more interesting. For example, Battelle dutifully takes on the threats (Wiley, 2005) to privacy posed by an indelible record of users’ clickstreams. But to this Fans feel loyalty to their teams. Dogs feel often effusive apostle of technology, anything that brings us closer to what loyalty to their owners. But what customers he styles a “perfect search” has destiny on its side. Someday, he prophesies, feel toward companies is much less pro- found, the authors argue in this relentless every fragment of text, image, musical composition, product, and service indictment of loyalty programs. Indeed, will be tagged, incorporated into the Web, and rendered findable by (proba- many assumptions about loyal customers – bly) Google’s powerful technology. As the online world comes to resemble that they are profitable or that repeat pur- a warehouse or department store, Google becomes a fearsome challenger chasing indicates some kind of emotional to Amazon and eBay, wielding the power of life and death over the enter- attachment – are simply wrong. These con- prises it chooses to acknowledge or ignore. sultants recommend that companies Such grandiose arguments are also the most stimulating parts of the book. eschew loyalty programs in favor of good, The Search–like its subject–is a pure product of Silicon Valley culture: by old-fashioned service and unsentimental turns wonky, earnest, and giddily utopian. cost/benefit analysis. – ben gerson – john t. landry

28 harvard business review

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The HR manager at Medignostics sees a disaster on the horizon: The company’s workforce is aging, and it can’t attract young talent. But his bosses are more concerned with cutting costs here and now. How can he persuade them to take the long view?

The Cane Mutiny Managing a Graying Workforce by Cornelia Geissler

uman resources manager Frank project. He’d done all the research, and HHeberer frowned. The internal- everything he’d read pointed to a rocky mail envelope he’d just torn open with road ahead. The average age of the Ger- great expectations contained the re- man population was steadily rising, and port he’d labored over for months. that had real implications for the mid- It outlined the long-term human re- size pharmaceutical company’s person- sources strategy he believed Medignos- nel. He flipped open his report to look tics needed to adopt in order to remain once again at the shocking statistic: competitive in the next 20 years. On the Without immigration, the country’s title page was affixed a yellow Post-it, population would fall from 82 million with the words “Not a priority” penned to 24 million by 2100. “Granted, that’s in the ornate handwriting of Erwin a long way off,” he thought, “but what Baum, the vice president of HR. Noting could be a bigger priority than a disaster the crispness of the binder, Heberer you clearly see coming?” doubted that anyone had read beyond Heberer had timed his proposal care- his cover sheet. fully. While the executive team might He felt completely deflated. For the not have been reading many demo- past six months, this had been his pet graphic studies, he trusted they’d heard

HBR’s cases, which are fictional, present common managerial dilemmas

DANIEL VASCONCELLOS DANIEL and offer concrete solutions from experts.

october 2005 31 HBR CASE STUDY • Managing a Graying Workforce

of the wildly popular bestseller Das take so long to find qualified candidates worked at a company that participated, Methusalem-Komplott (The Methuselah and wondered if he should contact a re- then, beginning at age 55, you could Conspiracy). Written by Frank Schirrma- cruiting agency. reduce your hours to half-time for the cher, an editor of the Frankfurter Allge- A knock on the door interrupted his rest of your working years but still earn meine Zeitung newspaper, the book train of thought. 80% of the wages you had as a full-time chronicled the demographic transforma- “Frank, can I speak to you for a mo- employee. Once you reached age 65, the tion occurring in Germany and seemed ment?” His HR colleague Rita Wachten statutory retirement age, you would to be the hot topic of conversation sounded troubled. “It’s about Matthias face only a small penalty in pension ben- everywhere Heberer went. The picture Hausmann.”The 58-year-old Hausmann efits for having worked those part-time it painted of the future was anything had been with Medignostics for more hours. At first Medignostics encouraged but rosy. In just 25 years, more than a than 20 years; he’d started as a book- employees to participate. But it was a quarter of the country’s population keeper and worked his way up through costly program, even with the offsetting would be over age 65. That was 6% more the accounting ranks before being moved government subsidies the firm earned than in America. In his report, Heberer into account management.“I just spoke by, for instance, taking on new trainees. went further to predict the effect this with his manager. Matthias’s time away And unlike some other businesses, the company did not need a palatable way “First the company insists on my being here of making workforce reductions. So a few months earlier, the executive team full-time, and then it finds a pasture to put me at Medignostics had decided not to offer out to.…Tell me, Frank, when it gets to be ten the program anymore. Hausmann, it turned out, was the first person the de- years from now, will you know less about how cision directly affected. to do your job–or more?” Heberer agreed to speak to the ac- count manager and asked his assistant to arrange a meeting. “It’s all part and trend would have on the German work- from the office is becoming problem- parcel, isn’t it?”Heberer thought.“We’ve force. “What happens when our em- atic. He can’t always be found when de- got a group of workers nearing retire- ployees start retiring in droves?” he cisions have to be made or when his cli- ment age and few good applicants look- asked.“How will we find good workers ents call. Apparently, there’s been more ing to take their spots. But all I hear to fill the ranks?”Heberer smiled grimly: than one complaint.” from top management is ‘We need to At the moment, the bestseller’s title “That doesn’t sound like Matthias. tighten our belts.’” He was more con- struck a chord. He felt as if the members When did the problem start?” vinced than ever that Medignostics was of Medignostics’s executive wing–all of “In the last few months, he’s taken an on shaky ground. them older than 55 – had ganged up on unusually high number of sick days.” him. Their priorities were all about cut- “Is there something seriously the mat- Too Early Retirement? ting costs. Why couldn’t they take the ter, do you think? He’s not as young as When Hausmann entered the HR man- long view? he once was, but his energy couldn’t ager’s office the next afternoon, Heb- He dropped the report on his desk have dwindled so suddenly.” erer caught himself looking for signs of and combed through the rest of his “I don’t know any details,” Wachten illness. But the tall, athletic man rum- mail. Only two more applications – a said. She hesitated, then added: “But it bled in full of energy. meager yield for a job that had been might have to do with the part-time “Did you go to the mountains last posted for three weeks on online boards statute. I’ve been hearing through the week?” Heberer asked by way of greet- and in the daily press. Heberer was try- grapevine about a lot of grumbling ing. “The weather was amazing.” The ing to fill a position in basic research among the old guard. You’re friendly two men had been members of the local that had opened when Medignostics with him–can’t you have a word?” mountain-climbing club for years. He had enticed one of its chemists into She was referring to the Part-Time offered Hausmann a chair and poured management. He hadn’t expected it to Statute for the Elderly, a special feature him a glass of water. of German social legislation–and, more “Yes,”Hausmann responded.“As soon Cornelia Geissler (cornelia_geissler@ specifically, to Medignostics’s policy re- as I’m surrounded by those peaks, I’m harvardbusinessmanager.de) is an asso- garding it. In the country’s ongoing bat- a new man.” ciate editor at Harvard Business Man- tle with unemployment, the statute was Heberer smiled. “But the climate in ager, HBR’s German edition. This article a way of easing older workers out the here doesn’t agree with you lately?” was adapted from the Case Study that ap- door so that jobs could be made avail- “Well, I’m not getting any younger.” peared in Harvard Business Manager in able for the young. Companies that com- Hausmann sighed significantly and sank August 2005. plied were eligible for subsidies. If you a little deeper into the chair.

32 harvard business review Managing a Graying Workforce • HBR CASE STUDY

“Nonsense! You can easily beat me “Ah. Are you having some difficulties agerial ranks at one of Medignostics’s up a mountain, even though I’m more with your boss?” Heberer had hired biggest competitors. Heberer consid- than ten years younger than you.” Hausmann’s supervisor just a year be- ered it a feather in his cap to have lured “Well, mountain climbing is an activ- fore. The 32-year-old sales director was this wunderkind away. ity that holds the body and soul to- labeled a high-potential; top manage- Hausmann studied Heberer’s face for gether. Also,”he paused and folded his ment expected great things from him. a moment before responding.“Your pro- arms across his chest, “no one tells me He had earned his MBA at Insead and, tégé is smart. I’ll give you that. But he what stone to put my foot on.” after that, had shot up through the man- has a lot to learn about managing. And october 2005 33 HBR CASE STUDY • Managing a Graying Workforce the ‘new’ approach to account manage- “Frank, I was just planning to call you. He stood up to leave, but Weber ment he’s touting is basically the same How are you doing? The reason you’ve placed a hand on his arm to stop him. thing we tried in the early 1990s, with been on my mind is that I’ve gotten “Frank, one more thing. I’ve heard a a few added bells and whistles. Perhaps some research results that raise a few rumor that the company is trying to you remember how it turned out the issues –” She stopped midstream and warehouse Hausmann.” first time? Because I surely do. Not only looked concerned. “Is something the Heberer looked surprised. “Bertha, that, but he recently sent me on a train- matter? You look worn out.” you know I can’t discuss personnel mat- ing program with people who were all “Sorry, I guess I am. You know how ters with you–” at least 20 years younger. I couldn’t un- we phased out the early retirement pol- She held up her hand to cut him off. derstand them – they spoke nothing icy? It’s causing some, er, tension.” He “No, of course not. I’m not asking you but jargon, tossing around words like shook his head as if to clear it.“But that’s to. All I’m saying is that – as we’ve just ‘turnkey’ and ‘synergy.’ And they’ve all hardly your concern, is it? Tell me, what agreed – older workers have a lot to got IT mania. I have to wonder, if their about this new research?” offer. Think of all the experience they laptops or Palms are turned off, do they “Actually, it may be related. The have. They know their way around the shut down, too?” good news is, our brand is the most re- firm better than anyone. Our stopping “I can sympathize with you, Matthias, spected in the geriatric market. There the early retirement option must have but no one benefits when you disen- is definitely a lot of potential for us to been a real blow. I just think you should gage. Your absences are having a nega- extend it.” give them some time to adjust.” tive impact on your colleagues and cli- “That’s great.”Heberer smiled. “Your “I’ll keep that in mind, Bertha, I will. ents. If you’re no longer comfortable in team must be very proud.”At the same But this is a company, and we need our this department, you should have talked time, he wondered what this had to do employees to be productive. Now, if to me. Perhaps we can come up with a with his worries. you’ll excuse me, I’ve got a full day new position for you.” “So that’s what this is really about! First the company insists on my being “Your ‘age wave’ crisis…is tremendously overhyped. here full-time, and then it finds a pas- It reminds me, in fact, of Y2K. Everyone panicked, ture to put me out to.”Hausmann looked belligerent.“I’ve been here a long time, talked in horror scenarios, and threw money at and I know this business inside and out. consultants–yet we woke up on January 1, 2000, If I say a man does not know how to man- age, why not assume I may be right? Tell to find nothing amiss.” me, Frank, when it gets to be ten years from now, will you know less about how “Think about it, Frank,” Weber said, ahead of me. I’ve got some applicants to to do your job – or more? And what if reading his mind. She leaned over the speak to and then a meeting this after- everyone has stopped listening?” table with a look that reminded him of noon with Erwin to talk about the other “I’m listening.” Heberer cautiously his high school math teacher.“What do end of the aging spectrum – children. patted Hausmann’s shoulder. “And no you know about the problems one faces He’s finally agreed to hear my plan on a one wants to put you out to pasture. when arthritis sets in? Or how it feels to company day care center.” Let’s both give this some more thought have a weak bladder?” Weber grimaced.“Good luck with the and meet again at the end of the week. “Listen, I just turned 45. That’s a long dinosaur.” All right?” way off for me.” Back in his office, Heberer picked up As soon as the door closed, Heberer “Precisely,” she beamed. “And there- the applications that still lay on his desk. exhaled slowly. He suspected that this fore people your age – not to mention Thoughts about the old-timers would unpleasant conversation was just the those who are younger–aren’t qualified have to wait; right now, Medignostics first of many; he could think of three to market the products that 70-year-olds urgently needed to fill this specialist other employees the same age as Haus- need. Our arthritis campaign that was so position. Basic research was the com- mann, and he wouldn’t be the least bit successful last year? It was spearheaded pany’s most important department – surprised if they soon started staging by Johann Weiss, who retired not long without it, the product pipeline would their own unofficial “strikes.” after.” dry up. Unfortunately, a good scientist “So you’re concerned about our re- was hard to find. He wondered if the Older and Wiser cruiting. I see. Maybe we need some lower birthrate was already having an Heberer was stirring his coffee in the more gray hairs in marketing?”Heberer impact on the number of university cafeteria when he noticed Bertha Weber thought for a moment. “Makes sense. graduates. from the marketing department waving Definitely gives me something to think One of the applicants looked promis- him over. about, thanks.” ing. The woman had excellent grades,

34 harvard business review her dissertation topic perfectly fit the only qualified applicant in this entire job, and she had worked for a competi- country.” tor for the past three years. “What a “It’s not just about this one position. find,”Heberer thought joyfully.“I didn’t We need to figure out a way to ensure even have to hire an expensive re- reinforcements for the next ten years. cruiter.”He picked up the phone and di- And let’s not forget the many mothers– aled her number. and fathers – already on our payroll. Think how it would improve retention In with the New? if leaving the company also meant Two hours later, Heberer knocked on pulling your child out of school.” Erwin Baum’s door. The VP of human “If it isn’t done right, the effect is resources was a formidable man. He had more dissatisfaction than satisfaction. joined Medignostics 30 years ago, in the And doing it right is expensive–in both sales department, and had been drilled the short run and the long run. You for decades on reaching financial goals. know, I’m 58 years old, but that doesn’t To Baum, every decision came down to mean I don’t care about the future of numbers. the company. If today’s problems don’t Heberer tried to suppress his disap- get taken care of, though, there is no fu- pointment over the rejection of his de- ture. Our first priority is cost contain- mographics report. He needed to be ment. Then growth. Once we are on that clearheaded and persuasive to have any path, I will gladly reconsider the luxury chance of getting approval for his day of a company nursery school.” care idea. Heberer thought about The Methuse- “Come in,”a voice rattled from within lah Conspiracy to steel himself.“I am not Baum’s office. Baum was sitting on his trying to create programs that sap our leather sofa and reluctantly looked up growth. I am trying to drive growth. from the documents he had been read- Somehow we must learn to keep our ing.“What can I do for you?”he asked in older workers engaged and productive. a tone that sounded more like,“Make it At the same time, we must become short.” more attractive to younger workers. In “I’d like to talk about the viability of some ways, those are similar goals; in establishing a company nursery school,” other ways, they are at odds. But when Heberer cautiously reminded him, tak- I create a long-term plan to strike the ing a seat in the opposite chair. balance–to tap the knowledge and net- “Child care is a private matter, Heb- works of older workers and signal their erer. We just got the costs for early re- worth to us without allowing their pro- tirees off our shoulders. Now you want longed tenure to block the ascent of to shackle us to parents? You know we young talent – you don’t even read my don’t have money to burn.” proposal.” “With all due respect, we talk a lot “Heberer, this conversation was not about costs, but we ought to be talking supposed to be about your ‘age wave’ about people.”Shocked by his own bold- crisis, but here is my thought on that: It ness, Heberer rushed on. “Otherwise, is tremendously overhyped. It reminds we’ll run into problems with recruiting me, in fact, of Y2K. Everyone panicked, and retention, and that means bigger talked in horror scenarios, and threw costs down the line. money at consultants – yet we woke “Let me give you an example. I finally up on January 1, 2000, to find nothing have a terrific applicant for the research amiss.” The telephone rang. After a job. Her qualifications are ideal, but she glance at the machine’s display, Baum has two children. Our having a school decided that the conversation was over. here could make the difference be- “And now, please excuse me.” tween her joining us and her going to a competitor.” What should Medignostics’s long- Baum leaned back and folded his term HR strategy be? • Four arms: “You can’t tell me that she is the commentators offer expert advice. october 2005 HBR CASE COMMENTARY • Managing a Graying Workforce

suspect that Frank Heberer did not sup- not valued. Continuing education can be I port his proposal with enough data and helpful, but not if it’s like the course Haus- facts. In my experience, human resources mann participated in. Instead of improving managers won’t get the ear of executive his productivity, the experience undermined management unless they translate their con- his motivation and further exacerbated rela- cerns into language that the top team un- tions with his supervisor. Managers should derstands. If Heberer wants his HR strategy pay attention to the needs of older workers to be taken seriously, he must show Erwin and send them to appropriate training Baum the business consequences of ignor- courses to help them remain productive until Norbert Herrmann (herrmann ing the demographics issue. He should frame they retire. @4pgroup.de) is a consultant them in terms of costs, performance, and Employee age has a mixed effect on inno- specializing in human re- innovation. vation. Older employees–especially at phar- sources and demographic change, based in Bad Endorf, Let’s look at costs first. Right now, the lop- maceutical companies–are an important re- Austria. Previously, he worked sided staffing structure at Medignostics is source. Medignostics supplies products to in HR management at BMW generating expenses that the executives seniors, a fast-growing market. As Bertha and Otis Elevator. might not be aware of. Matthias Hausmann Weber explained, firms that properly utilize frequently calls in sick, and that is creating older employees will develop better prod- work delays and hurting productivity. Sev- ucts for this target group and will be better eral clients have complained and may move equipped to market to them effectively.

Firms that properly utilize older employees will develop better products for the senior target group and will be better equipped to market them effectively.

their business elsewhere; winning them back However, a pharmaceutical company must may take expensive measures. also perform basic research to maintain its Additionally, the salary structure is surely product pipeline. For this, it needs young, becoming an issue since older employees highly qualified scientists. And they won’t generally have higher salaries than their col- sign on if they perceive Medignostics to be leagues who are ten to 15 years younger. If a conservatively managed, family-unfriendly Medignostics continues on its current course, company. this problem will become more acute in five Only when Heberer details these sobering to ten years. I’m less concerned with em- scenarios will Baum be ready to listen. We ployees like Hausmann, who are about to re- don’t know exactly what Heberer’s HR pro- tire, than with those between 40 and 50 years posal entails. But I hope it includes launching of age, for whom work/life balance is a for- an information campaign for Medignostics’s eign concept. Burnout and stress-related staff, to spread awareness about the changing cardiovascular illnesses are especially wide- demographics of the company and what they spread among this middle-aged group, and mean in practical terms. There should also be Medignostics will have to address costly a plan for internal development and contin- problems like these down the road. uing education that takes workers’life stages A similarly bleak scenario can be drawn into account. It should include managerial for performance: When managers are mark- training that older employees run and health edly younger than their reports, tensions programs that accommodate employees in often arise. The young high-potentials, using the middle of their working lives. The plan the most modern technology and business should also include affordable, flexible re- jargon, can make subordinates feel that their tirement and compensation models as alter-

experience and knowledge are outdated and natives to the part-time statute. WENDY WRAY

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HBR CASE COMMENTARY • Managing a Graying Workforce

To encourage older workers to stay on the job, the U.S. eliminated the Social Security earnings test for retirees over 65, which had been a strong disincentive to work.

his case does not depict a uniquely Ger- retirement age, even though many of them T man situation. The steady rise in average would prefer to scale back their work hours age is occurring in many advanced econo- more gradually. Other pension rules carry mies, including the United States. Each of similar disincentives for employers and work- these nations will have to address the ques- ers. Companies say that they face economic tion of how to plan for an approaching labor barriers to creating more of the part-time shortage. positions that would suit older workers. The The challenges posed by aging popula- fixed costs (for benefits, training, and such) of tions range from fiscal imbalance in national employing a worker can create strong incen- pension systems, like the U.S. Social Security tives to maximize that individual’s hours, out- program, to the potential economic strains put, and tenure prospects. due to shortages of skilled workers. In the Between these structural problems and United States, lower fertility rates, rising life employers’ ambivalence about the merits of expectancies, the retirement of the baby older workers (as seen in the Case Study), boom generation, and the popularity of early initiatives to hire or retain older workers are retirement are all contributing to slower not widespread in the American private sec- growth of the labor force: Annual growth has tor and are only somewhat more common in dropped from about 3% in the late 1970s to the public sector.Some public school systems around 1% now. Further, the United States is have instituted Deferred Retirement Option on an unsustainable fiscal path, driven in part Plans, which allow teachers who are eligible by these demographics. Absent change, the for full retirement through defined benefit country may experience reduced economic plans to continue working without having growth and a slower rise in living standards. their pension checks deferred or reduced. These trends and their implications are fore- DROP programs have reportedly been suc- seen in other nations as well. cessful in retaining some of the best and Countries can try to avoid that dark future most experienced teachers. The U.S. Govern- by enacting public policy changes to rebal- ment Accountability Office is currently study- Barbara D. Bovbjerg (bovbjergb ance their long-term fiscal trajectories and to ing older workers and their employers, as @gao.gov) is the director of expand the labor force. One way to do the lat- well as ways the federal government can re- Education, Workforce, and In- ter is to encourage and enable older workers move or mitigate barriers to working longer. come Security Issues at the U.S. to stay on the job longer.An obvious first step Many believe that more innovation will Government Accountability Of- is to dismantle barriers to older workers. For occur in the private sector as companies’ fice in Washington, DC. GAO example, the United States eliminated the growth becomes constrained by the labor has published several reports Social Security earnings test for retirees over crunch. The pioneers may be the industries relevant to this commentary, 65. The test reduced Social Security benefits that rely most on “knowledge work”– where the most recent of which is Re- to those with incomes above a certain level a career’s accumulation of experience and defining Retirement: Options and was a strong disincentive to work. wisdom is an especially precious asset. And for Older Americans (GAO-05- 620T, April 2005). The reports But more remains to be done to alter in- just as we in Washington hope to learn from can be found at www.gao.gov. centives both for workers and for employ- how other governments are dealing with ers. Rules in the United States governing the issue, companies will build on one anoth- employer-provided pensions prevent com- er’s solutions. Meanwhile, I sympathize with panies, in certain circumstances, from paying managers in the vanguard like Heberer.They out pension benefits to people still on the may not get a hearty welcome in their bosses’ payroll. For most affected workers, it is only offices yet, but their efforts can make a tre- rational to quit working entirely at the full mendous difference in the long run.

38 harvard business review

HBR CASE COMMENTARY • Managing a Graying Workforce

would recommend that Heberer make an- (and share the costs of) one day care facility Iother serious effort to convince Baum that that serves all their staff members. the changing demographics are a real con- The other issue Heberer is wrestling with cern for the company. As I see it, Heberer has to do with older employees. At Telekom, must not only raise a red flag but also present we still have a part-time provision for them, affordable ways to balance out the age struc- to smooth their transition into retirement. ture at Medignostics. At first glance, this solution looks expensive. I applaud his idea to provide a day care fa- But I am not certain we would save any costs cility on-site. Even though it is difficult to cal- if we were to do away with it, as Medignos- culate exactly the benefits such a program tics has done. Here, as in the case of offering will bring, there are various reasons to act on day care, it is difficult to assess all the bene- fits accurately. Take Hausmann, for in- Germany’s changing demographics have stance. He has given the company more than 20 years of great service. If man- created fierce competition to recruit qualified agers like him want to wind things professionals, so companies would do well down near the end of their working lives, then I believe they should be given to position themselves as family friendly. that opportunity. Otherwise, you run the risk of employees’ internally “re- this idea. In general, employers are demand- signing” – putting in only meager efforts, ing increased mobility and flexibility from blocking progress, and chasing away impor- their staff, and so they must provide some- tant clients. In the long run, this kind of sub- thing in return. And because the country’s tle sabotage causes the company far more changing demographics have forced firms damage–in terms of costs, competitiveness, into fierce competition with one another to and reputation – than an arrangement that recruit qualified professionals and manag- lets workers bow out earlier and with grace. ers, companies would do well to position An internal resignation like Hausmann’s themselves as family friendly.Child care is an eventually makes itself known through very important criterion when an employee de- clear signals, such as poor attendance. cides whether to join a company. If Medig- Since Medignostics is in a difficult finan- nostics truly wants to become more compet- cial situation, it cannot offer part-time work itive in attracting talented, young employees, to every aging employee. But I would rec- offering such a benefit will definitely help. In ommend that the company carefully analyze fact, that is one of the reasons we offer a day each case to determine the best possible out- care facility at Telekom’s Bonn site, where come. It may be worthwhile to hire a coach some 10,000 employees work. for late-life career changes or an outplace- Of course, Heberer must make sure the ment adviser for some employees. And it costs for such a project do not get out of might be good to think about transferring Dietmar Martina (dietmar hand. Before pushing his proposal too far,he aging workers to less demanding roles. In [email protected]) is has to calculate the construction, rental, and Japan, for instance, employees are routinely head of groupwide HR plan- staffing costs. The funding of a child care cen- taken out of management at a certain age ning and monitoring at ter is easier to handle for a corporation like and allowed to glide into retirement. Per- Deutsche Telekom in Bonn, Telekom, with €58 billion in yearly revenue, haps Hausmann might be better off in a con- Germany. than for a midsize firm such as Medignostics. sulting role at Medignostics. That way, the But that is no reason for Heberer to give up company could still benefit from his vast ex- his quest. If the company can’t afford to pro- perience, but clients wouldn’t be affected if vide a center on its own, Heberer should try he adopted a part-time schedule. For a busi- to come up with imaginative solutions. ness to be successful, it must take the inter- Maybe Medignostics could cooperate with ests of both its clients and its workforce into other companies in the region to establish account.

40 harvard business review

HBR CASE COMMENTARY • Managing a Graying Workforce

o address human capital needs, every for executives who have gone to the West to T company needs a long-term strategy – be educated and to work but who wish to re- one that takes into account the societal, po- turn home. Referred to as hai gui–or return- litical, economic, and technological changes ing sea turtles–these executives provide crit- that will dramatically transform the way we ical managerial and technical talent to work in the future. Chinese industry. Chinese companies, there- Two fundamental changes should frame fore, must learn how to identify and attract Medignostics’s response to the challenge of this group of professionals. an aging workforce. The first is globalization. In the West, an entire generation of exec- Although the movement of labor is not as utives nearing retirement is reinventing the unfettered as the movement of goods, labor way it works. Rather than retreating to the golf laws around the world are changing, and course, executives are extending their work- companies can cast a much wider net for tal- ing life far beyond traditional norms. They’ve ent. Medignostics, therefore, should consider prepared by “going plural”earlier in their ca- its potential talent pool to be global rather reers, pursuing various interests that may in- than national or local. The second is tech- clude public company boards, charity boards, nology. Today, everyone is interconnected and venture capital work. This trend coin- Eileen A. Kamerick (ekamerick and interdependent. The 24/7 environment, cides with the increased demand for experi- @heidrick.com) is the chief financial officer of Heidrick with its constant information flow, forces a enced directors. & Struggles, an international change in the basic work paradigm. Companies that have reinvented their pro- executive search and leadership In this context, the old model of hiring cesses to take advantage of these changes consulting firm headquartered young management trainees at corporate don’t have problems attracting young talent in Chicago. headquarters and having them work their or retaining seasoned executives. They lead way up through the ranks to senior manage- their sectors, in part because their own lead- ment is as archaic as quill pens. The new ers have challenged themselves to invent model focuses on attracting talent from all new ways to work in order to create the over the planet – people who can work from greatest possible opportunity for the broad- dispersed locations, linked by common goals est inclusion of talent. Kelvin Thompson, a se- nior partner and innova- The old model of hiring young trainees at corporate tion leader at Heidrick & Struggles, observes that headquarters and having them work their way the companies winning up to senior management is as archaic as quill pens. the talent wars have lead- ers with both the knowl- and enabled by technology. The post–World edge and the confidence to manage and War II business model is yielding to a more grow a global business. They hold inclusivity fluid, less hierarchical approach. as a core value and are willing to create in- The rigors of a global business model re- novative work environments in order to fos- quire far greater inclusivity. Despite the pre- ter it. Finally, they have the foresight to in- dictions of a looming global war for talent vest in technology that lets employees precipitated by declining Western birthrates optimize their talents. Companies with such and accelerating retirements, the talent pool leaders will face the challenges of global is deep when viewed from a global perspec- competition, technological innovation, and tive. Companies should expect to employ a workforce changes with the confidence that workforce that is far more diverse in terms of they will attract, retain, and motivate the nationality, age, and gender. most talented people they can find from Two examples underscore the changes in around the world. how companies must think about attracting talent and how people think about their Reprint R0510A work. In China, there is enormous demand To order, see page 159.

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The best leaders have an almost uncanny ability to understand the context they live in–and to seize the opportunities their times present. A look at U.S. business history shows how they do it.

Zeitgeist Leadership by Anthony J. Mayo and Nitin Nohria

leader’s long-term success isn’t simultaneous recession and inflation A derived from sheer force of per- when he nonetheless managed to sus- sonality or breadth and depth of skill. tain strong growth in both revenue and Without an ability to read and adapt to profits. He was well suited to an envi- changing business conditions, personal- ronment where rational planning and ity and skill are but temporal strengths. prudent investments were the order of An understanding of the zeitgeist and its the day. It was also a time of heavy reg- implications has played a critical but un- ulation, and Jones’s statesmanlike de- heralded role in some of the greatest meanor made him particularly effective business victories of all time. Jack Welch in negotiations with government regu- is widely credited with GE’s remark- lators. But Jones recognized that global able performance during the 1980s and competition was heating up and the 1990s, for example, but his predecessor, company’s future success would hinge Reginald Jones, made the wise decision on nimbleness and a greater capacity to name Welch as his successor despite for change and, hence, on a new type of the fact that the younger manager was CEO. The boundary-busting Welch – considered too inexperienced, too im- who also read the zeitgeist and saw patient, and too reckless for the job. great change on the horizon – was the Though they were polar opposites, each ideal person to grow the business during was perfectly attuned to his era. headier times. An accountant by training, the re- A lack of contextual sensitivity can served and dispassionate Jones ran the trip up even the most brilliant of exec-

JEFFREY PELO business during the 1970s – a time of utives. No less a luminary than GM’s

october 2005 45 BIG PICTURE • Zeitgeist Leadership

Alfred P. Sloan, whose decisions in the mud in an era that favored new or portunities or the potential of nascent 1920s fundamentally shaped the way emerging industries, such as the 1990s technologies and through perseverance large companies are run even today,was (or India today). A CEO who excels dur- and determination built successful new relieved of day-to-day management of ing a period of relative freedom might enterprises. Managers could spot op- the business in the 1930s because he was derail during a time of heavy govern- portunities to aggressively expand the unwilling to meet with the new United ment intervention, when an ability to scale and scope of an established busi- Automobile Workers union. Before the navigate rules and manage relationships ness through disciplined resource allo- 1930s, employees had little if any bar- might prevail over an inventive mind. cation and execution. Leaders sensed gaining power, but they made great This is not to say, though, that each era the potential in moribund businesses gains through the decade, and for the was ideally suited for only one type of and found ways to breathe new life into first time in U.S. business history, the executive. In every decade, many forces them. (For a fuller description of each ability to negotiate effectively with labor were at play, affecting the context of in- approach, see the sidebar “Three Ar- became critical to a manager’s success. dividual businesses in different ways chetypes of Leadership.”) Labor’s power would wax and wane and affording different opportunities. We organized our study chronologi- over the years. Indeed, throughout the The ideal CEO for one company in an cally, sorting the 1,000 business execu- twentieth century, the overall business era was not necessarily the right person tives according to the decade in which context shifted continually.To greater or to lead another at the same time. What’s they founded their company or became lesser degrees, factors such as govern- more, CEOs and founders played an im- CEO. Decades turned out to be a good ment regulation, social mores, and portant role in defining the context in proxy for different eras or specific com- global events influenced the opportuni- which they lived and worked because binations of contextual factors. There is ties available to industries and leaders. they not only seized the opportunities a common understanding, for example,

An understanding of the zeitgeist and its implications has played a critical but unheralded role in some of the greatest business victories of all time.

Certain conditions were more favorable of a specific age but also created oppor- of how the 1950s differed from the to some types of businesses than oth- tunities that influenced events. 1970s. Once we sorted our leaders in this ers. The 1920s were very good to con- The notion of zeitgeist might be in- way, what we found was this: While sumer products companies and adver- tangible, but the risks of contextual many contextual factors are at play tising agencies, for instance, because a insensitivity are concrete. If you can’t within any era, six factors–government nation newly out of war was eager to read the business landscape, you risk intervention, global events, demograph- buy, while the 1940s saw a focus on the leading your organization in the wrong ics, social mores, technology,and labor– heavy machinery needed to fulfill the direction or choosing the wrong suc- are especially influential in shaping the massive military requirements imposed cessors. To better understand this con- landscape for business. (The relative in- by World War II. And different types of nection between business performance fluence of these factors over the years is top executives could succeed depending and context, we studied 1,000 great U.S. shown in the exhibit “The Twentieth- on the context of both the broader busi- business leaders of the twentieth cen- Century Zeitgeist.”) ness world and the individual business. tury – individuals who shaped the way The kind of person who might be a su- Americans – and people around the Government Intervention perstar in a conservative time like the globe–live, work, and interact. (For our The extent to which the central gov- 1950s, when mature industries pros- definition of “great,”see the sidebar on ernment intervenes in business mat- pered, might be a hopeless stick-in-the- our methodology.) We identified exem- ters determines the degree of auton- plars of three distinct leadership arche- omy afforded business executives and Anthony J. Mayo ([email protected]) is a types – the entrepreneur, the manager, the level of resources a company needs lecturer and director of the Leadership and the leader – and examined the con- to cope with potentially complicated Initiative, and Nitin Nohria (nnohria@ ditions under which each thrived. regulations. hbs.edu) is the Richard P. Chapman Pro- While the ability to seize the zeit- The 1910s was a time of relatively fessor of Business Administration, at Har- geist – a skill we call “contextual intelli- high government involvement, witness- vard Business School in Boston. They are gence” – proved universally pivotal to ing a flurry of antitrust activity that in- the authors of In Their Time: The Great- their success, the way each of these var- cluded the breakup of Standard Oil and est Business Leaders of the Twentieth ious individuals exploited opportunities American Tobacco. In this period, the Century (Harvard Business School Press, was very different. Entrepreneurs were government established the Federal Re- 2005). uniquely skilled at sensing emerging op- serve System, transformed its tariff leg-

46 harvard business review Zeitgeist Leadership • BIG PICTURE

islation, expanded tax collection, and en- on by the lack of nice furniture) – prac- cofound Morgan Stanley, an indepen- listed the support and cooperation of tices that today would surely catch the dent bond house that would carry on business for America’s entry into World attention of consumer advocates and the securities-trading business that his War I. CEOs and founders in that decade could well land you in court. Even Pro- former employer was forced to exit. De- had to understand how to navigate the hibition, which was enacted in 1919 to spite the depressed economy, the firm’s halls of political power. reduce crime and improve urban stabil- very success invited further government But that requirement didn’t last long. ity, laid the foundation for many under- intervention into the industry. An ex- The 1920s saw a return to laissez-faire ground illegal businesses. ample of the leader archetype, Stanley governing, as a nation newly out of war The freewheeling atmosphere evapo- was an outspoken advocate for his com- wanted freedom and adventure. This rated when the 1929 stock market crash pany and his industry,and his testimony was a period in which high-profile anti- brought on a wave of regulation that helped fend off further antitrust activity trust suits against U.S. Steel and Alcoa transformed many businesses, most no- in the 1940s. failed, and both corporate and personal tably banking. Among the new laws was Government controls on business income tax rates were cut. Some manu- the Glass-Steagall Act of 1933, which remained strong through the Second facturers and their advertisers shame- prohibited any company from engaging World War, as business executives were lessly invented and marketed remedies in both investment-banking and com- in many cases forced to support the for diseases such as bromodosis (foot mercial-banking activities. It prompted war effort. Many manager-type CEOs odor) and homotosis (a malady brought Harold Stanley to leave J.P.Morgan and seized this opportunity to dramatically october 2005 47 BIG PICTURE • Zeitgeist Leadership expand their overall businesses through his main operation focused on tractors lished dealerships and service centers in product-line conversions or extensions. and bulldozers. They proved as critical these areas for training, maintenance, As the war ended, the technological in battle as planes and tanks, essential and – most important – follow-on pur- achievements it generated were turned for constructing landing strips, digging chases. At the same time, Neumiller’s to commercial applications, and busi- ditches, clearing forests, and so forth. insistence that the company stick to its nesses reestablished a much greater At the end of the war, Caterpillar re- core competency meant that after the level of autonomy. The 1960s was an- ceived an unexpected leg up in its in- war Caterpillar was well prepared to fill other era of greater government in- ternational expansion efforts as its the growing need for earthmoving volvement, as the Kennedy and John- bright yellow, easily recognizable brand equipment at home, providing ma- son administrations enacted legislation of equipment stayed behind when the chines for roadway construction, subur- focused on equal employment, work- U.S. troops came home. Most of that ma- ban expansion, and other large-scale de- place safety, and consumer rights. Peri- chinery was taken over by local Euro- velopment in the 1950s. ods of heightened regulatory activity pean and Asian governments and busi- Although American social attitudes don’t always unfold in the same way, nesses, which created a new market for remained isolationist following the war, though. This time, the government’s at- the manufacturer. Caterpillar estab- the relative stability of the 1950s created tempts to control mergers and acquisi- continued on page 57 tions within the same industry spawned the conglomerate business model, as companies attempted to skirt antitrust activity. During the last two decades of Three Archetypes of Leadership the twentieth century, government- The word “leader”has come to define business executives in a gen- mandated deregulation of the airline, eral way. But when we sought to understand the different types of banking, and telecommunication in- leadership, it became clear that the same word could be applied to dustries opened the door to many new one of three essential executive archetypes. competitors, once again changing the Entrepreneurs are often ahead of their time, not necessarily landscape for business executives. • bound by the context in which they live. They frequently overcome Global Events seemingly insurmountable obstacles and challenges to persevere in finding or launching something new. U.S. business executives were relatively Managers are skilled at reading and exploiting the context of immune to global events (and preferred • their times. Through a deep understanding of the landscape in it that way) through the first half of the which they operate, they shape and grow businesses. twentieth century, with the notable ex- Leaders confront change and identify latent potential in busi- ception of the two world wars and the • nesses that others consider stagnant, mature, declining, or mori- impact of immigration, which provided bund. Where some see failure and demise, this breed of executive a steady supply of cheap labor. sees kernels of possibility and hope. While most companies were happy Certain periods of the past century may at first glance seem al- to revert to the comfort of isolation at most ideally suited for the emergence and dominance of a partic- the end of both wars, some CEOs saw in ular type of executive. For in- the country’s leadership position at the stance, the early part of the close of World War II an opportunity to century may seem to have been expand into Europe and beyond. Look made for the entrepreneur. The at Caterpillar. The CEO at the time, 1950s might seem perfect for Louis Neumiller, fits our definition of the organization-man manager. the manager archetype, grasping how The tumultuous 1970s might seem ideal for the leader. But we the shifting business landscape pre- found that all three types coexisted and were pervasive through sented new opportunities for his com- every decade. In fact, we found that all three archetypes were vital pany, all the while running a smooth to sustaining the vibrancy of the capitalist system. Entrepreneurs operation. He resisted pressure from the create new businesses, managers grow and optimize them, and military to shift his manufacturing op- leaders transform them at critical inflection points. Time and erations entirely from bulldozers to ar- again, the American capitalist system has borne witness to this tillery during the war, convincing the business life cycle, and it is the ongoing regeneration of this pat- government that large-scale earthmov- tern that ultimately sustains development and progress. ing equipment would also be needed on the battlefields. He built a new plant to make engines for army tanks but kept

48 harvard business review REAT LEADERSHIP is not a singular G concept. On the contrary, it is a function THE of the circumstances in which businesses and their top executives operate. The opportuni- ties available to businesses are deeply influ- 20TH enced by six contextual factors – demograph- ics, technology, social mores, government CENTURY

intervention, labor, and global events – and Zeitgeist each comes into play to a varying degree at different times. In the 1930s, for example, the U.S. government took an active interest in business affairs, as the country struggled to recover from the Great Depression. That was a dramatic departure from the 1920s, when a laissez-faire postwar attitude gave businesses free rein to operate as they chose. A break-the- rules type of leader with an inventive mind might have excelled in a start-up during the 1920s but be unable or unwilling to navigate the complex regulations pertaining to a ma- turing company during the decade that fol- lowed. The best leaders can sense the winds of change and adapt with the times. The chart that unfolds across the following pages shows how these six contextual factors played out in business throughout the twenti- eth century in the United States. It also illus- trates how three different executive arche- types – entrepreneurs, managers, and leaders (“leaders” as an archetype, as opposed to the more generalized term for someone leading an organization)–capitalized on the opportu- TIMELINE, SEE INSIDE nities of their times. It demonstrates at a high level how context influences business and, in turn, how leaders can influence context.

october 2005 49

Decade by Decade 1900s 1910s

The nation’s mood shifted constantly. Growing population; vast market expansion; Heavy regulation; business Entrepreneurs, managers, and leaders minimal labor impact; initial government retools for WWI; some each seized the new opportunities – and intervention but strong big-business power small labor power responded to the corresponding chal- E Cyrus Curtis, Curtis Publishing, seizes E Clarence Saunders’ self- lenges – in different ways. on increased middle-class purchasing service Piggly Wiggly stores give consum- E Entrepreneurs M Managers L Leaders power to publish the Ladies’ Home Journal ers access to newly emerging national and the Saturday Evening Post. M Clarence brands.M Frank Phillips (above) cofounds Woolley consolidates the radiator industry Phillips Petroleum after the breakup of into American Radiator.L Frank Ball uses Standard Oil.L William Fairburn, Dia- the expired patent for the Mason Jar to mond Match, brings new life to the match Contextual Influence build Ball Corporation. industry with a nonpoisonous technology. The relative influence of each contextual factor shifted from decade to decade. The degree to which each played a part Demographics is shown on a scale of one to five by the Technology thickness of the shaded background in Social Mores each row. The colors correspond to the Government Intervention darker lines in the graph at right, which Labor indicate how the factors shifted in rela- Degree of Influence Global Events tion to one another across the decades. Low High

8.8 million immi- Anti-immigration Great Migration grants arrive sentiment peaks begins as African- throughout decade during WWI Americans relocate Demographics from rural South to Cities expand northern cities Pop: 76–92 million

Model T Widespread use of First widespread steam engine, elec- use of auto Plastic tricity, and open- assembly line Technology Safety razor hearth furnace al- Self-starter in- lows businesses to creases popularity expand nationwide of automobile

Progressivism Sedition Act The Jungle Prohibition begins Social Mores Red Scare and race riots

First significant en- Tariff Act forces cor- Breakup of Federal Reserve Act forcement of Sher- porations to open Standard Oil and First Federal-Aid man Antitrust Act their books for gov- American Tobacco Government Highway Act ernment inspection Intervention Pure Food and Clayton Antitrust Personal income Drug Act; breakup Excise tax imposed Act tax reinstituted of beef trust on corporations

Fewer than 500,000 Ford doubles fac- Worker shortage: union members tory wages and Unions double shortens workday membership and Department of Labor increase wages Commerce and Labor created

U.S. begins War Industries Cost-plus contracts construction of Board coordinates introduced Panama Canal activities among Protectionist tariffs Global Events labor, government, reduced and business for WWI

PHOTOGRAPHS THIS PAGE: @ Bettman/CORBIS: Immigrants, meat plant, Panama Canal, Ford Model T,Phillips, and Rudkin; CORBIS: Asto 1920s 1930s 1940s

Government retrenchment; cultural divide Heavy government influ- World War II; cooperation among busi- between rural and urban residents; broad ence; Great Depression; ness, labor, and government; postwar baby technology expansion; anti-immigration; union progress; technology boom; pent-up consumer demand massive consumer credit adaptation; migration E Edward DeBartolo, Sr., develops subur- E Juan Trippe founds Pan Am, the first E Margaret Rudkin (above) founds Pepper- ban shopping centers.M Louis Neumiller company to exploit international commer- idge Farm, creating an upscale commodity oversees Caterpillar’s mobilization for war cial flight.M Robert Woodruff makes Coca- product.M Martin Clement invests in the and later growth in expanding suburbia Cola a part of Americana with wholesome Penn RR to connect an expanding country. and abroad.L E. Morehead Patterson con- advertising.L Gerard Swope revitalizes L Harold Stanley forms Morgan Stanley to verts American Machine and Foundry GE by moving from utilities to consumer comply with regulations separating com- from cigar-rolling equipment to missile products. mercial and investment banking. systems to bowling-alley components.

Population of Westward migra- Massive dust storms Baby boom begins urban centers tion of midwestern uproot millions Suburbs start to overtakes that of farmers and labor- Smallest ten-year form o rural communities ers for employment increase in popula- and better climate tion: 123–132 million

First radio station Advances Air-conditioning Planes and ships ENIAC computer in aviation begins to realize built in less than Talkies Penicillin used commercial a day for the war Nylon extensively to treat Frozen foods potential effort soldiers’ infections Fiberglass Atomic bomb Polaroid camera

Social divisions Rampant bootleg- Escapism in radio Patriotism soars arise between rural ging and organized serials GI Bill and urban areas crime Golden age of Women’s suffrage movies

t U.S. Steel and Alcoa The New Deal Federal regulations Military spending Rationing withstand antitrust prohibit false explodes Commercial and in- accusations advertising vestment banking Graduated income Personal and corpo- separated tax, Victory Tax rate tax rates cut adopted to fund SEC established war effort Airmail service starts

Union membership Unemployment CIO union created Rosie the Riveter declines sharply peaks at 25% NLRB created Postwar strikes Minimum wage Unions surge, Fair Labor Standards Government backlash and maximum adding 7 million Act sets minimum against postwar working hour legis- members in a wage union movement lation overturned single year

Isolationism U.S. pushes for debt Increased tariff Continued War Production Marshall Plan recovery protection through isolationism Board readies U.S. restores high Cold war begins Smoot-Hawley nation for WWII tariffs Allied nations seek Tariff Act war reparations U.S. becomes from Axis powers a global power

r Theater 1950s 1960s 1970s

Baby boom; business growth un- Social discord; antitrust legislation; conglomer- Oil embargo; stagflation; computer technol fettered by regulations; conserva- ates; bulging population; space race; booming commercialized; weakening labor; moderat tive social norms; labor progress; economy government intervention; massive internat technology commercialization; competition E Korean War, cold war Sam Walton refines discount retailing at Wal- Mart.M Henry Singleton capitalizes on the con- E Dee Ward Hock, Visa International, fores E Ray Kroc masters the franchise operation with glomerate business model to build Teledyne. an interconnected world of electronic inter McDonald’s.M Howard Morgens forms P&G Pro- L Kenneth Iverson, Nucor, uses minimills to change long before the technology become ductions to produce TV soap operas.L Malcolm revolutionize steelmaking in the United States. ality.M Edmund Pratt, Jr., invests heavily in McLean (above), SeaLand Industries, revitalizes to make Pfizer a global player.L Charles (M the shipping business by creating the container- Harper transforms struggling ConAgra into ized cargo system. of the largest food processors in the world.

Medical advances Population soars to Baby boom tapers off Urban blight extend life expectancy 179 million – largest Emigration from Asia Rust Belt ten-year increase More people now live and Latin America in suburbs than cities surges

Television sales Man walks on the moon Integrated circuit Beginning of biotech UPC bar code expand dramatically boards replace industry Color TV market grows transistor technology Supercomputer Transistors used in Fiber-optic wire Microchips expand portable radios and First ATM installed possibilities in Pong (first video calculators electronics industry game)

Social conformity Civil rights move- FDA approves oral National Organization Social discord con ments gain strength contraceptive pill for Women mobilizes ues over Vietnam McCarthyism for Equal Rights and civil rights Antiwar sentiment Brown v. Board of Amendment divides electorate Watergate scanda Education desegre- Roe v. Wade legalizes undermines faith gated public schools abortion authority

Military spending Great Society Closing merger Deregulation of o shifts to nuclear loophole opens door and airline indust Consumer and envi- deterrents for conglomerate ronmental protection New energy polic business model Small Business movements strengthen and programs Administration Price controls created

The Organization Man The AFL merges with Factory automation Unions concentrated Wage controls Women enter the the CIO: 15 million slashes jobs in big businesses workforce in large Union membership OSHA created members numbers peaks Civil Rights Act Formation of United Service economy Farm Workers union Equal Pay Act expands

Cold war escalates Cold war continues to OPEC oil crisis build Korean War forces Vietnam War ends another mobilization Bay of Pigs invasion; Iran hostage crisis effort Cuban Missile Crisis Imports outpace Vietnam War escalates exports 1980s 1990s

ogy Global competition; deregulation; Globalization; diversity in work- te TQM; growing national debt; so- force; reengineering; booming tional cial conservatism; decline of labor; economy; massive immigration; continued shift to service economy; Internet opportunities streamlined business processes sees E Meg Whitman (above), eBay, builds the fledg- r- E Reginald Lewis (above), TLC Group, buys Beat- ling Internet retail model into a vibrant and pas- es re- rice Foods in the largest ever leveraged buyout of sionately loyal community.M Alfred Zeien guides R&D an offshore company.M Max De Pree restructures Gillette through large-scale product development Mike) Herman Miller with a unique focus on creative efforts and targeted acquisitions.L Lou Gerstner o one design.L Lee Iacocca, with massive government oversees IBM’s turnaround from a manufacturer assistance, pulls off the turnaround of Chrysler. to a systems integrator and e-business innovator.

Demographics/Social Mores/ Global Events THE Technology

Government Intervention 20 Labor TH CENTURY

Population Immigration tops Hispanics become Zeitgeist migrates to West 9 million (largest fastest-growing and Southwest number since first minority decade) Pop: 250–281 million Baby boomers age

Software industry Boom in connectivity booms Cloning, stem cell PC use expands in research scale and scope DVDs Space shuttle ntin- Moral Majority Internet “irrational War exuberance” “Me” generation Antigovernment Income gap widens l sentiment: Waco dramatically in standoff; Oklahoma AIDS City bombing il Reaganomics Breakup of AT&T Family and Medical Antitrust action initi- tries Leave Act ated against Microsoft Heavy defense and ies deficit spending Americans with Disabilities Act Savings and Loan bailout Welfare reform

Air traffic controllers’ Information technol- Reengineering Service sector out- e union dismantled ogy redistributes job paces manufacturing Record high functions in new job creation Union representation employment drops

Berlin wall falls USSR dismantled; Asian financial crisis ethnic conflicts s End of cold war NAFTA enacted exposed s Iran-Contra Affair European Union Gulf War: real-time forms TV coverage

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BIG PICTURE • Zeitgeist Leadership

How will business leadership emerge in the new Computer technology, which was the basis for millennium? What challenges will we face for the much of the innovation over the past two decades, rest of the decade? The last five years have pro- will undoubtedly continue to be refined, particu- vided some insight into the complexities, chal- larly as advances in wireless communications, data lenges, and opportunities for emerging entrepre- integration, and graphics transfer come to market. neurs, managers, and leaders. Though investments in technology have fallen off Much has changed since the 1990s. Celebrity precipitously since the Internet implosion, there and hype have been replaced with an emphasis on has been a renewed focus on productive technol- competence and results. Execution has dethroned ogy – technology with a clear purpose and bottom- vision. And consumer skepticism has overshad- line rationale. Technology in the new century will Century owed awe and unfiltered acceptance. In the post- most likely become the domain of managers and 1990s, more attention is being paid to board gov- leaders rather than entrepreneurs, and their abil- ernance, CEO compensation, reported financial ity to harness its power and capitalize on the la- results, and stock option grants. Business schools tent opportunity of the Internet will set them are reevaluating their curricula, adding new apart from their peers. courses on corporate accountability, ethical deci- As the baby boom generation moves into its sion making, law, and board governance. golden years, even greater importance and em- A NEW Not since the scandals of the 1980s have busi- phasis will be placed on medical science. Biotech- ness executives come under so much legal and nology, which has yet to deliver on its oft-heralded public scrutiny. Still, Sarbanes-Oxley notwithstand- promises, may be on the cusp of new break- ing, the probusiness George W. Bush administra- throughs. Still, the road to discovery will be ardu- tion has generally resisted the urge to introduce ous; social mores have become more conservative, and enforce greater levels of oversight, leaving it and the new century has already borne witness to to the business community to self-regulate in contentious debates over research involving stem many areas and deal with its own mess. Corpora- cells, frozen embryos, and cloning. It may be that, tions have a short window of opportunity to rise to for now, opportunities in this field, too, are best the occasion. History has shown that if business suited to managers and leaders rather than to the executives do not take any tangible and meaning- entrepreneurs who have done the initial work, as ful action voluntarily, regulation is likely to snap navigating the controversy will require vision and back with thunderous force and dramatically alter a deft negotiator’s touch. the opportunity structure for business. Labor continues to struggle as companies try to While the federal government may be disposed grapple with the recession that followed the col- to monitor business somewhat less aggressively lapse of the Internet bubble and the devastation than it has in the past, the country has been any- brought forth in the wake of September 11. The air- thing but reticent on the world stage. The war on line, travel, and hospitality industries have suffered terror, nuclear proliferation in developing coun- considerably, causing a ripple effect through a host tries, and the festering civil conflicts throughout of other businesses – especially in the manufac- the Middle East and Africa have heightened the al- turing sector – that is swelling the ranks of both ready sensitive and precarious position of the multiple-job holders and the underemployed. Out- United States in the world. Business executives sourcing, which has displaced thousands of jobs, trying to operate on the global stage must con- has become the new strategic mantra for compa- tend with increasing levels of uncertainty and in- nies attempting to retain or regain their competi- stability. Nevertheless, the long-anticipated open- tiveness on the global stage. And of course the work- ing of the Chinese market might very well provide place is facing a dramatic shift as baby boomers a new base for American business growth and approach retirement age and companies risk los- prosperity. ing vast reserves of knowledge and experience.

56 harvard business review Zeitgeist Leadership • BIG PICTURE opportunities for many large companies vive outside city limits. Edward J. De- to cities to suburbs as DeBartolo had to, like Caterpillar, gain in scale by capi- Bartolo, Sr., a founder in the entrepre- done but subsequently failed utterly to talizing on the European recovery and neur mold, challenged the theory when catch the migration of economic activity expanding globally. Institutions like the he built a 23-store plaza – what today is to the exurban Sunbelt in the 1980s and World Bank and the International Mon- called a strip mall – in a suburb of his 1990s, leaving Wal-Mart with open ter- etary Fund created some financial sta- hometown, Youngstown, Ohio, in the ritory in which to grow.) bility, and the cold war kept the global late 1940s. Onlookers were skeptical, but Alonzo G. Decker, Jr., son of one of political environment stable, if rigid. Ex- it was an almost instant success. More- the founders of Black & Decker, was one pats enjoyed status in their host coun- over, it wasn’t long before his “country” leader who took advantage of wartime tries, perceived as bringing American shopping center was joined by medical and postwar demographic shifts to breathe new life into a seemingly ma- ture product. The tool of choice for The 1920s saw a return to laissez-faire governing, Rosie the Riveter, the Black & Decker as a nation newly out of war wanted freedom and drill proved popular with women on the factory line–so much so that many drills adventure. were going home in lunch baskets, and defense contractors had to keep re- prosperity and products to the old offices and other service businesses. ordering them. At war’s end, the com- world. Because the United States con- DeBartolo, who had served in the war pany added a consumer products line, trolled such a large portion of the evaluating terrain for troop maneuvers an enormously profitable move as the world’s GDP, it was a comfortable time and other military actions, put his suburban revolution brought with it a for American businesses. But manufac- topography skills to use to grow the new do-it-yourself spirit. turers were dealt a blow in the 1970s, business rapidly, flying over the high- Demographic shifts affect not just the with the oil crisis and the rise of the Jap- ways and byways of the Midwest to market but the workplace. Over the cen- anese automobile and electronics in- choose his next retail locations. (Sears tury, employers had to learn to contend dustries. Companies were forced to nimbly followed Americans from farms with an ever more diverse employee focus more closely on processes and quality even as they searched for alter- native forms of fuel. As the century drew to a close, communications tech- nologies made truly global competition a reality, and many businesses were jarred out of their complacency and into an international mind-set. For some businesses, though, the process was painfully slow–it took the recession that followed the 1987 stock market drop, and a loss of both global and domestic market share, to stimulate action. Demographics For most of the twentieth century, the U.S. population grew apace, driven by periodic spikes in both domestic family expansion and immigration. During the population explosion that started in the late 1940s and continued through the early 1960s, families began to spread out, and the first suburbs were born, creating a host of opportunities for new businesses, for those perceptive enough to recognize them. Despite the ongoing population migration, for in- stance, the accepted wisdom of the time was that shopping centers couldn’t sur- october 2005 BIG PICTURE • Zeitgeist Leadership population, as well as totally new de- forgo early retirement to pursue a sec- den of war past, people shed their inhi- mands for work/family balance. During ond (or third or fourth) career. Tapping bitions and pursued indulgences at all the 1970s, the face of American business into this wellspring of knowledge and costs. It was a time of irrationality, ex- began to change dramatically as, once experience may very well prove to be a cess, and unprecedented freedom. The again, droves of women entered the competitive advantage for savvy execu- stock market was exploding, business labor force and businesses became more tives in this new decade. opportunities seemed limitless, and racially integrated. The growing diver- credit was both cheap and readily ac- sity of the workforce in the 1980s and Social Mores cessible. The fads of the times reflected 1990s reflected the changing mix of im- Of all the contextual factors, social the carefree mood: nudist colonies, migration. As a result of the huge waves mores are the most cyclical, and the dance marathons, flagpole sitting. Hav- of emigration from Latin America dur- swings can be dramatic. To manage this ing contracted through the war effort, ing that period, Hispanics now repre- factor, therefore, business executives consumer spending flourished in the sent the fastest-growing and largest mi- need to be at their most adaptable and 1920s, and business executives were all nority population segment in the flexible. too ready to provide outlets for the pub- United States. When social mores become more lib- lic’s desires. The products and services The aging baby boom generation is eral, a host of business opportunities they introduced–from customizable au- also adding a new level of complexity emerge to fulfill new needs and desires. tomobiles (no longer just the black Ford and opportunity for businesses, espe- This occurred on a large scale in the Model T) to branded linens (Cannon cially as many individuals choose to Roaring Twenties when, with the bur- towels) to talking movies (Warner Bros.’

Our Methodology

Each of the candidates included in our pool of 1,000 people outside the traditional business realm. But business executives had to have been a founder or CEO from the thousands and thousands of individuals who of a U.S.-based company for at least five years between headed large public and small private enterprises alike 1900 and 2000. As such, any CEO whose tenure began during the last 100 years, we have sought to identify after 1996 was excluded from this survey. (In the ear- only that small fraction that sits at the pinnacle of suc- lier decades, when “CEO”was not a common term, we cess – leaders whose legacies have truly stood the test chose to use business historian Richard Tedlow’s ap- of time. proach to identifying the key executive by designating The process of classifying each of the 1,000 business as such the primary, or perhaps the sole, individual in executives into one of the three archetypes (entrepre- a firm who was responsible for setting direction, allo- neur, manager, or leader) involved a review of data cating resources, and monitoring company progress.) from a number of sources, including historical biogra- Beyond the five-year tenure requirement, business phies, company documents, press coverage, and other executives had to have demonstrated at least four con- archival material. In reviewing these materials, we secutive years of top financial performance, or they focused specifically on how business executives ap- had to have led a company whose product or service proached their organization at the beginning of their changed the way Americans lived, worked, or inter- tenure as founder or CEO. Did they forge something acted with one another in the twentieth century. In new? Did they derive maximum potential from a de- view of the lack of easily accessible and complete finan- fined business opportunity? Or did they transform a cial information spanning the entire century (espe- business? While we have tried to minimize the inevita- cially before 1925), we used a multitiered financial ble subjectivity of this process, we recognize that the analysis approach to judging top performance – one or classifications are based on our personal judgment and the other of Tobin’s Q (that is, the ratio of a company’s our interpretation of the available secondary-source market to book value); return-on-asset ratios; and mar- information. ket value appreciation. A full listing of the 1,000 business leaders in our Though dominated by Fortune 100–type company study can be found on the Web site of the Leadership executives, the list endeavors to capture the impact of Initiative of Harvard Business School at www.hbs.edu/ factors other than company size. As such, it includes leadership.

58 harvard business review The Jazz Singer) to frozen foods (cour- for business. The 1940s saw the greatest tesy of Clarence Birdseye) – were de- leaps in productivity of any decade. Al- signed to ease the way Americans lived. most overnight, under the banner of ser- The Depression, which followed, ush- vice to country, companies were trans- ered in an almost complete reversal of formed from low-volume, inefficient social mores – a harkening back to tra- entities into highly efficient, standard- ditions and conservative values. People ized production facilities. passed their time in less whimsical ways: Yet technology’s impact was not al- collecting stamps, listening to radio soap ways immediate or obvious; it often

Of all the contextual factors, social mores are the most cyclical, and the swings can be dramatic. operas, and playing board games like took a visionary business executive to Monopoly. Small, affordable luxuries understand and then fulfill the potential replaced automobiles and other large of a specific development. In many purchases. cases, those individuals were entrepre- The social freedom of the 1920s neurs rather than leaders or managers. reemerged on a much larger scale in the But they were not necessarily the same 1960s and 1970s, creating myriad new people who could then take a resultant opportunities – particularly within the business forward and manage it in a sus- fashion, music, and media industries – tainable way. Juan Trippe, for instance, for those willing to address the changing an entrepreneur who pioneered inter- social conditions. national commercial air travel and And in the 1990s, the opportunities turned Pan American World Airways for business were virtually limitless: The into a powerhouse in the 1920s, under- free flow of capital and the irrational mined the long-term success of his air- exuberance of a get-rich-quick society line with his arrogance and heavy- fueled a sensibility that made a $10,000 handed approach to management. backyard grill seem like as good an idea Visa International’s Dee Ward Hock, as a cure for homotosis did in the 1920s. another entrepreneur, was an excep- tion, although he was somewhat dis- Technology dainful of corporate America and sev- Technology has had a strong influence eral times in his career found himself on business executives and the compa- out of a job for his failure to play by the nies they launched and led in every de- rules. While at the National Bank of cade of the twentieth century. Commerce, Hock had a vision that the The interconnection of the U.S. rail- newly emerging digital technology ways, for example, gave rise in the 1900s would transform the banking business. to the first large corporations, which Long before that became reality, he could now expand to a national scale. imagined paperless and instantaneous The first national brands began to transactions, 24 hours a day, seven days emerge, as products could be more effi- a week. He was responsible for the first ciently delivered across great distances. computerized system for the electronic At the same time, a national advertising transfer of data between banks, and he industry was born, as newspapers and pioneered the international magnetic magazines such as Cyrus Curtis’s Ladies’ strip, building bridges between do- Home Journal and Saturday Evening Post mestic and foreign banking operations. could reach farther afield. Subsequent He also persuaded a reluctant Bank of commercialization of technologies de- America to cede control over the Bank- veloped during World War II also cre- Americard program to a new indepen- ated an enormous set of opportunities dent membership organization, National october 2005 BIG PICTURE • Zeitgeist Leadership

BankAmericard Incorporated (the inter- has moved rapidly into a service-based conservatism. Given these challenges, it national equivalent of which was later economy.During the last two decades of is tempting to try to find the next iconic renamed Visa), and convinced all 2,700 the century, almost all new job growth CEO – the next Walt Disney, say, or banks licensed to issue cards to join him. was concentrated in the service sector– Henry Ford. But that impulse causes us In the end, his tyrannical management and Harvard no longer even teaches the to overlook the role that context played style was counterbalanced by great per- subject. in creating Disney’s and Ford’s suc- sonal charisma and the strength of his Though relatively few business exec- cesses. There’s no knowing how Disney technological vision. utives in the twentieth century stood would have dealt with today’s hyper- out for their treatment of workers, the media environment or whether Ford’s Labor ones who did were a breed apart – not steadfast and uncompromising focus Through much of the twentieth cen- just for their concern for employees but on productivity would resonate with tury, the role and influence of labor for the fact that, in many cases, there today’s more empowered labor force. grew steadily, if in fits and starts. Much was no mandate for it. Instead, they Even Jack Welch would find that the like government intervention, the labor chose to manage this contextual factor business world has changed since he left movement cycled through periods of progress and retrenchment that were tied to the country’s overall levels of eco- The few business executives who stood out nomic prosperity and opportunity. for their treatment of workers were a breed apart. In the first three decades, power was weighted heavily on the side of busi- They chose to manage this contextual factor ness, though employees gained some before it managed them. bargaining power during World War I. The business executives of the first de- cade were driven, opportunistic, and before it managed them. Henry Ford GE: Heady growth has given way to re- innovative. They built companies that caused an uproar when, in 1914, he re- cession, a halting recovery, and (despite often had a far-reaching impact on the duced the workweek and doubled a probusiness administration) a tighter way people lived, but they were, for wages, becoming the first employer to regulatory climate in the wake of cor- the most part, less concerned about the give workers a reasonable share of rev- porate scandals. way people worked. And during the Red enues. That was not an altruistic ges- So if your organization is seeking to Scare of the 1910s and 1920s–which was ture; well before his time, Ford reasoned fill a key leadership position, you need fueled by wartime anxieties and the Rus- that a highly motivated workforce to move past a candidate’s record of suc- sian Revolution–unions were viewed as would be more productive and that cess and understand the contextual en- havens for radical foreign-born residents turnover would be drastically reduced. vironment behind that record–and how and communists. As such, they were vi- People in the labor movement were ac- that influences the context your com- ciously attacked as anti-American. tually suspicious of the move, largely be- pany currently faces. Consider global Labor’s first real test and opportunity cause they feared that other organiza- events and impending regulations and came in the 1930s, during the Depres- tions would shorten the workweek as the role technology may play in future sion. Buttressed by a prolabor govern- well, effectively decreasing hourly work- success. And bear your company’s goals ment, unions began to win victories ers’ pay. in mind. If the business is attempting to such as the first federal minimum wage, • • • maximize growth, a manager may be despite a double-digit unemployment What does all this mean for the execu- the best choice for CEO. In times of cri- rate. The strength of the union move- tives of today? The central lesson we sis or decline, a leader may be needed. ment would reach its second apex in the can take from business history is that Boards should refrain from recruiting a 1950s, in tandem with the public’s in- context matters. The ability to under- celebrity CEO if that person’s strengths terest in equal opportunity and im- stand the zeitgeist and pursue the are not properly aligned with the direc- proved working conditions. So critical unique opportunities it presents for tion in which the company is going or was the ability to deal with unions in the each company is what separates the needs to go. Instead, we can learn from 1960s that Harvard Business School truly great from the merely competent. our predecessors the value of appreci- made a labor relations course manda- Executives at the beginning of the ating and understanding the conditions tory for all students. new millennium face the potential for that influence the business landscape, But the rate of union organization increased regulation, reticent consum- which in turn can help us choose the has been on a steady decline since its ers, constant global uncertainty,and vast right people for the time. heyday in the 1950s and early 1960s, as demographic changes. The euphoria manufacturing sectors have increas- and delirium of the 1990s have been re- Reprint r0510b ingly automated and American industry placed with caution, pragmatism, and To order, see page 159.

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HELPING YOU FIND PROFITS IN NEW PLACES. In companies where leadership 62 it isnotastand-alone activity. development really works, ti oepoeso the It isacore process of uies dyed into its business, very fabric. very harvard business review

LEIGH WELLS Growing Talent as if Your Business Depended on It

by Jeffrey M. Cohn, Rakesh Khurana, and Laura Reeves

n the thirteenth century, it took the College of Cardinals almost three years to anoint a successor to Pope Clement IV. ITo break the stalemate, one of history’s most bitter organiza- tional deadlocks, church officials began limiting the food and drink they provided the voting cardinals, eventually giving them just bread and water. Fortunately, today’s cardinals don’t seem to need such harsh incentives: It took them less than a week to choose Benedict XVI.

october 2005 63 Growing Talent as if Your Business Depended on It

When it comes to succession planning (and, by exten- and attractive identity; its employees perceive that lead- sion, leadership development) in the business world, cor- ership development processes are what they are declared porate boards could do with a similar sense of urgency – to be. Such coherence, identity, and authenticity, in turn, though we wouldn’t necessarily advocate starving them make it easier for the company to attract the future lead- into it. Traditionally, boards have left these tasks very ers it needs. much up to their CEOs and human resources depart- In the following pages, we’ll describe what some of ments. There’s a simple reason why directors pay so little the companies we’ve been observing are doing to create attention to these activities: They don’t perceive that a strong, effective succession-planning and leadership lack of leadership development in a company poses the development programs. First, let’s take a closer look at same kind of threat that accounting blunders or missed where many companies go wrong when they set out to earnings do. grow great managers. That’s a shortsighted view. Companies whose boards and senior executives fail to prioritize succession planning and leadership development end up either experiencing Every Which Way a steady attrition in talent or retaining people with out- Tyson Foods, a family-controlled company based in dated skills. Such firms become extremely vulnerable Springdale, Arkansas, provides a good example of where when they have to cope with inevitable organizational up- companies can fall short in leadership development. heavals – integrating an acquired company with a differ- Every time CEO John Tyson, grandson of the company ent operating style and culture, for instance, or reexamin- founder with the same name, picked up a journal, news- ing basic operating assumptions when a competitor with paper, or business magazine, he saw yet another story a leaner cost structure emerges. In situations like these, of how iconic companies like General Electric set the businesses need to have the right people in the right roles standard in churning out future leaders, and he was frus- to survive. But if leadership development has not been a trated in his ambition to leave a similar legacy. primary focus for CEOs, senior management teams, and It was a big ambition. Despite Tyson’s size after its boards, their organizations will be more likely to make merger with IBP in 2001–the company’s market cap was wrong decisions. Firms may be forced to promote untested, around $25 billion, putting it well into the Fortune 100–it possibly unqualified, junior managers. Or they might had, in its 70 years, invested very little in leadership de- have to look outside for executives, who could then find velopment. And the organization had no ingrained sys- it difficult to adjust to their new companies and cultures. tems, tools, or processes to ensure a steady supply of qual- Some companies, however, have not only recognized ified talent. When he took the reins in 2000, Tyson had the importance of including succession planning and made it his goal to change all that, and the company, over leadership development on the board’s agenda but have the next two years, experimented with several leadership also taken steps to ensure that those items get on the development initiatives. docket. Over the past three years, we have undertaken ex- These experiments all followed a similar course. Typi- tensive fieldwork with many of these companies, con- cally, Tyson or a member of his senior management team ducting multiple interviews and analyzing their varied would read an article or hear about an interesting ini- approaches to successful leadership planning and devel- tiative at another company, such as a mentoring pro- opment. We have found that the best of their programs all gram. Then he or one of his colleagues would chat with share some common attributes. They are not stand-alone, Ken Kimbro, the senior vice president of corporate HR, ad hoc activities coordinated by the human resources de- about the possibility of implementing a comparable pro- partment; their development initiatives are embedded in gram at Tyson (the Tyson Mentor Program, for instance). the very fabric of the business. From the board of direc- A few weeks later, a Tyson version of the initiative would tors on down, senior executives are deeply involved, and be discussed in internal focus groups, and pilots would be line managers are evaluated and promoted expressly for developed. their contributions to the organizationwide effort. One time, John Tyson was invited by the CEO of a promi- By engaging managers and the board in this way,a com- nent company to see how that organization monitored its pany can align its leadership development processes with emerging leaders’ progress. When he returned to the of- its strategic priorities. The company can also build a clear fices, he cleared out an entire conference room and plas-

Jeffrey M. Cohn ([email protected]) is the president of Bench Strength Advisors in New York, a former research as- sociate at Harvard Business School in Boston, and a former fellow at Yale School of Management’s Chief Executive Leader- ship Institute in New Haven, Connecticut. Rakesh Khurana ([email protected]) is an associate professor of organizational behavior at Harvard Business School and the author of Searching for a Corporate Savior: The Irrational Quest for Charis- matic CEOs (Princeton University Press, 2002). Laura Reeves ([email protected]) is a senior manager with A.T. Kearney’s transformation practice in Atlanta, specializing in organizational effectiveness.

64 harvard business review Growing Talent as if Your Business Depended on It tered on its walls pictures of Tyson’s rising-star managers, with descrip- tions of their job experiences, educa- tional backgrounds, strengths and weaknesses, and development paths. Another time, Tyson personally ap- proved a budget to send the com- pany’s high-potential managers to leadership retreats on a remote Rio Grande ranch. The managers worked to solve actual business challenges facing the company, reflected on their personal leadership styles, and broadened their spheres of influence by meeting other high-potentials within the company. For its part, Tyson’s HR group found it hard to keep up with the rush of programs. Despite John Tyson’s efforts and the popularity of many of his initia- tives, the company’s talent pipeline was still not producing enough qual- ity leaders, and by the summer of 2002, the CEO realized that his ad hoc approach to leadership devel- opment was not working. He formed a senior executive task force to look into the problem. The team included himself, his direct reports, and a small group of external succession-planning experts, who were there to ensure ob- jectivity and high standards and to help facilitate buy in. The task force members took noth- ing for granted. They sat down with a blank sheet of paper and mapped out their ideal lead- reasonable enough but is hard for many managers to ac- ership development system for Tyson. The blueprint they cept. That’s because many people, from the CEO on down, came up with integrated succession planning and leader- consider the word “succession” taboo. Planning your exit ship development, made sure that promising leaders is like scheduling your own funeral; it evokes fears and would be well versed in all aspects of the company’s busi- emotions long hidden under layers of defense mecha- ness, and put the accountability for succession planning nisms and imperceptible habits. Perversely, the desire to and leadership development squarely on the shoulders avoid this issue is strongest in the most successful CEOs. of John Tyson’s direct reports.“Leaders at all levels were Their standard operating procedure is to always look for either in or out,” Tyson recalled. They couldn’t waffle the next mountain to climb, not to step down from the about contributing their time and effort to the new talent mountain and look for a replacement. development system; they couldn’t “protect”talent, hoard We recently conducted a leadership and talent manage- resources, or declare themselves immune from succes- ment survey with 20 CEOs in large corporations, repre- sion planning, he said. senting a variety of industries and locations. Although all 20 executives agreed that having the right talent in the right roles was critical for their companies’ success and An Integrated Approach that a talent management program was important for de- Succession planning was the critical starting point for veloping effective leaders, almost half had no succession Tyson’s new program – as it was for all the leading-edge plans for VPs and above. Only one-fourth of the CEOs companies we observed. Succession planning should had talent pipelines that extended at least three mana- drive leadership development at a company; that sounds gerial levels below them. october 2005 65 Growing Talent as if Your Business Depended on It

any executives believe that leadership development is a job for the HR department. This may be the single biggest misconception they can have.

Meanwhile, those CEOs who are effective at building and the financial success of the organizations they leave strong leadership teams tend not to have any reservations behind. By integrating succession planning and talent de- about succession; they embrace succession planning and velopment, CEOs can alert the rising stars in their compa- integrate it closely with the company’s management- nies to potential leadership opportunities well in advance; training and development programs. When Orin Smith and they and their boards can more accurately assess their became president and CEO of Starbucks in 2000, for in- bench strength. When the process runs smoothly, boards stance, he made it a top priority to plan his own succession. have a strong sense of whether a company’s incumbent He established an exit date – in 2005, at age 62 – which leadership team will be able to execute important strate- helped him push his business agenda. Ultimately, Smith’s gic initiatives in the future. The company also gains be- actions focused attention on emerging leaders through- cause of minimal disruption to the business, shareholder out the company. confidence and positive analyst ratings, and reduced costs Two years into the job, Smith knew that the internal of external hiring for senior executive positions. contenders would still be too unseasoned for the CEO po- The consumer products company S.C. Johnson & Son sition by his exit date. Starbucks was under pressure to also uses an integrated approach. Its performance appraisal grow its leaders as fast as the business was expanding, program identifies the rising stars in the company’s hard- from approximately 8,500 global retail locations to to-fill management and technical positions, evaluates about 30,000 sites, half of them outside the United States. them through 360-degree feedback, and determines po- Because of his early commitment to succession planning, tential leaders’ readiness for promotions. The well-oiled Smith knew enough about the internal CEO candidates– program also includes processes to identify “safe positions”– and decided on an outsider, Jim Donald, as a promising crucial jobs with reinforced retention strategies and ready successor. Donald had an established record in supermar- replacements. The tight integration of succession plan- ket expansion as chairman, president, and CEO of Path- ning with talent development has paid off: The typical mark, a 143-unit regional grocery chain. He was recruited manager at S.C. Johnson has been on the job for nearly to Starbucks specifically to become the next CEO. 15 years, and nine out of every ten positions are filled Starbucks gave Donald 90 days of dedicated immer- internally. sion. He worked in the stores to understand the customer At Tyson, just a few years after the formation of the ini- experience, and he observed firsthand the operations in tial senior management task force on leadership devel- the coffee-roasting plants. Then Donald was made respon- opment, all of John Tyson’s direct reports are fully com- sible for North American operations, Starbucks’s largest mitted to the succession-planning process. In what they business. Progressively, he became accountable for more call the “talent alignment and optimization” initiative, pieces of the company. One of his first major tests was to or TAO, leaders from across the organization try to strike develop his own succession plan and to execute against it a balance between the supply of talent (rising stars) and in order to move to a larger role himself. Smith and Star- the demand for talent (critical positions). Right after bucks’s board members paid close attention to Donald’s Tyson’s strategic review process, which is held semiannu- ability to assess and develop a talented leader who could ally, the company’s senior management team holds open take over Donald’s assignments and provide the right fit and constructive discussions about the company’s high- with the leadership team. potential managers to ensure that the organization nur- As Starbucks’s experience shows, CEOs need to em- tures in them the skills necessary to execute current strat- brace succession planning to achieve their own legacies egy while also preparing them to take on larger, more

66 harvard business review Growing Talent as if Your Business Depended on It complex roles. And to make sure that rising stars are chal- board didn’t monitor the leadership pipeline. There was lenged and achieve long-term success at Tyson, the senior also little chance that the board members would be held leaders work closely with HR to devise development personally accountable for the resulting weak talent pool. paths that consider multiple career possibilities for high- In A.T. Kearney’s 2004 survey on the effectiveness of cor- potentials, three to five years out. porate governance, participating board directors univer- sally acknowledged the importance of leadership devel- A Line and Board opment and succession planning. Yet only one in four respondents believed the board of directors was very Responsibility good at these activities. Many executives believe that leadership development The CEOs of savvy companies realize that their boards is a job for the HR department. This may be the single are well placed to help them plan for new leadership to biggest misconception they can have. As corporations take the reins. Detached from day-to-day operations have broken down work into manageable activities and and biases, board directors can objectively look at the then consolidated capabilities into areas of expertise, company’s leadership development systems and bench employee-related activities have typically fallen into HR’s strength. At Starbucks, for example, the board oversees domain. The prevailing wisdom has been that if HR took a formalized succession-planning process for 2,500 po- care of those often intangible “soft” issues, line managers sitions. Its goal is to make sure the company always has and executives would be free to focus on “hard” business the right people with the right values in the right places issues and client interaction. at the right times. As Orin Smith explains: “The values and But at companies that are good at growing leaders, behaviors of the individuals you choose go through the operating managers, not HR executives, are at the front organization like a rifle shot; they can be felt at the line line of planning and development. In fact, many senior level within months. We can’t afford to hire or promote executives now hold their line managers directly respon- people with the wrong values. It’s a path to mediocrity.” sible for these activities. In this worldview, it is part of the line manager’s job to recognize his subordinates’ devel- opmental needs, to help them cultivate new skills, and to provide them opportunities for professional develop- ment and personal growth. Managers must do this even A Leadership if it means nudging their rising stars into new functional Development Checklist areas or business units. They must mentor emerging lead- ers, from their own and other departments, passing on To grow great leaders, companies should do important knowledge and providing helpful evaluations the following: and feedback. The operating managers’ own evaluations, ❏ Launch a formal, high-level succession-planning con- development plans, and promotions, in turn, depend on ference for senior executives facilitated by corporate HR how successfully they nurture their subordinates. and outside experts; outline the leadership development Line managers are held accountable not only for aiding process; and cascade it through the company. in the development of individual star managers but also for helping senior executives and HR experts define and ❏ Create leadership development programs that fill create a balanced leadership development system for the holes in your company’s talent portfolio to ensure a deep entire company.They must tackle questions such as “How bench for critical positions in the firm. will we balance the need to nurture future leaders with ❏ Let HR create tools and facilitate their use, but re- the pressures to eliminate redundant activities?” and quire the business units to own the leadership develop- “How should we encourage burgeoning leaders to take ment activities. risks and innovate while maintaining our focus on short- ❏ Have the board oversee all leadership development term operations and profit goals?” (Firms shouldn’t have initiatives, and insist on continual communication by to forgo their quarterly targets for the sake of develop- CEOs and other senior managers on their commitment ing high-potential managers.) Practical solutions to these to leadership development. and other challenges don’t magically appear in HR con- ference rooms; they come from the line managers. ❏ Reshuffle rising stars throughout the company, taking If line managers are held responsible for executing the care that A players are exchanged for other A players. talent development initiatives, the board should assume ❏ Make sure that your leadership development pro- high-level ownership of the overall system. Traditionally, gram is aligned with your strategy, reinforces your com- however, most boards have focused on CEO succession, pany’s brand, and has support from your employees. giving short shrift to systematic leadership development. After all, there was little risk of a calamity occurring if the october 2005 67 Growing Talent as if Your Business Depended on It

Some boards are becoming aggressive in getting to That is, Tyson realized that a manager’s success in one know their companies’ rising stars. Pittsburgh-based Mel- area of the business was by no means a guarantee of suc- lon Financial, a 136-year-old financial institution, had long cess in another. So the company carefully retrofitted its required the heads of its major business units to give pre- performance assessment tools to measure the competen- sentations to the board. But in 2002, CEO Marty McGuinn cies, values, and skills that would be necessary for any fu- saw potential value in having the company’s rising stars ture positions that a manager might pursue. The results make these presentations. Now, Mellon’s unit managers are objective, so business unit leaders are exchanging accompany the rising stars to the board meetings. They “apples for apples,”not simply sending B players to other answer questions when absolutely necessary, but the fu- units and keeping their fingers crossed for a star in return. ture leaders get the floor. As a result, the board can assess Tyson has also adopted formal performance-management for itself the efficacy of the company’s leadership pipe- review policies that link senior executive compensation to line and hear about corporate initiatives from the people the movement and development of emerging leaders. who are actually “doing things.” Meanwhile, the rising Mellon’s Marty McGuinn has a similar philosophy. His stars gain direct access to the board, gleaning new per- strikingly simple but powerful mantra is “Connect the spectives and wisdom as a result. dots.”That is, for Mellon to create a leadership develop- ment system that competitors cannot match, all its man- agers must map their discrete leadership development ac- A Shared Resource tivities and processes to a coherent, companywide system. No leadership development program can be effective un- Managers in dramatically different functions, locations, less it provides mechanisms for exposing future leaders to and operating units are expected to share knowledge and the full range of the company’s operations. By introducing talent that they think would enhance the whole system. their rising stars to new business units, geographies, and (The sidebar “A Crash Course”describes how Mellon built business challenges (managing a turnaround, for instance, its integrated leadership development system.) or launching a new product in a foreign market), compa- nies can help these executive-track employees broaden Aligned, Attractive, their power bases and spheres of influence while giving them a sense of how the different parts of the organiza- and Authentic tion work together to execute the overall corporate strategy. As Tyson learned, an effective talent development pro- It’s a reasonable goal but hard to accomplish. Why gram is more than just a portfolio of off-the-shelf com- would the supervisor of a brilliant junior manager share ponents such as competency-profiling tools, 360-degree that talent with another unit, knowing that productivity feedback, and online training. It is a carefully thought-out and profitability in his own unit might suffer? And what system that you have to develop for yourself. if the rising star misinterprets the transfer to another busi- As a CEO assessing a new program, the first question ness unit (with perhaps fewer people and less revenue) as you need to ask yourself is whether the constituent parts a negative gesture and considers leaving the company? of your program combine to enable the company to com- Tyson Foods faced just such challenges. Under the pete more effectively.A company that operates in a highly company’s revamped leadership development program, innovative environment, for example, needs to know business unit heads were obliged to share their highest- whether its leadership development system actually en- performing managers with other business units so these ables it to produce better innovations more quickly than rising stars could gain cross-functional experience. Initially, its competitors. If the system rewards individuals who pro- it was hard for the unit leaders to do so, after years of duce the most predictable rather than the most innova- hoarding talent and building personal fiefdoms. tive results, it is misaligned. To encourage sharing, John Tyson holds the business Misalignment usually occurs when companies have de- unit and functional leaders personally accountable for veloped, tested, and rolled out initiatives ad hoc, without rotating emerging leaders through different parts of the any high-level planning or a defined time horizon. The company.Cross-functional development plans–essentially, first iteration of Tyson’s mentoring program, for instance, the road maps for high-potentials’ assignments to Tyson’s was barely linked to the company’s existing leadership different businesses–are clearly articulated at the succes- development activities and strategic goals. Little thought sion conferences described earlier. These plans are moni- went into the matching process; rising stars weren’t nec- tored by Tyson and the vice president of corporate HR. essarily assigned mentors in the businesses and functions Moreover, the CEO assures unit leaders that they will re- that could have helped them the most, so significant de- ceive equally qualified managers in exchange for their velopmental opportunities were lost. outgoing ones. The company’s talent-assessment practices Misalignment can also occur when a company’s 360- have been refined so that the right qualities and skills degree feedback and performance-management instru- are being measured across all businesses and functions. ments measure (and reward) behaviors that are inconsis-

68 harvard business review Growing Talent as if Your Business Depended on It tent with the company’s values and culture. It may be defined leadership development program at a company counterproductive, for instance, to reward managers for and the types of job candidates the company attracts, their skills in acquiring new customers if the company’s external stakeholders’ perceptions of the business, and overall strategy is to focus on existing customers by cross employees’ understanding of the firm’s values and strate- selling and offering bundled products and services. gies. For example, Starbucks employees, all of whom are The second question you need to ask is whether your called “partners,”are attracted to the job in part because leadership development system reinforces the percep- of the company’s talent identity. They want to be that tions you want people to have about the company. We’ve cheerful, smiling-to-the-music person behind the counter found that there is a direct relationship between a strongly who helps customers start the day out right with a venti

A Crash Course Most of the companies we studied developed their lead- tives helped Mellon’s rising stars understand the compe- ership programs over time or at least were under rela- tencies they would need and developed plans for them tively little pressure in terms of talent management. Mel- to acquire those skills. lon Financial, however, had to build a new system under But McGuinn and Mellon’s human resources direc- extreme pressure to support senior management’s efforts tor knew that HR’s tools for leadership development to transform the company. would not gain traction among managers if they were By the late 1990s, the venerable organization com- not owned and implemented by the business units. prised a wide range of businesses. The senior manage- Mellon’s managers had a reputation for being results ment team had articulated a business strategy that fo- driven and focused on achieving day-to-day goals. An HR- cused on high-growth opportunities and global expansion. mandated mentoring program or 360-degree feedback Through the disposition of specific units, and through assessment initiative, no matter how shiny and slick, strategic acquisitions to build its asset management and might seem like a distraction to these people–and would corporate and institutional services businesses, senior ultimately be futile. management effectively transformed Mellon from a tra- McGuinn, therefore, instituted a policy that leader- ditional commercial bank to a more focused financial ship development tools would be created in formal services institution. centers of excellence consisting of three to six resident But CEO Marty McGuinn realized that the next gener- experts. The tools would then be offered to the business ation of leaders would not be able to execute the new units through a specialized distribution network of strategy without an enhanced set of competencies and a human resources business partners (HRBP) – liaisons broader, more entrepreneurial mind-set, one that could between the centers of excellence and the business unit include bundling products and services, cross heads. The HRBPs were charged with under- selling to clients, and expanding into standing the strategies of the business unproven global markets. units and the competencies they To meet this challenge, Mel- wanted to develop and execute. lon’s HR department created The HRBPs would use that in- an extensive leadership devel- formation to determine, in opment program that was collaboration with the unit rolled out to the whole com- leaders, which leadership pany. Mellon’s senior man- development tools to use. agement team was involved Because the units’ strate- from the start. McGuinn and gies varied considerably his team met frequently (in across Mellon, McGuinn and person and via e-mail) and con- HR granted the HRBPs wide ducted one-on-one discussions latitude in their decisions about with emerging leaders at the com- how, when, and why to use particu- pany. Armed with these data, the execu- lar tools.

october 2005 69 Growing Talent as if Your Business Depended on It or a grande. The company’s leadership development pro- operating executives.) Specifically, the sessions demon- gram reinforces this identity: Its hiring and promotion strate the positive correlation between the productive re- processes put equal weight on an employee’s functional lationships a manager can have with his or her team capabilities and his or her ability to fit in with the com- members and the economic effectiveness of that group or pany’s values and beliefs system. And to preserve the com- division. Most executives find it a compelling proposi- pany’s culture in this time of rapid growth, Starbucks has tion that, with help from the mentoring program, they added a component to the program, called Leading from can actively improve their employees’skills, increase peo- the Heart, which helps existing managers transmit Star- ple’s commitment to work, boost information sharing, bucks’s customer-friendly (and brand-centric) ethos to and create better-trained employees who are willing to new hires. accept greater responsibility. The third question you have to ask is whether your • • • employees think the company’s leadership programs are The companies that shared their stories and knowledge legitimate. They will take the program seriously only if with us highlighted several critical aspects of leadership they know these talent management elements will af- development – in particular, CEOs’ awareness and ac- fect actual business decisions instead of just padding per- knowledgment of the importance of succession planning; sonnel folders. They must also believe that those individ- boards’ increased activity in system oversight; managers’ uals whom the system recruits, selects, and promotes are refocused attention on people issues and processes; and truly qualified for their positions and aren’t just being re- HR’s role in facilitating the entire organization’s owner- warded for their political allegiances. ship of leadership development. As their experiences Companies need to address the issue of authenticity demonstrate, a leadership development program need head-on. Senior executives at Mellon realized that some not be a ragbag of training programs and benefits. Prop- people might be skeptical about the company’s new tal- erly thought through, it can be a major part of a com- ent development initiatives: Many managers felt they pany’s value proposition–one that competitors can’t even were too busy dealing with day-to-day operations and cli- understand, much less copy. ent relations to take time off to attend the company’s Our colleague Gianni Montezemolo passed away just before this article was mentoring program. Recognizing this skepticism, HR in- published. We’d like to thank him for his contributions to this research. cluded in the sessions case studies of mentoring relation- ships and how they helped to improve results on the job. Reprint r05010c; HBR OnPoint 1924 (The sessions themselves are data driven and led by senior To order, see page 159.

“Sure it’s expensive for a tow, but I’m the only tow truck in the living room.” VEY P.C.

70 harvard business review

Strategy at many companies is almost completely disconnected from execution. Establishing a dedicated unit to orchestrate both will help to bridge the divide.

ost companies have ambitious plans that strategy. (For background on the for growth. Few ever realize them. In their Balanced Scorecard, see our book The M book Profit from the Core, Chris Zook and Strategy-Focused Organization, Harvard James Allen report that between 1988 and 1998, Business School Press, 2000.) seven out of eight companies in a global sample of Some companies, of course, have 1,854 large corporations failed to achieve profit- achieved better and longer-lasting im- able growth. That is, these companies were unable provements than others. The organi- to deliver 5.5% annual real growth in revenues and zations that have managed to sustain earnings while earning their cost of capital (a rather their strategy focus have typically es- modest hurdle). Yet tablished a new unit 90% of the compa- at the corporate level nies in the study had to oversee all strat- developed detailed THE OFFICE OF egy related activities, strategic plans with an office of strategy much higher targets. STRATEGY management (OSM), Why is there such as we call it. a persistent gap be- MANAGEMENT This might appear tween ambition and to be nothing more performance? The than a new name for gap arises, we believe, from a discon- the familiar strategic planning unit. nect in most companies between strat- But the two are quite different. The egy formulation and strategy execu- typical planning function facilitates tion. Our research reveals that, on the annual strategic planning process average, 95% of a company’s employees but takes little or no leadership role in are unaware of, or do not understand, seeing that the strategy gets executed. its strategy. If the employees who are The companies we studied, however, closest to customers and who operate recognize that effective strategy execu- processes that create value are un- tion requires communicating corporate aware of the strategy, they surely can- strategy; ensuring that enterprise-level plans are not help the organization implement translated into the plans of the various units and it effectively. departments; executing strategic initiatives to It doesn’t have to be like this. For deliver on the grand plan; and aligning employ- the past 15 years, we have studied com- ees’ competency development plans, and their panies that have achieved perfor- personal goals and incentives, with strategic ob- mance breakthroughs by adopting the jectives. What’s more, they recognize that the Balanced Scorecard and its associated tools to help them better communi- by Robert S. Kaplan and cate strategy to their employees and to guide and monitor the execution of David P. Norton IAN WHADCOCK

72 harvard business review october 2005 73 The Office of Strategy Management company’s strategy must be tested and adapted to stay What can companies do to change this state of affairs? abreast of the changing competition. The OSM becomes The experience of the Chrysler Group first suggested to us the central point for coordinating all these tasks. It does that the answer lies in bringing all strategy-related activi- not do all the work, but it facilitates the processes so that ties into a single functional unit. After a string of innova- strategy execution gets accomplished in an integrated tive successes in the early 1990s, Chrysler had hit a dry fashion across the enterprise. spell. Performance problems were exacerbated by an eco- In the following pages, we will describe how the con- nomic downturn, rising costs, and encroaching imports, cept of the office of strategy management came into and by 2000, the company was staring at a projected being and how it has helped companies align key man- deficit of more than $5 billion for the coming year. At this agement processes to strategy. Although the companies point, the parent company, DaimlerChrysler, appointed we have studied use the Balanced Scorecard as the frame- a new CEO, Dieter Zetsche, who introduced the Balanced work for their strategy management systems, we believe Scorecard as part of a major change in strategy. The proj- that the lessons we draw are also applicable to compa- ect was spearheaded by Bill Russo, vice president of busi- nies that do not use the Balanced Scorecard. ness strategy, whose unit worked with Chrysler’s execu- tive team to translate the company’s new strategy into a Strategy Management: Balanced Scorecard. Russo’s unit also served as trainer and consultant to help Chrysler’s business and support The New Support Function units create local scorecards that were aligned with cor- The exhibit “The Old Strategy Calendar”depicts the strat- porate objectives and customized to local operations. egy management schedule at a typical large company. Once the design phase had been completed and score- The process starts about midway through the fiscal year, cards had been cascaded throughout the company, the when the CEO and the executive team get together to strategy group maintained responsibility for the data col- clarify their strategic vision and update the strategy. lection and reporting processes for the scorecards. Sometime afterward, similar processes take place at the Up to this point, Chrysler’s Balanced Scorecard project business and functional units, led by unit heads and other had followed a traditional course. Where Chrysler broke senior executives. Toward the end of the third quarter, the new ground was in the roles assumed by the strategy finance function takes the baton, finalizing corporate and group. The group took the lead in preparing scorecard- unit budgets. At the end of the year, the HR function con- related materials to communicate the strategy to the ducts employees’ annual performance reviews and or- more than 90,000 employees. Russo began to brief chestrates the setting of professional goals and develop- Zetsche before each management meeting about issues ment programs. Throughout the year, meanwhile, different that had been revealed through the scorecard reporting teams and units have engaged in performance reviews, and that required management attention and action. In corporate communication, and knowledge sharing. his capacity as a member of the executive team, Russo fol- The problem with this approach is that the activities lowed up after each meeting to make sure that the re- are carried out largely in isolation and without guidance quired items were communicated and acted upon. As a from the enterprise strategy. This partition of responsi- result of this proactive involvement in agenda setting bilities creates the gulf between an organization’s strategy and follow-up, the responsibilities of the business strat- and its processes, systems, and people. Surveys that we egy function expanded to incorporate many new cross- conducted of HR and IT managers reveal that the strate- enterprise strategy execution processes. Thus was born gies of fully 67% of those organizations are not aligned Chrysler’s Office of Strategy Management – a unit cur- with business unit and corporate strategies; nor do HR rently employing some 13 full-time people who not only and IT departmental plans support corporate or business- manage the company’s strategy but also assist the busi- unit strategic initiatives. Budgeting is similarly discon- ness units in developing new products. Chrysler’s new ap- nected: Some 60% of organizations do not link their fi- proach to strategy execution appears to have paid off nancial budgets to strategic priorities. Incentives aren’t handsomely. In 2004, despite a weak domestic automo- aligned, either: The compensation packages of 70% of bile market, Chrysler successfully launched a series of ex- middle managers and more than 90% of frontline em- citing new cars and generated $1.2 billion in earnings. ployees have no link to the success or failure of strategy The U.S. Army’s Balanced Scorecard project produced implementation. Periodic management meetings, corpo- an office of strategy management in much the same way. rate communication, and knowledge management are A central project team at the Pentagon headquarters, similarly not focused on strategy execution. under the leadership of the Army chief of staff, developed

Robert S. Kaplan ([email protected]) is the Baker Foundation Professor at Harvard Business School in Boston. David P.Nor- ton ([email protected]) is the founder and president of the Balanced Scorecard Collaborative (www.bscol.com), based in Lincoln, Massachusetts.

74 harvard business review The Office of Strategy Management the initial scorecard, which the Army called the Strategic annual conference, led periodic conference calls with SRS Readiness System (SRS). The project team also selected leaders at each command level, and conducted scorecard the software to be used for scorecard reporting and es- training, both in person and on the Web. This extensive tablished systems and processes so that the scorecard communication process was critical for educating soldiers would be regularly populated with valid, timely data. In and civilian employees and gaining their support for the the next phase, the team helped to cascade scorecards to new strategy. And the Army project team, much as Chrys- 13 major subcommands and subsequently to more than ler’s did, began to facilitate the monthly discussions at 300 subsidiary commands throughout the world. The headquarters about the readiness status of units around centralized project team provided training, consulting, the world. Once again, an ad hoc project team had turned software, and online support for the dispersed project into a sustainable part of the organization’s structure (the teams. The central team also reviewed the scorecards pro- team and the SRS survived the appointment of a new duced by local project teams to ensure that their goals chief of staff in June 2004). were aligned with those articulated on the chief of staff’s The creation of a central office for strategy execution scorecard. may appear to risk reinforcing top-down decision making The Army’s project team, like its counterpart at Chrys- and inhibiting local initiative, but it does just the oppo- ler, soon took on more than the traditional roles of score- site. A unit with responsibility for the implementation of card custodian and consultant. It established and took strategy becomes a convenient focal point for ideas that ownership of a strategy communication program. The percolate up through the organization. These emerging Army team created a Web site that was accessible from ideas can then be put on the agendas of quarterly and around the world in both classified and unclassified ver- annual strategy reviews, with the best concepts being sions, developed an online portal and library containing adopted and embedded in enterprise and business unit information about the SRS, wrote articles about the ini- strategies. The OSM is a facilitating organization, not a tiative, published a bimonthly newsletter, conducted an dictating one.

The Old Strategy Calendar

Strategy management at most companies consists of processes carried out in isolation by different groups with different reporting lines. That’s why strategy becomes disconnected from the units responsible for executing it.

Q1 Q2 Q3 Q4

Senior executives Strategy update: CEO and executive have no consistent way team clarify vision. to describe strategy.

Line-of-business and support-unit Two-thirds of HR and IT leaders conduct strategic planning. 70% of organizations are middle managers do not aligned with strategy. not have strategy-linked 60% of CFO oversees budgeting. incentive pay. The vast majority of companies do not link executive teams spend budgets to strategy. less than one hour per HR coordinates personal goal setting, month discussing strategy. incentives, and personal development.

Top executives conduct monthly management reviews. 95% of the Corporate communications unit disseminates information. workforce does not understand the strategy. Chief knowledge officer oversees knowledge sharing.

= deficiencies in old management process october 2005 75 The Office of Strategy Management

What Good OSMs Do coaches the team in selecting performance targets on the scorecard measures and identifying the strategic initia- Most of the organizations we have studied follow the path tives required to achieve them. As guardian of the score- Chrysler and the Army took: The Balanced Scorecard card, the OSM also standardizes the terminology and project team incrementally and organically assumes more measurement definitions across the organization, selects and more responsibilities on its own initiative. But that’s and manages the scorecard reporting system, and ensures not the only way to institute an OSM. From these cases, the integrity of the scorecard data. The OSM need not we have learned what functions an effective OSM must be the primary data collector for the scorecard, but it perform and how an OSM must relate to other functions should oversee the processes by which data are collected, within the organization. As a consequence, a few organi- reported, and validated. Finally, the OSM serves as the zations we advise have recently opted to make the cre- central scorecard resource, consulting with units on their ation of an OSM an early and integral part of their score- scorecard development projects and conducting training card initiatives. Canadian Blood Services, the main and education. provider of blood services in Canada with an annual bud- Align the organization. A company can execute its get of Can$900 million, more than 4,000 employees, and strategy well only if it aligns the strategies of its business 17,000 volunteers, is an excellent example of an organiza- units, support functions, and external partners with its tion that created an OSM at the beginning of its journey broad enterprise strategy. Alignment creates focus and to becoming more strategy focused. (See the sidebar coordination across even the most complex organiza- “How to Wield Influence and Stay Informed,”by CEO Gra- tions, making it easier to identify and realize synergies. At ham Sher.) present, few companies actively manage the process of

A unit with responsibility for the implementation of strategy becomes a convenient focal point for ideas that PERCOLATE UP THROUGH THE ORGANIZATION.

What should people designing an OSM bear in mind as alignment; in many cases, unit strategies have only rhe- they embark on the project? Through research into Bal- torical links with corporate strategy. The OSMs we’ve anced Scorecard best practices, we’ve identified the activ- studied help the entire enterprise to have a consistent ities that should be directly managed by or coordinated view of strategy and to systematically manage organiza- with an OSM. Some of these activities–specifically those tional alignment. The OSM oversees the process of devel- involved in creating and managing the scorecard, aligning oping scorecards and cascading them through the levels the organization, and setting the agenda for monthly of the organization. It defines the synergies to be created strategy reviews – are the natural turf of an OSM. They through cross-business behavior at lower organization did not exist prior to the introduction of the Balanced levels and ensures that individual business unit and sup- Scorecard, so they can be given to a new unit without in- port unit strategies and scorecards are linked to each fringing on the current responsibilities of any other de- other and to the corporate strategy. partment. But many other activities – strategic planning, Review strategy. For all their professed commitment budget supervision, or HR training, for instance – are al- to strategy, senior managers spend remarkably little time ready the territory of other units. In these cases, the com- reviewing it. Our research suggests that 85% of executive pany needs to be explicit about the allocation of respon- leadership teams spend less than one hour per month dis- sibilities between the OSM and other functional units. We cussing their unit’s strategy, with 50% spending no time at have identified the following basic OSM tasks: all. Companies that manage strategy well behave differ- Create and manage the scorecard. As the owner of the ently. Top managers usually meet once a month for four scorecard process, the OSM must ensure that any changes to eight hours. This meeting provides the opportunity to made at the annual strategy-planning meeting get trans- review performance and to make adjustments to the strat- lated into the company’s strategy map and Balanced egy and its execution. The underlying hypotheses of the Scorecard. Once the executive team has approved the ob- company’s strategy can be tested and new actions initi- jectives and measures for the subsequent year, the OSM ated. Managing this meeting is a core function of the

76 harvard business review The Office of Strategy Management

OSM. It briefs the CEO in advance about the strategic is- velopment should not be done only by senior managers. sues identified in the most recent scorecard so that the The OSM or strategic planning unit can act as a filter for agenda can focus on strategy review and learning, rather new ideas that come from within the organization. We’ve than just a short-term financial performance review and found that most planning units adapt fairly quickly to the crisis management. The OSM then monitors the meeting continual strategy development process we observe at to determine action plans and follows up to ensure that scorecard-driven companies. The additional processes the plans are carried out. Since the board of directors also represent a natural extension of, and complement to, plays an important role in reviewing and guiding strategy, their traditional work. Problems arise when a scorecard the OSM helps the chief financial officer prepare the project is managed by a group from outside planning board packet and agenda for board meetings. (such as HR, quality, or an ad hoc team). As the scorecard Develop strategy. Typically,strategy formulation is the acquires strategic importance, conflicts over strategy de- responsibility of the existing strategic planning unit. The velopment can arise between the planning unit and the unit performs external and internal competitive analysis, scorecard team. If this occurs, top management should conducts scenario planning, organizes and runs an annual quickly merge the two groups. strategy meeting, and coaches the executive team on stra- Communicate strategy. Effective communication to tegic options. But developing strategy should not be a employees about strategy, targets, and initiatives is vital onetime annual event. After all, performance measures, if employees are to contribute to the strategy. Canon such as those supplied by the Balanced Scorecard, provide U.S.A., a scorecard user, describes its internal communi- continual evidence about the validity of the assumptions cation process as “democratizing strategy,”and it actively underlying a company’s strategy. Those assumptions can promotes understanding of the company’s strategy and be discussed periodically by the executive team, which the scorecard in all business units and support functions. can update the strategy if appropriate. And strategy de- Strategy communication, therefore, is a natural turf for an

The New Strategy Calendar

At scorecard-driven companies, the strategic processes are carried out or super- vised by the office of strategy management in coordination with the appropriate management teams or executives. This ensures that the strategy is fully reflected in all strategy-related activities at all levels of the company.

Q1 Q2 Q3 Q4

Strategy update: CEO and executive team clarify vision. Balanced Scorecard team facilitates development of corporate scorecard and strategy map.

Line-of-business and support-unit leaders align their units with strategy. Board of directors becomes aligned. Balanced Scorecard team facilitates development of unit scorecards. Office of strategy management oversees alignment CFO, HR head, CIO, and COO of all management processes conduct planning and budgeting. with strategy.

HR oversees alignment of personal goal setting, incentives, and personal development with strategy.

Top executives conduct monthly management reviews.

Corporate communications unit disseminates information.

Chief knowledge officer oversees knowledge sharing.

october 2005 77 How to Wield Influence and Stay Informed by Graham Sher

As the chief executive of the nonprofit that manages the supply Because of my urgent need to accomplish change, I followed the of blood products for all of Canada except the province of Quebec, unconventional route of establishing an office of strategy man- I instituted an office of strategy management to help me cope agement at the outset of our Balanced Scorecard project. I also with three big challenges in implementing a strategic agenda. wanted the OSM to report directly to me–that was a way to high- First, I spend a great deal of time dealing with external demands light the importance of this office to my strategic agenda. But the and constituents. In addition to reporting to the board of directors OSM needed other clearly defined linkages or relationships, too; I of my organization, Canadian Blood Services (CBS), I must also want change at CBS to come from within, not to be imposed from focus on the 12 Canadian provincial and territorial governments above. To that end, I created a dotted-line reporting relationship that provide its funding. So I have limited time and information between the OSM and two other key executives at CBS, the CFO with which to manage internal issues. and the COO, who ultimately are going to help execute the change Also, while many people believe that chief executives wield di- agenda. I did not create the new corporate-level OSM unit lightly. rect and easy influence, the reality is that any CEO has a difficult Its positioning in the organization enables me to fulfill my inter- time influencing his or her organization. A CEO’s attempts to nal duties as a change leader but doesn’t affect my ability to meet command and control undermine the authority of senior execu- the many external obligations I have as the CEO of a rapidly evolv- tives. I want to exert my influence indirectly and in a way that em- ing public-sector organization emerging from crisis – Canada’s powers my executives and creates an environment in which they blood-supply system was completely revamped after thousands of can lead and manage their parts of the organization. I set the people received contaminated blood in the 1980s and 1990s. tone, and I define the strategic agenda, communicate it, and en- As for the OSM’s responsibilities, I see strategy management as sure that it gets undertaken, but I don’t command any parts of the being made up of three high-level processes: strategy formulation, organization. leading to strategy execution, leading in turn to strategy learning, My third challenge is staying informed. Information, particu- which then cycles back to strategy formulation. The exhibit “The larly bad news, is filtered before it gets to me. I typically do not Processes of Strategy” shows the activities within the categories. see the most timely, valid information about CBS’s current per- The OSM has primary responsibility for most of these processes, formance. Before our OSM was implemented, we were spending but not all. For example, in 2004, the OSM led the project team way too much time debating the quality of our information – ob- that developed the strategy maps and scorecards for the enter- viously an unwieldy way of executing strategy and a very time- prise, our three operating divisions, and two support units – intensive way of conducting management meetings. human resources and information technology.For some processes, I see the Balanced Scorecard, managed by an office of strategy however, the OSM’s role is more integrative and facilitative than management, as a way of overcoming these three barriers to suc- direct. For example, the chief financial officer has primary respon- cess. The Balanced Scorecard empowers executives, as opposed sibility for budgeting, with the OSM playing a coordinating role. to invading their territory and undermining their authority. It We launched the OSM with three full-time individuals. The gives me performance management information that is aligned OSM leader is a vice president and a member of the executive at all executive levels and appropriately validated before it comes management team; her position in the organization is consistent to my attention. Much of management is a search for the truth. with the importance we give this function. She leads and facili- The Balanced Scorecard provides me with easy access to timely, tates the integration of strategy into all our core processes. In ad- unfiltered information about our strategy implementation. dition, we have two individuals reporting to the OSM leader to provide day-to-day management of the of- fice; to manage the multiple work streams The Processes of Strategy and cross-functional teams; to lead and facilitate meetings; to educate people on The Canadian Blood Services’ Office of Strategy Management has direct or indirect the Balanced Scorecard and other strategy- (shaded items) responsibility for strategic processes, which fall into three categories. focused practices and tools; and to perform analyses of problems, performance, and STRATEGY FORMULATION STRATEGY EXECUTION STRATEGY LEARNING metrics. This should be the right comple- Environmental assessments Balanced Scorecard Benchmarking ment of individuals to help support the performance reporting leader of the OSM, and ultimately the rest Strategic planning Initiative management Best-practice sharing of the executive team, in undertaking our ambitious change agenda for this year. Budgeting Communicating strategy Internal coaching and change management Graham Sher is the CEO of Canadian Blood Personal scorecards Services, based in Ottawa.

78 harvard business review The Office of Strategy Management

OSM. But as with strategy planning, internal communi- Integrate strategic priorities with other support cation is sometimes another unit’s existing responsibility. functions. Existing functional departments retain prime In these situations, the OSM has tended to take an edito- responsibility for three other key processes necessary for rial role, reviewing the messages to see that they commu- successful strategy implementation: planning and bud- nicate the strategy correctly. In cases where the corporate geting, human resource alignment, and knowledge man- communications group has little knowledge of or focus agement. These processes are critical for effective strategy on strategy, such as at Chrysler and the U.S. Army, the execution, and the OSM should play a consultative and in- OSM takes on primary responsibility for communicating tegrative role with the respective functional departments. both the scorecard and strategy to employees. In either Planning and Budgeting. At most corporations, the var- situation, the OSM should always take the lead in crafting ious functional departments are responsible for planning strategy messages delivered by the CEO, because one of how the corporation will allocate resources over the year. the most effective communication channels is having The finance department oversees budgeting and the allo- each employee hear about strategy directly from the cation of cash to the units and cross-functional initiatives; CEO. Finally,as part of its communication responsibilities, IT makes recommendations about investments in data- the OSM must cooperate with HR to ensure that educa- bases, infrastructure, and application programs; and HR tion about the scorecard and its role is included in em- makes plans for hiring, training, and leadership develop- ployee training programs. ment. For a strategy to be effective, all the functional Manage strategic initiatives. Strategic initiatives – plans must be aligned with the strategy. The budgets pre- such as a TQM program or the implementation of CRM pared by the finance department, for example, should re- software – are discretionary programs that help compa- flect those established in the strategic planning process nies accomplish strategic objectives. The executive team and should incorporate funding and personnel resources

It’s simplest to place the office of strategy management on a par with functions that report directly to the CEO. THE OFFICE SERVES, IN EFFECT, AS THE CEO’S CHIEF OF STAFF.

typically identifies these initiatives as part of its annual for cross-functional strategic initiatives. To ensure this planning process, although new initiatives may arise alignment, the OSM must work closely with all these throughout the year. Ideally, the entire portfolio of such functional units. initiatives should be assessed and reprioritized several Human Resource Alignment. No strategy can be effec- times annually. The screening, selection, and manage- tive unless the people who have to carry it out are moti- ment of strategic initiatives are what drive change in the vated and trained to do so. Motivation and training is, of company and produce results. Our experience suggests course, the natural domain of HR, which typically carries that such initiatives should be managed separately from out annual performance reviews and personal goal set- routine operations. Typically, they are managed by the ting and manages employee incentive and competency units most closely associated with them (a CRM project, development programs. It is the responsibility of the OSM for instance, is best managed by customer service) or by an to ensure that HR performs these activities in a manner ad hoc team drawn from the functions or units affected. consistent with corporate and business unit strategic ob- Responsibility for managing initiatives that already have jectives. The goal is to make strategy everyone’s job. a natural home should remain with the associated unit or Knowledge Management. Finally, the OSM needs to en- function. The OSM intervenes only when an initiative sure that knowledge management focuses on sharing the falls behind schedule, is over budget, or is not delivering best practices most critical for the strategy. If managers expected results. But the OSM should manage initiatives use the wrong benchmarks, the company’s strategy will that cross unit and functional lines–it can thus make sure fall short of its potential. At some companies, learning that they get the resources and attention they need. In all and knowledge sharing are already the responsibility of cases, the OSM retains responsibility for monitoring the a chief knowledge or learning officer; in those cases, the progress of strategic initiatives and reporting on them to OSM needs to coordinate with that person’s office. But if top management. such a function does not already exist, the OSM must take october 2005 79 The Office of Strategy Management the lead in transferring ideas and best practices through- tives. The office of strategy management at GNP also has out the organization. a matrixed relationship with 20 Balanced Scorecard man- The exhibit “The New Strategy Calendar”illustrates the agers in the two major business units and nine support activities that a properly constituted OSM will be en- units and with the owners of the major strategic initia- gaged in during the year. The strategy cycle launches at tives. The relationship enables the OSM to coordinate the the beginning of the second quarter, when the OSM starts strategic planning done in the business and support units. to plan strategy and update the enterprise scorecard. The OSM may be an important functional unit, but it After the enterprise strategy meeting, the OSM starts the doesn’t have to be large; it is certainly not our goal to en- process of aligning the organization with the enterprise courage companies to build a new bureaucracy. Although goals. Before the end of the third quarter, it will be coor- Chrysler employs 13 full-time people in its OSM, reflecting dinating with finance to bring unit-level plans and bud- the unit’s involvement in product development, our ex- gets in line with strategy, and by the beginning of the perience suggests that firms with sales of $500 million to fourth quarter, it will be working with HR on aligning the $5 billion and 1,000 to 10,000 employees can get by with competency development and incentives of employees fewer than ten people. In principle, as the exhibit on this with scorecard objectives. While these calendar-driven page shows, a fully functioning OSM should not need processes are going on, the unit continually engages in more than six to eight full-time-equivalent positions to control and learning: reviewing and communicating strat- cope with its activities. egy, managing initiatives, and sharing best practices. We have observed that establishing an OSM does not usually involve hiring expensive new talent. The OSM is Positioning and Staffing typically staffed with people who led the Balanced Score- card project – they often come from the planning and fi- the OSM nance functions, but some come from other staff groups Executing strategy usually involves making changes that such as quality, HR, and IT.Several organizations we stud- only a CEO can empower, and the OSM will be most ef- ied have reported that the people assigned to their OSMs fective when it has direct access to the CEO. Barbara do not constitute a net increase in the organization’s head Bossin, the director of strategic alignment at St. Mary’s count. In many cases, the evolution of a well-functioning Duluth Clinic, told us she was able to overcome resis- OSM actually helps reduce overall head count, thanks to tance to her initiatives because managers knew she had the OSM’s role in streamlining and focusing management a direct reporting line to the company’s chief operating processes and helping managers eliminate layers of staff and chief executive officers. An OSM buried deep in the engaged in data gathering and reporting. The OSM, how- finance or planning department may find it difficult to ever, should be assessed by the value it creates through command similar respect and attention from senior exec- successful strategy execution, not by whether it can re- utives for strategy management priorities. duce head count. The simplest solution, therefore, • • • is to place the OSM on a par with Many organizations have achieved major functions, such as finance and To fulfill its responsibilities success- dramatic performance improve- marketing, that report directly to fully, an office of strategy management ments by sustaining a focus on im- the CEO. The OSM serves, in effect, at a large company typically needs plementation of strategy. We have as the CEO’s chief of staff. But if the only six to eight full-time people. captured and codified a body of OSM has originated within a power- knowledge from these successful or- ful function, such a positioning may STRATEGY MANAGEMENT TYPICAL ganizations that provides the foun- not be feasible. In that case, the OSM PROCESS # OF FTE dation for an emerging professional will usually report to the chief of the Scorecard management 1.0 function focusing on the manage- function in which it is nested – such ment of strategy. An office of strat- Organization alignment 1.0 – 1.5 as the CFO or vice president of stra- egy management that is positioned tegic planning – but with occasional Strategy reviews 0.5 – 1.0 at the level of other senior corporate direct access to the CEO. At the Mex- Strategic planning 0.5 staff offices and has responsibility ican insurance company Grupo Na- Strategy communication 0.5 – 1.0 for managing and coordinating all cional Provincial (GNP), for example, Initiative management 1.0 – 1.5 the key strategy management pro- the OSM reports both to the chief cesses can help companies realize Planning and budgeting 0.5 executive and to the chief financial the benefits from this body of officer. The OSM sets the agenda for Workforce alignment 0.5 knowledge. a weekly meeting with the CEO and Best-practice sharing 0.5 – 1.0 r d CFO and for a broader weekly meet- TOTAL FTE POSITIONS 6.0 – 8.5 Reprint 0510 ; HBR OnPoint 1894 ing with the six top company execu- To order, see page 159.

80 harvard business review WE INVESTED FIVE YEARS IN THIS DEAL. OBVIOUSLY, MAKING A QUICK BUCK WASN’T THE STRAATEGY.

Cargill and Merrill Lynch identifi ed IMC Global for strategic acquisition. But it became clear that outright ownership had drawbacks. Our interdisciplinary team of M&A, rating, high-yield, debt and fi nance specialists developed a plan to combine IMC with a Cargill subsidiary to form a new, publicly traded company. After fi ve years of on-again, off-again negotiations, Cargill, through its investment in Mosaic, was able to gain a leadership position in the crop nutrient industry and a foothold in the public equity market. This is just one example of how Merrill Lynch develops exceptional fi nancial solutions for exceptional clients.

©2004 Merrill Lynch & Co., Inc. DAVID PLUNKERT

82 harvard business review It’s a place where more energy is put into thwarting things than starting them, but in the nicest way. A startling percentage of companies, especially large, established ones, display the symptoms. by Gary L. Neilson, Bruce A. Pasternack, and Karen E. Van Nuys ThePASSIVE- AGGRESSIVE Organızatıon

ealthy companies are hard to mistake. Their managers have access to good, timely information, the authority to make informed decisions, H and the incentives to make them on behalf of the organization, which promptly and capably carries them out. A good term for the healthiest of such organizations is “resilient,”since they can react nimbly to challenges and recover quickly from those they cannot dodge. Unfortunately, most companies are not resilient. In fact, fewer than one in five of the approximately 30,000 individuals who responded to a global online survey Booz Allen Hamilton conducted describe their organizations that way.1 The largest number – over one-quarter – say they suffer from the cluster of pathologies we place under the label “passive- aggressive.’’ The category takes its name from the organization’s quiet but tena- cious resistance, in every way but openly, to corporate directives.

october 2005 83 The Passive-Aggressive Organization

In passive-aggressive organizations, people pay those a firm somewhere that has never suffered from the syn- directives lip service, putting in only enough effort to drome. Even high-performing organizations harbor pock- appear compliant. Employees feel free to do as they see ets of resistance, while semiautonomous pockets of ex- fit because there are hardly ever unpleasant conse- cellence lift up poorly performing ones. These areas of quences, and the directives themselves are often mis- excellence can be the levers by which good managers guided and thus seem worthy of defiance. Making matters show to the rest of the firm that action is possible.Nonethe- worse, senior management has left unclear where ac- less, we’ve found that the passive-aggressive organiza- countability actually lies, in effect absolving managers tion is the hardest to change of the seven types we stud- of final responsibility for anything they do. Those with ied because such companies have generally had more initiative must wait interminably for a go-ahead, and time than the others to accumulate and institutionalize their actions when finally taken are accompanied by dysfunctions, and their people are the most cynical about a chorus of second-guessing, a poor but understandable reform attempts. substitute for the satisfaction of accomplishing the Before bursting into full flower, passive-aggressive task at hand. (See the exhibit “What Kind of Company Is organizations are dotted with frustrated world-beaters Yours?”) who cannot understand why their most promising proj- When employees’ healthy impulses–to learn, to share, ects can’t gain traction. After a couple of years, such in- to achieve – are not encouraged, other harmful but dividuals either quit or become demoralized into inef- adaptive conduct gradually takes fectuality by the thanklessness over. It is no wonder that action and futility of effort. Still, it of any kind becomes scarce and would be wrong to say that or- that erstwhile doers find safety When employees’ ganizations displaying passive- in resisting unpromising efforts. healthy impulses – to learn, aggressive behavior must have The absence of confrontation at lots of passive-aggressive people such places is only a disguise for to share, to achieve – are not in them. The passive-aggressive intransigence. encouraged, other harmful organization is not one where As a general rule, companies bad outcomes can be attributed that are not healthy suffer from but adaptive conduct to the hostile or perverse inten- either too much control at the top gradually takes over. tions individuals bring to the or not enough. Either can cripple job. It is, in fact, a place where performance: in the former case, mostly well-intentioned people by failing to devolve authority, share information, and are the victims of flawed processes and policies. reward constructive decision making; in the latter, by To some venerable observers, the employees of such allowing individuals and business units to work at cross- companies bear a passing resemblance to the “organiza- purposes or do little. The passive-aggressive corpora- tion man’’ of 1950s sociology and literary fiction. In the tion, due to the peculiarities of its evolution, can ex- postwar era, when U.S. corporations dominated their hibit the drawbacks of both too much control and not domestic markets and enjoyed stable market shares, enough. personal initiative and risk taking were understandably In such organizations, people with authority lack the in- seen as disruptive rather than opportunity seeking. But formation to exercise it wisely or the incentives to serve what may have been innocuous and even suitable behav- the company’s strategy and interests or the personnel that ior for its time can, in today’s world of global markets and will carry out their directives. Conversely,people with the unfettered competition, bring a company to the brink incentives and information necessary to make good deci- of failure. Indeed, some of the companies today that find sions lack the authority to execute them or oversee their security and comfort in inertia are the very ones that execution by others. As a result, many in senior positions dominated markets 50 years ago. operate under the false impression that they control Our conception of the passive-aggressive company things they actually do not. At the same time, many think and the other six organizational types in our seven-part they cannot control what they actually can. schema grew out of our decades of experience advising Of course, there is no such thing as a pure exemplar of firms in a wide variety of industries and locations on or- the passive-aggressive corporation, any more than there is ganizational issues. Over and over, we saw certain classic

Gary L. Neilson ([email protected]) is a senior vice president in the Chicago office of Booz Allen Hamilton, a management consulting firm. Formerly a Booz Allen senior vice president, Bruce A. Pasternack ([email protected]) is now serving as president and CEO of Special Olympics, in Washington, DC.Karen E. Van Nuys ([email protected]) is a prin- cipal of Booz Allen in its Los Angeles office. Neilson and Pasternack are the authors of Results: Keep What’s Good, Fix What’s Wrong, and Unlock Great Performance (to be published this month by Crown Business), from which this article is adapted.

84 harvard business review The Passive-Aggressive Organization

What Kind of Company Is Yours?

Of the seven major organizational types we’ve observed, the healthiest is the resilient organization, which as its name implies is the most flexible and adaptable. Our online survey shows, unfortunately, that the most common is the far-from- healthy passive-aggressive type, in which lines of authority are unclear, merit is not rewarded, and people have learned to smile, nod, and do just enough to get by.

The type of organization respondents‘ answers most closely describe

HEALTHY ORGANIZATIONS UNHEALTHY ORGANIZATIONS

Resilient Passive-Aggressive Highly adaptable to external market Congenial and seemingly conflict free, shifts, yet focused on and aligned behind achieves consensus easily, but struggles a coherent business strategy 17% to implement agreed-upon plans 27%

Just-in-Time Inconsistently prepared for change but 10% can rise to an unanticipated challenge Overmanaged without losing sight of the big picture 9% Its multiple layers of management create analysis paralysis and also 4% politicize decision making Military Precision Dominated by a small, involved Inconclusive 10% senior team; succeeds through 15% superior execution and the Outgrown efficiency of its operating model 8% Too large and complex to be effectively controlled by a small team, but has yet to democratize decision-making authority Fits-and-Starts Contains scores of smart, motivated, and talented people who rarely pull in the same direction at the same time

Source: Org DNA data set, 30,000 observations; Booz Allen analysis behavioral patterns occur, which, we began to notice, cor- The Slide into related with certain objective features of those compa- nies, such as size and age. To explain the emergence of Passive-Aggressiveness these patterns, we postulated the existence of a limited Most passive-aggressive organizations don’t start out full number of underlying forces in every organization. After of entrenched resistance. Problems develop gradually as isolating what we determined to be the four most basic a company grows, through a series of well-intended but ones, we studied how each operated and interacted with badly implemented organizational changes layered one the others to shape the seven organizational types. As upon another. Passive-aggressive organizations are, there- we came to understand what made each type of organi- fore, most commonly large, complex enterprises whose zation function well or poorly, we were able to refine our seeds of resistance were often sown when they were much definitions. When we tested the soundness of our schema smaller. in the online survey, we found that the organizational While each organization takes a unique path, we have portraits the responses painted corresponded closely to seen a particular development pattern recur. A company the seven types we had identified. is founded on a healthy core business. The large amount october 2005 85 The Passive-Aggressive Organization of cash it throws off finances a series of acquisitions, aggressive territory. Instead of vesting authority in the increasing organizational complexity and confusion. As units and holding them accountable for results, manage- it grows beyond about $1 billion in revenues, the firm ment teams like the one in this company tighten the becomes too large and complex to be run effectively by reins. Weakened divisional managers who are already un- a small, hands-on senior team. So it begins to experiment clear about the boundaries of their own authority, and with decentralization in ways that are ill planned, because fearful of losing what is left of it, come to take little per- it is inexperienced at integration or growing too quickly, sonal responsibility for the success of the enterprise. and halfhearted, because the founders have trouble gen- Misleading Goals. A new CEO of an American house- uinely letting go. To regain control, the founders add lay- wares company decided that empowering people fur- ers of managers to oversee the line managers whose per- ther down in the organization would enhance initiative formance has disappointed them. The additional layers and boost profits. Worldwide, salespeople were given make it difficult for people in the organization to under- more authority to respond to customers’ wishes while stand who bears responsibility for specific results. Some being measured on revenues. Country-based marketing managers become reluctant to make decisions, and others teams were given the authority to develop local cam- won’t own up to the ones they’ve made, inviting colleagues paigns and were measured on the basis of market share. to second-guess or overturn them. An already passive- Plant managers were given the authority to make oper- aggressive organization grows increasingly so as its people ating decisions and were held accountable for their costs. become more certain of the acceptability of such conduct. The program had an impact, but not the one the CEO Resistance becomes entrenched, and failure to deliver on had intended. Salespeople increased volume through commitments becomes chronic. heavy discounting, so margins fell. The increased volume More specifically, we’ve seen organizations descend taxed the plants’ capacity, so quality problems emerged. into the passive-aggressive state through one or an- On-time delivery rates plummeted, but since plant man- other of three classic failings, as the following examples agers were being judged on costs, they declined to intro- demonstrate: duce expensive overtime shifts. Regional management Unclear Scope of Authority. One consumer products found itself telling plant managers, “You were supposed company we studied was founded by a California entre- to lower costs by 7% this year, but we’ll make an exception preneur who began by selling a single snack food through- when reviewing your year-end results because making out the western United States. That product became the on-time deliveries is more important right now.” company’s first national brand. The founder made virtu- The legacy of this initial failure to properly align the ally every major decision not only about strategy but also incentives and goals of the organization was an unmis- about marketing, sales, and operations. When a couple of takable signal that metrics and plans weren’t really bind- companies in Latin America became available for pur- ing. Failing to deliver on commitments became accept- chase, the company pounced. The founder put a vice pres- able as long as one had a reasonable excuse. ident in charge of overseeing both acquisitions, assuring Agreement Without Cooperation. A decade later at the VP that his door would always be open. that same company, headquarters had become focused The VP believed that product development should be on delivering profits by reducing the cost of both opera- tailored to local markets and kept close to home. The tions and staff. The managers of the European division, founder reluctantly agreed to a pilot program in which however, believed that the future of the business lay in a formulation of the snack food modified for the Latin gaining market share. American market would be developed in Brazil, with “pe- Shortly after his appointment, a new CEO launched riodic” oversight from headquarters. But as develop- a complexity reduction program. In his view, a lack of ment progressed, the founder became increasingly in- standardization in machinery and processes was creating volved, flying to Brazil almost weekly. More often than unnecessary costs. At one of the company’s quarterly not, he overrode the local development team’s recom- meetings, the CEO, the regional VPs, and the function mendations. The final product, representing the founder’s heads discussed the problem. The CEO invited an execu- wishes, met with lukewarm demand. tive from another firm to come and tell the story of how Not wanting to thwart regional initiative, the founder such a program had succeeded at his company. As the turned the pilot process into established practice. All CEO went around the table, every individual endorsed the people involved in regional product development, the program, including the head of Europe, though he however, recognized that they really weren’t calling the warned against eliminating complexity that served big shots. Nevertheless, they continued to pretend to be in customers having special requirements and the willing- control while never insisting on actually having it. ness to pay for them. Everyone agreed that this advice Misunderstandings and misrepresentations concerning was sensible. who really has control over which decisions are often European management understood the program to be the first signs that an organization is slipping into passive- something corporate cared about, but it fell somewhere

86 harvard business review The Passive-Aggressive Organization around tenth place on the division’s strategic agenda. and reward individuals according to their business value The Europe VP appointed a middle manager who had to the organization–or even to distinguish better perfor- been working on special projects for the previous two mance from worse. Fifty-seven percent of respondents years to take the lead. At the CEO’s next quarterly review, working at passive-aggressive companies agreed that the VP reported on Europe’s progress: The division had in their organizations the individual appraisal process appointed a leader, staffed the team, sent out a commu- fails to differentiate among high, adequate, and low per- nication, and started a project. It all sounded fine. But for formers. Yet only 15% of respondents from resilient com- all intents and purposes, Europe was ignoring the initia- panies agreed with that statement. (See the exhibit “Di- tive. Its VP never talked about the program or asked how agnosing the Passive-Aggressive Organization.”) In some it was going when he brought his regional team together cases, the rewards given to certain job titles seem incom- or visited the plants. He didn’t add it mensurate with those functions’ to any management meeting agen- overall contribution to the firm. das and never put his name to it; in- Misunderstandings People who expect their efforts to stead, he let all communications con- go unrecognized or to be inade- cerning the project come from the and misrepresentations quately valued put in just enough project manager. The implicit mes- concerning who really effort to stay out of trouble, since sage in Europe was that the program they have no reason to believe didn’t really matter. But by leaving has control over which that any extra effort or initiative an impression of compliance with decisions are often will lead to additional rewards or headquarters, European management superior results. made it much harder for corporate to the first signs that What’s more, incentive systems see the program’s lack of progress an organization is communicate to the organization and its even dimmer prospects. as a whole what really matters to Regardless of how they arrived slipping into passive- upper management. Corporate where they are, passive-aggressive aggressive territory. may send out countless memos organizations are usually the sum of about its strategy, mission, and a series of ad hoc decisions or events goals, but its true values are em- that made sense in the moment but have the effect of bodied in what it is willing to pay for and otherwise rec- gradually blurring decision rights. Over time such shot- ognize, which is one reason that the annual e-mail de- gun arrangements outlive their individual rationales, scribing how bonuses will be calculated is the one and the organization loses all vestiges of a coherent over- everybody not only reads but remembers. all plan. Within passive-aggressive firms, privileges and pecking order often loom larger than the realities of the market- The Anatomy of the place. Such firms’ very size and wealth can insulate em- ployees from competitive pressures, which register as Organization mere symbols – the share price or numbers on a P&L In all unhealthy organizations, dysfunction is rooted in statement – not as forces that will affect the company’s a fundamental misalignment of four basic building blocks success. So, for example, a manager may be rewarded of the organization: incentives or, more broadly speak- for the number of market studies his department pre- ing, motivators; decision rights; information; and organi- pared in the past fiscal year, regardless of how many of zational structure. In passive-aggressive organizations, those studies served as the basis for marketing campaigns the misalignments generally involve complicated inter- that actually enhanced sales. The job of senior manage- actions among all four, which together conspire to freeze ment is to remind everyone else of the reality behind initiative. those symbols by connecting each manager’s standing Ineffective Motivators. We define “motivators” to in- within the firm – size of office, size of bonus, access to su- clude not just financial compensation but all the factors, periors – to the firm’s standing within the marketplace. explicit and implicit, that affect anything an employee Still, as profoundly in need of proper motivation as a cares about: whether her office has a window, whether he passive-aggressive organization is, it would be a mistake is promoted to a position with greater visibility or a larger to think that tinkering with incentives alone, without number of direct reports, whether she receives a com- regard to the other forces at play,will coax such a company pany car or is invited to important meetings or foreign out of its doldrums. off-sites. Far surpassing these in influence is some tangible Unclear Decision Rights. As in the California snack evidence of the impact of one’s efforts. food company described earlier, nearly everyone in a Passive-aggressive organizations are exceptionally passive-aggressive organization is unsure about where poor at providing that evidence, often failing to judge the limits of his or her own responsibilities end and those october 2005 87 The Passive-Aggressive Organization of other colleagues begin. In our online survey, only In one company that we analyzed, for instance, a seem- 27% of respondents from passive-aggressive organi- ingly routine decision to renew the annual contract of zations agreed that “everyone has a good idea of what a longtime supplier of aluminum fasteners had to run decisions/actions he or she is responsible for,”compared nine hurdles before it could be made. The matter was with 93% at resilient organizations. initially taken up by central purchasing, which negoti- Vaguely defined roles give their occupants “plausible ated the contract according to standard sourcing guide- deniability’’ when things go badly. The problem can al- lines. But business-unit operations objected because it ways be said to be the responsibility of the next person, wanted parts with a lower defect rate, which were going who can likewise shift blame elsewhere. Meanwhile, to cost more. Purchasing, feeling it had been ignored, conscientious employees may hang back for fear of in- withheld its approval. After several weeks of gridlock, truding on someone else’s turf. the business unit identified an alternative supplier, and As a consequence, authority becomes fragmented. its sourcing manager approved a purchase order at a When everyone has a say in making a decision, everyone higher price. thinks he has the right to stymie or reverse it after it has But central purchasing still refused to release the been made. In passive-aggressive organizations, 75% of order because the new supplier was not on purchasing’s respondents believe that “once made, decisions are often pre-approved list. So the new supplier faced having to second-guessed,”versus just 26% in resilient organizations. go through the entire approval procedure all over again. And second-guessing that occurs in the middle of the Ultimately, the issue had to be presented to senior man- decision-making process can bring it to a halt. agement for a final decision. The whole process took

Diagnosing the Passive-Aggressive Organization

People working in passive-aggressive organizations feel strongly that they don’t know which decisions they’re responsible for, that no decision is ever final, that good information is hard to obtain, and that the quality of their work is not being accurately appraised. People in resilient organizations feel the opposite.

Do you agree or disagree with the following statements?

Field/line employees The individual usually have the performance Everyone has a information they appraisal process good idea of what need to understand Information flows differentiates decisions/actions Once made, the bottom-line freely across among high, he or she is decisions are often impact of their organizational adequate, and responsible for second-guessed day-to-day choices boundaries low performers 100 7% 25% 15% 19% 15% ■ ■ disagree 80 ■ ■ agree 57%

73% 74% 77% 80% Respondents60 93% 81% 85% 75% 40 85%

43% 20 27% 26% 23% 20%

Resilient Passive- Resilient Passive- Resilient Passive- Resilient Passive- Resilient Passive- Aggressive Aggressive Aggressive Aggressive Aggressive

Type of organization

Source: Org DNA data set, 30,000 observations; Booz Allen analysis

88 harvard business review The Passive-Aggressive Organization months rather than the few weeks it should have. If deci- others sought. In a passive-aggressive organization, rituals sion rights had not been fragmented – if either central and routines, even modes of dress, become fetishized, as purchasing or the business unit had been charged with though they contain the secret to the firm’s past successes. getting both the right goods and the right price–the pro- When in possession of information or knowledge of cess wouldn’t have created so much frustration. As it genuine value, employees of passive-aggressive organiza- was, the lesson for purchasing managers was: Deadlines tions are reluctant to share it, since doing so frequently didn’t matter; neither did either unit’s internal guide- benefits the recipient more than the sharer. For example, lines, since each could be overridden by the other. many departments use acronyms and terms of art to ab- Of course, it is never possible to specify every decision breviate the information they use internally. When shar- right a priori. Opportunities and challenges will appear ing that information with a new department, they ne- as matters unfold, and any attempt to give a complete glect to explain what their shorthand means, if not out of accounting of all decisions that can be a desire to hoard the information for foreseen would take too long and be their own benefit then because spend- too complex to be useful. But in healthy Within passive- ing the time required to translate it organizations, decisions do not go un- will not be rewarded. made because no one has been desig- aggressive firms, Finally, in an organization already nated to make them. Most of the time, privileges and rife with meddling, many managers someone will jump in and get the job find that providing information gives done. In such places, people take the ini- pecking order the recipients a pretext to interfere. tiative because they know their efforts often loom larger All these factors explain why only 20% will be rewarded. of surveyed individuals in passive- Quest Diagnostics, for one, designates than the realities aggressive organizations agree that “in- a decision maker for each of its 50 most of the marketplace. formation flows freely across organi- important decisions. Below that level, zational boundaries.”By contrast, that the company is less explicit in its ap- figure is 81% at resilient organizations. proach but just as effective in assuring that decisions get Misleading Structure. Because individuals in passive- made. It does so by creating incentives. To each of its 15 aggressive companies often lack clear measures of how most important cross-functional processes, ranging from they add value, they may instead rely on the organization acquiring specimens to billing, it assigns a process owner, chart as a map of relative status – focusing on how many who is responsible for the performance of the company direct reports they have, how many levels away from the as a whole, not just the parts he or she directly controls. CEO they are, or whether their immediate supervisor is Because the owner of the specimen-collection process, a favorite. Ironically, the org chart rarely conveys much for instance, can obtain information that billing can use information about how work gets done in these firms to improve its own collection rates, the firm rewards the because decision rights are unclear or often reside in un- specimen-collection process owner as well as the billing expected places. process owner when the bad-debt rate declines. The Wrong Information. Employees of a passive- aggressive organization are often more interested in Curing the Patient learning about what goes on inside their company than Passive-aggressive organizations are,by definition,uniquely about the competitive realities that affect the firm’s long- resistant to change and are therefore uniquely difficult to term survival. For example, though never officially, brand rehabilitate. To begin with, it’s hard to discern their actual managers at one software company were judged on the condition from beneath the accretions of earlier failed elaborateness of their forecast presentations. However, fixes. What’s more, the remedy is bound to be compli- forecasts and results differed on average by as much as cated and taxing. Analysis may reveal the need for greater 25% in that volatile industry, suggesting that spending centralization in some areas (to support products that so much time on documents intended for internal con- rely on the same basic technology or production pro- sumption was diverting brand managers from more pro- cess, for instance) and greater decentralization in others ductive pursuits. (perhaps to serve a market requiring significant product In another case, employees noticed that executives who tailoring). received frequent promotions spent a lot of their time in The first order of business is the greatest challenge of meetings at headquarters. Wanting to get ahead, they all: getting a passive-aggressive organization’s attention. started seeking invitations to those meetings themselves, A long history of seeing corporate initiatives ignored and whether or not they had anything to contribute. They then fade away makes employees almost hopelessly failed to realize that the high performers were called into jaded. Many people have become so hard-bitten that only meetings because they had important market insights a significant business threat can rouse them to action. But october 2005 89 The Passive-Aggressive Organization because such organizations are also so inward gazing, more than fulfilled its near-term goals. Years later, the such a threat remains invisible until it’s almost too late. company in its turn demutualized, and today it is thriv- For example, an insurance company we worked with ing. The transformation is still remembered as much for suffered a downgrading of its debt just when its competi- its impact on the organization’s culture as its earnings. tors were demutualizing and it needed to appeal to in- In addition to these catalysts, elements of successful vestors who were not policyholders. Managers there programs to fix passive-aggressive organizations include had long had the attitude that “this too shall pass” when the following: presented with a change program – and always they’d Bring in new blood. Outsiders often lead the change been right. To emphasize that this time was different, in passive-aggressive organizations, for several reasons. senior management pulled 30 managers out of their reg- First, they send an unmistakable signal to the troops that ular jobs to focus full-time on the turnaround. Among “things are so badly broken we can’t fix them ourselves those 30 were the seven most visible, up-and-coming fig- anymore.” Second, outsiders bring new standards they ures in the company, each of whom was put in charge of expect the organization to meet; they haven’t been worn one of the seven elements of the turnaround. The senior down by the old habit of making excuses. And third, they managers had limited experience working with teams, often find it easier than incumbents to treat the organi- but they formed seven cross-functional ones and met with zation more like a business than a family. them every other week. Soon senior management was John Thompson was one such outsider when he be- modeling its behavior on that of the teams it had orga- came CEO of software security firm Symantec in April nized – it cooperated, set explicit goals, made hard deci- 1999 after 28 years at IBM. He says of Symantec: “This sions, and stuck with them. was a company that had lost its way, and it needed some- This time, the whole organization woke up to the seri- body who was not connected to the people or processes ousness of what was happening, and the turnaround or strategy to ask the tough questions and be prepared to act on the answers. The former CEO, Gordon Eubanks, did a terrific job of building the company from nothing. The Where There’s Health, There Are Profits raw material, the raw attributes, were there. I just brought a different set of In our survey, more than half the respondents from resilient organizations eyes, a different set of lenses.” characterized their companies as being more profitable than the average Nevertheless, outsiders like Thompson for their industry. But less than a third of the people from passive-aggressive have certain handicaps. If they alienate companies said theirs was. middle management by going too fast, they can aggravate its natural tendency to display resistance in classic passive- Relative to your industry, is your company… aggressive fashion. Successful newcom- ers retain enough senior members of the more profitable than average old guard to enlist the organization’s loy- alty while purging those who are unlikely 51% about as ever to get on board. profitable Because of these hazards, a home- grown CEO who is capable of grasping the 37% less profitable urgency of the situation can sometimes Respondents 34% than average be the safer choice. But the message he 28% or she sends that a new day has arrived 23% don’t know or N/A must be unequivocal. Leave no building block unturned. 12% 9% Passive-aggressive organizations are so 6% fundamentally misaligned that the best Resilient Passive- Res Passive- Resilient Passive- Resilient Passive- way to get their attention is by changing Aggressive ilient Aggressive Aggressive Aggressive everything at once, so that the magni- tude of the problem, and of the effort that will be required to fix it, cannot be denied. Type of organization Soon after he arrived at Symantec, Thompson spun off several businesses and product lines, changed the manage- Source: Org DNA data set, 30,000 observations; Booz Allen analysis ment team, reassigned decision rights,

90 harvard business review The Passive-Aggressive Organization and revised all the incentive systems – in short,“changed almost everything about the company.” Thompson explains: “We chopped up all of the old signal paths. It’s like what goes on in Florida when the hurricanes hit, one after another. The power lines are down; they’re just crackling there on the ground. And some- body’s got to reconnect them. We de- cided to seize the opportunity to recon- nect them a different way.” Make decisions, and make them stick. Clarifying and articulating decision rights is often the first order of business in fixing a passive-aggressive organiza- tion, where decisions have been made, unmade, overturned, and second-guessed so many times that no one really knows who truly decides what any more. In many cases, decision-making authority has become lodged where it doesn’t be- long. When Thompson took over at Sym- antec, “the product manager was king. And the regional managers were even more autonomous.”Regions were known to redesign packaging and sit on inven- tory they didn’t want to sell. “We had many people who could say no, but few peo- “That was the shot heard around the world,”Thompson ple who could say yes and make it stick,” Thompson ex- says.“There was this epiphany,‘Wow, this guy’s serious.’” plains. So one of the first things he did when he arrived Spread the word – and the data. No organization can was firmly establish, once and for all, what the respective make good decisions without having access to the relevant roles of the regional and product managers should be. information. But to know what’s relevant, people must be “We told the regions, ‘Your job is execution. You’re going clear about which issues deserve the highest priority.This to do what you’re told to do. You’re not a business unit. is not just a matter of sending out a memo or two. You are the sales engine of the company.Your job is to sell At 7-Eleven, for example, bright and early every Mon- what we build, not to decide whether or not you want to day morning, the eight members of the executive commit- sell it and then design your own company campaign tee and invited guests convene to discuss strategic issues around it.’” and survey the week that was and the week coming up. Once decision rights are clarified, they must be re- They arrive knowing which of the 2,500 products in the spected. If they are, people in the organization begin to 7-Eleven inventory are moving and which are not in its count on one another and to trust that what is planned 5,800 stores across the United States and Canada. By will be done. 11 am the senior executive team has determined the Early in his tenure, Thompson realized the company week’s priorities and begins relaying them to all execu- could save money by providing computer cables free only tives down to the vice president level. During the first to customers who requested them instead of putting half of this two-hour national videoconference, division them in every box of software. At a meeting on cost re- VPs go over the updated forecast for the month and the duction, everyone, including the executive responsible, quarter. At noon, department heads, product directors, agreed it should be done. But weeks later, the boxes still category managers, and sales and marketing managers contained the cables. “We don’t make decisions but discuss issues at the store level that need to be bumped up once,” Thompson told the executive. “If you’ve got a dis- to headquarters. agreement or a point of view, bring it up when we’re On Tuesdays at 11:15 am, 7-Eleven’s nearly 800 field con- going through the discussion. Don’t hold back and give sultants–each of whom oversees a group of stores–are de- me this smiley kind of benign agreement. Go back and get briefed in another videoconference. The call covers case it fixed. We’re not shipping cables any more. And if you studies, new merchandising issues, featured products, can’t communicate that, I will. findings in test markets–everything the field consultants october 2005 91 The Passive-Aggressive Organization need to educate store owners and associates about that ence within their own scope of influence. Large organiza- week’s priorities. When these consultants head into the tions are made up of many small overlapping units. Even field after the call, they know exactly what news to deliver if they are not entirely independent, most of us can make to the stores because they’ve heard it directly from the changes in ours. If you are a brand manager in a passive- top. Clearly, the care in setting and keeping to priorities aggressive company, for instance, you can make it clear is paying off: As of July 2005, 7-Eleven had reported 35 to your team that delivering on promises matters. Then consecutive quarters of same-store sales growth. find an opportunity to prove it – not a public hanging, Match motivators to contribution. When Thompson but some signal that things have changed. When, say, arrived at Symantec, any executive who was promoted your market researchers report in the staff meeting that to vice president automatically was given a BMW. Se- the focus groups have to be postponed for two weeks, nior management’s bonuses were paid quarterly and express disappointment that the team contract hasn’t were heavily skewed toward cash rather than stock. “So been followed. Make the point in the staff meeting so if the stock didn’t do well, they didn’t care,” Thompson that everyone gets the message. explains.“We [now] have a stock option plan that is broad When such a message is delivered clearly and consis- based but not universal. One of the things we recognized tently, it sinks in. Slowly, your division can become a early on was that if we were going to grow at the rate source of initiative in a sea of lassitude. You may not that we were growing, we had to be more selective in change the whole company overnight, but you just might who we gave options to so as not to dilute the value of our begin to set a new tone. stock. And so the first thing we did was identify a range 1. In addition to the approximately 30,000 responses to our Web site (orgdna of employees who were valuable to the company but .com), our research also includes about 20,000 responses to the same survey didn’t need equity to come to work, and we focused their given in the course of client engagements. compensation around cash bonuses. Then we increased the equity we gave to the engineers and other people that Reprint r0510e were critical to our long-term success.”By paying the two To order, see page 159. groups differently, the new compensa- tion scheme recognizes their distinctive importance. “We changed the alignment through- out the organization,” says Thompson. “Now everyone gets paid based upon revenue production as well as profit gen- eration. My view was,‘Most of you don’t have anything to do with profit. But all of you have something to do with reve- nue, so let’s rebalance our incentives to reflect that reality.’” • • • It’s only a matter of time before the dis- eased elements of a passive-aggressive organization overwhelm the healthy ones and drive the organization into fi- nancial distress. In fact, our research con- firms a link between organizational health and profitability. Respondents who identify their organizations as resil- ient report better than average prof- itability nearly twice as often as respon- dents in passive-aggressive organizations (see the exhibit “Where There’s Health, There Are Profits”). A full transformation of a passive- aggressive organization is impossible without the engagement of senior man- agement. But even those in the middle “Around here, Falstaff, we always use the word

of the organization can make a differ- ‘remember,’instead of ‘recall.’” DAVID BROWN

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Uncensored

“Candor….is a willingness to speak the unspeakable, to expose unfulfilled commitments, to air the conflicts that undermine apparent consensus. Candor means that people express their real opinions.”

Ram Charan “Conquering a Culture of Indecision” Harvard Business Review April 2001

“I like it, but I don’t think it will slide past the people in charge of quashing this kind of thing.”

“Instead of relying on buzz, perhaps we should just go ahead and produce something.” MARK ANDERSON, MASEAR, ARTHUR SCOTT THOMAS RUNYAN, VEY AND P.C.

94 harvard business review “Look at the bright side, sir. At least we’ve finally established brand recognition.”

“I think I speak for all of us when I say what in God’s name are you talking about?”

“What I lack in strategic thinking I more than make up for in my uncanny ability to know my limitations.” october 2005 95 Board practices for monitoring technology investments vary widely and often wildly. As technology’s cost, complexity, and consequences grow, directors need a framework to develop IT policies that fit the companies they oversee. Information Technology and the Board of Directors

ver since the y2k scare, boards have grown increas- ingly nervous about corporate dependence on infor- Emation technology. Since then, computer crashes, denial of service attacks, competitive pressures, and the need to automate compliance with government regula- tions have heightened board sensitivity to IT risk. Unfor- tunately, most boards remain largely in the dark when it comes to IT spending and strategy. Despite the fact that corporate information assets can account for more than 50% of capital spending, most boards fall into the default mode of applying a set of tacit or explicit rules cobbled to- gether from the best practices of other firms. Few under- stand the full degree of their operational dependence on computer systems or the extent to which IT plays a role in shaping their firms’ strategies.

by Richard Nolan and F. Warren McFarlan ALEX NABAUM

96 harvard business review

Information Technology and the Board of Directors

This state of affairs may seem excusable because to that works for eBay can’t work for a cement company. date there have been no standards for IT governance. Cer- Creating a board-level committee is not, however, a best tainly, board committees understand their roles with re- practice all companies should adopt. For many firms – gard to other areas of corporate control. In the U.S., the consulting firms, small retailers, and book publishers, for audit committee’s task, for example, is codified in a set of instance–it would be a waste of time. Generally Accepted Accounting Principles and processes In this article, we show board members how to recognize and underscored by regulations such as those of the New their firms’positions and decide whether they should take York Stock Exchange and Securities and Exchange Com- a more aggressive stance. We illustrate the conditions under mission. Likewise, the compensation committee acts ac- which boards should be less or more involved in IT deci- cording to generally understood principles, employing sions. We delineate what an IT governance committee compensation consulting firms to verify its findings and should look like in terms of charter, membership, duties, help explain its decisions to shareholders. The governance and overall agenda. We offer recommendations for devel- committee, too, has a clear mission: to look at the com- oping IT governance policies that take into account an position of the board and recommend improvements to organization’s operational and strategic needs, as well as its processes. To be sure, boards often fail to reach set suggest what to do when those needs change. As we dem- standards, but at least there are standards. onstrate in the following pages, appropriate board gover- Because there has been no comparable body of knowl- nance can go a long way toward helping a company avoid edge and best practice, IT governance doesn’t exist per se. unnecessary risk and improve its competitive position. Indeed, board members frequently lack the fundamental knowledge needed to ask intelligent questions about not only IT risk and expense but also competitive risk. This The Four Modes leaves the CIOs, who manage critical corporate informa- We’ve found it helpful to define the board’s involvement tion assets, pretty much on their own. A lack of board according to two strategic issues: The first is how much oversight for IT activities is dangerous; it puts the firm at the company relies on cost-effective, uninterrupted, se- risk in the same way that failing to audit its books would. cure, smoothly operating technology systems (what we Understanding this, a small group of companies has refer to as “defensive” IT). The second is how much the taken matters into its own hands and established rigorous company relies on IT for its competitive edge through IT governance committees. Mellon Financial, Novell, systems that provide new value-added services and prod- Home Depot, Procter & Gamble, Wal-Mart, and FedEx, ucts or high responsiveness to customers (“offensive”IT). among others, have taken this step, creating board-level Depending on where companies locate themselves on IT committees that are on a par with their audit, com- a matrix we call “The IT Strategic Impact Grid”(at right), pensation, and governance committees. When the IT technology governance may be a routine matter best han- governance committee in one of these companies assists dled by the existing audit committee or a vital asset that the CEO, the CIO, senior management, and the board in requires intense board-level scrutiny and assistance. driving technology decisions, costly projects tend to re- Defensive IT is about operational reliability. Keeping main under control, and the firm can carve out competi- IT systems up and running is more important in the com- tive advantage. pany’s current incarnation than leapfrogging the compe- The question is no longer whether the board should tition through the clever use of emerging technology.One be involved in IT decisions; the question is, how? Having famously defensive firm is American Airlines, which de- observed the ever-changing IT strategies of hundreds veloped the SABRE reservation system in the late 1960s. of firms for over 40 years, we’ve found that there is no Once a source of innovation and strategic advantage, the one-size-fits-all model for board supervision of a com- SABRE system is now the absolute backbone of Ameri- pany’s IT operations. The correct IT approach depends on can’s operations: When the system goes down, the airline a host of factors, including a company’s history, industry, grinds to a complete halt. Boards of firms like this need competitive situation, financial position, and quality of assurance that the technology systems are totally pro- IT management. A strategy that works well for a clothing tected against potential operational disasters – computer retailer is not appropriate for a large airline; the strategy bugs, power interruptions, hacking, and so on – and that costs remain under control. Richard Nolan ([email protected]) is an emeritus professor of Offensive IT places strategic issues either over, or on business at Harvard Business School in Boston and a pro- the same level as, reliability. Offensive IT projects tend fessor of management and organization at the University of to be ambitious and risky because they often involve Washington Business School in Seattle. F.Warren McFarlan substantial organizational change. An offensive stance is ([email protected]) is a Baker Foundation Professor and called for when a company needs to alter its technology the Albert H. Gordon Professor of Business Administration strategy to compete more effectively or to raise the firm to emeritus at Harvard Business School. a position of industry leadership. Because of the resources

98 harvard business review Information Technology and the Board of Directors The IT Strategic Impact Grid How a board goes about governing IT activities generally depends on a company’s size, industry, and competitive landscape. Companies in support mode are least dependent on IT; those in factory mode are much more dependent on it but are relatively unambitious when it comes to strategic use. Firms in turnaround mode expect that new systems will change their business; those in strategic mode require dependable systems as well as emerging technologies to hold or advance their competitive positions.

DEFENSIVE OFFENSIVE Factory Mode Strategic Mode * If systems fail for a minute or more, there’s * If systems fail for a minute or more, there’s an an immediate loss of business. immediate loss of business. * Decrease in response time beyond one second * Decrease in response time beyond one second has serious consequences for both internal and has serious consequences for both internal and external users. external users. * Most core business activities are online. * New systems promise major process and service * Systems work is mostly maintenance. transformations. * Systems work provides little strategic * New systems promise major cost reductions. differentiation or dramatic cost reduction. * New systems will close significant cost, service, or process performance gap with competitors.

Support Mode Turnaround Mode * Even with repeated service interruptions of up * New systems promise major process and service to 12 hours, there are no serious consequences. transformations. * User response time can take up to five seconds * New systems promise major cost reductions. with online transactions. * New systems will close significant cost, service, * Internal systems are almost invisible to suppliers or process performance gap with competitors. and customers. There’s little need for extranet * IT constitutes more than 50% of capital spending. capability. LOW TO HIGH NEED FOR TECHNOLOGY RELIABLE INFORMATION * IT makes up more than 15% of total corporate * Company can quickly revert to manual procedures expenses. for 80% of value transactions. * Systems work is mostly maintenance.

LOW TO HIGH NEED FOR NEW INFORMATION TECHNOLOGY required to take an offensive position, financially and tions by designing, producing, and distributing its own competitively strong companies usually have to be inten- clothing. Though IT is used in these areas, the company sively involved in IT on all levels. Wal-Mart, for example, won’t suffer terribly if a system goes down. (For more on is replacing bar codes with radio frequency identification Zara, see Kasra Ferdows, Michael A. Lewis, and Jose A.D. (RFID) technology, which effectively drives the supply Machuca,“Rapid-Fire Fulfillment,”HBR November 2004.) chain directly from the supplier to the warehouse with- Core business systems are generally run on a batch cycle; out the need for scanning by associates. most error correction and backup work is done manually. Firms can be either defensive or offensive in their stra- Customers and suppliers don’t have access to internal tegic approach to IT – approaches we call “modes.” Let’s systems. Companies in support mode can suffer repeated look at each mode in turn. service interruptions of up to 12 hours without serious Support Mode (Defensive). Firms in this mode have bottom-line consequences, and high-speed Internet re- both a relatively low need for reliability and a low need sponse time isn’t critical. for strategic IT; technology fundamentally exists to sup- For such firms, the audit committee can review IT port employees’ activities. The Spanish clothier Zara, operations. The most critical questions for members to which began as a small retail shop, is a good example; the ask are: “Should we remain in support mode, or should company keeps strict control over its supply chain opera- we change our IT strategy to keep up with or surpass the october 2005 99 Information Technology and the Board of Directors

Asking the Tough Questions What board members need to know about IT depends on the company’s strategic position. Firms in support and factory mode should have their audit committees, with the help of an IT expert, query management. Organizations in turnaround and strategic mode will want the assistance of a full-fledged IT committee in getting answers to their questions.

If your company is in Support Mode, ask the questions in set A. If your company is in Factory Mode, ask the questions in sets A and B. If your company is in Turnaround Mode, ask the questions in sets A and C. If your company is in Strategic Mode, ask the questions in sets A, B, and C. A * Has the strategic importance of our IT changed? * What are our current and potential competitors doing in the area of IT? * Are we following best practices in asset management? * Is the company getting adequate ROI from information resources? * Do we have the appropriate IT infrastructure and applications to exploit the development of our intellectual assets? B * Has anything changed in disaster recovery and security that will affect our business’s continuity planning? * Do we have in place management practices that will prevent our hardware, software, and legacy applications from becoming obsolete? * Do we have adequate protection against denial of service attacks and hackers? * Are there fast-response processes in place in the event of an attack? * Do we have management processes in place to ensure 24/7 service levels, including tested backup? * Are we protected against possible intellectual-property-infringement lawsuits? * Are there any possible IT-based surprises lurking out there? C * Are our strategic IT development plans proceeding as required? * Is our applications portfolio sufficient to deal with a competitive threat or to meet a potential opportunity? * Do we have processes in place that will enable us to discover and execute any strategic IT opportunities? * Do we have processes in place to guard against IT risk? * Do we regularly benchmark to maintain our competitive cost structure?

competition?” and “Are we spending money wisely and real-time data response fall into this group.) These com- not just chasing after new technology fads?” (In this panies are much more dependent on the smooth opera- mode, the spending mantra is, “Don’t waste money.”For tion of their technology, since most of their core business a list of questions appropriate to each mode, see the ex- systems are online. They suffer an immediate loss of busi- hibit “Asking the Tough Questions.”) ness if systems fail even for a minute; a reversion to man- Factory Mode (Defensive). Companies in this mode ual procedures is difficult, if not impossible. Factory-mode need highly reliable systems but don’t really require state- firms generally depend on their extranets to commu- of-the-art computing. They resemble manufacturing nicate with customers and suppliers. Typically, factory- plants; if the conveyor belts fail, production stops. (Air- mode organizations are not interested in being the first to lines and other businesses that depend on fast, secure, implement a new technology, but their top management

100 harvard business review Information Technology and the Board of Directors and boards need to be aware of leading-edge practice and airline-manufacturing industry until Airbus took the monitor the competitive landscape for any change that lead. Now convinced that its future rests on the success- would require a more aggressive use of IT. ful design, marketing, and delivery of a new commercial Because business continuity in IT operations is critical plane, Boeing has embarked on an ambitious technology for these firms, the board needs to make sure that disas- project that it hopes will return the company to industry ter recovery and security procedures are in place. The dominance. Its new 787 plane, due in 2008, will be audit committee for a large East Coast medical center, equipped with a new lightweight carbon composite skin. for example, recently authorized a full disaster recovery, Since carbon composite skin is a relatively new mate- security, and operational environment review simply to rial to be used so extensively in a commercial airplane, ensure that appropriate safeguards were there. The study a neural network will be embedded in the fuselage and was expensive but completely necessary because, in the wings to constantly monitor load factors and make ad- event of a failure, patients’ lives would be at risk. (In this justments as changing conditions warrant. The 787 will be mode, the spending mantra is,“Don’t cut corners.”) manufactured and assembled through the world’s largest Turnaround Mode (Offensive). Companies in the project management system, which will simultaneously midst of strategic transformation frequently bet the farm coordinate thousands of computers and automate an on new technology. In this mode, technology typically integrated supply chain comprising hundreds of global accounts for more than 50% of capital expenditures and partners. Each supplier will send components via spe- more than 15% of corporate costs. New systems promise cially equipped 747s to Boeing’s site in Everett, Washington, major process and service improvements, cost reductions, where the 787 will be assembled in a mere three days, en- and a competitive edge. At the same time, companies in suring low costs and fast delivery. The 787 is like a jigsaw this mode have a comparatively low need for reliability puzzle whose pieces must fall into perfect alignment at when it comes to existing business systems; like compa- once, making Boeing both operationally and strategically nies in support mode, they can withstand repeated service dependent on IT. interruptions of up to 12 hours without serious conse- As is the case for firms in turnaround mode, board-level quences, and core business activities remain on a batch IT governance is critical in strategic mode. Organizations cycle. Once the new systems are installed, however, there require a fully formed IT oversight committee with at is no possible reversion to manual systems because all least one IT expert as a member. (The mantra for strategic- procedures have been captured into databases. mode companies is, “Spend what it takes, and monitor Companies usually enter turnaround mode with a major results like crazy.”) IT project that requires a big reengineering effort, often As we said at the outset, the specific action a company accompanied by the decision to outsource or move a sub- should take with respect to IT oversight depends on stantial portion of their operations offshore. Most firms which mode it’s in. Regardless of its business, it behooves don’t spend a long time in turnaround mode; once the any company to take an in-depth look at its current busi- change is made, they move into either factory mode or ness through the IT lens. In doing so, a company gains strategic mode. American Airlines functioned in turn- a much firmer grasp of what it needs to be successful. around mode when it created the SABRE system; now it lives in factory mode. Similarly, the Canadian company St. Marys Cement operated in support mode until it How to Conduct IT Oversight began equipping its trucks with GPS devices, which Having identified which mode they currently inhabit, pushed it into temporary turnaround mode. companies then need to decide what kind of IT expertise Board oversight is critical for companies in turnaround they need on the board. Firms that require a high level of mode; strategic IT plans must proceed on schedule and on reliability need to focus on managing IT risk. The job budget, particularly when competitive advantage is at of these boards is to assure the completeness, quality, stake. (Here, the spending mantra is,“Don’t screw it up.”) security, reliability, and maintenance of existing IT in- Strategic Mode (Offensive). For some companies, total vestments that support day-to-day business processes. innovation is the name of the game. New technology in- Rarely will such companies want a separate IT committee. forms not only the way they approach the marketplace but Instead, the audit committee must do double duty as also the way they carry out daily operations. Strategic-mode the IT governance team and delve deeply into the quality firms need as much reliability as factory-mode firms do, but of the company’s IT systems. they also aggressively pursue process and service oppor- On the other hand, companies that need to go beyond tunities, cost reductions, and competitive advantages. Like defensive mode require an independent IT governance turnaround firms, their IT expenditures are large. committee, rather than just having an IT expert serve on Not every firm wants or needs to be in this mode; the audit committee. The IT governance committee’s job some are forced into it by competitive pressures. Con- is to keep the board apprised of what other organizations– sider Boeing, a company that dominated the commercial- particularly competitors – are doing with technology. october 2005 101 Information Technology and the Board of Directors

Below, we outline the general duties of boards according come paramount. An attack by a hacker or a virus can re- to their modes. duce profits by millions of dollars. An attack on Amazon, Inventory the assets (all modes). A board needs to for example, would cost the company $600,000 an hour understand the overall architecture of its company’s IT in revenue. If Cisco’s systems were down for a day, the applications portfolio as well as its asset management company would lose $70 million in revenues. Thus, strategy. The first step is to find out what kinds of hard- the board needs to ensure that management is contin- ware, software, and information the company owns so as ually evaluating the company’s networks for security to determine whether it’s getting adequate return from its breaches. (Some companies actually work with would-be IT investments. hackers to test vulnerability to threats.) Physical IT assets–counted as computer hardware–are A board will also want to make sure that service out- relatively easy to inventory; intangible assets are not. ages don’t occur in the case of power failures or natural Despite the fact that intangible assets have largely been disasters. IT services are analogous to electrical power; ignored by the accounting field, most companies are in- an outage of days can trigger the demise of a company, creasingly reliant on them. Companies have huge invest- particularly one in defensive mode. For this reason, ments in applications software, ranging from customer backup systems must be continually tested to make sure and HR databases to integrated supply chains. The board that they actually work. IT also needs to ensure that ser- must ensure that management knows what information vice continues even while maintenance is under way, resources are out there, what condition they are in, and so proper detours and backups need to be in place. Many what role they play in generating revenue. One rule of companies use diesel generators to keep backup systems thumb in determining intangible assets is to first mea- running, but as the gigantic power outage that struck sure the hardware inventory – including all mainframes, the East Coast of the U.S. in August 2003 demonstrated, servers, and PCs–and then multiply that by ten. This ren- the diesel can run out if the backup systems are in con- ders a rough notion of what the software inventory will tinuous use. In such cases, companies must take special

A LACK OF BOARD oversight for IT activities is dangerous; it puts the firm at risk in the same way that failing to audit its books would.

be (including off-the-shelf and proprietary software). The steps. (Following the 2003 blackout, Delta Air Lines next step is to assure that the IT organization sorts arranged for generator fuel to arrive by helicopter in the the wheat from the chaff by determining the number and event of another shortage.) location of aging and legacy programs, and then decide Avoid surprises (factory, turnaround, and strategic which should be upgraded or maintained. modes). No board wants to be taken unawares, and the The board will also want to ensure that its company most frequent source of IT-related surprises is from lax has the right IT infrastructure and applications in place or ineffective project management. The larger the IT to develop intellectual assets such as customer feedback project, the higher the risk. Consider what happened to about products and services. It needs to know how well candy maker Hershey’s when an expansion of its brand employees can use IT systems to analyze customer feed- new ERP system blew up in the company’s face. By the back and develop or improve products and services. time Halloween rolled around, the company still could Assure security and reliability (factory and strategic not keep track of orders, revenues, and inventory. Best es- modes). Ideally, boards of companies in factory and stra- timates are that this cost the company $151 million. tegic modes should conduct regular reviews of their se- Even companies that are supposed to be technology curity and reliability measures so that any interruption experts can botch a project, as EDS proved when it lost of service doesn’t send a company into a tailspin. Unfor- $2 billion on a contract to build an intranet for the U.S. tunately,and all too often, oversight takes place following Navy. Because EDS didn’t fully understand the scope of a crisis. the strategically important Navy initiative, the project With the development of highly integrated IT networks suffered from unexpected delays and technical setbacks, within and outside the company, proper security has be- costing EDS massive write-downs that ultimately drove

102 harvard business review Information Technology and the Board of Directors

its debt to junk bond status. To avoid such unwanted sur- those systems, companies tend to build on top of them. prises, boards must ensure that appropriate project man- And firms running batch-oriented systems often overlay agement systems are in place and that key decision points them with new online user interfaces. This can create se- along the way are elevated to the appropriate level so rious problems for accounting departments: A user of that management can decide whether the project is still an online query system, for example, may believe that the worth doing. answer he or she receives is up-to-the-minute; but if, in Companies can also be caught unawares if they don’t fact, data files are updated in batch mode, the information have adequate service level agreements (SLAs) with ven- could be many hours out of date. Having to sort through dors or clients, particularly when they choose to out- such misinformation might require accounting depart- source their IT activities. A solid, well-thought-out SLA ments to hire additional staff to ensure that financial re- that makes explicit specific terms, deliverables, and porting is done on time. To avoid such problems, the gov- responsibilities can help firms avoid serious project man- ernance committee needs to decide whether it is more agement problems. The agreement should guarantee economical to maintain legacy hardware, software, and that the needs of all the diverse groups within the com- applications or to replace them. It’s relatively easy for IT pany – such as marketing, sales, call center operations, departments to determine when computer hardware and bad debt collection–are met under the terms of the needs upgrading. But when it comes to intangible assets agreement. such as legacy databases, the question of maintenance Additionally,legacy systems can present unwanted sur- versus replacement becomes trickier; it’s not uncommon prises because companies are so dependent on them, as to find maintenance taking up 90% of IT programming the Y2K problem demonstrated. Rather than replace expenditures. october 2005 103 Information Technology and the Board of Directors

An IT Governance Committee Calendar To be successful, an IT oversight committee must ensure that its discussions with senior management are deep and ongoing. The committee can help management visualize IT’s impact on the firm. We recommend that it develop a to-do calendar of the defensive, offensive, and administrative oversight tasks it needs to carry out over the year. Here’s a sample calendar.

DEFENSIVE GOVERNANCE Frequency IT Projects/Architecture Receive update of strategic projects. Quarterly Receive update of technical architecture and critique it. As Needed Ensure update of applications architecture and critique it. As Needed Receive and review update of project investments. Annual

IT Security Critique IT security practices. Annual Review and appraise IT disaster-recovery capabilities. Annual Review security-related audit findings. As Needed Review current developments in security practices, standards, and new security-related technology strategies. Annual

Internal Controls Review IT internal control practices. Annual Review IT-related audit findings. As Needed Send reports to audit committee regarding IT systems and processes affecting internal controls. Annual

OFFENSIVE GOVERNANCE Frequency Advisory Role Advise senior IT management team. As Needed Stay informed of, assess, and advise the company’s senior IT management team about new technologies, applications, and systems that relate to or affect the company’s IT strategy or programs. As Needed Receive update of IT strategy and critique it. Annual Review and critique business plan (annual and three-year). Annual Review internal IT assessment measurements and critique action plan. Annual Hold private session with CFO. Quarterly

Strategic Technology Scanning Visit other companies to observe technology approaches and strategies. Annual Engage outside experts as required to provide third-party opinions about the company’s technology strategy. As Needed Report to the board on matters within the scope of the committee, as well as on any special issues Quarterly that merit the board’s attention. Perform other duties as appropriate to ensure that the company’s IT programs effectively support As Needed the company’s business objectives and strategies.

ADMINISTRATIVE Frequency

Review and assess the adequacy of the IT oversight charter and recommend proposed changes to the board. As Needed Evaluate IT oversight committee’s effectiveness (self-assessment). Annual Approve minutes of prior meetings. Quarterly Present report to board regarding the IT oversight committee’s activities. Annual Hold executive session with committee members. As Needed Approve IT committee meeting planner for the upcoming year, Annual and approve mutual expectations with management.

104 harvard business review Information Technology and the Board of Directors

Watch out for legal problems (turnaround and stra- Finally, boards of firms in offensive modes must con- tegic modes). Companies can be subject to legal prob- stantly scan for opportunities as technologies advance lems if they don’t tread carefully around the intellectual and the cost of computing drops. Anything that has been property issues relating to IT.The advent of the Linux op- performed manually, for example, presents an opportu- erating system, for example, has been a boon to many nity not only to automate but also to raise the bar for companies; at the same time, making free use of associ- products or services. Otis Elevator, for instance, dramati- ated patented intellectual property has exposed them to cally improved its product delivery cycle by intelligently legal risks. Consider SCO’s $3 billion lawsuit against IBM, using IT to replace a paper-based tracking and fulfillment in which SCO alleges that IBM illegally incorporated system. Once a contract for an elevator, escalator, or walk- SCO’s intellectual property to the code base of the Linux way is signed, a program called eLogistics sends project operating system. Cases like this have made it clear that information directly from the field via nearly 1,000 local organizations need to stay alert for possible problems and area networks and 1,000 global wide-area networks to avoid the expensive distraction of an intellectual property contract logistics centers. The result has been a huge drop dispute involving IT. The board needs to watch out for in inventory and a fivefold improvement in delivery time. such risks and be ready to bring in appropriate legal coun- sel when necessary to keep the senior management team Building the IT Governance from being distracted. Keep an eye out for fresh threats and opportunities Committee (turnaround and strategic modes). It’s a good idea for How do you set up an IT governance committee? A com- committee members to interrogate the CIO and line pany that decides it needs board-level IT oversight must management about new products they may have seen or do three things: select the appropriate members and the

The IT strategy that works for a clothing retailer is not appropriate for a large airline; THE STRATEGY that works for eBay can’t work for a cement company.

heard about at technology trade shows or industry con- chairman, determine the group’s relationship to the audit ferences. It is also good practice to monitor firms in other committee, and prepare the charter. The first two are es- industries that have a reputation for making effective use pecially important. of leading-edge technology applications. We recommend that the IT governance group be made The committee must be on the lookout for technology- up of independent directors, as is the case with audit and based competitive threats that could place a company in compensation committees. Chairmanship is also critical. what we call “strategic jeopardy,” which occurs when For firms in support, factory, or turnaround modes, the executive management is asleep at the switch vis-à-vis the chairperson need not be an IT expert but should certainly competition. For example, the board can hire, or ask be a tough-minded, IT-savvy business executive – either management to hire, a consulting company to gather a CEO or a top manager who has overseen the use of IT intelligence, do benchmarking, and develop a scenario of to gain strategic advantage in another organization. possible threats from competitors, as well as outline op- In any case, at least one person on the committee should portunities. IT committees should also be sure that man- be an IT expert who should operate as a peer at the senior agement has created a good customer feedback system management and board level. The expert’s job is to chal- that allows customers to offer opinions about competi- lenge entrenched in-house thinking. He or she should tors’ products and services. In addition, it’s important to not think ill of technology-averse cultures and must be monitor companies that may have the means and incli- a skilled communicator who does not hide behind tech- nation to become competitors. Had supermarket chains nology jargon or talk down to board members. The expert been apprised of what Wal-Mart was up to with RFID, should help the committee avoid dwelling on the difficul- they might not have found themselves blindsided by the ties of the work and emphasize instead the opportunities. retail giant’s aggressive supply-chain advances in the gro- The focus should be on the big picture: Conversations cery business. about IT strategy are hard and can be discouraging if the october 2005 105 Information Technology and the Board of Directors committee gets dragged down in technical details. (In fact, previously served as CIOs in major Fortune 100 companies; when looking for someone who fits these criteria, boards they also serve on Novell’s audit committee. may find that many talented CIOs and CTOs drop off the We recommend that the relationship of the IT gover- list of potential IT committee members.) The IT expert nance committee to the audit committee be very close, must have not only a solid grounding in the firm’s overall because IT issues can affect economic and regulatory mat- business needs but also a holistic view of the organization ters such as Sarbanes-Oxley compliance. For this reason, and its systems architecture. This is particularly important it’s a good idea to have one audit committee member if the firm chooses to outsource its functions and connect serve on the IT oversight committee. The charter of the multiple vendors across a network. The expert must also IT committee should explicitly describe its relationship to thoroughly understand the underlying dynamics govern- the audit group, as well as its organization, purpose, over- ing changes in technology and their potential to alter the sight responsibilities, and meeting schedule (see the ex- business’s economic outlook. hibit “An IT Governance Committee Calendar”). Generally speaking, the IT expert serves much the same • • • function as the certified financial expert on an audit com- Regardless of a company’s position, top-level commit- mittee. A CIO or CTO with solid experience in the man- ment is critical if the board is to engage in IT governance. agement of IT qualifies; for example, the IT oversight Board members and senior managers must identify and

The IT expert’s jobis to challenge entrenched in-house thinking. He or she must be a SKILLED COMMUNICATOR who does not hide behind technology jargon or talk down to board members.

committee chairman for the Great Atlantic & Pacific Tea carefully gauge their current positions on the IT impact Company (A&P) was previously CEO of an extremely suc- grid and decide whether setting up an IT oversight com- cessful supermarket chain on the West Coast, where he mittee is necessary, given the company’s current situa- achieved impressive business results through effective IT tion. If the need is not clearly understood, or if general system implementation and management. As chair of the buy-in for establishing such a committee – which neces- IT committee, he helps balance his company’s short-term sarily includes an IT expert among its members – doesn’t business needs with long-term IT investments. exist, then the company shouldn’t do it. Any effort to do Unfortunately, skilled, business-oriented technology so will be a waste of time, and failure will sour the chances strategists are in short supply.In the absence of such a per- of establishing such a committee later. son within a company, an IT consultant who can help sort That said, it’s clear that as more and more companies in out technology issues can fit the bill, as might a divisional support and factory modes change tactics, and as other CEO or COO who is actively managing IT. Alternatively, firms choose to adopt new technologies to stay ahead of a manager who has served in an influential technology the game, board-level technology governance will be- company such as Microsoft or Oracle can help a firm come increasingly important. This is good news, for when determine its place on the strategic impact grid, begin to top managers understand the degree to which they must embrace emerging technologies, and locate other experts be accountable for technology, for project expenditures, who can serve on the committee. and for monitoring return on investment from IT, they Businesses in strategic mode should have an IT oversight will do a better job of ensuring that critical systems func- committee chaired by an IT expert. In this mode, it’s even tion as promised. One thing is certain: Given the dizzying more important to get the membership right. For example, pace of change in the world of technology, and the the chairman of the IT committee for Novell – a company changes IT can force upon a business, there is no such in strategic mode–founded a major IT-strategy-consulting thing as too much accountability. company,sold it to one of the then Big Six accounting firms, and continued as a senior partner in that firm’s IT consult- Reprint r0510f ing business. Two other members of Novell’s IT committee To order, see page 159.

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Companies must pay as much attention to the hard side of change management as they do to the soft aspects. By rigorously focusing on four critical elements, they can stack the odds in favor of success. by Harold L. Sirkin, Perry Keenan, and Alan Jackson D

I R D S A H THE HARD SIDE H OF CHANGE E A N MANAGEMENT A G

M T N HEN FRENCH NOVELIST Jean-Baptiste Alphonse Karr wrote “Plus ça change, plus c’est la même chose,” he could have been w penning an epigram about change management. For over three decades, academics, managers, and consultants, realizing that transforming organizations is difficult, have dissected the subject. They’ve sung the praises of leaders who communicate vision and walk the talk in order to make change efforts succeed. They’ve sanctified the importance of changing orga- nizational culture and employees’ attitudes. They’ve teased out the tensions between top-down transformation efforts and participatory approaches to

DANIEL BEJAR DANIEL change. And they’ve exhorted companies to launch campaigns that appeal

october 2005 109 The Hard Side of Change Management to people’s hearts and minds. Still, studies show that in that executives can ignore the soft elements; that would most organizations, two out of three transformation ini- be a grave mistake. However, if companies don’t pay atten- tiatives fail. The more things change, the more they stay tion to the hard issues first, transformation programs will the same. break down before the soft elements come into play. Managing change is tough, but part of the problem is That’s a lesson we learned when we identified the that there is little agreement on what factors most influ- common denominators of change. In 1992, we started ence transformation initiatives. Ask five executives to with the contrarian hypothesis that organizations handle name the one factor critical for the success of these pro- transformations in remarkably similar ways. We researched grams, and you’ll probably get five different answers. projects in a number of industries and countries to iden- That’s because each manager looks at an initiative from tify those common elements. Our initial 225-company his or her viewpoint and, based on personal experience, study revealed a consistent correlation between the out- focuses on different success factors. The experts, too, offer comes (success or failure) of change programs and four different perspectives. A recent search on Amazon.com hard factors: project duration, particularly the time be- for books on “change and management” turned up 6,153 tween project reviews; performance integrity, or the capa- titles, each with a distinct take on the topic. Those ideas bilities of project teams; the commitment of both senior have a lot to offer, but taken together, they force compa- executives and the staff whom the change will affect the nies to tackle many priorities simultaneously, which most; and the additional effort that employees must make spreads resources and skills thin. Moreover, executives to cope with the change. We called these variables the use different approaches in different parts of the organi- DICE factors because we could load them in favor of zation, which compounds the turmoil that usually ac- projects’ success. companies change. We completed our study in 1994, and in the 11 years In recent years, many change management gurus have since then, the Boston Consulting Group has used those focused on soft issues, such as culture, leadership, and four factors to predict the outcomes, and guide the exe- motivation. Such elements are important for success, but cution, of more than 1,000 change management initia- managing these aspects alone isn’t sufficient to imple- tives worldwide. Not only has the correlation held, but no ment transformation projects. Soft factors don’t directly other factors (or combination of factors) have predicted influence the outcomes of many change programs. For outcomes as well. instance, visionary leadership is often vital for transfor- mation projects, but not always. The same can be said about communication with employees. Moreover, it isn’t The Four Key Factors easy to change attitudes or relationships; they’re deeply If you think about it, the different ways in which organiza- ingrained in organizations and people. And although tions combine the four factors create a continuum – from changes in, say, culture or motivation levels can be indi- projects that are set up to succeed to those that are set up rectly gauged through surveys and interviews, it’s tough to fail. At one extreme, a short project led by a skilled, to get reliable data on soft factors. motivated, and cohesive team, championed by top man- What’s missing, we believe, is a focus on the not-so- agement and implemented in a department that is recep- fashionable aspects of change management: the hard tive to the change and has to put in very little additional factors. These factors bear three distinct characteristics. effort, is bound to succeed. At the other extreme, a long, First, companies are able to measure them in direct or drawn-out project executed by an inexpert, unenthusias- indirect ways. Second, companies can easily communi- tic, and disjointed team, without any top-level sponsors cate their importance, both within and outside organi- and targeted at a function that dislikes the change and zations. Third, and perhaps most important, businesses has to do a lot of extra work, will fail. Businesses can eas- are capable of influencing those elements quickly. Some ily identify change programs at either end of the spec- of the hard factors that affect a transformation initiative trum, but most initiatives occupy the middle ground are the time necessary to complete it, the number of peo- where the likelihood of success or failure is difficult to as- ple required to execute it, and the financial results that in- sess. Executives must study the four DICE factors carefully tended actions are expected to achieve. Our research to figure out if their change programs will fly–or die. shows that change projects fail to get off the ground when Duration. Companies make the mistake of worrying companies neglect the hard factors. That doesn’t mean mostly about the time it will take to implement change

Harold L. Sirkin ([email protected]) is a Chicago-based senior vice president and the global operations practice leader of the Boston Consulting Group. He is the coauthor of “Fix the Process, Not the Problem” (HBR July–August 1990) and “Innovating for Cash”(HBR September 2003). Perry Keenan ([email protected]) is a BCG vice president and the global topic leader for rigorous program management based in Auckland, New Zealand. Alan Jackson ([email protected]) is a BCG senior vice president in Sydney,Australia. More on change management and an interactive DICE tool are available at www.bcg.com/DICE.

110 harvard business review The Hard Side of Change Management programs. They assume that the longer an initiative car- ries on, the more likely it is to fail–the early impetus will THE FOUR FACTORS peter out, windows of opportunity will close, objectives These factors determine the outcome of any will be forgotten, key supporters will leave or lose their transformation initiative. enthusiasm, and problems will accumulate. However, con- trary to popular perception, our studies show that a long project that is reviewed frequently is more likely to suc- D > The duration of time until the change program ceed than a short project that isn’t reviewed frequently. is completed if it has a short life span; if not short, the amount of time between reviews Thus, the time between reviews is more critical for success of milestones. than a project’s life span. Companies should formally review transformation projects at least bimonthly since, in our experience, the I > The project team’s performance integrity; that probability that change initiatives will run into trouble is, its ability to complete the initiative on time. rises exponentially when the time between reviews ex- That depends on members’ skills and traits ceeds eight weeks. Whether reviews should be scheduled relative to the project’s requirements. even more frequently depends on how long executives feel the project can carry on without going off track. C > The commitment to change that top manage- Complex projects should be reviewed fortnightly; more ment (C1) and employees affected by the familiar or straightforward initiatives can be assessed change (C2) display. every six to eight weeks. Scheduling milestones and assessing their impact are the best way by which executives can review the execu- E > The effort over and above the usual work that tion of projects, identify gaps, and spot new risks. The the change initiative demands of employees. most effective milestones are those that describe major actions or achievements rather than day-to-day activi- ties. They must enable senior executives and project spon- address weaknesses. When necessary, they should alter sors to confirm that the project has made progress since processes, agree to push for more or different resources, the last review took place. Good milestones encompass or suggest a new direction. At these meetings, senior ex- a number of tasks that teams must complete. For exam- ecutives must pay special attention to the dynamics ple, describing a particular milestone as “Consultations within teams, changes in the organization’s perceptions with Stakeholders Completed” is more effective than about the initiative, and communications from the top. “Consult Stakeholders” because it represents an achieve- Integrity. By performance integrity, we mean the ex- ment and shows that the project has made headway. tent to which companies can rely on teams of managers, Moreover, it suggests that several activities were com- supervisors, and staff to execute change projects suc- pleted – identifying stakeholders, assessing their needs, cessfully. In a perfect world, every team would be flaw- and talking to them about the project. When a milestone less, but no business has enough great people to ensure looks as though it won’t be reached on time, the project that. Besides, senior executives are often reluctant to team must try to understand why, take corrective actions, allow star performers to join change efforts because reg- and learn from the experience to prevent problems from ular work can suffer. But since the success of change pro- recurring. grams depends on the quality of teams, companies must Review of such a milestone–what we refer to as a “learn- free up the best staff while making sure that day-to-day ing milestone” – isn’t an impromptu assessment of the operations don’t falter. In companies that have suc- Monday-morning kind. It should be a formal occasion ceeded in implementing change programs, we find that during which senior-management sponsors and the proj- employees go the extra mile to ensure their day-to-day ect team evaluate the latter’s performance on all the work gets done. dimensions that have a bearing on success and failure. Since project teams handle a wide range of activities, The team must provide a concise report of its progress, resources, pressures, external stimuli, and unforeseen and members and sponsors must check if the team is on obstacles, they must be cohesive and well led. It’s not track to complete, or has finished all the tasks to deliver, enough for senior executives to ask people at the water- the milestone. They should also determine whether cooler if a project team is doing well; they must clarify achieving the milestone has had the desired effect on members’ roles, commitments, and accountability. They the company; discuss the problems the team faced in must choose the team leader and, most important, work reaching the milestone; and determine how that accom- out the team’s composition. plishment will affect the next phase of the project. Smart executive sponsors, we find, are very inclusive Sponsors and team members must have the power to when picking teams. They identify talent by soliciting october 2005 111 The Hard Side of Change Management names from key colleagues, including human resource he was doing much more than necessary to display his managers; by circulating criteria they have drawn up; support for a nettlesome project. When we talked to line and by looking for top performers in all functions. While managers, they said that the CEO had extended very little they accept volunteers, they take care not to choose only backing for the project. They felt that if he wanted the supporters of the change initiative. Senior executives per- project to succeed, he would have to support it more sonally interview people so that they can construct the visibly! A rule of thumb: When you feel that you are talk- right portfolio of skills, knowledge, and social networks. ing up a change initiative at least three times more than They also decide if potential team members should com- you need to, your managers will feel that you are backing mit all their time to the project; if not, they must ask the transformation. them to allocate specific days or times of the day to the Sometimes, senior executives are reluctant to back ini- initiative. Top management makes public the parameters tiatives. That’s understandable; they’re often bringing on which it will judge the team’s performance and how about changes that may negatively affect employees’ that evaluation fits into the company’s regular appraisal jobs and lives. However, if senior executives do not com- process. Once the project gets under way, sponsors must municate the need for change, and what it means for em- measure the cohesion of teams by administering confi- ployees, they endanger their projects’ success. In one fi- dential surveys to solicit members’ opinions. nancial services firm, top management’s commitment to Executives often make the mistake of assuming that a program that would improve cycle times, reduce er- because someone is a good, well-liked manager, he or rors, and slash costs was low because it entailed layoffs. she will also make a decent team leader. That sounds rea- Senior executives found it gut-wrenching to talk about sonable, but effective managers of the status quo aren’t layoffs in an organization that had prided itself on being necessarily good at changing organizations. Usually, a place where good people could find lifetime employ- good team leaders have problem-solving skills, are results ment. However, the CEO realized that he needed to tackle

THE SIMPLICITY OF the DICE framework often proves to be its biggest problem; executives seem to desire more complex answers. By overlooking the obvious, however, they often end up making compromises that don’t work.

oriented, are methodical in their approach but tolerate the thorny issues around the layoffs to get the project ambiguity, are organizationally savvy, are willing to ac- implemented on schedule. He tapped a senior company cept responsibility for decisions, and while being highly veteran to organize a series of speeches and meetings in motivated, don’t crave the limelight. A CEO who success- order to provide consistent explanations for the layoffs, fully led two major transformation projects in the past the timing, the consequences for job security, and so on. ten years used these six criteria to quiz senior executives He also appointed a well-respected general manager to about the caliber of nominees for project teams. The top lead the change program. Those actions reassured em- management team rejected one in three candidates, on ployees that the organization would tackle the layoffs in average, before finalizing the teams. a professional and humane fashion. Commitment. Companies must boost the commit- Companies often underestimate the role that manag- ment of two different groups of people if they want ers and staff play in transformation efforts. By commu- change projects to take root: They must get visible back- nicating with them too late or inconsistently, senior ex- ing from the most influential executives (what we call C1), ecutives end up alienating the people who are most who are not necessarily those with the top titles. And they affected by the changes. It’s surprising how often some- must take into account the enthusiasm – or often, lack thing senior executives believe is a good thing is seen by thereof – of the people who must deal with the new sys- staff as a bad thing, or a message that senior executives tems, processes, or ways of working (C2). think is perfectly clear is misunderstood. That usually Top-level commitment is vital to engendering com- happens when senior executives articulate subtly differ- mitment from those at the coal face. If employees don’t ent versions of critical messages. For instance, in one see that the company’s leadership is backing a project, company that applied the DICE framework, scores for they’re unlikely to change. No amount of top-level sup- a project showed a low degree of staff commitment. It port is too much. In 1999, when we were working with turned out that these employees had become confused, the CEO of a consumer products company, he told us that even distrustful, because one senior manager had said,

112 harvard business review The Hard Side of Change Management

“Layoffs will not occur,”while another had said, “They are not expected to occur.” DICE SCORES PREDICT PROJECT OUTCOMES Organizations also under- When we plotted the DICE scores of 225 change management initiatives on the horizon- estimate their ability to build tal axis, and the outcomes of those projects on the vertical axis, we found three sets of cor- staff support. A simple effort relations. Projects with DICE scores between 7 and 14 were usually successful; those with to reach out to employees scores over 14 and under 17 were unpredictable; and projects with scores over 17 were usu- can turn them into champi- ally unsuccessful. We named the three zones Win, Worry, and Woe, respectively. (Each ons of new ideas. For exam- number plotted on the graph represents the number of projects, out of the 225 projects, ple, in the 1990s, a major having a particular DICE score.) American energy producer was unable to get the sup- port of mid-level managers, 1 1 2 5 3 7 1 4 7 6 1 563 11 supervisors, and workers for 111 1 a productivity improvement 12149 14 929 18 511 program. After trying several Highly Successful times, the company’s senior 1 112 1 executives decided to hold a 4 1316229 21 series of one-on-one conver- 1222 1 2 sations with mid-level man-

Actual Outcome 1 11515 61314 1 agers in a last-ditch effort to 1111 win them over. The conver- 11112 51 3 1 2 1 sations focused on the pro- gram’s objectives, its impact WIN WORRY WOE on employees, and why the Highly Unsuccessful organization might not be 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DICE Score able to survive without the changes. Partly because of the straight talk, the initia- tive gained some momen- tum. This allowed a project team to demonstrate a series Companies must decide whether to take away some of quick wins, which gave the initiative a new lease on life. of the regular work of employees who will play key roles Effort. When companies launch transformation efforts, in the transformation project. Companies can start by they frequently don’t realize, or know how to deal with ridding these employees of discretionary or nonessential the fact, that employees are already busy with their day- responsibilities. In addition, firms should review all the to-day responsibilities. According to staffing tables, peo- other projects in the operating plan and assess which ones ple in many businesses work 80-plus-hour weeks. If, on are critical for the change effort. At one company, the top of existing responsibilities, line managers and staff project steering committee delayed or restructured 120 have to deal with changes to their work or to the systems out of 250 subprojects so that some line managers could they use, they will resist. focus on top-priority projects. Another way to relieve Project teams must calculate how much work employ- pressure is for the company to bring in temporary work- ees will have to do beyond their existing responsibilities ers, like retired managers, to carry out routine activities or to change over to new processes. Ideally, no one’s work- to outsource current processes until the changeover is load should increase more than 10%. Go beyond that, and complete. Handing off routine work or delaying projects the initiative will probably run into trouble. Resources is costly and time-consuming, so companies need to think will become overstretched and compromise either the through such issues before kicking off transformation change program or normal operations. Employee morale efforts. will fall, and conflict may arise between teams and line staff. To minimize the dangers, project managers should use a simple metric like the percentage increase in effort Creating the Framework the employees who must cope with the new ways feel As we came to understand the four factors better, we cre- they must contribute. They should also check if the addi- ated a framework that would help executives evaluate tional effort they have demanded comes on top of heavy their transformation initiatives and shine a spotlight on workloads and if employees are likely to resist the project interventions that would improve their chances of suc- because it will demand more of their scarce time. cess. We developed a scoring system based on the variables october 2005 113 The Hard Side of Change Management

CALCULATING DICE SCORES

Companies can determine if their change programs will succeed by asking executives to calculate scores for each of the four factors of the DICE framework–duration, integrity, commitment, and effort. They must grade each factor on a scale from 1 to 4 (using fractions, if necessary); the lower the score, the better. Thus, a score of 1 suggests that the factor is highly likely to con- tribute to the program’s success, and a score of 4 means that it is highly unlikely to contribute to success. We find that the fol- lowing questions and scoring guidelines allow executives to rate transformation initiatives effectively:

DURATION [D] tive, you can give the project 1 point, and if they are just will- Ask: Do formal project reviews occur regularly? If the project ing, 2 points. If they’re reluctant or strongly reluctant, you will take more than two months to complete, what is the av- should award the project 3 or 4 points. erage time between reviews? Score: If the time between project reviews is less than two EFFORT [E] months, you should give the project 1 point. If the time is be- Ask: What is the percentage of increased effort that employ- tween two and four months, you should award the project ees must make to implement the change effort? Does the in- 2 points; between four and eight months, 3 points; and if cremental effort come on top of a heavy workload? Have peo- reviews are more than eight months apart, give the project ple strongly resisted the increased demands on them? 4 points. Score: If the project requires less than 10% extra work by em- ployees, you can give it 1 point. If it’s 10% to 20% extra, it INTEGRITY OF PERFORMANCE [ ] should get 2 points. If it’s 20% to 40%, it must be 3 points. And Ask: Is the team leader capable? How strong are team mem- if it’s more than 40% additional work, you should give the bers’ skills and motivations? Do they have sufficient time to project 4 points. spend on the change initiative? Score: If the project team is led by a highly capable leader Executives can combine the four elements into a project who is respected by peers, if the members have the skills score. When we conducted a regression analysis of our data- and motivation to complete the project in the stipulated base of change efforts, we found that the combination that time frame, and if the company has assigned at least 50% of correlates most closely with actual outcomes doubles the the team members’ time to the project, you can give the weight given to team performance (I) and senior manage- project 1 point. If the team is lacking on all those dimen- ment commitment (C1). That translates into the following sions, you should award the project 4 points. If the team’s ca- formula: pabilities are somewhere in between, assign the project 2 or DICE Score = D + (2 x ) + (2 x C1) + C2 + E 3 points. In the 1-to-4 scoring system, the formula generates over- all scores that range from 7 to 28. Companies can compare SENIOR MANAGEMENT COMMITMENT [C1] a project’s score with those of past projects and their out- Ask: Do senior executives regularly communicate the reason comes to assess if the project is slated for success or failure. for the change and the importance of its success? Is the mes- Our data show a clear distribution of scores: sage convincing? Is the message consistent, both across the Scores between 7 and 14: The project is very likely to suc- top management team and over time? Has top management ceed. We call this the Win Zone. devoted enough resources to the change program? Scores higher than 14 but lower than 17: Risks to the Score: If senior management has, through actions and project’s success are rising, particularly as the score ap- words, clearly communicated the need for change, you must proaches 17. This is the Worry Zone. give the project 1 point. If senior executives appear to be Scores over 17: The project is extremely risky. If a project neutral, it gets 2 or 3 points. If managers perceive senior ex- scores over 17 and under 19 points, the risks to success are ecutives to be reluctant to support the change, award the very high. Beyond 19, the project is unlikely to succeed. That’s project 4 points. why we call this the Woe Zone. We have changed the boundaries of the zones over time. LOCAL-LEVEL COMMITMENT [C2] For instance, the Worry Zone was between 14 and 21 points Ask: Do the employees most affected by the change under- at first, and the Woe Zone from 21 to 28 points. But we found stand the reason for it and believe it’s worthwhile? Are they that companies prefer to be alerted to trouble as soon as out- enthusiastic and supportive or worried and obstructive? comes become unpredictable (17 to 20 points). We therefore Score: If employees are eager to take on the change initia- compressed the Worry Zone and expanded the Woe Zone.

114 harvard business review The Hard Side of Change Management

[D] [ ] [C1][C2][E]

Calculate Highly Successful

DICE SCORE = D + 2 + 2C1 + C2 + E Likely Outcome

WIN WORRY WOE Plot Highly Unsuccessful 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DICE Score

that affect each factor. Executives can assign scores to the out their differences proved impossible; people were just DICE factors and combine them to arrive at a project too busy.That’s when the project team decided to analyze score. (See the sidebar “Calculating DICE Scores.”) the initiative using the DICE framework. Although the assessments are subjective, the system Doing so condensed what could have been a free- gives companies an objective framework for making flowing two-day debate into a sharp two-hour discussion. those decisions. Moreover, the scoring mechanism en- The focus on just four elements generated a clear picture sures that executives are evaluating projects and making of the project’s strengths and weaknesses. For instance, trade-offs more consistently across projects. managers learned that the restructuring would take A company can compare its DICE score on the day it eight months to implement but that it had poorly defined kicks off a project with the scores of previous projects, as milestones and reviews. Although the project team was well as their outcomes, to check if the initiative has been capable and senior management showed reasonable com- set up for success. When we calculated the scores of the mitment to the effort, there was room for improvement 225 change projects in our database and compared them in both areas. The back-office workforce was hostile to with the outcomes, the analysis was compelling. Projects the proposed changes since more than 20% of these peo- clearly fell into three categories, or zones: Win, which ple would lose their jobs. Managers and employees means that any project with a score in that range is sta- agreed that the back-office staff would need to muster tistically likely to succeed; worry, which suggests that the 10% to 20% more effort on top of its existing commit- project’s outcome is hard to predict; and woe, which im- ments during the implementation. On the DICE scale, the plies that the project is totally unpredictable or fated for project was deep in the Woe Zone. mediocrity or failure. (See the exhibit “DICE Scores Pre- However, the assessment also led managers to take dict Project Outcomes.”) steps to increase the possibility of success before they Companies can track how change projects are faring by started the project. The bank decided to split the project calculating scores over time or before and after they have time line into two – one short-term and one long-term. made changes to a project’s structure. The four factors Doing so allowed the bank to schedule review points offer a litmus test that executives can use to assess the more frequently and to maximize team members’ ability probability of success for a given project or set of projects. to learn from experience before the transformation grew Consider the case of a large Australian bank that in 1994 in complexity.To improve staff commitment, the bank de- wanted to restructure its back-office operations. Senior cided to devote more time to explaining why the change executives agreed on the rationale for the change but was necessary and how the institution would support the differed on whether the bank could achieve its objectives, staff during the implementation. The bank also took a since the transformation required major changes in pro- closer look at the people who would be involved in the cesses and organizational structures. Bringing the team project and changed some of the team leaders when it re- and the senior executives together long enough to sort alized that they lacked the necessary skills. Finally, senior october 2005 115 The Hard Side of Change Management managers made a concerted effort to show their backing He wasn’t able to attribute his concerns to anything other for the initiative by holding a traveling road show to ex- than a bad feeling. However, when the general manager plain the project to people at all levels of the organiza- used the DICE framework, he was able to confirm his sus- tion. Taken together, the bank’s actions and plans shifted picions. After a 45-minute discussion with project man- the project into the Win Zone. Fourteen months later, the agers and other key people, he established that three bank completed the project – on time and below budget. projects were in the Win Zone but two were in the Woe Zone and one was in the Worry Zone. The strongest projects, the general manager found, Applying the DICE Framework consumed more than their fair share of resources. Senior The simplicity of the DICE framework often proves to be hospital staff sensed that those projects would succeed its biggest problem; executives seem to desire more com- and spent more time promoting them, attending meet- plex answers. By overlooking the obvious, however, they ings about them, and making sure they had sufficient often end up making compromises that don’t work. Smart resources. By contrast, no one enjoyed attending meet- companies try to ensure that they don’t fall into that trap ings on projects that were performing poorly. So the gen- by using the DICE framework in one of three ways. eral manager stopped attending meetings for the projects Track Projects. Some companies train managers in how that were on track; he attended only sessions that re- to use the DICE framework before they start transforma- lated to the three underperforming ones. He pulled tion programs. Executives use spreadsheet-based ver- some managers from the projects that were progressing sions of the tool to calculate the DICE scores of the vari- smoothly and moved them to the riskier efforts. He ous components of the program and to compare them added more milestones to the struggling enterprises, with past scores. Over time, every score must be balanced delayed their completion, and pushed hard for improve- against the trajectory of scores and, as we shall see next, ment. Those steps helped ensure that all six projects met the portfolio of scores. their objectives.

THE GENERAL MANAGER walked to a whiteboard and circled the five most important projects. “We’re not going to start until these are well within the Win Zone. What do we have to do to achieve that?”

Senior executives often use DICE assessments as early Manage portfolios of projects. When companies warning indicators that transformation initiatives are in launch large transformation programs, they kick off trouble. That’s how Amgen, the $10.6 billion biotechnol- many projects to attain their objectives. But if execu- ogy company, used the DICE framework. In 2001, the tives don’t manage the portfolio properly, those tasks company realigned its operations around some key pro- end up competing for attention and resources. For in- cesses, broadened its offerings, relaunched some mature stance, senior executives may choose the best employees products, allied with some firms and acquired others, and for projects they have sponsored or lavish attention on launched several innovations. To avoid implementation pet projects rather than on those that need attention. problems, Amgen’s top management team used the DICE By deploying our framework before they start transfor- framework to gauge how effectively it had allocated peo- mation initiatives, companies can identify problem ple, senior management time, and other resources. As projects in portfolios, focus execution expertise and se- soon as projects reported troubling scores, designated nior management attention where it is most needed, executives paid attention to them. They reviewed the and defuse political issues. projects more often, reconfigured the teams, and allo- Take, for example, the case of an Australasian manu- cated more resources to them. In one area of the change facturing company that had planned a set of 40 projects project, Amgen used DICE to track 300 initiatives and as part of a program to improve profitability. Since some reconfigured 200 of them. had greater financial implications than others, the com- Both big and small organizations can put the tool to pany’s general manager called for a meeting with all the good use. Take the case of a hospital that kicked off six project owners and senior managers. The group went change projects in the late 1990s. Each initiative involved through each project, debating its DICE score and identi- a lot of investment, had significant clinical implications, fying the problem areas. After listing all the scores and or both. The hospital’s general manager felt that some issues, the general manager walked to a whiteboard and projects were going well but was concerned about others. circled the five most important projects.“I’m prepared to

116 harvard business review The Hard Side of Change Management accept that some projects will start off in the Worry Zone, though I won’t accept any- thing outside the middle of this zone for more than a few weeks. For the top five, we’re not going to start until these are well within the Win Zone. What do we have to do to achieve that?” he asked. The group began think- ing and acting right away. It moved people around on teams, reconfigured some projects, and identified those that senior managers should pay more attention to – all of which helped raise DICE scores before implementa- tion began. The most impor- tant projects were set up for resounding success while most of the remaining ones managed to get into the Win Zone. The group left some projects in the Worry Zone, but it agreed to track them closely to ensure that their scores improved. In our expe- rience, that’s the right thing to do. When companies are trying to overhaul them- selves, they shouldn’t have all their projects in the Win Zone; if they do, they are not ambitious enough. Transfor- mations should entail funda- mental changes that stretch an organization. Force conversation. When different executives calcu- groups of eight to 15 senior and middle managers, along late DICE scores for the same project, the results can vary with the project team and the project sponsors, hold widely. The difference in scores is particularly important a candid dialogue. The debate usually moves beyond the in terms of the dialogue it triggers. It provokes partici- project’s scores to the underlying causes of problems and pants and engages them in debate over questions like possible remedies. The workshops bring diverse opinions “Why do we see the project in these different ways?” and to light, which often can be combined into innovative “What can we agree to do to ensure that the project will solutions. Consider, for example, the manner in which succeed?” That’s critical, because even people within the DICE workshops helped a telecommunications service same organization lack a common framework for dis- provider that had planned a major transformation effort. cussing problems with change initiatives. Prejudices, dif- Consisting of five strategic initiatives and 50 subprojects ferences in perspectives, and a reluctance or inability to that needed to be up and running quickly, the program speak up can block effective debates. By using the DICE confronted some serious obstacles. The projects’ goals, framework, companies can create a common language time lines, and revenue objectives were unclear. There and force the right discussions. were delays in approving business cases, a dearth of rigor Sometimes, companies hold workshops to review and focus in planning and identifying milestones, and floundering projects. At those two- to four-hour sessions, a shortage of resources. There were leadership issues, too. october 2005 117 The Hard Side of Change Management

For example, executive-level shortcomings had resulted in To mitigate the risks, senior managers decided to an- poor coordination of projects and a misjudgment of risks. alyze each project at several levels of the organization. To put the transformation program on track, the Using the DICE framework, they reviewed each effort telecom company incorporated DICE into project man- every month until they felt confident that it was on track. agers’ tool kits. The Project Management Office arranged After that, reviews occurred when projects met major a series of workshops to analyze issues and decide future milestones. No more than two months elapsed between steps. One workshop, for example, was devoted to three reviews, even in the later stages of the program. The new product development projects, two of which had time between reviews at the project-team level was landed in the Woe Zone and one in the Worry Zone. even shorter: Team leaders reviewed progress biweekly Participants traced the problems to tension between throughout the transformation. Some of the best peo- managers and technology experts, underfunding, lack of ple joined the effort full time. The human resources de- manpower, and poor definition of the projects’ scopes. partment took an active role in recruiting team mem- They eventually agreed on three remedial actions: hold- bers, thereby creating a virtuous cycle in which the best ing a conflict-resolution meeting between the directors people began to seek involvement in various initiatives. in charge of technology and those responsible for the core During the course of the transformation, the company business; making sure senior leadership paid immediate promoted several team members to line- and functional attention to the resource issues; and bringing together leadership positions because of their performance.

CONVERSATIONS about DICE scores are particularly useful for large-scale transformations that cut across business units, functions, and locations.

the project team and the line-of-business head to formal- The company’s change program resulted in hundreds ize project objectives. With the project sponsor commit- of millions of dollars of value creation. Its once-stagnant ted to those actions, the three projects had improved their brands began to grow, it cracked open new markets such DICE scores and thus their chances of success at the time as China, and sales and promotion activities were aligned this article went to press. with the fastest-growing channels. There were many Conversations about DICE scores are particularly use- moments during the process when inertia in the organi- ful for large-scale transformations that cut across business zation threatened to derail the change efforts. However, units, functions, and locations. In such change efforts, it is senior management’s belief in focusing on the four key critical to find the right balance between centralized over- variables helped move the company to a higher trajectory sight, which ensures that everyone in the organization of performance. takes the effort seriously and understands the goals, and • • • the autonomy that various initiatives need. Teams must By providing a common language for change, the DICE have the flexibility and incentive to produce customized framework allows companies to tap into the insight and solutions for their markets, functions, and competitive experience of their employees. A great deal has been said environments. The balance is difficult to achieve without about middle managers who want to block change. We an explicit consideration of the DICE variables. find that most middle managers are prepared to support Take the case of a leading global beverage company change efforts even if doing so involves additional work that needed to increase operational efficiency and focus and uncertainty and puts their jobs at risk. However, they on the most promising brands and markets. The company resist change because they don’t have sufficient input in also sought to make key processes such as consumer de- shaping those initiatives. Too often, they lack the tools, mand development and customer fulfillment more inno- the language, and the forums in which to express legiti- vative. The CEO’s goals were ambitious and required in- mate concerns about the design and implementation of vesting significant resources across the company. Top change projects. That’s where a standard, quantitative, management faced enormous challenges in structuring and simple framework comes in. By enabling frank con- the effort and in spawning projects that focused on the versations at all levels within organizations, the DICE right issues. Executives knew that this was a multiyear ef- framework helps people do the right thing by change. fort, yet without tight schedules and oversight of individ- ual projects, there was a risk that projects would take far Reprint r0510g; HBR OnPoint 1916 too long to be completed and the results would taper off. To order, see page 159.

118 harvard business review elevatetechnology

Cleaner fuels. Advanced fuels. Liquefied natural gas. Converting gas fuels into liquids. 3-D seismic technology for the discovery of new fuels. Ultra-deepwater drilling and production technology to access once unreachable sources of fuels.

Shall we go on? When it comes to energy technologies, our answer to that question is, “yes we will.” Because at ConocoPhillips, discovering and innovating new technologies is just another way we elevate.

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The New York Times expects real business benefits from its new headquarters building because the company is taking an aggressively active role at every stage of its design and construction.

Master of the House Why a Company Should Take Control of Its Building Projects by David Thurm

oming in on budget and on time bined, produce an energizing work en- C isn’t good enough. vironment instead of enervating clus- Granted, that’s no small feat in itself: ters of cubicles. Take on a big building project, and vir- And you won’t get this kind of pack- tually every construction professional age – great design and innovative fea- you meet will kindly inform you that tures that together further your busi- the large majority of people who run ness goals–unless you take an active role such projects are fired when their build- in the project’s planning and construc- ings are completed – usually late and tion. It isn’t enough to simply write a over budget–if not before. check and then delegate project over- But if you want to avoid squandering sight to consultants, no matter how able what is probably your company’s largest they are. Unless your voice is in the mix, capital investment, keep in mind that you will get, at best, well-intentioned meeting your schedule and your bud- guesses by others as to what you want. get is just the starting point. It’s impor- At worst, you’ll get something that is tant to create something that truly pro- incongruous with your goals. Actively pels your business forward. A building assemble the right team, and then stay that dynamically reflects your com- an integral part of the process, asking pany’s mission–brand instead of bland. hard questions about things that are A building with innovations that, com- generally taken as givens. Articulate a

120 harvard business review JOHN WEBER october 2005 may finduseful asthey consider their series oflessons that other companiesa wehave learned – facilities production offices and butnumerous headquarters notonlyournew – struction projects Gods.) Butinthecourse ofmultiplecon- the wrathing oftheConstruction is stillgoingupundeniablyrisksincit- asthesteel writing thisarticle (In fact, willownandoperate therest. Ratner, Forest City our development partner, and own andoccupythefirst27floors, TheTimes will the summerof2007. andscheduledtoopenin and Gensler, with thearchitectural firmsFox &Fowle inassociation signed byRenzo Piano, build 1.5-million-square-foot a52-floor, ters, the New headquar- Yorking Times’new inbuild- to seizethoseopportunities what thecompany aspires tobe. andtosaybusiness isabout internally tosay externally what the – tunities ings that miss two tremendous oppor- build- mediocre ofsoulless, ful number building ownershasresulted inashame- andrisk-averse industry construction ening combination ofahidebound Thedead- assets. your mostimportant sive consumer whenitcomes tooneof over schedule. budgetandbehind avoidcally, theembarrassment ofbeing the teamdragooned for thetask: Basi- struction projectslittle andaskvery of play arelatively minorrole intheircon- mostcompanies ence andconfidence, ness ofthefieldandalackexperi- Because ofthemurki- true innovations. movesmake thebold to that willyield companies are hesitant day afterday, painfullyrevisited tobe and concrete, where failures are memorializedinsteel this isoneoftherare places inbusiness since Moreover, rife withpitfalls. ding, construction seemforeign andforbid- designand To mostcompanies, rule. proach istheexception rather thanthe an owner. notmerely abuilder, be Inshort, vision. drive thesearch for ways torealize this and vision ofyour future work space, lal,wedon’t haveClearly, alltheanswers. ofhowwehaveThis isthestory tried apas- tobe though, It’s agiantmistake, It’s easy tounderstand whythisap- ing inmidtownManhattan de- 121 BEST PRACTICE • Why a Company Should Take Control of Its Building Projects own projects. Implicit in all these lessons: as a filter for selecting your designers the sun warming the glass of the tower. You have to push yourself as hard as you and, as a result, will inform the build- Conventional approaches include mak- push your contractors. ing’s design. If our experience is indica- ing small windows (think of the 1960s- tive,you will almost magically connect vintage buildings lining upper Sixth Insist on Great Design with the right architects, who will offer Avenue in New York) or coating the win- An architect friend recently recounted themes that resonate with your view of dows with reflective film (think of any a conversation he had with the head the company. suburban office complex). The trouble of a large financial services company. Our vision grows out of our core val- with these solutions is that they result, The firm had just built a satellite office ues: good corporate citizenship, a com- in Piano’s words, in “selfish buildings” on the outskirts of its main community. mitment to our employees, and the in- that obscure their inner workings from Because the building was simply back- tegrity and quality of our news and the street and leave employees with a room space for the company, it got information. Thus, we wanted a build- dimly lit, winter-in-Helsinki workplace. treated as such architecturally – nice ing that would make a positive contri- Piano’s unique fix: Add to the build- enough but nothing special. However bution to the city,create a superior work ing a second skin, one created out of slen- modest its profile in the company’s environment, and reflect our journalis- der, horizontal ceramic rods that hang overall strategy, though, the facility is tic mission. An ostentatious, forbidding 18 inches off the glass, spaced to allow visible to the community, and people fortress would not express the transpar- clear views but sufficient in number to refer to the building by the bank’s ency at the heart of this mission: our block half the sun’s energy. This ap- name. The result: A prestigious com- openness to our readers and our central proach gives occupants lots of natural pany is branded with a mediocre facility. function of providing news in an open light and the open feeling of floor-to- Like it or not, all your buildings re- and democratic society. ceiling glass. And it offers people on the flect your identity. Because of that, they Renzo Piano’s concept for the build- street a building animated by the move- should be consistent with it. You don’t ing perfectly meshed with this principle. ment of employees within. The view is further enlivened by the rods’ glazed finish, which subtly assumes the colors Since failures are memorialized in steel and of the day and season. Shortly after we hired the architects, concrete, companies are hesitant to make the bold we assembled a broad group of leaders moves that will yield true innovations. at the Times for a discussion about how the design could go beyond the build- ing’s facade to reinforce the company’s wear Hush Puppies with an Armani After visiting the Times’newsroom dur- vision and core values. These conversa- suit, and you shouldn’t build a Hush ing the election-night excitement of tions informed a wide range of deci- Puppies building – unless, of course, the 2000 U.S. presidential race and lis- sions, from the placement of private you’re a Hush Puppies kind of com- tening to our description of the com- offices against the core of the building pany. At the same time, forget the con- pany and its mission, Piano proposed (letting people in the open-plan work ventional wisdom that a well-designed, a building in which the dynamic “fac- spaces enjoy the windows and light) to well-conceived building that elegantly tory”of the newsroom would be visible our embracing Piano’s proposal for and distinctively conveys your com- through floor-to-ceiling windows. The stairways connecting the floors. Instead pany’s image will cost significantly more city would be able to see us at work – of making the fire stairs more inviting than an ordinary structure. It needn’t; and we’d be able to see the city.The feel- to encourage people to walk between in fact, it will increase the value of your ing of openness would extend to the floors, we will have an interconnecting investment. lobby: Instead of the customary large series of stairways against the windows But great design doesn’t just materi- and exclusionary security desk set in at the corners of the building with the alize. Early on, think carefully about front of an impregnable wall of stone, best views. This refined version of the ex- your vision for the business – both how the architects created an inviting space terior escalators of Piano’s Pompidou you want it to be perceived and where by separating the elevator banks so that art museum in Paris doesn’t only further you want to take it. This vision will act visitors would be able to see almost 375 our aim of bringing the interior of the feet through the lobby to a central gar- building to life for passersby; placing David Thurm ([email protected]) is a den and, beyond that, to a glass-fronted the stairs in the location of the prover- vice president and the chief information auditorium. bial corner office physically expresses officer of the New York Times Company. But this grand vision of openness pre- our dedication to breaking down barri- He is leading the team responsible for sented a tremendous challenge. One of ers between departments. designing and building the Times’ new the fundamental difficulties in skyscraper Without an initial engaged effort to corporate headquarters in Manhattan. design is how to shed the heat load of figure out just what you want your new

122 harvard business review Why a Company Should Take Control of Its Building Projects • BEST PRACTICE building to say to the world and to em- the way one of our (quickly replaced) ity,speed, and automation. So we worked ployees, you are unlikely to achieve this construction professionals articulated with manufacturers to create new gen- happy match between architect and this prevailing sentiment. erations of equipment, a process that project. Furthermore, absent a guiding That we, the building owners, needed forced us to stretch ourselves and even- design principle, it’s easy to lose your to drive innovations became apparent tually to get comfortable with the idea bearings during the inevitable compro- to us only through long experience. of championing innovation. mising and cost cutting that will take Starting in the early 1970s, the New York That mind-set carried over to our new place as the project progresses. (For a Times built a series of offices and pro- headquarters building, where we have discussion of the pressures of cost cut- duction facilities for newspapers it made it a priority to enhance the qual- ting on design principles, see the sidebar owned across the country. The build- ity of the work environment for em- “The Art of Value Engineering.”) ings were largely cookie-cutter. They ployees. The innovations have ranged worked fine, looked OK, and were built from the seemingly trivial (toilet stall Demand Meaningful within budget. But we never stepped doors that fit the frames without gaps Innovation back and asked what they said about and thus offer more privacy) to the ob- Every project offers an opportunity to the company, how they affected peo- viously significant (improvements in reexamine the technologies that help ple’s work, or how they might transform lighting and ventilation). Experience shape your work environment. Forget our business. has taught us a number of things about this fact, and you won’t get the full value The epiphany came when we moved innovation. of your investment. our printing operations from the base- Don’t be afraid to think big: The light- Although your architects, engineers, ment of our midtown Manhattan build- ing story. Lighting designers typically and contractors will play an important ing to two cutting-edge production fa- strive for an even light level – approxi- role, you’ll need to provide leadership cilities, one in Edison, New Jersey, and mately 50 foot-candles, to use the tech- to counteract the surprisingly risk- the other in Queens,New York. We found nical term – throughout a building and averse nature of the construction in- in planning those facilities that the throughout the day. Five years ago, dustry. “I want to be the first one who printing equipment in the market sim- when we built new offices for our Inter- does something for the second time” is ply didn’t meet our needs for color qual- net operation, we installed lighting BEST PRACTICE • Why a Company Should Take Control of Its Building Projects

The Art of Value Engineering

The surest sign that a phrase has been overused and a design features that are nice but not essential – such as concept distorted is a noun morphing into a verb. Things custom light fixtures that could be readily substituted get even fuzzier when that verb is made into an acronym. with standard materials without compromising the aes- This is the case with “value engineering.”It is common to thetic vision. And press your own organization to make hear construction folk talk about “VEing” an item out of choices – for instance, decreasing the floor loads versus a project because preliminary cost estimates have come preserving the option of high-density storage sometime in above budget. in the future. In its crudest form, value engineering simply involves A word of caution: The voice that is likely to get cutting the quality or quantity of materials to be used in drowned out in the process is the architect’s. The bare- a construction project. At its most sophisticated, value en- knuckle world of scrounging for savings is not particu- gineering is about making the project less expensive and larly conducive to discussions of design philosophy. better. Wielding a hatchet is easy and, alas, often neces- However, philosophy – and its execution in the details sary; sculpting is harder but far more satisfying. of a building – does affect the integrity and Whether reaching for the hatchet or the unity of the design, so the owner needs chisel, avoid compromising on the ele- to ensure it is given due, but not ments of the building that reflect absolute, weight. your philosophy and design. If Go where the money is. It a large open stairway that phys- sounds elementary, but start ically and symbolically links with the big issues. For exam- departments is an essential ple, reductions in square complement to your com- footage, more than anything pany’s mission, as it was de- else, will lower costs. Such signed to be in the New York changes, when you’re work- Times’ new headquarters, ing with expensive materials you shouldn’t try to achieve like steel, can yield huge sav- the same effect with a gussied- ings. Many of these changes up fire stairway painted in bright will be invisible. By contrast, colors. However, through careful going cheap on the lobby – collaboration, you should be able to which sets the tone for the entire reduce costs and meet your aesthetic building – hardly saves enough to be objectives – for example, by adjusting worth the dramatic cutback in design. the size or materials of the stairs. Plan rather than panic. Value engineering The challenge of value engineering is all the greater should not be reactive. It should be scheduled as an es- because the exercise is usually preceded by a heart- sential step, particularly in complex or difficult projects. stopping preliminary cost estimate and a conversation Whether or not the preliminary estimate meets your suffused with the all too natural panic, depression, and budget, you will want to evaluate the project design in dejection that follow a near-death business experience. light of the estimate. Make systematic reviews part of the Without the firm hand of a caring owner, there will be schedule, and require the architect to include as a basic a rush to find the “VE” in “eViscErate.” service any redesign needed to stay within budget. Involve everyone. Draw on the collective talents of Hedge your bets. Estimating is an inexact science, and your team, and don’t let anyone off the hook. Press the there is a risk that you will denude the building of special contractor to explain why the estimate is as high as it is features in reaction to early estimates that later prove to and to seek materials and methods that could achieve be unduly conservative. When faced with difficult choices the desired effect at a lower price – for example, bolting in preliminary estimates, work with your architect to instead of welding steel connections. (If you dig, you will create a list of building features that you want if money find cushions that have been built into the estimate as a allows. Prioritize the list, and, more important, tie deci- hedge against the contractor’s risk.) Press the engineer to sions to specific dates. The type of roof is an early, big- identify instances where he’s been too conservative in his number decision, but you can wait to select bathroom design assumptions – for example, creating extra space tile. Working closely with your contractor, you can care- above the ceiling to make it easier for contractors to fit in fully preprice options as alternates and lock in no-penalty pipes, ducts, and wires. Press the architect to identify the decision dates in the subcontracts.

124 harvard business review that followed this textbook prescrip- products: lighting fixtures, fluorescent tion. After people moved in, employees lighting ballasts, automated window turned off the circuit breakers control- shades. With the financial support of ling all the lights in two large depart- the New York State Energy Research ments. Our people were asking us some- and Development Authority, scientists thing that the industry,with its uniform from Berkeley Lab used 107 sensors to lighting standards, clearly hadn’t been collect minute-by-minute data, from the hearing: Why can’t we have flexible winter solstice to the summer solstice. lighting levels? And then we wondered, We also had employees tour and work in Why can’t the lights in our new head- the space in order to test the dynamic- quarters automatically adjust to take ad- lighting concept. vantage of the amount of daylight that The testing convinced us of the value will come through the floor-to-ceiling of dynamic lighting. But we could never windows? afford a one-of-a-kind installation. So, We took these questions to our archi- to share information and generate in- tects and lighting designers, but there terest, we invited more than 450 design wasn’t much practical precedent for them professionals to come and see the mock- to draw from. So we began researching up. We spoke at lighting trade shows, the issues ourselves–contacting people challenging the industry to adjust its in the trade, talking to lighting experts pricing to make dynamic lighting a at universities, reading everything we standard product. Then we solicited bids for the lights, shades, and controls. The result is that two companies, Lutron You have to push and MechoShade, are creating a pack- age of dynamic lighting and shades yourself as hard as you that is within the typical lighting bud- push your contractors. get for a Class A building. The effect of this lighting is profound. For much of the day, the test space is lit could on the subject. Our research led us with the soft glow of natural light in- to the Building Technologies Depart- stead of harsher artificial light. An im- ment at the Lawrence Berkeley National portant but unanticipated dividend is Laboratory at the University of Califor- that the quality of the light and the feel- nia. We took a ten-person team–Times ing of the space change with the season people, architects, electrical engineers, and the time of day. A natural circadian and lighting designers–to the lab, where rhythm replaces the time-frozen-in-aspic we spent a day trying to understand the feel of standard offices. (If you’re read- gap between what the market offered ing this article in your office, can you tell and what should be standard practice. from the light what time of day it is? This meeting led to further pursuit of What season?) a dynamic-lighting system that would By taking a risk on a new way of allow departments to set their own light thinking and by tapping into the enor- levels and would automatically adjust mous interest and intellect of academ- the artificial light to take advantage of ics, engineers, government authorities, sunlight–and would cost no more than and manufacturers, we could end up a conventional lighting system. helping to change the commercial light- One of our first steps, spurred by the ing industry.But that’s incidental to our discussion at Berkeley Lab, was to trans- central goal of enhancing the working form the furniture mock-up for our new environment for our employees. headquarters building into a full-blown Dare to challenge the experts: The test lab for lighting and shade controls. underfloor-air story. Everyone knows We constructed a replica of the south- how bad the air in office buildings can west corner of the new building, its be. To address this problem, we’ve opted sunniest aspect, and equipped it with for a nascent technology that gently an array of competing technologies and brings up air from under a raised floor october 2005 BEST PRACTICE • Why a Company Should Take Control of Its Building Projects instead of forcing it down from the ceil- ing. This will result not only in greatly improved air quality but also in reduced energy usage. Look up at your office ceiling, and you will likely see two vents, one to bring in fresh air and the other to take out stale air. This conventional building practice makes little sense. To get the cool, fresh air to penetrate the warm, stuffy air that has risen to the ceiling, buildings chill the incoming air to around 55 degrees Fahrenheit and force it into the room at fairly high pressure. Sit under the vent and you freeze; sit ten feet away and you sweat. Moreover, since the return- air duct is usually placed a few yards away from the supply vent, a substan- tial amount of the chilled fresh air scoots across the ceiling and out the re- turn, never coming near the people who are working in the space. There is a better way: Leave the re- turn vent in the ceiling but gently cir- culate the chilled air by pumping it through the space beneath a raised in Europe and in parts of the United tion professionals tend to reach for tools floor, the kind increasingly used by States–our building will be the first large that are in their comfort zones. But if businesses to provide flexibility for fu- installation of underfloor air in Man- they are pushed to consider alternatives ture wiring needs. The cooler air natu- hattan. Why? People think it’s prohibi- and to dig deeper into the true costs and rally fills the lower, occupied area of tively expensive. The CEO of a company benefits, they will often sharpen their the room; when it meets warm objects building its own new headquarters took cost calculations and get caught up in the such as people and computers, convec- a tour of our lighting mock-up, in which excitement of doing something inter- tion sends it toward the ceiling vent, we’d also installed an underfloor-air esting and significant. where the stale air is expelled. Since the system. At one point, he turned to his Of course, it’s one thing to challenge system doesn’t fight physics, incoming construction adviser and asked why conventional wisdom but quite another air can be chilled to a moderate 68 de- their new space was designed with tra- to rush into a faddish new design or let grees and brought in at low pressure ditional air-conditioning. The adviser, your contractor embark on a task when through adjustable floor vents placed in a seasoned and respected professional, there is no solid body of knowledge virtually every workstation. For added replied that underfloor air had been about how to accomplish it. Indeed, we comfort, carbon dioxide sensors in the rejected because it would have cost $9 visited one underfloor-air installation return-air ducts automatically increase a square foot. in London at which the contractor was the amount of fresh air when the vented His answer was authoritative and de- freelancing a solution that changed air is stuffy. This approach saves energy finitive – and wrong. The discussion- from floor to floor–an incredibly messy because it requires less refrigeration stopping estimate did not take into and inefficient approach. So we called and, given the higher temperature of account the substantial savings a raised- together the 40 professionals working the air pumped in, there are signifi- floor system would provide – in duct- on the heating and ventilation for our cantly more days when the space can be work, energy costs, and simplified work- headquarters building and another cooled at low cost with outside air. The station wiring. When you factor in those Times building in Sarasota, Florida, for work space is more evenly cooled, the benefits, underfloor ventilation is only an “underfloor summit” to develop a fresh air actually circulates, less energy marginally more expensive than a ceil- protocol for the construction of these is used, and people have control over ing system. two – and any future – underfloor-air the local environments of their work- Challenging the cool calculus and projects. stations. conventional wisdom of consultants is We also hired a lab in Texas to test As sensible as all this sounds–and al- an important step toward real innova- the headquarters’ air design in a sepa- though the concept is fairly well-known tion in your work space. Many construc- rate mock-up. We then hired a noted

126 harvard business review Why a Company Should Take Control of Its Building Projects • BEST PRACTICE professor of fluid dynamics from the the job, to engineer and build a sample turing the 170,000 rods that will grace University of California, San Diego, to of the wall. Going through this exercise our building. double-check the Texas lab’s experi- demystified the design and removed As this story illustrates, the more you ment. These extra steps have allowed us fear from the price formula. And by push the innovation envelope, the to continue to improve the design be- drawing on the insights of four manu- more time you will need to investigate fore we install the system throughout facturers, our architects were able to possibilities and develop solutions. It the new headquarters building. Simi- identify and simplify unduly expensive doesn’t take a lot of time to pursue a larly, we bid the fixtures and controls elements of the design without com- better layout. It does take time, how- for our dynamic-lighting system a year promising its integrity. Having tamed ever, to develop a different purchas- and a half earlier than we normally everyone’s fears, we invited the manu- ing strategy, such as the one employed would have and then equipped the facturers to bid on the wall. Their quotes for the curtain wall of our new build- mock-up with the winning design, giv- were well below initial estimates and ing. It takes even more time to get an ing the manufacturer the opportunity fell within our budget. entire industry to economically offer a to fine-tune the system before it is actu- Even then, we had a long way to go. new product, as we did with dynamic ally installed. The more innovative you And because we were pioneering an in- lighting. are, the more you have an obligation–or novative concept, it was important that at least the dictate of self-preservation– we be open to serendipitous detours Get Involved in the Details to make sure that bright new theories from the path we had laid out. As should be readily evident, innovation will actually work. Since ceramic rods are not standard is a team sport. This makes it all the Don’t pay a fear premium: The ce- building items, the architects had to more important for the building’s owner ramic rods story. One of the critical de- be creative in sourcing the material. to take special care in assembling the sign features of our new headquarters Their detective work yielded a range of team – the architect, the engineer, the building is the double facade: floor- possible suppliers, from a company contractor, the owner’s representative, to-ceiling glass and an outer screen of that makes tiles for the walls of the Paris and, in the case of our new headquar- glazed ceramic rods. The challenge was Metro to a firm that makes ceramic ters building, a particularly creative de- finding a way to build this unique en- sewer pipes. Then, to better under- veloper with deep construction exper- closure – and doing so within a tight stand how easily and uniformly rods tise–and in setting the tone for its work. budget. could be manufactured, the Times and Each member has a unique perspec- The usual equation for new materials Forest City Ratner sent a team of archi- tive and skill set, and the power of all is simple: new design + fear = premium tects and the construction manager to these independent voices will be greater price. That is, subcontractors, because observe production runs at a ceramic- if the owner has taken the effort to they are uncertain about a new design sewer-pipe factory in Leipzig, Germany. hire wisely and create the proper team concept, build cushions into their bids There, our team watched clay being dynamic. to cover unforeseen problems. In our extruded, like sausage, into pipes that Sounds logical, but it doesn’t usually work this way. For one thing, owners typically don’t hire a contractor until Architects clearly have a critical role to play, but the design process is well along, so they engineers also make all kinds of decisions–and usually lack a third party who can pro- vide a reality check for the architect’s compromises–that have an effect on the quality ideas. Indeed, one of the key attributes of the finished building. of a good contractor is the ability to offer effective preconstruction advice. Although every firm will claim to have case, the risk was heightened because were then stood on end on pallets and this skill, it is surprisingly rare. If you a skyscraper’s exterior (called the cur- sent on a weeklong journey through a can find a company (or, more likely, a tain wall) usually represents around 20% kiln. While observing this process, one person within the firm) with the right of the cost of the building. Even small member of our team noticed that the mind-set and creativity, the value of the premiums for this part of the project conveyor belt for the kiln was made of advice will be enormous. would have resulted in substantial mon- uniformly sized ceramic rollers that Moreover, owners all too frequently etary pain. were precisely manufactured in a diam- talk primarily with the architects and So the Times and its development eter that was very close to what we not with the engineers who report to partner, Forest City Ratner, decided to wanted. The architects located the them. Architects clearly have a critical experiment with a new purchasing manufacturer of the conveyor rollers role to play, but engineers also make all paradigm. We hired four curtain wall and included the company in the bid- kinds of decisions – and compromises – manufacturers, all likely bidders for ding process. This firm is now manufac- that have an effect on the quality of october 2005 127 BEST PRACTICE • Why a Company Should Take Control of Its Building Projects the finished building. For example, the avoid the consequences of getting the your company. The worst mistake you underfloor-air system would not have wrong people on your job. can make is to build without involving been possible if we hadn’t had a quality Once the team is assembled, the employees, at all levels. The next worst engineering firm like Flack and Kurtz owner must set a tone of collegiality thing you can do is to make the in- that had already done pioneering work and the expectation that people will ex- volvement fake. Don’t ask people’s opin- in this area. change information freely and chal- ions unless you are willing to listen. In selecting your team, don’t just lenge one another. The contractor should Clearly, you are not going to conduct a focus on the top people. In our recent be free to ask questions about the intent popular vote on every element of the projects, we have participated in the of the design. The architect should feel project. If you did, you’d replace design and vision with homogenized shades of gray.But you can offer people a number Everyone on the team should conduct a detailed of choices. For our new headquarters building, we narrowed down the op- review of the plans and “walk the space,” looking tions for workstation partition height for elements that don’t work. to three and the number of potential furniture vendors from 12 to six. With the input – not a vote but meaningful interviews of everyone reporting di- comfortable questioning the means and input – of a broad range of employees, rectly to the architect, from the acousti- methods. The aim is to establish creative we decided on the height of the parti- cian to the food service designer. Re- tension leavened with mutual respect tions and finalized our furniture choices. serve the right to pick team members (and, of course, held in check by the It’s also important that you pay care- and to veto any person about whom budget). ful attention to your relationship with you have the slightest doubt. This sort of One crucial point: The spirit of collab- the executive committee of your com- deliberation can be difficult under the oration you establish with the architect, pany. For instance, educate the commit- pressure to keep a project moving for- the contractor, and the subcontractors tee about the avoidable evils of change ward, but it’s time well spent if you can must be extended to the people within orders, which can destroy your budget Why a Company Should Take Control of Its Building Projects • BEST PRACTICE and wreak havoc on your schedule, and sure that everyone receives a complete to anticipate issues that will likely arise. establish formal processes to preclude primer on the symbols and other con- Elements free for the asking in the bid them. Given the complexity of our head- ventions.) Start at the front door, walk process are, again, very expensive once quarters project and the cumulative na- through what will become the corridors, the project is under way. ture of basic decisions about its design stop at the bathroom, go to your office, • • • and construction, we created a request- pretend to hang up your coat and plug Even in this age of rampant outsourcing, for-guidance form. The RFG presents in your laptop, and so on. We typically a business doesn’t cede control of its the company’s executive committee do this as a team in all-day review ses- core marketing, sales, and strategic de- with an issue to settle, includes the in- sions that we call our “Where’s Waldo?” cisions. Similarly, there is no reason to formation necessary to do so, and re- exercises because they involve search- divorce yourself from the process of cre- cords the committee’s decision. By doc- ing for small but significant items – as ating the environment for your busi- umenting such decisions and creating in the Waldo children’s books – amid ness. Buildings are simply too large an an institutional memory, the form not a dizzying amount of detail. Knowing investment to ignore. Push your organi- only prevents confusion but helps in- your new building inside and out be- zation to articulate its values. Convey still a discipline about keeping changes fore plans leave the drafting table pre- those guiding principles to your consul- to a minimum. vents expensive change orders. tants. Then work to ensure that those Active involvement in the details of You’ll want to remind the contractor values are translated into a wonderfully a project can reduce change orders in and consultants that the price of their designed and innovative structure that other ways. For example, everyone on early admission to the process is partic- is a productive place to work. Whether the team should conduct a detailed re- ipation in this detailed review. Other- or not you make these efforts, the finan- view of the plans and “walk the space,” wise, you won’t take full advantage of cial investment is the same; the effect looking for elements that don’t work. the opportunity to identify problems on your company will be remarkably Moving a line on a drawing is cheap; early and fix them before the bidding different. moving a wall is markedly more expen- begins. Additionally, review the con- sive. (If you and your people are new tractor’s standard specifications to make Reprint r0510h to reading architectural plans, make sure they accurately reflect your job and To order, see page 159.

FRONTIERS

If you’re like many product-centric companies, you’re scrambling to grow your revenues from services. The best ways begin with making the products themselves smarter. Four Strategies for the Age of Smart Services by Glen Allmendinger and Ralph Lombreglia

ny industrial manufacturer that A has not awakened to the fact that it must become a service business is in serious peril today.Sadly,there are many such businesses – companies that still think of themselves as builders of things and that state their gross margins, op- erating profits, and other measures of success solely in terms of “the product.” But even their more enlightened com- petitors, the ones who’ve begun to wrap valuable services around their prod- ucts and, in some cases, profit directly from those services, are enjoying only a temporary advantage. They may be improving their customer relationships by taking on various burdens such as maintenance and replenishment of sup- plies, but that will get them only so far. A select group of companies is already upping the ante. Soon, it will not be enough for a company to offer services; it will have to provide “smart services.” Smart services go beyond the kinds of upkeep and upgrades you may be bundling with your products, both in their value to customers and in their cost efficiency to you. To provide them, you must build intelligence – that is, awareness and connectivity – into the products themselves. And you must be prepared to act on what the products

ANDY POTTS then reveal about their use.

october 2005 131 FRONTIERS • Four Strategies for the Age of Smart Services

Consider Heidelberger Druckmaschi- vanguard of smart services think differ- time, all this background activity gives nen (commonly known as Heidelberg), ently about their purpose and how they managers and decision makers much a maker of high-end printing presses. make their profits–but they have come more visibility into a business’s assets, Throughout its history,the company has to that new heading by degrees. costs, and liabilities–precisely when they offered repair services to its customers. need or want it. (See the sidebar “What Several years ago, when it developed What Makes Service Smart? a Connected Device Can Do.”) the ability to monitor its equipment re- Smart services are a wholly different This is not dazzling futurespeak; for motely, Heidelberg found that it could animal from the service offerings of the many companies, smart services are al- provide maintenance much more cost- past. To begin with, they are fundamen- ready reality. For many more, it’s a mat- effectively. Now with its machines tally preemptive rather than reactive or ter of reaping the harvest of seeds sown. communicating continuously over the even proactive. Preemptive means your For decades, businesses have been Internet, relaying information about actions are based upon hard field intel- steadily building electronic intelligence their status between the print shops ligence; you launch a preemptive strike into manufactured objects by means of and Heidelberg’s regional and global to head off an undesirable event when sensors, controllers, and microproces- technical support specialists, the com- pany has the access and insight to opti- mize printing performance in custom- Smart services are based upon actual ers’ shops. The total product support evidence that a machine is about to fail, that that Heidelberg now offers – which ex- tends even to removal and resale of the a customer’s supply of consumables is about machines–represents a whole new level to be depleted, and so on. of value for buyers. The network context has made the difference for Heidelberg and has allowed the firm to achieve true you have real-world evidence that the sors. Today, virtually all products that intimacy with its customers. event is in the offing. Smart services are use electricity – whether you’re talking The rewards of becoming a smart ser- thus based upon actual evidence that about toys, coffeemakers, cars, or med- vice provider are hard to deny. In our a machine is about to fail, that a cus- ical diagnostic machines – possess in- research, we’ve documented organic tomer’s supply of consumables is about herent data-processing capabilities. growth rates in double digits for many to be depleted, that a shipment of ma- Each has a wealth of information to of the companies that are following this terials has been delayed, and so on. offer about its current status, usage path. The leaders are establishing the For customers, smart services create history, and performance. So if a manu- new performance benchmarks for their an entirely new kind of value–the value facturing machine, consumer product, industries, deriving more than 50% of of removing unpleasant surprises from or building is not presently monitoring their revenues and 60% of their margin their lives. Meanwhile, because the every detail that its creator might wish contributions from services as opposed field intelligence makes product per- to extract, it can easily and cheaply be to product sales. For most management formance and customer behaviors visi- made to do so. teams in product-centric companies, ble as never before, manufacturers gain numbers like these sound like nirvana. unprecedented R&D feedback and in- Learning from the Vanguard Joining the ranks of smart service sight into customers’needs and can pro- If some companies are further ahead organizations is not primarily a techni- vide even greater ongoing value. than others in offering smart services, cal challenge. The necessary technolo- Finally, because it is impractical to it’s for good reason. Manufacturers such gies, while critical to the task, are well- deploy humans to gather and analyze as Honeywell with its aerospace equip- enough established by this point. Rather, the real-time field data required, smart ment, ABB with its power plant equip- in most companies, the biggest chal- services depend on “machine intelli- ment, Siemens with its medical equip- lenge is getting senior management to gence.”In a smart services environment, ment, and GE with its jet engines and adopt a new perspective on the nature reliable and blindingly fast micro- locomotives all produce assets so critical of the business. The companies in the processors do what they are very good to customers’ work that, for years al- at doing: digesting billions of data ready, they’ve been using various kinds Glen Allmendinger (gallmendinger@ points, talking to one another about of networking to perform remote mon- harborresearch.com) is the founder and the data, controlling one another based itoring and diagnostic work. Mean- president of Harbor Research, a strategic upon the state of the data–all in a mat- while, as the forces of competition and consulting and business development ter of nanoseconds. Humans cannot do commoditization relentlessly assault firm based in Boston and San Francisco. this, nor should they; this incessant their product lines, most of these man- Ralph Lombreglia is a vice president at stream of business information should ufacturers have made it an explicit goal Harbor Research. be invisible to people. At the same to change their business mix and in-

132 harvard business review Four Strategies for the Age of Smart Services • FRONTIERS crease the margin contribution from upon assumptions (proactively) or, even access to unified data and knowledge their service activities. As a result, they worse, after the power has gone off (re- about the status of the equipment. have already pushed themselves fur- actively). For one thing, this has a dra- Customers now look to GE not just ther into the life cycles of the prod- matic effect on the profitability of GE’s for high-quality energy equipment but ucts they sell–beyond purchase and in- maintenance services. Most manufac- also for help in optimizing their ability stallation and into customers’ ongoing turers cannot charge more than $90 to to supply consistent and high-quality use. A favorite example in the business $110 per hour for their technical sup- power to their customers. (In fact, GE press is the industrial gases business. port because of price and benefit pres- has created a significant amount of cus- Companies such as Air Products and sures from local competitors. But GE tomer dependency.) This has allowed Chemicals and Air Liquide, because Energy, because of its efficient network- GE to tie its pricing to the benefits it they provide expensive components of enabled remote servicing, can charge provides (“power by the hour,” for in- critical processes, have traditionally $500 to $600 per hour for the same stance) versus the products themselves. needed to offer customers performance- technician. Even more important, the The same kinds of economics are at based service contracts. Even when this information generated by its continual work at GE Healthcare. Its typical cus- meant having “human sensors” sitting monitoring allows GE to take on addi- tomer is a radiology practice in the at clients’sites 24/7 watching everything tional tasks, such as managing a cus- market for an MRI machine. In truth, that went on, it was worth it: The com- tomer’s spare parts inventory or pro- customers have not purchased such panies naturally learned more about viding the customer’s and GE’s service equipment in years; given the rapidly their customers’ problems than the typ- and support personnel with complete obsolescing technology and quirks of ical manufacturer could have, and they converted those issues into business opportunities. “Chance favors the prepared mind,” What a Connected Device Can Do observed scientist Louis Pasteur. In the same way, emerging technologies favor Most companies still view their electronic and electromechanical prod- prepared companies. When a global ucts as stand-alone objects, not things that could or should be connected. data network–the Internet–arrived on But it’s the networking and management of these devices that will gener- the scene alongside rapidly advancing ate the intelligence businesses need to deliver smart services. Connected technologies for large-scale storage and data mining, most management teams products will be able to perform the following functions: in the world were not thinking about the implications for device networking. >> Status. Status applications capture and report on the operation, But prepared companies, like the asset- performance, and usage of a given device or the environment being intensive businesses cited earlier, spot- monitored. ted the shift in the economics. Now >> Diagnostics. Diagnostic applications enable a device to self-optimize products could be wired throughout or allow a service person to monitor, troubleshoot, repair, and maintain a business, and the connectivity was devices. cheap enough to permit continual mon- >> Upgrades. Upgrade applications augment the performance of a given itoring of them. Even a company like device. They prevent problems with version control, technology obsoles- General Electric, already the poster cence, and device failure. child for downstream service expan- >> Control and Automation. Control and automation applications sion, saw unprecedented opportunities. coordinate the sequenced activity of several devices. They can also cause Look at GE’s power turbine busi- devices to perform one-off, discrete actions. ness, for instance. Its customers, major >> Profiling and Behavior Tracking. Profiling and behavior-tracking utilities, have good reason to hate equip- applications monitor variations in the location, culture, performance, ment failures. At the least, any down- usage, and sales of a device. These applications can create more cus- time creates huge opportunity costs for tomized or predictive responses for end users. these customers; often it means they >> Replenishment and Commerce. Replenishment and commerce have to pay hefty regulatory compliance applications monitor consumption of a device and buying patterns of fines. To reduce that risk, GE (and its the end user. These applications can initiate purchase orders or other competition) invests heavily in remote transactions when replenishment is needed. monitoring and diagnostics so it can deploy a technician or engineer ahead >> Location Mapping and Logistics. Location mapping and logistics of a failure (preemptively) as opposed to applications track and optimize the service support system for a device. doing so according to a schedule based These applications also support supply chain and sales activities. october 2005 133 FRONTIERS • Four Strategies for the Age of Smart Services

hospital finances, they’ve tended to or leasing the car of your choice but in- Finding Your Smart Service lease the machines. Now even conven- stead paying for its use by the mile. Opportunities tional leasing has gone by the wayside GE’s ability to price those “miles” as companies like GE offer to install right is critical to its ongoing competi- Thinking about the business oppor- the equipment at no up-front cost and tiveness. For an MRI machine, GE must tunities associated with a networked instead charge for its ongoing upkeep estimate the number of images that product is a highly creative process. and use. will be required over the life of the con- Often there are no cut-and-dried mar- The wonderful result is a longer-term tract based on the demographics of the kets to identify and size. Rather, there relationship than a traditional prod- served area. Again, the company can are whole new markets that might de- uct sale would have yielded. Under the make such estimates because of its net- velop as networked products are rolled old model, a customer buys or leases work monitoring. Not long ago, we out. To find your opportunities, start a thing and gets some kind of warranty met with managers in GE’s industrial by looking at the life cycle of your and support package with it – and then capital equipment leasing division. product. What are the activities the cus- a salesperson is back within a pre- These are the people responsible for tomer engages in to procure, own, use, dictable amount of time trying to sell those leased trailers you find at practi- and dispose of it? Next, check out the an upgrade or extension. Under the new cally every construction site on earth. adjacencies. For each of the identified model, the customer simply signs up, We were incredulous when we heard activities, what else is the customer typically for a five-year-plus relation- how much self-awareness the trailers close to or in contact with when per- ship with a major asset. All the support have – even down to the number of forming the activity? And what other and replenishables related to that ma- times a particular door or window is activities precede and follow the activ- chine are handled, through individual opened in a given period. Why collect ities you’ve identified? Finally, once transactions, as part of the managed those data? “Because,” we were told, you’ve examined the possibilities of- service. By analogy, imagine not buying “the business is actuarial science now.” fered by these various activities and

134 harvard business review

FRONTIERS • Four Strategies for the Age of Smart Services adjacencies, bundle the most economi- At that level, almost anything a com- tions so it can follow those activities cally attractive elements into a total pany does to learn about the product and go beyond them. The company opportunity. Each of these steps bears and its continual use will offer oppor- has also partnered with specialty ser- further explanation. tunities for the business to enhance its vice providers such as Target and Wal- Looking at the Life Cycle. The first profitability. greens that produce quality prints of step involves identifying the activities Checking Out Adjacencies. Having the photos. that are directly connected with own- outlined the customer’s activities in Getting Perspective on the Whole ing and using your product. (See the the life cycle of your product, you’ll Opportunity. So far, we’ve been dis- exhibit “The Product Life Cycle from want to take a second look, this time cussing how to look for opportunities, a Customer’s Perspective” for the list of studying the adjacencies. What else is but, to be precise, we’re actually talk- activities one company generated.) the customer close to or in contact with ing about how to look for elements of The most obvious activity that a con- when performing each of these activi- an overall business opportunity. A man- nected product can streamline, while at ties? And what other activities precede ufacturer might find that adding con- the same time allowing the manufac- and follow this set of activities? Some- nectivity to an MRI scanner, for in- turer to intervene, assist, and reap ben- times, even when an opportunity is stance, will help it in several ways. The efits, is maintenance. If your product not directly connected to a product, connectivity might enable the just-in- can detect that one of its parts is ap- the product can serve as a gateway to time ordering of replenishable mate- proaching failure and can alert you to it. Nearly all digital cameras, for in- rials. It might alert the product maker that fact, you are in a perfect position stance, need some form of connectivity to maintenance needs and so allow it to to benefit the customer – and to own to a computer, where the photos are lock in service contracts with custom- the opportunity to deliver maintenance viewed, sorted, edited, and stored. ers. It might allow the manufacturer services. Kodak has responded to this adjacent to perform machine calibration and val- It’s well known that the profit in opportunity by closely integrating its idation, functions previously handled printers, for example, is in the replen- digital camera technologies with widely by hospital personnel, for which it can ishables, such as toner cartridges. But available PC software and Web applica- now receive separate compensation. there are clones of most toner car- tridges, and they cut into both the reve- nues and the margins in a printer man- ufacturer’s ink sales. Hewlett-Packard The Product Life Cycle from has responded by adding a very simple bit of connectivity to one of its printer a Customer’s Perspective models. The printer can detect when its toner is low and can initiate a just- One company we worked with identified the following activities involved in owning in-time order for a new cartridge. By and using one of its products. The question then became,“Which of these activities adding this simple new function to its represent opportunities?” machines, HP has reclaimed ownership of a high-profit transaction in which it >> Determining requirements and justifying purchase of the product had suffered encroachment. >> Finding a product supplier But maintenance is only one activity to consider; the life cycle of a product >> Financing the purchase has many pockets of value. In their >> Installing the product HBR article “Go Downstream: The New Profit Imperative in Manufacturing” >> Modifying other products or processes to work with the product (September–October 1999), Richard >> Adapting the product to its environment or to a specific use Wise and Peter Baumgartner analyzed the difference between a product’s value >> Maintaining the product and replacing parts at purchase and its value throughout >> Replenishing materials (for instance, paper and toner for a copier) its life cycle, for a variety of industrial assets. They found, for instance, that >> Training personnel to use the product a buyer of a locomotive engine ends >> Using the product up spending 21 times its purchase value to support its use. Our own research >> Upgrading the product suggests that any asset that costs more >> Disposing of product waste than ten times its purchase value to use is a clear candidate for networking. >> Disposing of the product

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Each of these services is an opportunity (installation, warranties, maintenance 5. Maintaining and replacing parts in itself; together, they form an overall contracts, and so on). Historically, man- 6. Replenishing materials (gases and business opportunity. ufacturers have bundled such services imaging media) with their products to make sales. Thus, 7. Training personnel to use the scanner Four Flavors of Success embedded innovators that decide to 8. Determining a patient’s need for a HP and Kodak both found business add connectivity to their products may scan (preliminary diagnosis) opportunities by looking at their prod- have a hard time levying additional 9. Preparing the patient for a scan uct life cycles and examining the ad- charges in relationships where every- 10. Scanning the patient jacent activities related to their prod- thing was previously included. 11. Interpreting the scan ucts’ primary activities. In HP’s case, Because the embedded innovator 12. Updating the software a single product (a printer) made by a has built intelligence and communica- 13. Upgrading the hardware single company (HP) was the sole gate- tions into its products, however, these Because of the high value, complex- way to the business opportunity. In goods become the company’s inani- ity, and cost of MRI scanning, nearly all Kodak’s case, the company tapped a mate silent partners. The near-perfect of these activities represent an oppor- business opportunity in which it sup- visibility of products that can be re- tunity for a scanner manufacturer. (Ac- plies the products (digital cameras) but motely monitored greatly optimizes the tivities 8, 9, 10, and 11 are primarily med- also relies on partners to supply their delivery of services, eliminates waste ical matters and thus cannot be the province of a manufacturer – but that Embedded innovators that decide to add still leaves nine activities that are eco- nomic opportunities for scanner mak- connectivity to their products may have a hard time ers.) This is precisely the situation GE levying additional charges in relationships where Healthcare has stepped into, position- ing itself as a complete solution pro- everything was previously included. vider, or a solutionist. Along similar lines, consider Honey- expertise in user interfaces and photo and inefficiency, and raises service mar- well, which makes (among other things) processing. gins. Thus, it is largely in these areas that control and automation systems for pe- As you look at the opportunities avail- companies achieve ROI on their device- troleum refining. Recognizing that the able to your company, there are, like- networking investments. (Think Pepsi- start-up of a new refinery to process pe- wise, two possibilities. It may be that Co’s returns on its vending machines troleum represents a fraction of the most of the elements of the opportu- and fountain systems, and Emerson total expense associated with maintain- nity are attached directly to your prod- Electric’s returns on its backup network ing and optimizing the facility, Honey- uct’s life cycle, so you’ll be able to pur- power systems.) But it doesn’t have to well developed a new mode of customer sue the opportunity alone. Or it may end there. The embedded innovator can service called Experion Process Knowl- be that the opportunity lies mainly in also add new value to its products that edge System (PKS). PKS is a collection the adjacencies, so you will have to part- could not have been achieved without of embedded-intelligence technologies ner with others. The direction you take networking–for instance, allowing cus- deployed at a customer’s refinery and will help determine the kind of busi- tomers to automatically upgrade their controlled and monitored remotely.The ness model you should adopt after con- products by means of software down- system performs a variety of manufac- necting your product. If you go it alone, loads. Heidelberg is a good example of turing equipment support and opti- it may be as what we call an “embed- a successful embedded innovator. mization tasks formerly handled exclu- ded innovator” or, more ambitiously, The Solutionist. In the solutionist sively by maintenance personnel. as a “solutionist.” If you partner with business model, a single product is still PKS customers typically experience others, it may be as an “aggregator” or the dominant gateway to a business fewer false alarms indicating that a pro- as a “synergist.”These are the four basic opportunity,but the scope of high-value cess is in danger of failing, less unan- business models available to product activities associated with the product is ticipated downtime, and lower main- makers that decide to embrace smart broader. Think, for example, of all the tenance costs. They can work with services. Let’s look at each in turn. activities associated with the life cycle Honeywell to access knowledge related The Embedded Innovator. The em- of an MRI scanner: to their systems and equipment perfor- bedded innovator is the most product- 1. Determining requirements and mance. The clear value of the program centric of the models. Customers may whether having a scanner is justified has allowed Honeywell to charge a pre- still perceive the physical product as 2. Financing the scanner mium for the system, and, in many the source of primary value, and they 3. Installing the scanner cases, the company has been able to in- will expect to continue receiving the 4. Testing, calibrating, and validating crease the scope of services and value support services they have in the past the scanner it provides its customers.

138 harvard business review Innovative companies can develop better products faster and more efficiently because they are built that way. UGS delivers a suite of enterprise Product Lifecycle Management, or PLM, solutions designed to drive top-line revenue growth by building a streamlined, repeatable process of innovation for all types and sizes of companies. Better yet, the UGS® portfolio offers an open approach that works with your legacy systems and spans the entire product lifecycle. By standardizing your company’s best practices, our PLM solutions allow you to speed up the entire collaborative development process, so you can evaluate more ideas and get the best ones to market faster. Automated processes reduce waste, prevent duplication and improve the quality of products. Plus, the UGS portfolio is backed by an unparalleled commitment to our customers’ success. With UGS solutions you won’t just create products that are one step ahead, you’ll create a company that is. Visit www.ugs.com/go/strategy to explore our customer case studies and to discover for yourself what UGS can do to help transform your company.

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How Smart Do You Want Your Products to Be?

Obviously, not all devices and subsystems need to be networked. In general, a device is not a candidate for networking if it: Consider, for example, the difference in value between net- >> Is not mechanical or electromechanical working a refrigerator in a small office and networking a refrig- eration system in a grocery store, where failure would have >> Is very simple or inexpensive and thus not worth the initial investment of networking much greater consequences. In the latter case, a one-night shut- down could cost the store a year’s profits, so the up-front cost of >> Has no important information to share networking is an obvious investment. The decision to network >> Has no available or reliable network access a product will depend largely on how that product will be used and the potential role it can play in a larger system. >> Has a very brief or very long (15-year-plus) life span

The benefits of networking depend on the context, but there are some important issues to consider when deciding what to network:

>> The Impact of a Device Failure. Not every failure is cata- >> The Device Turnover Rate. If you add connectivity to a de- strophic. If a keyboard breaks in a food-processing plant, pro- vice with a life span of more than 15 years, you will probably duction won’t stop. The failure will be confined to one spe- create a technology obsolescence problem – even if the de- cific computer, and the keyboard can be easily and cheaply vice is designed so it can be updated remotely via software replaced. But if the plant’s power system suddenly stops work- downloads and so on. Meanwhile, a device with a very short ing, the end result could be vast amounts of wasted products life span might be networked only for its content or com- and employee time. merce opportunities rather than for its performance or main- tenance considerations, potentially making the ROI harder to >> The Value of Device Information. A scanner at a department achieve. store is a good candidate for networking because the data it collects can inform many decisions related to customers’ buy- >> The Service Needs. If a vending machine could notify its ing behaviors. Connectivity will deepen the manufacturer’s owner when it needed to be restocked or repaired, the com- insight into purchasing patterns, inventory, procurement, and pany could use employees much more efficiently and save product or store designs. a significant amount of money by eliminating unnecessary site visits. >> The Impact of Networking. If technicians know in advance that the HVAC system in a commercial office building may >> The Importance of Information. Medical devices that need break down (because the connectivity they’ve built into the to transmit vital health information quickly to a variety of system allows the equipment to be continually monitored), people and locations are excellent candidates for network- they can diagnose and repair the problem before tenants no- ing.The ability to simultaneously inform technicians, special- tice any issues. They can eliminate the downtime and the ists, primary care physicians, and the patient is extremely expense of evacuating the building. valuable.

>> The Cost and Ease of Connectivity. Most companies can >> The Location of the Device. Certain devices and systems comfortably justify buildingwide networking or device enable- are harder to maintain than others simply because of their ment because they can amortize the expense across multiple location. If a motor in an offshore oil rig could remotely departments and products. By contrast, the initial costs and inform the owners of its health and performance, compli- complications of creating a home network are prohibitive for cated and unnecessary service visits would be a thing of most households. the past.

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Again, the difference in the opportu- pany has remained a manufacturer of plex service infrastructure. What both nities facing an embedded innovator printers and toner cartridges and has companies have in common is that and a solutionist is the breadth of high- made money by selling these things. they’ve found and tapped business op- value activities associated with their Connectivity simply gives it a lock on portunities dominated by their own products. So, between HP’s printers the toner sales, which is where the prof- devices. Neither organization has been and GE Healthcare‘s MRI scanners, its are. By contrast, GE Healthcare’s new very dependent on partnerships (al- there is a world of difference in the business model is far from that of a sim- though they could use them, and GE scope of services that could be offered ple maker and seller of products. The certainly does). with or through the connected device. connected scanner opens up many ser- The Aggregator. The two remaining In HP’s case, the change in business vice opportunities, and to tap these, business models are those in which the model has been incremental; the com- GE has built a large, well-tooled, com- business opportunity cannot be tapped by a single device and a single vendor. There are situations in which a device may collect data, but the information, Out of the Basement in and of itself, may not be valuable enough to create an opportunity. In- If you take only one message away from Eaton Electrical’s Home Heartbeat stead, several disparate devices may initiative, it should be that successful product-centric businesses are rapidly work within an environment, and only transitioning to smart services. The story is all the more interesting because it by connecting all or most of them can goes beyond the business-to-business realm, bringing the benefits of machine- a company create a high-value body to-machine communication to home owners. of data. An extreme example of this is Cleveland-based Eaton started out in 1911 making axles and other truck a simple table lamp. It can be enabled parts and later diversified into other engineered components, including resi- to sense and communicate information dential circuit breakers. As the end of its first century in business approached, such as when it is on and when it is off, it found itself in very mature businesses fighting with established competitors the wattage flowing through it, and over every point of market share. That’s when a few visionary managers within perhaps even the age of the bulb or the electrical products division started to think about device connectivity bulbs it is burning. Of course, none of and the broader solutions it could offer consumers. these data, on their own, are likely to be The system they envisioned, recently launched as Home Heartbeat, moni- of high economic worth. If the lamp tors the status of a home and alerts the home owner when some- burns a 100-watt bulb constantly in an thing is amiss. To do this, it uses water sensors, open/closed empty room, the money being spent on sensors, and power sensors, which communicate to a base the wasted electricity will hardly break station over a wireless network. That base station communi- most families. But the sum of all wasted cates with a key fob device carried by the home owner. electricity is worth a home owner’s at- The system can also be instructed to send an e-mail tention, and so an application that col- or text message to a cell phone if there is a change lects and deploys all those data may be in the state of a sensor. of enough value to represent an eco- Pause for a moment to consider how useful this nomic opportunity for a manufac- would be. You’re sitting on the train to work, and it turer. And there may be further value occurs to you that a space heater might have been in building remote-control options into left on. You can check your key fob to be reassured the lamp and other devices. instead of having to turn back. (The key fob device In the case of a system that gathers works only within a certain range of distance but does and processes data from multiple de- capture data about the status of your home as you left it.) vices, your product may play one of two Home Heartbeat features a water shut-off valve that can be automatically roles: It can be central or peripheral. activated by sensors. So if you’re on vacation, and you hear about a cold snap, The hub or a spoke. The brains of the power outages, and burst pipes back home, you can check your e-mail; in the operation or just a body part. This last meantime, you can be confident that if the water needed to be shut off, it was. variable defines our third and fourth Home Heartbeat is a good example of smart service innovation: Eaton built business models. When such a system is awareness and connectivity into the devices it was already selling and, in this required in order to define and tap an way, was able to position itself not just as a product vendor but also as a ser- opportunity, then there will be an ag- vice provider. No longer consigned to an obscure corner of the basement, the gregator, which controls the applica- Eaton brand now stands for total home awareness. And the company is now tion’s actual data collection and central- in the role of aggregator, courting an entirely new range of partners, from processing power; and there will be wireless carriers to insurance companies. synergists, whose devices contribute

142 harvard business review valuable data or functions that are con- trolled by the application. Aggregator businesses we’ve studied include Eaton Electrical, Gardner Den- ver, Electrolux, and Rockwell Automa- tion; they all provide remote monitor- ing and related Web-based services across channel, alliance, and customer- fulfillment networks. In other words, these companies bring their “secret weapon” to bear on all their business relationships, not just on their rela- tionships with customers. Aggregators are still primarily prod- uct companies and don’t vertically inte- grate all aspects of their product life-cycle management. For example, they tend not to be involved in product recycling or disposal. Instead, they sell interested third parties smart-information services– or access to the data collected from networked devices – either for a fee or for a share of earnings. Where aggrega- tors do choose to deliver services di- rectly to the customer, they now own that relationship as never before, with distinct barriers to competition. Aggre- gators cannot be cut out of the services loop by competitors or channel partners because their possession of device- generated data allows them to offer ser- vices more intelligently and profitably than entities that cannot see into the status of the products in question. Aggregators will make larger invest- ments in data warehousing and data mining than will embedded innovators, and they will achieve some of their ROI by providing smart services to their dis- tributor and system-integrator partners. For example, a large percentage of in- stalled uninterruptible power supply (UPS) devices contain dead batteries. Unfortunately, users discover this only when these devices fail to work during a power outage. In the embedded inno- vator model, a networked UPS device could initiate its own order for a battery replacement from the vendor–in itself, a smart service. But imagine how an aggregator could build on that oppor- tunity. Eaton Electrical (a global leader in circuit breaker technology), for in- stance, is bringing something called Home Heartbeat, a home monitoring october 2005 FRONTIERS • Four Strategies for the Age of Smart Services system, to the consumer market. Eaton to create a product that can contribute synchronize the data from disparate has partnered with companies that sell valuable data or functionality to other sources into compatible formats. power-quality devices, such as fire connected products, you are pursuing Still, it’s safe to say that IT infra- alarms, backup generators, and the UPS a synergist model. structure is not the biggest obstacle for devices mentioned previously. Eaton Consider the Dutch electronics man- most companies. Much harder to over- has even partnered with insurance com- ufacturer Philips, which specializes in come is the product-centric mind-set of panies, which would gladly offer Eaton’s lighting ballasts and controls. The com- most senior management teams, along customers incentives for deploying ver- pany believes there could be a huge with the P&L structure that perpetu- ifiable battery replacements in their opportunity for value creation if com- ates that philosophy. Manufacturing re- connected devices. (See the sidebar “Out plementary manufacturers in building- mains the basic building block of the of the Basement.”) systems equipment could share their P&L for most product companies, and Illinois-based Gardner Denver has data. That is, if data could be collected the cost structure of a product business a similarly expansive vision of how from all the electrical devices in a com- raises all kinds of barriers to service- it might aggregate information from mercial facility, the aggregated infor- oriented investments. Across virtually many sources to serve buyers of its air mation could then be used to create ex- every industry, dozens of examples of compressors. Compressed air is used in traordinary levels of customer service. intelligent device management have all kinds of industrial processes; some So Philips is helping to build a com- sprouted up as technical or functional 350,000 systems are in place in the munity of several parallel players in initiatives–in R&D, in supply chain ap- United States, covering 97% of manu- the commercial building-management plications, or in customer support, for facturing plants. As a first step toward arena in order to leverage all the valu- instance. These initiatives hit a ceiling, intelligent device management, Gard- able data about usage patterns, poten- though, when the expense of imple- ner Denver has enabled its equipment tial energy savings, and the like. Central menting them became hard to justify. to monitor and communicate the wear to this community’s plan is an agree- Often, a smart services initiative will and tear on “expendables” in plant ment to go with the ZigBee open stan- benefit each functional area to varying equipment, such as piston rods and dard for wireless connectivity. Through degrees – either in the scope of advan- cylinder liners. As a result, customers its participation in the ZigBee Alliance, tages gained or in the time needed to re- can buy subscriptions from the com- a group formed to further the ZigBee alize advantages–making it hard to get pany and can receive performance standard, Philips has been pursuing a everyone to agree that the initiative trend information and preemptive synergist model with several important makes sense and should be considered maintenance service. But while Gard- global partners. a financial priority. The frustration in ner Denver makes the compressors, organizations is immense, as middle any application of compressed air calls Your Worst Enemy managers who believe in the potential for a total system that includes compo- What will stand in your way as you try of smart service try to elevate the topic nents such as air coolers, filters, and dry- to move forward in one of these busi- to a strategic level. ers. Once Gardner Denver’s devices are ness models? It would be irresponsible Senior management, one middle in place for its own and its customers’ for us to minimize the technology hur- manager told us, “kind of gets it, and benefit, it’s a short step to providing dles you’ll face. Automated information kind of doesn’t.” We’ve seen this for other manufacturers and distributors gathering can easily generate trillions ourselves. A different manager invited with data that could inform their of data points every day for a typical us to his company for a presentation on pieces of the system. The opportunity is product manufacturer. Each of these the need to invest aggressively in re- especially appealing to a manufacturer data points may be very tiny (the torque, mote services. The ranking executive like Gardner Denver, which is not the pressure, or temperature of a specific in the room had a predictable response biggest in its industry and must sell component or the physical location of to the proposal: “As soon as you lose the through channels that are hardly cap- a product), but they must all be vali- line of sight between the product P&L tive to it. If it can use networked devices dated and stored and then subjected and the plan, you lose control of the to tie customers, distributors, and other to the sophisticated techniques (data business.” support elements into a closed-loop, smoothing, data mining) that turn What seems to be missing is a good asset management system, it can par- them into intelligence that can be acted script that communicates the opportu- ticipate in the highest-value deals in- upon. Clearly, such intense data pro- nity to senior management in a com- stead of being cut out of them. That’s cessing cannot simply be thrown at pelling way. Our research regarding the beauty of being an aggregator. today’s average corporate IT infrastruc- smart services is our contribution to cre- The Synergist. It is possible to suc- ture or application suite. For example, ating that script–and it may find an au- ceed in the age of smart services simply companies pursuing RFID-tagging ini- dience in a competitive context that in- by providing intelligent devices that tiatives will need organizationwide creasingly focuses managers’ minds on play well with others. When you set out data standards and new middleware to the need to grow organically and to do

144 harvard business review so by selling service. If not, we expect the script ultimately to be handed to business leaders by equities analysts. When they start asking questions such as “Are the assets you sell to customers networked?”and placing the companies that say yes in a distinct group in terms of potential future performance, inter- est in the topic will undoubtedly boom. • • • Companies such as GE, Heidelberg, Air Products, and others we’ve discussed have undergone what we like to call the “ubiquity shift.”They’ve perceived that once intelligent devices become ubiq- uitous – as they will – the commercial context will change, and they’ve re- aligned their strategies to capitalize on that new reality. Meanwhile, most product-centric companies remain at least a full step behind in their think- ing. They know that their best hopes for growth lie in increasing the services component of their businesses, but they are focusing on the same kinds of services that have always surrounded their products. Their plan is to capture the adjacent service markets currently owned by other companies and per- suade customers to pay for the (mar- ginally enhanced) services they used to provide gratis. In other words, they are moving aggressively to implement – by about 2010 – a 1990s “dumb services” strategy and are in serious danger of destroying value rather than creating it. Making the ubiquity shift is chal- lenging, but it starts with a simple in- sight: A device that can report back to its maker on its status and usage represents the foundation for much richer and longer-term customer relationships. From that straightforward proposition spring the four new business models we’ve outlined. For any given company, it may make the most sense to be an em- bedded innovator, a solutionist, an ag- gregator, or a synergist. But woe to the company that takes none of these paths; it will soon find its best customers locked in – and happily – to other smart service providers.

Reprint r0510j To order, see page 159. october 2005

Letters to the Editor

Six Sigma Pricing discount level will quickly become the effective new list price. When I picked up your May 2005 issue I imagine that the second action, bet- and saw “Six Sigma Pricing” by Man- ter measurement and reporting, con- Mohan S. Sodhi and Navdeep S. Sodhi tributed strongly to the immediate listed on the cover, I quickly and excit- profit gains. The attention focused on edly began to read it. What I read was pricing due to the Six Sigma project it- disappointing. More than that, the so- self probably helped as well. But the lution offered to Acme – the article’s larger gain, the 5% price increase, had main example – give the salesperson nothing to do with the Six Sigma work. discount authority – is wrong. The real That gain occurred because a manager problem is salespeople setting prices felt market conditions were right and without full information. This informa- took the risk. tion, which includes item profitability, My biggest concern is that now Acme is under the illusion that, because it applied Six Sigma, it has exhaustively looked at its pricing opportunity and defined solutions. This was the wrong tool to use, and the issue of pricing de- fects, as defined, was probably not among the top pricing opportunities. Where were the tried-and-true pricing analysis tools? Price differences by segment, cus- tomer value analysis, the importance of value selling versus price in winning an order, hit rate, mix effects on plant ca- pacity, and, of course, anticipated com- petitor behavior? Sorry, but this consul- tant isn’t ready to add Six Sigma to his pricing diagnosis tool kit. Alan Fortier President Fortier & Associates plant utilization, competitor directions, Fort Lee, New Jersey and product-mix goals, is often better evaluated centrally,which is why Acme’s Sodhi and Sodhi respond: Alan Fortier pricing group exists and why sales- repeats some common misperceptions people cannot optimize pricing. Giv- about pricing and Six Sigma, and we ing salespeople discount authority will thank him for the opportunity to cor- probably result in margin erosion be- rect these: cause, unless Acme’s sales force is com- First, Six Sigma is not intended to pensated based on margin or has devel- create strategy but to control strategy oped a strong value-selling culture, its adherence. It does this by improving

We welcome letters from all readers wishing to comment on articles in this issue. Early responses have the best chance of being published. Please be concise and include your title, company affiliation, location, and phone number.E-mail us at [email protected]; send faxes to 617-783-7493; or write to The Editor, Harvard Business Review, 60 Harvard Way,Boston, MA 02163. HBR reserves the right to solicit and edit letters and to republish letters as reprints. october 2005 147 LETTERS TO THE EDITOR operations involving repeated processes. Finally, a company doesn’t just have sented and where each student must In our article, we show how Six Sigma to consider how it presents itself in the carefully choose the comments and re- applies to pricing processes; in particu- market but how it conducts itself inter- actions shared in a potentially threat- lar, it controls discount levels off list nally as well. Fortier suggests that Acme ening class environment. Not a good prices and does not set list prices. Acme missed the boat by not looking at prob- place to learn and talk freely about has centralized list-price settings based lems exhaustively and only presenting managing culture change, or your boss on market factors. However, it must ex- the external view. In fact, Acme used the for that matter. Other extreme models ecute discounts for the tens of thousands external view to set the list price and include the Accelerated MBA, or “how of individual transactions in one division the internal view to improve the setting fast can I get my ticket punched”model, in a year in a decentralized way. This of transaction-specific discounts to han- and the pure and near-pure distance process requires better control, and Six dle the company’s immediate problems. learning, Internet, or e-learning MBA. Sigma proves extremely useful for that. Fortier & Associates may offer greater Tom Kelly Second, giving personnel flexibility benefits to clients by using Six Sigma, es- Associate Dean does not mean absence of control. pecially if some of them already have a College of Business Administration Fortier misrepresents us as advocating Six Sigma foundation. We reiterate that Rider University giving Acme salespersons discount au- Acme’s Six Sigma project used internal Lawrenceville, New Jersey thority.Acme creates tighter (not looser, resources only, no investment in IT,and as Fortier states) and escalating discount just three months to realize the gains we guidelines for salespeople, sales manag- reported. Toward a Theory of High ers, and pricing personnel. Six Sigma Performance helped Acme achieve the right amount of control. How Business Schools Lost As an avid reader of business books, Third, a Six Sigma project is not a chat Their Way I greatly enjoyed “Toward a Theory of session and involves tried-and-tested, High Performance” by Julia Kirby in robust statistical and other tools. We Warren G. Bennis and James O’Toole your July–August 2005 issue. Given the discuss pricing (discount) analysis spe- in their May 2005 article “How Busi- difficulty companies have in staying on cific to region and job size, for which we ness Schools Lost Their Way” point to top, it is not surprising that there is no used ANOVA, a statistical tool. Further- the business community as a source consensus of secrets for achieving lasting more, each stage has its own set of tools of the pressure for curriculum special- top performance. Nonetheless, it is in- applicable to different situations; we dis- ization by its hiring of MBAs with nar- teresting to compare the prescriptions. cuss some of these as well. row specialties. However, the authors I’d add more fuel to the fire by ex- Fourth, having better measurement let the corporate world off much too panding the list of perspectives and and reporting is easier said by consul- easily. Most of our MBA candidates al- analyses. One of the most interesting tants than done by companies. The most ready have business degrees with ma- books in this genre is The Living Com- important challenge for CEOs is bring- jors in management, marketing, finance, pany by Arie de Geus (Harvard Business ing about organizational change. The even sports marketing. Those students School Press, 2002). While at Shell, the Six Sigma project at Acme helped build are enrolled in those programs because author and others studied companies trust between sales and pricing groups, corporate America has told them an older than Shell and important in their allowing for pricing processes to gain MBA is a key to success in the job hunt, industries. This netted 27 companies still acceptance and be effective. Better mea- and the more specific the degree, the strong after at least 100 years. These surement and reporting resulted from better the fit. companies shared four characteristics: this effort. Then, out of the other side of the sensitivity to the environment, cohesion Fifth, when it comes to pricing,“cow- same office comes the reality check: You and identity, tolerance and decentral- boy” managers taking the risk can be will work for several different compa- ization, and conservative financing. part of the problem rather than part nies across several different industries in Will and Vision: How Latecomers Grow of the solution. Actual customer prices your career. The same corporations are to Dominate Markets by Gerard J. Tellis being too high can also be a defect. (We fast to point out that the MBAs they see and Peter N. Golder (McGraw-Hill, 2002) discuss only the postdiscount prices today are narrow thinkers. Technically presents another interesting angle. The being too low as a defect.) So Acme’s competent, they lack the soft skills to authors’focus is testing whether the first gains come from many sales and pricing manage and lead. At the extreme, some to enter a market has an insurmount- personnel sticking close to desired dis- major companies want the MBA deliv- able edge to enduring leadership. They count levels off the list prices. Acme ered to their people at their location. In concluded that “few pioneers survive as bases this on transaction size, sales ter- those situations, the specialized profes- leaders.”Indeed, they found that endur- ritory, and other factors rather than on sor is faced with a specialized classroom ing market leadership requires vision bold decisions by mavericks. with only one corporate culture repre- (a unique perspective, a drive to serve

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www.hbr.imd.ch +41 21 618 06 64 a mass market) and will (persistence, re- Bob Wolf’s brilliant July–August 2005 lentless innovation, financial commit- article, “Collaboration Rules,” nicely ment, and asset leverage.) shows how communities can innovate. What would be most interesting is to However, the critical reader could pin- canvass these types of studies and then point what appears to be incremental try to segment the discovered prescrip- innovation in the examples of the Linux tions by any company’s specific situa- and Toyota communities. Few would tion, since each company’s strategy and dispute that Linus Torvalds’s innovation survival are unique and far less stable was groundbreaking when he started than these broad theories of perfor- to program Linux in 1991. However, mance admit. when the community really started to Rob Duboff play a role in the further development CEO of Linux throughout the 1990s, it was Hawk Partners highly effective to employ user feedback Cambridge, Massachusetts to conduct software debugging and con- tinuous and incremental product re- It’s fine that management thinkers re- finement. So are communities good for search performance management and radical innovation, too? then disseminate ideas; it’s understand- We think so. The open-source world able that others spend time researching has some great examples of products the research. But when the outcome is that are truly radical; for instance, that we apparently just need a slightly Freenet, the peer-to-peer network in- better data set, I can’t help but feel that vented by Ian Clarke and supported by Peters and Waterman were on to some- a community of developers. Freenet al- thing in their book In Search of Excel- lows complete anonymity in the sharing lence. From an academic perspective, of information for both publishers and you can criticize the methodology by retrievers. In addition to the trust that which they established their “cool” re- Wolf and Evans describe, two additional search population, but from a practical rules were important to Freenet project position their advice to companies was innovation. to take action and stop managing so First, the Freenet community has very conservatively, which seems pretty sen- restrictive membership policies and sible to me. joining scripts. Only insiders can change It strikes me that, rather like the re- the official software code, and only 4% search into a Theory of Everything, this of the developers contributed more subject is simply guaranteed to keep ac- than 60% of all the software code. To be- ademics in business forever. When we’ve come insiders, however, people had to figured out the formula for performance demonstrate understanding of the soft- management, the killer question will ware; highly sophisticated, technical still remain valid: It might apply to his- coding skills; breakthrough ideas; and tory, but does it apply to the future? a consistent, high level of activity. For a Ready. Fire. Aim. radical innovation, you don’t only want Mark Foscoe people just to be trusted and hardwork- Group Logistics Manager ing, but you also want them to be cre- Mitsubishi Electric ative and talented. London Second, ideas are subject to competi- tive forces. Because Freenet was a radi- cal design for a file-sharing network, and Collaboration Rules of interest to many (the software has been downloaded more than 1.5 million Innovation fundamentally takes two times since its inception), developers forms: radical and incremental. Science, and others had competing ideas and for example, consists of both break- radical solutions. However, the commu- through ideas and extension and verifi- nity of insiders considered the pros and cation of those ideas. Philip Evans and cons and implemented only those it con-

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LETTERS TO THE EDITOR effectively.Credit and acknowledgment Of course, new tools of all kinds have world championship because his car are essential for healthy collaborative their value and perhaps are of para- had been released from the pits with a cultures. The role of community build- mount importance in other contexts. wheel nut undone. So what happened? ing within the enterprise is similarly im- These tools can be pervasive, simple, Who was sacked? Who was blamed? portant. But what I’ve observed is that and adopted by the practitioners if they The answer is no one. In the words the role of informal collaboration–let’s need them. of the chief mechanic at the time, call it “gray-market collaboration” – is As the Freenet example illustrates, Williams F1’s Dickie Stanford: “We try at least as important as more formal other forces shape Schrage’s shared to isolate the problem, not the person.” mechanisms to promote collaborative spaces. Certain kinds of innovation dic- In these high-performing teams, it is interaction. tate entry scripts and concentration vital to develop an open, no-blame cul- Creating collaborative infrastruc- of decision rights. Perhaps, as in many ture. Only in this kind of environment tures – seamless and scalable networks open-source projects, a core community can mistakes be aired and discussed in of shared spaces – is every bit (pun in- (more hierarchical, hard to enter) per- order to improve overall performance. tended) as important as forms one kind of role, This characteristic is also important developing incentives for and a periphery envi- within winning teams, especially effec- creative collaboration. ronment (flat, open) tive multicultural teams. The recent CEOs and innovation performs another. Or, dominance of Ferrari is attributed by champions reading the perhaps (as in a phase those inside the organization not just to Wolf and Evans piece of Toyota’s Prius devel- the driving brilliance of Michael Schu- should be inspired by its opment), small groups macher, but also to their ability to learn essential recognition of compete and collabo- to be more open about their problems collaborative potential. rate in a loosely modu- and mistakes across different functional But if they really want to lar, recombinant fash- units within the organization. For ex- tap and exploit that po- ion. We are not arguing ample, historically at Ferrari, the engine tential, they want to think for a single homoge- was deemed to be the most important hard and work harder to neous space devoid of element in the car, and the engine de- ensure that their innova- any entry-barrier fences sign team would rarely admit to any tive people have easy and inexpensive or hierarchical hills. But we do believe shortcomings in its product to other access to innovative shared space. that a richer and more robust hetero- parts of the organization. That changed Michael Schrage geneity often emerges if managers will in the 1990s under the leadership of Author set the direction, create the precondi- Jean Todt (French) with engine direc- MIT Media Lab tions, and then immerse themselves as tor Paolo Martinelli (Italian) working Cambridge, Massachusetts peers in the real work. closely with technical director Ross Brawn (British) and chief designer Rory Wolf and Evans respond: Michael Byrne (South African) to ensure that Schrage’s spatial metaphor neatly re- Mechanics of Speed all the potential weaknesses were rec- states a piece of our argument: The To- ognized and that the design was opti- yota and Linux communities achieve We enjoyed the “The Mechanics of mized. Brawn summarized this best: superior collaboration via a universal Speed”perspective from Ray Evernham “A Ferrari is a Ferrari. It’s not an en- shared space defined by simple and per- in the July–August 2005 article “When gine; it’s not a chassis; it’s not an aero- vasive IT, shared semantics, and ele- Failure Isn’t an Option” and agree that package. It’s a Ferrari.” ments of shared intellectual property. many aspects of motor racing relate to Mark Jenkins If Schrage means, more ambitiously, other high-performance organizations. Professor of Business Strategy that specific software tools, such as the We have conducted an in-depth study of Cranfield School of Management spreadsheet, define that space, then we success and failure in Formula 1 racing Bedfordshire, England are not so sure. Certainly, tools enable teams in our book Performance at the the collaborative spaces in our exam- Limit: Business Lessons from Formula 1 Kenneth Pasternak ples. But they tend to be ad hoc and so Motor Racing (Cambridge University Co-Founder low tech as to be sometimes unrecog- Press, 2005). We agree with Evernham at-the-limit Limited nizable as software. Toyota has its A4 that constant, open communication is Helsinki, Finland reports and obeya (big room), where very important. large teams work in physical proximity. However, one aspect we also explored Richard West Linux developers rely on “listservs” and was how the team reacted when things Co-Founder plain old e-mail. Each of these tools is went wrong. In one particular case in at-the-limit Limited pervasive, simple, and virally adopted. 1991, Nigel Mansell lost the driver’s Redenhall, England

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COVER STORY 62 | Growing Talent as if Your Business Depended on It Jeffrey M. Cohn, Rakesh Khurana, and Laura Reeves Traditionally, corporate boards have left leadership Executive Summaries planning and development very much up to their CEOs and human resources departments – primarily because they don’t perceive that a lack of leadership development in their companies poses the same kind of threat that accounting blunders or missed October 2005 earnings do. That’s a shortsighted view, the authors argue. Companies whose boards and senior executives fail to prioritize succession planning and leadership development end up experiencing a steady attrition in talent and becoming extremely vulnerable when they have to cope with inevitable upheavals – inte- grating an acquired company with a different oper- ating style and culture, for instance, or reexamining basic operating assumptions when a competitor with a leaner cost structure emerges. Firms that haven’t focused on their systems for building their bench strength will probably make wrong decisions in these situations. In this article, the authors explain what makes a successful leadership development program, based on their research over the past few years with com- panies in a range of industries. They describe how several forward-thinking companies (Tyson Foods, Starbucks, and Mellon Financial, in particular) are implementing smart, integrated, talent develop- ment initiatives. A leadership development program should not comprise stand-alone, ad hoc activities coordinated by the human resources department, the authors say. A company’s leadership development processes Planning your exit is like should align with strategic priorities. From the board scheduling your own of directors on down, senior executives should be deeply involved in finding and growing talent, and funeral; it evokes deep line managers should be evaluated and promoted fears and emotions. expressly for their contributions to the organization- wide effort. HR should be allowed to create develop- – page 62 ment tools and facilitate their use, but the business units should take responsibility for development ac- tivities, and the board should ultimately oversee the whole system. Reprint R0510C; HBR OnPoint 1924

october 2005 155 IDEAS & TRENDS HUMAN RESOURCES LEADERSHIP

FORETHOUGHT HBR CASE STUDY 45 | Zeitgeist Leadership 16 | Beware of Economists Bearing 31 | The Cane Mutiny: Anthony J. Mayo and Nitin Nohria Greek Symbols Underneath every eco- Managing a Graying Workforce nomic model involving math lies a sub- Companies and leaders don’t succeed or Cornelia Geissler strate of great simplification and imagina- fail in a vacuum. When it comes to long- tion, says Columbia University’s Emanuel Frank Heberer, a human resources man- term success, the ability to understand and Derman. Reprint F0510A ager at Medignostics, has proposed a long- adapt to changing business conditions is term HR strategy for the German midsize at least as important as any particular per- “Bureaucracy” Becomes a Four- pharmaceutical company. All his research sonality trait or competency. Letter Word The tension between bu- reaucracy and innovation dates back to the points to trouble on the horizon: In just 25 A clear picture of how powerful the zeit- reign of Louis XIV,says University of Ore- years, more than a quarter of the country’s geist can be emerges from the authors’ gon’s William H. Starbuck. Reprint F0510B population will be over age 65. What will comprehensive study of the way the busi- happen to the firm when workers start re- ness landscape in the United States evolved, Every Product’s a Platform To exploit tiring in droves? How will it attract smart decade by decade, throughout the twenti- your product’s platform potential, say con- new hires from a much smaller talent pool? eth century. Six contextual factors in partic- sultants John Sviokla and Anthony J. Paoni, you need creativity – and good intellectual But the executive team is focused on ular, they found, most affected the prospects property protection. Reprint F0510C cutting costs here and now. In fact, to save for business: the level of government inter- money, Medignostics recently withdrew vention in business, global events, demo- Masters of the Multicultural Chief di- from an early-retirement program spon- graphics, shifts in social mores, develop- versity officers, in new roles, foster innova- sored by the German government. Mean- ments in technology, and the strength or tion and generate revenues, writes author while, age-related tensions at the company weakness of the labor movement. Frans Johansson. Reprint F0510D are growing. A 58-year-old account man- A lack of contextual sensitivity can trip Hang On to Those Founders Compa- ager, angry about being forced to resume up even the most brilliant executive. No nies that retain their CEO founders when full-time hours and report to a jargon- less a luminary than Alfred P.Sloan was re- preparing for IPOs often come out ahead happy tyke, has been taking lots of sick lieved of GM’s day-to-day management in in the long run, says Martin L. Martens at days and otherwise disengaging from his the 1930s because he was unwilling to meet Concordia University. Reprint F0510E job. Heberer believes it is only a matter of with the new UAW. Conversely, an under- The Hazards of Hounding Customers time before other employees stage unoffi- standing of the zeitgeist can play a crucial who buy your product because they want cial “strikes,”too. but unheralded role in business perform- to – not because you make them – are the Heberer is convinced that, for Medig- ance. Jack Welch is widely credited with most loyal, says Rice University’s Paul M. nostics to stay competitive, its leaders have GE’s remarkable success during the 1980s Dholakia. Reprint F0510F to start thinking strategically about the de- and 1990s, for example, but far less atten- Been There, Read That Robert Morris, mographic shift. He’s trying to sound the tion has been paid to his predecessor, the an Amazon Top 10 reviewer, helps you de- alarm; he’s even put together plans to cre- statesmanlike and prudent Reginald Jones, cide which business books are worth your ate a child care center to help attract work- who sustained strong revenue and profit time and attention. Reprint F0510G ing parents – but his boss has summarily growth during the heavily regulated stagfla- Room at the Top Line Across the S&P rejected the idea as a luxury Medignostics tion of the 1970s. 500, companies’ sustainable growth rates can’t afford. How can Heberer persuade To better understand this connection exceed analyst growth forecasts, which his boss and the other executives, all near- between business performance and con- means companies are not optimizing ing retirement age themselves, to take the text, the authors studied 1,000 great U.S. shareholder value, say consultants Rekha long view? business leaders of the twentieth century Sampath and Ajit Kambil. Reprint F0510H Commenting on this fictional case study and identified three distinct archetypes: Talk About Brand Strategy Communi- are Norbert Herrmann, an HR consultant Entrepreneurs, often ahead of their time, cating your brand strategy to the financial in Bad Endorf, Austria; Barbara D. Bovb- overcame dire challenges to build some- community can boost share price, say Co- jerg, the director of Education, Workforce, thing new. Managers excelled at reading lumbia Business School’s Natalie Mizik and Income Security Issues at the U.S. Gov- and exploiting the existing zeitgeist to grow and University of Washington Business ernment Accountability Office in Washing- their businesses. Leaders defied context to School’s Robert Jacobson. Reprint F0510J ton, DC; Dietmar Martina, the director of identify latent potential in businesses others The Hardest Hire If your new COO will Groupwide Performance Measurement at considered mature, stagnant, or in decline. eventually succeed your CEO, says consult- Deutsche Telekom in Bonn, Germany; and In every decade, all three archetypes were ant Anne Lim O’Brien, be clear about which Eileen A. Kamerick, the chief financial vital. It is the ongoing regeneration of this role you’re seeking to fill. Reprint F0510K officer of Heidrick & Struggles Interna- pattern in the business life cycle that ulti- tional, headquartered in Chicago. Book Reviews HBR reviews four books. mately sustains development and progress. Reprint R0510A Reprint R0510B

156 harvard business review STRATEGY & COMPETITION ORGANIZATION & CULTURE MANAGING TECHNOLOGY

72 | The Office of Strategy 82 | The Passive-Aggressive 96 | Information Technology Management Organization and the Board of Directors Robert S. Kaplan and David P.Norton Gary L. Neilson, Bruce A. Pasternack, Richard Nolan and F. Warren McFarlan There is a disconnect in most companies and Karen E. Van Nuys Ever since the Y2K scare, boards have between strategy formulation and strategy Passive-aggressive organizations are grown increasingly nervous about corpo- execution. On average, 95% of a company’s friendly places to work: People are congen- rate dependence on information technol- employees are unaware of, or do not under- ial, conflict is rare, and consensus is easy to ogy. Since then, computer crashes, denial stand, its strategy. If employees are unaware reach. But, at the end of the day, even the of service attacks, competitive pressures, of the strategy, they surely cannot help the best proposals fail to gain traction, and a and the need to automate compliance with organization implement it effectively. company can go nowhere so imperturbably government regulations have heightened It doesn’t have to be like this. For the that it’s easy to pretend everything is fine. board sensitivity to IT risk. Unfortunately, past 15 years, the authors have studied Such companies are not necessarily sad- most boards remain largely in the dark companies that achieved performance dled with mulishly passive-aggressive em- when it comes to IT spending and strategy, breakthroughs by adopting the Balanced ployees. Rather, they are filled with mostly despite the fact that corporate information Scorecard and its associated tools to help well-intentioned people who are the vic- assets can account for more than 50% of them better communicate strategy to their tims of flawed processes and policies. Com- capital spending. employees and to guide and monitor the monly, a growing company’s halfhearted A lack of board oversight for IT activities execution of that strategy. Some compa- or poorly thought-out attempts to decen- is dangerous, the authors say. It puts firms nies, of course, have achieved better, tralize give rise to multiple layers of man- at risk in the same way that failing to audit longer-lasting improvements than others. agers, whose authority for making deci- their books would. Companies that have The organizations that have managed to sions becomes increasingly unclear. Some established board-level IT governance com- sustain their strategic focus have typically managers, as a result, hang back, while oth- mittees are better able to control IT project established a new corporate-level unit to ers won’t own up to the calls they’ve made, costs and carve out competitive advantage. oversee all activities related to strategy: an inviting colleagues to second-guess or But there is no one-size-fits-all model for office of strategy management (OSM). overturn the decisions. board supervision of a company’s IT oper- The OSM, in effect, acts as the CEO’s In such organizations, information does ations. The correct approach depends on chief of staff. It coordinates an array of not circulate freely, and that makes it dif- what strategic “mode” a company is in – tasks: communicating corporate strategy; ficult for workers to understand the impact whether its operations are extremely de- ensuring that enterprise-level plans are of their actions on company performance pendent on IT or not, and whether or not translated into the plans of the various and for managers to correctly appraise em- it relies heavily on keeping up with the units and departments; executing strategic ployees’ value to the organization. A failure latest technologies. initiatives to deliver on the grand design; to accurately match incentives to perform- This article spells out the conditions aligning employees’ plans for competency ance stifles initiative, and people do just under which boards need to change their development with strategic objectives; and enough to get by. level of involvement in IT decisions, ex- testing and adapting the strategy to stay Breaking free from this pattern is hard; plaining how members can recognize their abreast of the competition. The OSM does a long history of seeing corporate initiatives firms’ IT risks and decide whether they not do all the work, but it facilitates the ignored and then fade away tends to make should pursue more aggressive IT gover- processes so that strategy is executed in an people cynical. Often it’s best to bring in nance. The authors delineate what an IT integrated fashion across the enterprise. an outsider to signal that this time things governance committee should look like in Although the companies that Kaplan and will be different. He or she will need to ad- terms of charter, membership, duties, and Norton studied use the Balanced Score- dress every obstacle all at once: clarify de- overall agenda. They also offer recommen- card as the framework for their strategy cision rights; see to it that decisions stick; dations for developing IT policies that take management systems, the authors say the and reward people for sharing information into account an organization’s operational lessons of the OSM are applicable even to and adding value, not for successfully ne- and strategic needs and suggest what to do companies that do not use it. gotiating corporate politics. If those steps when those needs change. Reprint R0510D; HBR OnPoint 1894; are not taken, it’s only a matter of time Given the dizzying pace of change in the OnPoint collection “Focus Your Organi- before the diseased elements of a passive- world of IT,boards can’t afford to ignore zation on Strategy – with the Balanced aggressive organization overwhelm the the state of their IT systems and capabili- Scorecard, 3rd Edition” 1886 remaining healthy ones and drive the com- ties. Appropriate board governance can go pany into financial distress. a long way toward helping a company Reprint R0510E avoid unnecessary risk and improve its competitive position. Reprint R0510F

october 2005 157 CHANGE MANAGEMENT ORGANIZATION & CULTURE STRATEGY & COMPETITION

108 | The Hard Side of 120 | Master of the House: 131 | Four Strategies for the Change Management Why a Company Should Take Age of Smart Services Harold L. Sirkin, Perry Keenan, Control of Its Building Projects Glen Allmendinger and Ralph Lombreglia and Alan Jackson David Thurm Most industrial manufacturers realize that Everyone agrees that managing change is When you head up a big construction proj- the real money isn’t in products but tough, but few can agree on how to do it. ect for your organization, coming in on in services. Companies such as General Most experts are obsessed with “soft” is- time and on budget isn’t enough. If you Electric and IBM have famously made the sues, such as culture and motivation, but, want to avoid squandering what is proba- transition: A large proportion of their rev- say the authors, focusing on these issues bly your company’s largest capital invest- enues and margins come from providing alone won’t bring about change. Compa- ment, it’s important to create a building value-added services to customers. But nies also need to consider the hard factors– that reflects your company’s mission and other companies attempting to do the like the time it takes to complete a change produces a truly energizing work environ- same might miss the boat. initiative, the number of people required ment, says David Thurm, CIO of the New It is not enough, the authors say, just to execute it, and so forth. York Times Company and head of the team to provide services. Businesses must now When the authors studied change initia- responsible for designing and building the provide “smart services”– building intelli- tives at 225 companies, they found a con- Times’ new corporate headquarters in gence (awareness and connectivity) into sistent correlation between the outcomes Manhattan. the products themselves. Citing examples of change programs (success versus fail- The only way to get this kind of pack- such as Heidelberger Druckmaschinen’s ure) and four hard factors, which they age – great design and innovative features Internet-connected printing presses and called DICE: project duration, particularly that together further your business goals – Eaton Electrical’s home-monitoring ser- the time between project reviews; integrity is to take an active role. Assemble the right vice, the authors demonstrate how a prod- of performance, or the capabilities of proj- team, and then stay involved, asking hard uct that can report its status back to its ect teams; the level of commitment of senior questions about things that are generally maker represents an opportunity for the executives and staff; and the additional taken as givens. Articulate a vision of your manufacturer to cultivate richer, longer- effort required of employees directly af- future work space, and drive the search for term relationships with customers. fected by the change. The DICE framework ways to realize this vision. In short, be a Four business models will emerge in is a simple formula for calculating how builder, not merely an owner. this new, networked world. If you go it well a company is implementing, or will be It’s easy to understand why this ap- alone, it may be as an embedded innovator– able to implement, its change initiatives. proach is the exception rather than the that is, your networked product sends back The framework comprises a set of simple rule. To most companies, design and con- information that can help you optimize questions that help executives score their struction seem foreign and forbidding, rife service delivery, eliminate waste and ineffi- projects on each of the four factors; the with pitfalls. Because of the murkiness of ciency, and raise service margins. Or, you lower the score, the more likely the project the field and a lack of experience and confi- may pursue a more aggressive solutionist will succeed. Companies can use DICE as- dence, most companies play a relatively business model – that is, you position your sessments to force conversations about minor role in their construction projects. networked product as a “complete solution projects, to gauge whether projects are on But it’s a giant mistake to be a passive con- provider,”able to deliver a broader scope track or in trouble, and to manage project sumer when it comes to one of your most of high-value services than those provided portfolios. important assets. At best, you’ll get well- by the embedded innovator’s product. In The authors have used these four factors intentioned guesses by others as to what the case of a system that aggregates and to predict the outcomes and guide the exe- you want; at worst, you’ll end up with a processes data from multiple products in cution of more than 1,000 change manage- building that’s at odds with your identity. a building or home, you may be either an ment programs worldwide. Not only has The author shares a series of lessons aggregator or a synergist, partnering with the correlation held, but no other factors learned. Implicit in all of them: You have others to pursue a smart-services opportu- (or combination of factors) have predicted to push yourself as hard as you push your nity. An aggregator’s product is the hub, outcomes as successfully. contractors. collecting and processing usage informa- Reprint R0510G; HBR OnPoint 1916; Reprint R0510H tion – and creating a high-value body of OnPoint collection “Lead Change – data. A synergist’s product is the spoke, Successfully, 3rd Edition” 1908 contributing valuable data or functionality. Woe to the company that takes none of these paths; it’ll soon find its former cus- tomers locked in – and happily – to other smart service providers. Reprint R0510J

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october 2005 159 PANEL DISCUSSION by Don Moyer

Most workplace violence has nothing to do with disgruntled former employees. Instead it involves Give to Get cutthroat competition. Knives in the back. Dogs eating dogs. But stepping on heads isn’t the best way to get ahead. Reciprocity – both the explicit exchange of favors and less targeted displays of generosity – makes the ascent easier and more pleasant. Good turns meet with others. Favors bestow influence on the bestower. Indebted allies are often the most reliable.“To engage in this sort of arrangement with another is not to be exploited by that person,”writes Robert Cialdini in Influence: The Psychology of Persuasion. “Quite the contrary; it is to participate fairly in the ‘honored network of obligation’ that has served us so well…from the dawn of humanity.” So do what you can for whom you can: superiors, employees, and peers alike. And remember, reciprocity cuts both ways. Stab someone in the back, and you’ll need lots of friends to help keep an eye on yours. Don Moyer can be reached at [email protected].

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