London Business School specialreport.pdf

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Business Strategy Review Spring 2007 2007 The Author | J ournal compilation 2007 London Business School 61

6 2 Organisational thunderboltsWhen a management innovator is set loose inside

an organisation, watch out! Management innovation

can have thunderous results.

6 6 From R&D to Connect + Develop at P&GChallenged by its CEO to source ideas from

outside, Procter & Gamble decided to blaze a new

path for its research and development function. In

pursuit of inspiration, its R&D became

turbocharged by using insourcing to expand

P&Gs horizons.

7 0 Perfectly in balance

Art Schneiderman pioneered what later becamethe concept of the balanced scorecard while a vice

president of quality and productivity at Analog

Devices. We talked with Schneiderman to find out

more about the early evolution of a management

innovation.

7 2 Making the firm flexibleHow companies operate has been established over

two centuries. Is it possible for a firm to break the

established rules of organisation? Eden McCallum

did just that.

7 6 Death to budgetingIts considered one of the basics of management.

If you dont have a budget, you arent really

managing. But, UBS has made budgeting

secondary to performance and customer

satisfaction.

7 9 Designing the cultureWhen the design firm, IDEO, opened for business,

its three founders designed an organisation low on

hierarchy, big on communication, with a minimal

amount of ego. Forty years on, it still works.

8 2 Employees firstInnovation is often focused on products. Yet the

leader of one Indian company is shifting the

business model of a 30,000-employee company.

HCL Technologies reveals how innovation can

apply to organisational systems as well.

Written by Julian Birkinshaw, Stuart Crainer and

Michael Mol.

Specialreport

ManagementInnovation


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2007 The Author | J ournal compilation 2007 London Business SchoolBusiness Strategy Review Spring 200762

Most people consider

management a tool of the

status quo. They consider

the good manager as someone who

keepsthings running smoothly; or, if

theres a problem, as someone who

restoresthe status quo so that the

business can keep humming along.

Consequently, when a manager

shakes up the status quo and actually

improvesthe way things run, theimpact (especially in large

organisations) can be thunderous.

Boeings Debbie Collard shares the

story of the manager who thought the

C-17 jumbo transport plane could be

built in a radically different way.

Collard tells of the revolution

created by Koz (most likely, Don

Kozlowski), the executive newly

charged with leading the production

of the C-17, a plane so gigantic that

its tail is four stories high. Planes

that huge require hundreds of peopleto assemble them, and the tradition

is that such a plane is built in

stages, by moving it from one

position to another as the successive

work is completed. The norm in the

industry was for movement from

position to position to occur per the

set timetable, whether every

production detail was attended to or

not. At least in the case of the C-17,

prior to Koz, thats the way it always

was. Everyone thought, thats the

way its supposedto be.

But, as Collard told J ohn Kotter

and Dan Cohen, in Heart of Change

(Harvard Business School Press,

2002), everything changed when Koz

rattled the status quo. We are not

going to move an airplane, she

remembers Koz saying, until it is

complete in position. Quality is

number one, so thats what we aregoing to focus on. Until the plane is

done and done right, no movement.

Period.

Collard then relates how workers

and managers alike responded to Koz

and his revolutionary way of doing

things:

Everyone thought he was off his

rocker. You didnt do things this

way. I think some of his direct

reports, in particular, thought he

was crazy. They were convincedthat we would never be able to

deliver on time if we did it this way.

Never. Wouldnt happen, anybody

knows that. Something would

always bring everything to a halt.

Youd have employees twiddling

their thumbs at great expense to

the company. You might as well

expect cars to be made by

secretaries on the fifty-ninth floor

of the Sears building in Chicago.

As you probably surmise, Koz

changed not only the company but

the rest of the industry. Collard

completes her story by attesting that

this one management innovation

transformed the place, and, as a

result, quality has gone up and all of

our aircraft have not only been on

time, theyve been early!

Its rare for management to hurl

an organisational thunderbolt, but itsimpact can be enormous.

Management innovation the

implementation of new management

practices, processes and structures

that represent a significant departure

from current norms has

transformed the way many functions

and activities work in large

organisations. Fords introduction of

the moving assembly line in 1913

and Western Electrics invention of

statistical quality control in 1924

changed businesses forever. Everymanagerial process we now take for

granted was created by inventive and

far-sighted individuals: double-entry

book-keeping was invented by Luca

Pacioli in 1494, and the limited

liability company was created in

1856.

But management innovation

remains poorly managed and poorly

understood. It is typically left to

occur in an ad hoc fashion, and

Organisational

thunderboltsManagement innovation the implementation of new managementpractices, processes and structures that represent a significant departurefrom current norms has transformed the way many functions andactivities work in large organisations. When a management innovator isset loose inside an organisation, watch out, management innovation canhave thunderous results.


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successful management innovators

like Boeings Koz have to work very

hard to get others to understand

what they are doing, or why they are

doing it. While academic studies of

the diffusion of existing

management innovations are

common, there is virtually no

literature on its origins, that is, on

the generative processes through

which management innovation first

takes shape.

In search of...a process?

Management innovation has some

obvious commonalities with

technological innovation as a

process: it involves key individuals

pulling together ideas and resources

in novel ways, championing their

ideas inside their organisation,

building coalitions of seniorexecutives to support them and

using their political skills to

overcome internal resistance. But

our research suggested there were

also two important points ofdifference that made management

innovation a distinct process.

Change agentsThe first distinction

was a much more significant role for

external change agents. These

individuals were a mix of academics,

consultants, gurus and ex-

employees. They often provided the

initial source of inspiration, and they

frequently helped to shape and

legitimize the management

innovation as it took hold. Whileexternal agents rarely developed new

practices themselves, they offered

important inputs at all steps along

the way. The process thus had a

highly interactive quality. It typically

took place on the fringes of the

organisation rather than in the core

through the relations between

conceptually oriented managers and

managerially oriented external

change agents.

Distant horizonThe second point of

difference was the amount of

uncertainty and ambiguity in the

process. Most management

innovations took several years to

implement, and in some cases it was

impossible to say with any precision

when the innovation actually took

place. To some degree this can also

be the case with technological

innovations, but the subtle nature of

the process was particularly acute in

the management innovations we

studied.

How it happens

Our research suggests management

innovations occur in five stages.

Dissatisfaction with status quo In

cases we studied, the internal

problem that management innovationaddressed was always some level of

dissatisfaction with the status quo.

We use the word dissatisfaction

because it covers a multitude of

situations, from a nagging operationalproblem through a strategic threat to

an impending crisis.

One classic example: in 2003 UBS

Wealth Management, the private

banking arm of the Swiss giant, was

looking to grow after several years of

painful cost cutting. The executives

started looking into the blockers

the things that were standing in the

way of the growth agenda and they

realised that the budgeting process

was a key problem area. As CFO Toni

Stadelmann notes, Budgeting ishighly defensive it is cumbersome,

and it is fundamentally against

growth. It is about negotiating down

the targets that are proposed by the

centre. And it causes people to talk

about numbers, not about clients

and market opportunities. This

realisation led to a complete re-

thinking of how individual client

advisors worked and the elimination

of the traditional budgeting process.

Wealth Management has been

growing rapidly ever since (and the

full story is explored on page 76).

Inspiration from outside

Management innovators need

inspiration examples of what has

worked in other settings, analogies

from different social systems or

unproven but alluring new ideas.

Managers with thunderbolts revealed

a breadth of thinking that allowed

them to strike out on their own path,

rather than just adopt a proven

model applied by a competing firm.

For example, Dee Hock founded Visa

with a unique cooperative

organisational model that drew more

from the principles of J effersonian

Democracy than from traditional

hierarchical thinking.

More generally, we observed thatmany management innovators had

unusual backgrounds or they had

worked in a wide variety of different

functional areas or countries. Art

Schneiderman, the manager atAnalog Devices who in 1987

developed the prototype for what

became known as the Balanced

Scorecard, was strongly influenced

by Jay Forresters system dynamics

concepts during his MBA training at

MITs Sloan School, then spent six

years as a strategy consultant with

Bain working on quality management

projects in J apan before joining

Analog Devices. This background

gave Schneiderman insight into

continuous improvement techniquesthat were being used in J apan plus a

system-wide perspective on the

functioning of the organisation. So

when asked by CEO Ray Stata to

develop a quality improvement

process for the companys

manufacturing, he quickly developed

a set of metrics that included both

financial and non-financial

components. (Art Schneiderman is

interviewed on page 70.)

Its rare for m anagem ent to hurl an organisational thunderbolt.

W hy so?


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Invention It is customary to

assume that every innovation has a

eureka moment when the

inventor makes the key conceptual

breakthrough or proposal that

everything else follows from. 3Ms

Art Fry famously came up with the

Post-it Note concept at his local

church as he sought to keep track of

multiple pages in his book of hymns.

And people at Boeing still tell the

Koz C-17 story because eureka

moments are legendary. However, our

evidence suggests that such eureka

moments are rare. Invention is a

process in which the innovator brings

together the various elements of a

problem (dissatisfaction with the

status quo) with the various elements

of a solution (which involves some

inspiration from outside plus a clear

understanding of the internalsituation and context), but the

manner in which these elements are

brought together is typically iterative

and gradual.

Consider the case of Connect &Develop, Procter & Gambles radical

approach to building an external

network of scientists around the

world as a means of turbocharging

its internal R&D. This major

organisational innovation (analysed

in our article on page 66) took the

best part of 10 years to put together.

Larry Huston, the key architect of the

model explains:

Back in the mid-1990s I was

interested in how to develop a neworganisation form where people

would be fluid and could swarm to

the good projects, yet protect the

base business. We spent time

actually thinking through the

detailed, entire organisation

design and I actually made a

concept video. I then tried to get

one company off the ground,

called Company Way, where you

would get rewards for participation

and your peers could give you

rewards for participating on a web-

based innovation model.

Then in 2000 my boss said we

want you to create the new

business model of innovation.

Building on my earlier work I

started to create the conceptual

positioning for connect and

develop. A lot of it starts with

experiments, making concepts and

storyboards and films, just like you

would do if youre making a

product. People just think this

stuff falls to the ground: they dont

realize that these big management

systems are constructed, and you

have to be smart about it; it takes

a lot of skill to do that.

Internal validation In one important

respect management innovation isjust like every other form of

innovation: it involves change and

uncertainty, and as a result it

encounters resistance from people

who dont understand or dont valuethe proposed innovation. And it is

impossible to accurately predict

whether any innovations benefits will

exceed its costs. A critical stage in

the process, then, is for the

management innovators to generate

validation for their new idea. We

describe the process of validation to

external parties below; but the more

important step, at least in terms of

the initial implementation, is for the

innovation to gain internal acceptance.

Management innovation is eventrickier to validate than technological

innovation because the innovation

itself is less easily codified, requires

the willing participation of many

people for it to work and often

delivers its results only several years

after implementation.

Consider Oticon, which in the early

1990s developed a radical

organisation model with no formal

hierarchical reporting relationships, a

resource allocation system built

around self-organised project teams

and an entirely open-plan physical

layout. This new model helped

Oticon to achieve dramatic increases

in profitability over the rest of the

decade. Lars Kolind, the CEO of

Oticon and architect of these

changes, got his inspiration for this

new model from his deep

involvement in the scouting

movement:

The scouting movement has a

stronger volunteer aspect, and

whenever scouts come together,

they cooperate effectively together

without hierarchy. There is no game

playing, no intrigue; we are one

family brought together through

common goals. My experiences in

scouting led me to focus ondefining a clear meaning for

Oticon employees, something

beyond just making money, and to

build a system that encouraged

volunteerism and self-motivation.

Kolinds experiences at Oticon were

typical. His first challenge was to

persuade the owners of the company

(primarily a foundation) that a

radical change was necessary to

confront the challenge posed by

giant competitors like Siemens and

Philips. Once that had been

achieved, he embarked on a massive

internal selling programme to

explain the nature of his proposed

changes to the employees. He usedradical slogans such as think the

unthinkable and visual symbols,

such as a large transparent chute in

the middle of the building down

which all shredded documents fell.

Inevitably there were some

employees who chose to leave

because they were not comfortable

with his changes, but most were

quick to see the benefits and

became involved in implementing

W e found that there w ere also tw o im portant points of difference

that m ade m anagem ent innovation a distinct process.


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the transition to what became known

as Oticons spaghetti organisation.

The management innovator may be a

brilliant inventor initially, but it is

equally important for that inventor to

then build a support coalition to

carry the invention into the

organisation. Effective management

innovation requires determined

individuals as much as it does the

creation of a fertile breeding ground

for their ideas.

External validation One of the

distinctive features of the

management innovation process that

emerged during the research was

what we came to call external

validation essentially a stamp of

approval from an independent

observer, such as an academic, a

consultancy, or a media organisation.Again, the reason why external

validation proved to be so important

had to do with the uncertain and

ambiguous nature of most

management innovations. Because

of a lack of hard data to prove that a

particular innovation was working,

companies frequently sought

external validation as a means of

increasing the level of internal

acceptance. This process of

validation also typically increasedthe visibility of the innovation to

competitors or companies in other

industries, which tended to reinforce

the innovation further. Four types of

external actors were identified during

the research:

The business school academic

who typically acts as a thoughtful

observer of the emerginginnovation and who sees his/herrole as codifying the practice in

question for use in research andclassroom teaching.

The consulting organisationthatsees its role primarily in terms ofcodifying and documenting the

innovation so that it can then beused in other settings.

The media organisationthat sees

its role as broadcasting the story

of the innovation to as wide an

audience as possible.

The industry associationthatseeks to develop improvedpractices across its member

organisations. Remember thatTotal Quality Management cameabout when W.E. Deming and

other quality experts gave a seriesof lectures before the JapaneseUnion of Scientists and Engineers.

Various member companies of thatUnion then started taking up TQMand sharing their experiences.

Making thunderbolts

So what can you do to improve your

companys capacity for management

innovation? A number of common

themes emerged from the research

that should serve as useful pointers

for a company that would like to take

its management innovation efforts

more seriously.

Become a conscious management

innovatorEvery company today

knows that it needs to continuously

create new products and services to

meet customers evolving demands.

And these firms have all set up some

sort of innovation function, whether

it is in the form of a physical R&D

lab or a new venture division. If you

want to become a management

innovator, selling the importance of

management innovation to yourorganisation is a crucial first step.

Create a questioning, problem-

solving cultureWhen you or your

employees are faced with an unusual

challenge in your company, look

deeper into the problem: see the

problem in new ways and start to

hypothesize about new ways of

solving it. Only the latter path can

take you towards management

innovation, so you need to encourage

employees to explore the unexploredand to avoid the easy answers.

Seek out analogies and exemplars

from diff erent environments

Depending on the problem you are

trying to solve, the types of solutions

you might want to consider will vary.

Exposing your employees to many

different types of environments and

different ways of operating is also

invaluable as a means of opening up

their minds to new alternatives.

Build a capacity for low-risk

experimentationIn one company we

know, there is a sustained effort to

encourage individuals and teams to

come up with management

innovations to tackle everyday

problems with the existing

bureaucracy and processes. But

each innovation must be tested with

a limited number of people and for a

limited period of time. This has

ensured that every idea gets a shot

at implementation without crippling

the ability of the organisation as a

whole.

Make use of external change-agents

to explore your new ideasOutsidersfulfil three primary roles. They

represent a source of new ideas and

analogies from different settings,

they can act as a sounding board for

making sense of your emerging

innovations, and they can help to

validate what you have done.

Become a serial management

innovatorThe real success stories in

management innovation are not the

companies who have innovated onceor twice. The serial management

innovators (like GE, which has been

a pioneer in many new approaches,

from strategic planning to executive

development to divisions observing

boundarylessness) are the ones to

emulate.

These six points are certainly not a

recipe for management innovation.

The process of developing radical

new ways of working will always have

some dose of luck and randomnessto it. But you can certainly tilt the

odds in your favour by working on

these points and by creating a

greater understanding in your

company of how management

innovation happens. To be sure,

thunderbolts seldom happen in

companies in which managers

worship the status quo.


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I

n 2000 Procter & Gamble (P&G)

was at a crucial point in its long

history. One of the worlds best-known corporations and creator of

some of the worlds most famous and

successful brands was at a

crossroads. Its CEO, Dirk Jager, had

left after a mere 18 months in the

job. In March, the company

announced it would not meet its

projected first quarter earnings. The

stock price was spiralling downwards

falling from $116 in J anuary to

$60 per share by March. The massive

loss of $85 billion in marketcapitalization was matched by the

loss of confidence within. It provoked

a media frenzy. Perhaps most

poignantly, Ad Ageheadlined its front

page story: Does P&G Still Matter?

It was one of many column inches

devoted to the apparently impending

demise of the company.

P&Gs new CEO, A.G. Lafley,

provided an instant dose of reality:

We werent delivering on goals and

commitments to analysts and

investors. Major P&G businesseswere underperforming only three of

them accounted for 80 per cent of

the total value created inthe 1990s.

Competitors were swooping in and

gobbling up market share. We were

overinvested: we overbuilt capacity,

hired too many people, funded too

many aggressive introductions of new

products and expansions of existing

brands. P&G brands were not

delivering good consumer value: we

werent consistently leading

innovation, and prices were too high.

We had priced-up big establishedbrands to pay for new products and

aggressive geographic expansion. Our

costs were also too high. We had

frayed relations with important

customers who were frustrated with

incompatible strategies, poor service

levels, and P&Gs inability to create

value for them. We were too

internally focused. Consumed with

the massive reorganisation, and with

so many people in new jobs, we were

all spending too much timemanaging internal transactions.

In addition to this litany of internal

problems, P&G had the abiding

corporate challenge of achieving

growth. A mature company, such as

P&G, is usually expected to deliver

organic growth rates of around four

to six per cent every year.

Historically, this growth had been

delivered by the companys

formidable research and

development resources thousands

of researchers spread worldwide. Butwith the proliferation of new

technologies and intensifying

competition, P&Gs standard

approach to R&D was under threat.

Only 35 per cent of its new products

met their financial objectives. R&D

productivity was stagnant.

Lafleys prescription for the ailing

corporate patient was wide-reaching.

Estimating that it would take three

years to get P&G back on track, he

focused the company on four core

businesses (accounting for 54 per

cent of sales and 60 per cent ofprofits); its big, established leading

brands; and P&Gs top 10 countries

(80 per cent of sales and 95 per

cent of profits). Costs, which had

rocketed under Jager, were cut.

Capital spending had leapt to eight

per cent of sales and was trimmed.

Nearly 10,000 jobs were lost around

the world as underperforming

businesses were closed and the

company left businesses now

regarded as non-strategic. Someproduct lines were discontinued,

investments were written off and

brands, such as Comet, Crisco and

J if, were sold off.

And, perhaps most boldly of all, in

the midst of establishing the new

P&G order, Lafley announced an

entirely new approach to innovation.

P&Gs corporate innovation fund had

increased seven-fold in four years.

Two-thirds of these projects were

cut. Lafley announced that, in the

future, instead of relying on itsinternal research and development,

P&G expected that 50 per cent of its

innovation would come from outside

the company. R&D numbers would

remain the same, but the onus

would be on maximizing ideas

internally and externally.

The logic was simple. For every

one of the companys researchers,

P&G calculated there were 200

people scientists or engineers

FromR&D toConnect + Developa

t P&GChallenged by its CEO to source ideas from outside, Procter & Gambledecided to blaze a new path for its research and development function.In pursuit of inspiration, its R&D became turbocharged by usinginsourcing to expand P&Gs horizons.


8/28


outside the company who had

talents the company could utilise.

Instead of 7,500 people in corporate

R&D, P&G recalculated that there

were 1.5 million worldwide whose

knowledge they needed to tap into.

Research and development was

reincarnated as Connect + Develop

with an organisation of 1,507,500

people.

Green lights; new dawn

For Larry Huston, then 26 years into

his P&G career, Lafleys

announcement was a crucial

moment, a green light for his work

stretching back much of the past

decade. He told his team: Were in

business, things are going to start

happening.

Hustons state of readiness was

understandable. Tracing back theidea that became Connect +

Develop, he goes back to the mid-

1990s and draws parallels with

artists. Its just like the way some

artists will develop models and

sketches before they commit to

creating the final painting, says

Huston. Thomas Hart Benton, for

example, a US-based social realist,

would create clay models and then

more models of what he was

eventually going to paint and then

he would start working on the

perspectives with all kinds of

sketches. He would work on the

concept for a long, long time before

he ever actually created a successful

painting. Thats the way most artistswork; look at all the study pieces

that everybody does. And, in the

case of this new innovation model,

we worked, probably, five or six years

on creating the studies that led to it

coming together, ultimately, in the

year 2000.

Huston, along with colleague

Nabil Sakkab, was initially interested

in how to develop a new organisation

form that combined the ability to

deliver high-performing results, yet

be adaptive. He spoke, among

others, to Dee Hock at Visa, who had

instigated a unique organisational

form labeled the chaordic

organisation. His attention then

developed to embrace chaos theory.

Huston sought to understand

whether there was a way to attract

the best people to projects with a

greater chance of success and to

allow bad projects to die because

they would go unstaffed. I wanted

to create an organisation where

people would be fluid and move

around and could swarm to the good

projects, yet protect the base

business.

Huston made contact with Stuart

Kauffman at the Bios Group and

spent time thinking through and

developing a detailed organisationdesign. This was captured on the

walls of a large conference room in

Santa Fe, and Huston was then

filmed giving a guided tour to the

organisation design of the future

with Kauffman following with his

own commentary.

By way of further experimentation

Huston then worked with a start-up

software company to launch a

company to facilitate a flow to the

best opportunity model. This web-

based investigation lasted a year

while Huston and his team studied a

handful of innovation projects that

had been brought in from outside

P&G. External connections created

about twice as much value asinternal initiatives when factors such

as success rates and time to market

and after costs were fully

considered. Huston extrapolated that

a connections model of innovation

could create a breakthrough in

driving P&Gs business and its

productivity.

Gilbert Cloyd, P&Gs Chief

Technology Officer, approached

Huston with a challenge: could he

create a new R&D model for the

company?

This was a moment in time that

allowed us to really consider a whole

new operating method, Huston

summarizes. I had run six years of

experiments, and went out and

started studying real world

innovation networks and how value

could be created. Then we created

the conceptual positioning for

Connect + Develop, around the idea

of turbocharging our already strong

base organisation. I had the

rationale and some ideas about the

tools and how to get it off the ground

and created a new role called

technology entrepreneurs. Lafley

announced that we were going to get

half of our innovation from the

outside. That was a major

intervention and so we were off andrunning.

Importantly, Lafleys

announcement was a very public

one. He put the stake in the ground.

Reactions were decidedly mixed,

Larry Huston recalls: Some peoples

first reaction was, wow, P&G is

getting rid of its R&D. Should we

sell the stock? This is a science-

driven company, what are they

doing, have they lost their minds?

They didnt realize that what we

were doing was substantially

strengthening our R&D capability.

Reality and development

The positioning of Connect +

Develop was important. First, it wasmade clear that Connect + Develop

was not a matter of outsourcing

P&Gs research and development

capability. Connect + Develop was

about finding good ideas and

bringing them in to enhance and

capitalize on internal capabilities. In

essence, an insourcing strategy.

The second point was that

Connect + Develop was not a

transformation programme.

The Connect and D evelop m odel of innovation is nascent and

likely to becom e the dom inant innovation m odel of our tim es.


9/28


I think transformation is a dirty

word, says Huston. If you go and

say to a company, Im going to go

transform you, theyll say, its going

to be impossible and well never

finish. In the case of Connect +

Develop we were careful not to

position it as transformation even

though now it is. We said, we have a

strong, powerful, global organisation,

weve built outstanding capability all

over the world, we have world class

people, what were going to do is

take this already strong capability

and turbocharge it. And so the core

idea is based upon how do we

turbocharge? And then, what are the

accepted beliefs that people have

about this kind of thing? How do we

create its credentials?

Connect + Develop focused on

three areas: the needs of consumers(each business and the company as

a whole identified the top 10 needs

of consumers); adjacencies (products

or services which could help P&G

capitalize on existing brand equity);

and, what the company labels

technology game boards (a

planning tool which enables P&G to

evaluate how technologies in one

area impact elsewhere in the

business).

At the heart of Connect + Developis using networks to gain connections

to new ideas. In the old invention

model know-how was key and

really this is what was focused on the

most. In the new connections model

know-who would become critical.

The networks P&G keys into are

varied. Among the most notable are

proprietary networks developed

specifically for Connect + Develop.

For example, P&Gs leading 15

suppliers have around 50,000

people employed in R&D. P&G builtan IT platform to share technology

briefs with suppliers. Closer working

relationships and the sharing of

information have brought a 30 per

cent increase in projects with staff

from suppliers and P&G working

together.

Even competitors offer sources of

inspiration. Huston recalls meeting a

competitor from Japan. He said,

Are you comfortable with talking? I

said, Of course Im comfortable

talking. I consider your 2,500 R&D

people to be my R&D lab. And this

really blew his mind.

P&G also created a network ofwhat it labels technology

entrepreneurs. They are senior

experienced people who have seen

everything, done everything. They are

focused on being the growth

provocateurs for the organisation,

Huston explains. The technology

entrepreneurs number 70 worldwide.

They are effectively the eyes and

ears of Connect + Develop making

contacts within industry and

education, with suppliers, and with

local markets. To date, thetechnology entrepreneurs have

brought over 10,000 products, ideas

and technologies to the attention of

P&G. Each is then evaluated.

Elsewhere, P&G taps into a

number of open networks. It is

involved with YourEncore, which

connects companies with high

performing retirees from over 350

companies; InnoCentive, which deals

with more specific technical

problems; and Yet2.com, an online

intellectual property marketplace.

Once ideas emerge through the

networks they are rigorously

evaluated by P&G before deciding toproceed with further development.

The innovation dividend

P&G accomplished its goal. Over 50

per cent of the companys

innovations now originate outside

the company. When Lafley first

announced his bold target in 2000,

the figure was under 15 per cent.

Connect + Develop has helped

turbocharge more than 250 products

into the marketplace, and has

generated billions of sales.Now Procter & Gambles vice

president for innovation and

knowledge, Huston believes that

Connect + Develop offers broader

lessons on how to develop

management innovations. The one

thing that is really important is to

get the concept right, says Huston.

P&G is a concept-driven company.

A concept for us is how the products

going to make the consumers life

Larry Huston: well connected


10/28


better and providing strong reasons

to believe in it. So we practice

concept development here every day,

because we have to move hearts and

minds. We have to win the battle at

the store shelf and getting the

concept right is enormously

important. In fact, most product

failure, 75 per cent of product

failure, is not because the product

doesnt perform, but because it was

the wrong idea. It didnt provide

desired consumer benefits at the

offered price. Many organisation

failures are due to both a poor

concept and poor execution.

For a number of innovations that

Huston has been involved in, he

went through the formal concept

development storyboarding process,

applying what P&G does for products,

to management concepts andbusinesses. One of the new business

ideas tested was called YourEncore

(www.YourEncore.com). The concept

was to take the experience and

expertise of people who have retired

and to utilize it in organisations.

Huston and his team created

storyboards for the concept and then

took them to 21 prime prospect

companies. They commented on and

critiqued the idea, how it would work,

and the value proposition. Hustonnext ran financial models to see if

the desired concept was capable of

making money. YourEncore now links

over 1,800 retired scientists and

engineers drawn from 350

companies to organisations in need

of their experience and expertise.

Its all about bringing in new

innovation DNA to create new

sources of growth. Thats the core

idea, says Huston.

Clearly, Connect + Develop offers

further lessons on how companiescan utilize external expertise and

maximize internal resources. The

commitment of the companys

leadership was important. Says

Huston: This is all about

leadership, number one, being clear

about where to play, how youre

going to win and where you want to

grow. Thats the job of the CEO and

the top management to really figure

this thing out. But, it is trite to say

that this is all about starting with the

CEO and changing the rewards

system. For me, it starts with an

idea, one that is proven, one that

can be scalable. Then it moves to

the top leadership for support. Then,

on to making the necessary changes

in the culture, like rewards, to

enable adoption at scale.

Second, its about building a lot

more muscle. Connect + Develop is

about muscle, its about giving us

many more hearts, minds, hands and

feet to do the work. And the third

thing is, it is about equipping people

and mindsets. For the most part our

people have good ideas. We dont

really have an idea problem. We have

people who are smart and motivated,

but mostly organisations are under-

led around innovation. Its the topofficers that have to really create a

growth culture based on innovation

rather than just acquisition.

There are also cultural challenges

involved in moving any organisation

from an emphasis on finding

solutions internally to tapping into

brilliant minds elsewhere. Most

senior managers at P&G have been

with the company for the vast

majority of their careers. You rely

on people outside, to some extent, tohelp challenge you and put ideas in

your head about what might

happen, Huston admits. In

refining your ideas and ideas of

whats possible, you have to expose

yourself outside. Whether its going

to see Dee Hock or Stu Kauffman or

some little entrepreneurial company

or studying the movie industry or the

toy industry, or whatever it might be,

you have to. The problem is people

dont know the right questions to

ask. And if youre inside a companythe only questions you know to ask

are those within your frame of

experience. Its hard to ask a

question outside your frame of

experience so you have got to be

moving to other frames of experience

to come up with good questions.

Huston believes that the Connect

+ Develop model of innovation is

nascent and likely to become the

dominant innovation model of our

times. It is like developing the

telephone system. If Procter &

Gamble developed the telephone

system and only we had it in the

world, yes, it would benefit our

operations. But, if the world has the

telephone, look how much more

effective we are and whats most

important with the telephone system

is not the utility but the

conversations. So weve been telling

our potential partners, heres the

utility, heres how you do Connect +

Develop, because fundamentally we

believe that our competitive

advantage is knowing the

consumers, leveraging the strength

of our brands, and the quality of the

conversations that we have. Its not

whether or not there are networks

out there or people know that we arelinking to scientists, its the quality

of the conversation.

Today, for many companies, the

innovation phone system, the

innovation phone book, and the idea

of innovation conversations barely

exists. For Procter & Gamble,

management innovation has been an

important driver of its enduring

success. It pioneered brand

management in the 1920s, it was

one of the first companies toimplement a transnational

organisation in the late 1980s in

R&D (also led by Larry Huston), and

it is now leading the world in its

approach to open innovation. And

the beauty of such innovations is

that they are sufficiently deep-seated

that competitors take a long time to

catch up. As Huston observes,

Connect + Develop is a long-term

investment: I think P&G will run on

this model for 20 years, and one-by-

one many other companies willembrace it.

ResourcesLarry Huston and Nabil Sakkab,

Connect + Develop, Harvard

Business Review, March 2006.

A.G. Lafley, Getting Procter &

Gamble Back on Track, speech at

the Rotman School, April 21, 2003.

www.pg.com


11/28


How did you come to a scorecard

point of view?I was an aerospace research scientist

for 15 years and decided that I

wanted to change careers. So I quit

my job, attended B-school, and

worked in a strategy consulting firm.

Ultimately, I became aware of Total

Quality Management (TQM) on a trip

to Japan. And thats when I became

so interested in it that I decided I

really wanted to focus attention on

TQM rather than strategy consulting.

Were you also interested in

innovation at this point?

Yes. I wanted to make sure that I

worked in companies that had a

record of innovation and were

particularly responsive to innovation at

the management level, because TQM

is a kind of innovation. As I searched

for American companies that would

meet the test of being both innovative

and receptive to TQM principles, I

increasingly focused on Analog

Devices, and I wrote to Ray Stata.

Why that company?

Ray was and is one of the rare CEOs

who is really curious and interested

about management innovation. I

remember when I first went to see

him, it turned out that it was quite

timely because he had just gotten off

the phone with one of Analogs major

customers who was irate because a

key shipment was late. And so I

talked about TQM and it made for a

great dialogue. It seemed to me rightaway that Ray and Analog were

blessed with an innovative culture.

Did you say culture?

After years of working with

innovation, there is no question in

my mind that the number one

ingredient is to have an innovative

environment. You cant innovate in

an environment that is not open to

innovation, and that means from the

very top, from the CEO all the waydown through the organisation. And

it was clear that Ray was interested:

he recognized that TQM was an

important thing, that it had an

impact on any and every industry,

but that it would acutely affect the

semi-conductor industry, of which he

was a part. Theres no question that I

immediately liked and respected Ray

Stata and so that ended up being the

chemistry of my going to Analog. It

was the right environment for me

and it was the right time for him.

Was everyone inside Analog as

committed to TQM and innovation?

No. And, in time, Ray was succeeded

by someone who has more of a

traditional approach to management,

the kind of executive who makes

doable promises to Wall Street and

then tries to deliver on them. The

lesson here is that the leader of a

company is essential to innovation;

yet, after a company has become

innovating and if the industry doesnot demand that you innovate

further someone of a different

temperament can lead the company,

with a much more status quo

demeanour.

When you worked on being

innovative, what kind of time horizon

was in your mind?

One of the first assignments that Ray

gave me at Analog was to develop

five-year strategic plans.Traditionally, once every five years,

they would develop a strategic plan.

Curiously, they would not revisit that

plan until the five years were up. So

I started to think of innovation with

at least this kind of time horizon.

But five years...does that work in

todays marketplace?

Obviously in todays world thats not

a viable approach, and it did change

even while I was at Analog more

toward a continuous strategicplanning model. Thats whats

needed now. If the market demands

constant innovation (and just about

every market does), you have to

focus on innovation constantly.

Whats most relevant to note here is

that innovation is not something that

is always defined by numerics. Even

at Analog, I came up with something

that was called the Corporate

Performance Audit, an annual audit

Perfectlyin balancArthur M. (Art) Schneidermanpioneered what later became the conceptof the balanced scorecard while a vice president of quality andproductivity at Analog Devices. We talked with Schneiderman, now anindependent consultant, to find out more about the early evolution of amanagement innovation.


12/28


that used what I called a half-life

method. The plan we devised used

an annual context and focused on

seven or eight non-financial things

that we needed to manage in order

to get to where we wanted to be in

five years, numerically and

otherwise. In fact, one of my tasks at

Analog was to manage the agenda

for the monthly business meetings.

There was always a battle with other

senior managers whether we should

discuss, first, the non-financial

parameters of the business or thehard numbers. Many companies fight

that same battle today.

How did you resolve this battle?

I cant put my finger on where or

when it happened, but I suddenly

realized the best thing to do was to

try and combine the two items in

what became the overall scorecard

for the business. In trying to meet

the demands of the hard number

execs, I agreed that we would haveno more than three financial

measures at the top of the scorecard

and then non-financial measures for

the rest. So that is how the Analog

Devices scorecard was born. The

general manager urged that we

abandon the fancy name of

Corporate Performance Audit and

call our performance tracking,

simply, the Corporate Scorecard. And

guess what? Divisional Scorecards

soon followed, which gave us a

weighted average of each divisionsonline performance. What would

change over time are the things that

went on the scorecard, not the

financials but the non-financials. At

the time, as far as I know, no other

company was doing it this way.

The balanced scorecard has evolved

over time, and it seems that there

are variants of the concept you

originally created. Is there one right

scorecard?

Some of my colleagues over the

years have concentrated on creating

the perfect scorecard, but Im not

sure its helpful to insist on just one

form of scorecard. The big problem

that organisations have is in

implementing the scorecard; they

dont have tools in place for

achieving the goals. And so they fail.

They have a scorecard but they dont

achieve the results they desire, so it

never makes any strategicdifference. In the end, they waste a

lot of effort and a lot of energy that

could be spent elsewhere. Some say

the scorecard itself is the big thing; I

say the real power of the scorecard

concept is in how youre going to

implement the changes. Thats the

key thing.

Along those lines, if its important

how you implement the scorecard, is

it also important to think about howyou develop the scorecard?

Absolutely. The process by which

you develop the scorecard is of

critical importance. Most of the

time, measures that people add to

the scorecard are politically chosen

measures, not strategically chosen.

So you have to have a well-

documented, well-understood

process that you refine each cycle.

This means that you not only have to

work on the scorecard, you also have

to work on how you are going tocreate it and how youre going to

ensure that it is widely known and

thoroughly understood, which leads

you to how you are going to achieve

the goals that you come up with.

So having worked with scorecards for

so long, do you have any favourite

lessons learned?

Let me offer three. First, I think that

any time you come up with an

innovation in management that has

numerical targets as its basis, it is

unlikely that it will ever be accepted

with enthusiasm throughout the

organisation. The lesson is that you

should focus on rate of improvement

rather than specific end results.

Second, I believe the scorecard is

probably somewhat less important

than the half-life method: you have

to test everyones sense of making

solid progress and thus you have to

establish sound improvementprocesses in the organisation. And

then the third thing is to cultivate

the mental process for process

management. On my website,

www.schneiderman.com, I list 7-

Steps of Process Management. I do

this for a very important reason: its

vitally important how you approach

innovation or the end results will be

far less than optimal.

Are your seven steps the same asTQM?

My 7-step model for process

management encompasses TQM, but

it also tells you when, if necessary,

to redesign a process, to re-engineer

it. It also has control built into it,

which basically says that it doesnt

do you any good to improve a

process if it has random applicability

or otherwise is out of control. In

terms of the steps I recommend, I

dont care where you start, but I do

care that you have an open processthat allows you to ask questions from

time to time, questions like: How are

we doing? Are we on course? If not,

why not? A scorecard is an essential

component to running a business,

but only if you know how to play the

game very well. In the end, the

scorecard tells you whether the

structure and processes inherent in

your business are helping or not.

I cant put m y nger on w here or w hen it happened, but I

suddenly realized the best thing to do w as to try and com bine the

tw o item s in w hat becam e the overall scorecard for the business.


13/28


T

he origins of the modern firm

can be traced to the 19th

century. Yet the nature ofbusiness enterprises remains a

constant work in progress. Over the

last decade, in particular, technology

has opened up a wide range of

opportunities to change the

fundamental shape of the traditional

firm. This potential has been

enthusiastically charted by

commentators and academics alike.

In 1998, Thomas W. Malone and

Robert J . Laubacher of the

Massachusetts Institute ofTechnology (MIT) looked at how a

new kind of organisation could form

the basis of an economy in which the

old rules of business are overturned

and big companies are rendered

obsolete. Drawing on their research

at MITs Initiative on Inventing the

Organisations of the 21st Century,

Malone and Laubacher heralded the

dawn of the e-lance economy a

world where freelance workers would

come together in temporary or virtual

constellations rather than astraditional employees. Malone and

Laubacher were not alone in

predicting that technology would

change the shape of organisational

life. There has been an array of

variations on the theme of creating

and managing virtual and networked

organisations. Yet, despite

continuing technological strides, the

predictions of revolutionary change

remain largely unfulfilled.

In parallel, the 1990s saw

increasing interest in professional

service firms as a uniquely fertilearea for discussions of organisational

structures. For example, Tom Peters,

a former McKinsey consultant turned

management commentator,

celebrated the multi-functional

global teams speedily assembled by

the consulting firm to tackle client

problems. Their speed and flexibility,

coupled with their strongly defined

culture and their ability to manage

and maximise knowledge, convinced

Peters that it provided a partialblueprint for how business firms

could be constructed and behave in

the global economy.

Inspirations

The London-based consulting firm

Eden McCallum provides an

innovative take on the nature of the

firm as well as potential future

scenarios for the organisation of

consulting firms.

Launched in 2000 by Liann Eden

and Dena McCallum, EdenMcCallum is a network-based

consulting firm. Rather than having a

large headquarters and all the

overheads associated with a

conventional consulting firm, Eden

McCallum retains a minimal central

staff and utilises a network of

freelance consultants. Eden is a

former McKinsey consultant who also

held international marketing roles at

Unilever and Siemens. McCallum

was formerly an international vice

president and director of planning

and strategy for the publisher CondNast as well as being a former

McKinsey consultant.

The inspiration for the firm began

when McCallum was working at

Cond Nast and Eden was working at

McKinsey. McCallum realized that

her budget did not stretch to hiring

one of the big-name strategy

consulting firms McKinsey & Co.,

Boston Consulting Group, Bain or

Booz Allen Hamilton but she still

needed that calibre of support. Edenobserved that many strategy

consultants, particularly in the dot-

com era, were reassessing what they

wanted from their work and

flexibility and control were key. Soon

after, the former INSEAD MBA

classmates came up with the idea of

creating a pool of experienced,

independent consultants.

Six years later, turnover of the

company is over 10 million and it

has delivered more than 300

projects. The firm has grown by morethan 80 per cent per year. It now has

24 full-time staff and around 200

freelance consultants, making it the

second biggest strategy consulting

company in London after McKinsey.

Trends and opportunity

As with many other businesses,

Eden McCallums evolution was

based on the benign convergence of

a number of factors. In hindsight, a

Ma

king the firmflexibleHow companies operate has been established over twocenturies. Is it possible for a firm to break the established

rules of organisation? Eden McCallumdid just that.


14/28


lot of things came together at once,

explains McCallum. First and

foremost we wanted to create a

business. So, we looked at the

marketplace in a business we knew:

management consulting. And we saw

a couple of major trends the

maturing of the consulting market,and professional people wanting to

take more control of their careers.

These then led us into our unique

business model. And in creating this

business, we also ended up coming

up with an entirely new organisation

model. Business innovation begets

management innovation.

The first change was the maturing

of the management consulting

market, with clients seeking more

control and value in their consulting

spend. The dominance of the bigplayers in the business was and is

largely unquestioned. It has

spawned an entire generation of

companies and senior executives

who are comfortable with the notion

and value of management

consulting. They are aware of its

potential value to the business. In

the past, companies hired top

consulting firms to tap into their

bright, business-school-educated,

minds. With MBA graduates and

former strategy consultants now

commonplace among the senior

echelons of multinational firms,

there is a resistance to formulaic

consulting products and neatly

packaged solutions. Instead,

companies want consulting advicethat is genuinely tailored to their

situations. Companies are

sophisticated buyers. They can pick

and choose and shape. Clients want

the same flexibility as consultants,

says Eden.

The second trend Eden McCallum

happily tapped was among

consultants themselves. Many

consultants were bitten by the new

economy bug and left consulting

firms in search of entrepreneurial

excitement and the opportunity tomake a lot of money. When the new

economy fizzled from rocket to damp

squib, many one-time consultants

had reassessed what they wanted out

of their careers and were loathe to

re-enter the corporate world on the

same terms as before. At the time

when Eden McCallum began life,

many experienced consultants were

contemplating their next career

moves. At one point everyone

wanted to be partners, then they all

wanted to be entrepreneurs, recalls

Eden. The dot-com thing created

demand for flexibility. People left

their traditional careers and then

didnt come back.

At an operational level, too, Eden

McCallum recognized anopportunity. Large consulting firms

typically focused on high-level board

issues at FTSE 50 companies. For

their part, client companies often

wanted continued consulting support

on specific strategic issues or

implementation but were put off by

continuing high costs. Eden

McCallum offered a market-breaking

alternative: consultants with the

same high-level skills and rigorous

approach at approximately half the

cost. After the dot-com crash, thiscombination of quality at lower cost

was particularly alluring as many

firms had scaled down their

consulting budgets.

Innovative solutions

Eden McCallums proposition was

simple but scary: a consulting firm

without any consultants on the

payroll and without any proprietary

methodologies. Instead, they

Liann Eden and Dena McCallum: flexible friends


15/28


would employ consultants on a

contract basis as demanded by their

clients, and they would use whatever

methodologies were appropriate to

solving their clients problems. As

one former Bain consultant observed,

this approach appeared to challenge

everything consultancies held dear: it

was like the sky falling in.

To make this model work, Eden

McCallum had to rethink many of the

standard precepts of management

thinking:

Tailor the offering Eden McCallum

focuses on tailoring the consultants

experience, skills and personalities

to the clients needs. The firm makes

it clear that it is not in the business

of creating its own distinctive

intellectual capital and that it is

agnostic when it comes to particularmethodologies, despite the fact that

novel ideas and tools are the

lifeblood of most big consulting

companies. We rely on what our

consultants bring to the table and let

our clients choose their preferred

approach by interviewing and

selecting the consultants, reflects

McCallum. Clients want to work

with a person they trust; they dont

necessarily want a particular

methodology. They just want theproject to succeed.

Outsourcing the delivery channel

Eden McCallums core delivery

mechanism is effectively outsourced

to freelance consultants. On the

surface, at least, this appears to be a

dangerous strategy. The company is

clearly reliant on the quality of the

service offered by the consultants. To

make it successful, Eden McCallum

works hard to ensure the quality of

these people. Only one in 10

applicants makes it into the

companys talent pool. The second

safety element is that consulting is

built on relationships rather than

transactions. Relationships are

between clients and Eden McCallum,

and the firm endeavours to retain

control and oversight over the

relationship with the client. Says

Eden: If we structure the project up

front and we have a long-term

relationship with the client, then we

dont have to own the delivery

mechanism. The keys are trust-based

relationships, clear problem-

structuring and careful selection of

consultants.

Involve the competitionThe standard

organisational model is to start small

with the intention of emulating or

overtaking an industrys big players

over time. Not so in the case of Eden

McCallum. From the start, Eden and

McCallum were clear that theirlivelihoods, and the future of their

business, depended on what was

ostensibly the competition: big-name

consulting firms. We exist because

they exist, says Eden. Companies

like McKinsey, Bain and BCG create

the market on both the client and

consultant side.

Before the firm was launched,

Eden McCallum began a dialogue

with the big players in the market.

This alerted them to the potential ofworking with Eden McCallum rather

than regarding the company as

another upstart strategy consulting

boutique with eyes on their own

markets. And this symbiotic

approach has worked. Eden

McCallum has referred business to

big-name consulting firms, and they

have returned the compliment.

Elevate the process behind the

networkThe idea of a networked

organisation is not new. Brokers and

agents are commonplace. What

marks out Eden McCallum is that the

process behind the network is where

a great deal of the value lies.

Indeed, in a business without its

own consultants and without its own

intellectual property, this is the heart

of Eden McCallums value-added.

Consequently, about half of its

full-time staff are fully employed

ensuring that its consultants are the

right people in the right jobs. The

other half of the full-time staff are

totally dedicated to developing and

nurturing client relationships. Our

full-time employees are either

working on the supply side so they

are consultant-facing or on the

demand side which is client-facing,

explains McCallum. And it is the

skills of these individuals, and their

ability to match top-quality

consultants with the right projects,

that define Eden McCallum. Every

consulting company works hard tomatch its consultants to the right

projects; reflects Eden, the

difference is we dont have to worry

about capacity management, so we

can always make a good match.

Initially, to build awareness among

potential consultants, Eden

McCallum placed advertisements in

the Financial Timesand The

Economist a statement of intent as

much as anything. The ads

emphasized that the company waslooking for consultants who were

independently minded with

experience in a top consulting firm

and who had an MBA from a leading

business school. These basic

recruitment benchmarks remain in

place. In addition, Eden McCallum

consultants are evaluated against

five core competencies, their CVs are

screened, all references are checked,

and they go through multiple rounds

of partner interviews. The people

who recruit the consultants are,

themselves, former consultants who

understand the dynamics and

demands of the business.

Eden observed that m any strategy consultants, particularly in the

dot-com era, w ere reassessing w hat they w anted from their w ork

and exibility and control w ere key.


16/28


When they actually go to work,

Eden McCallum puts two to three

consultants from its talent pool in

front of a client. The client then

evaluates with whom they think they

would work best. On the completion

of projects there is an extensive

feedback process focused on the

individual consultants and Eden

McCallums performance. Big

consulting firms put forward a team

and the client generally doesnt have

a say about who is on it, says

McCallum. Because our clients are

involved in choosing the consultants

they work with, they have a vestedinterest in making it work with those

people.

Redefine the em ployment

relationship Eden McCallums

network of consultants are not

employees in a traditional sense, nor

are they entirely freelance

contractors. They lie somewhere in

between: they have considerable

loyalty to Eden McCallum, and they

get most of their work from thecompany, but they define their own

terms of engagement. This includes

choosing which sectors they will

accept projects in, how many days

per week and how many months per

year they work, the logistics around

travel and many other elements as

well. We are constantly putting

together a new puzzle for each

project, explains Eden. To be sure,

this arrangement requires constant

balancing to keep everyone happy,

and it is not for everyone. But, by

letting their consultants choose their

own terms of employment, Eden

McCallum has a much more

dedicated and committed workforce

than would have been possible with

a traditional hierarchical

organisation structure.

Create transparency Eden McCallum

works very hard on creating

transparency in its management

model so that everyone knows where

he or she stands. This ensures that

there is a good relationship between

network members and avoids the

sense that some people may begetting favourable treatment ahead

of others.

One complication lies in financial

arrangements. To avoid this, Eden

McCallum is very open about its fee

structure. For around 100 of its

consultants, the firm is their main

source of income. Another 100 work

on about one project a year. Initially,

fees were put forward by the

consultants. Then the company tried

to allow clients to determine fees.Now, how much consultants are paid

depends on a banding system in

which consultants are paid

according to their seniority and

consulting skills.

Another common concern in

network organisations is how the

available work gets shared. So the

firm tries to be clear about the likely

levels of demand for people with

different skills sets. It is about

calibrating expectations, says Eden.

Were honest with consultants we

dont anticipate using a lot. We tell

them that we anticipate using them

once a year. Our interviews actually

provide great career coaching for

them and the network offers them a

lot of information. Often they will tell

us what their targets are in terms of

working with us. Some will work for

six months and then go travelling or

do something else others are

working full-time on back-to-back

projects. There is no exclusivity in

the relationship.

Reinventing the firm

Eden McCallums experiences helpto shed light on the age-old

question: What is the real raison d

tre of the firm? In an era of

outsourcing and virtual working,

what are the minimum few things

that the firm has to do to justify its

existence?

The answer is three things. First,

the Eden McCallum brand

represents a particular value

proposition to its clients and its

consultants, and for the founders akey part of their job is to continue to

nurture and sustain that value

proposition. Second, Eden McCallum

is a nexus of relationships: it gains

value from the social capital that

builds up over time in that set of

relationships. And third, it is a

mechanism for structuring the work

and managing projects. These are, in

essence, the core competences of

Eden McCallum and are the things

the company has to sustain as it

grows and evolves.

Eden M cCallum s experiences help to shed light on the age-old

question: W hat is the real raison dtre of the rm ?


17/28


18/28


The 20 top executives of the

business group held an off-site in a

windowless room in London at the

end of 2003. They developed a clear

agenda for growing the business,

and then they started looking into

the blockers, the things that were

standing in the way of the growth

agenda. The usual suspects were all

there centralized structures and

processes, not enough scope for

initiative taking and budgeting. As

Stadelmann notes, Why do we do

the budgeting process when we arelooking for growth? Budgeting is

highly defensive. It is not just

cumbersome, it is fundamentally

against growth. It is about

negotiating down the targets that are

proposed by the centre. And it

causes people to talk about

numbers, not about clients and

market opportunities.

Ziegler takes an even more

emotive position: The old budgeting

process was basically aboutwithholding information. I go in to

the process arguing that I can make

30 per cent less than what I think I

can; and my boss pushes for 30 per

cent more than he thinks I can do.

Then we have some kind of a

bazaar and the one who can

negotiate more convincingly wins.

How does this help us achieve our

growth targets in any way?

Out with the old

Following the off-site, a workinggroup was set up for enabling and

driving growth, with the abolition of

the budgeting process as one topic

on the agenda. This was easier said

than done, however. The process

could not just be thrown out without

replacing it with something; client

advisors still needed to be motivated

to grow the business.

And most tricky of all, there were

no role models for UBS to follow. A

Swedish bank Svenska

Handelsbanken had pioneered a

no-budgeting model back in the

1970s, so a couple of UBS

executives took a trip up to

Stockholm to compare notes. But as

Ziegler recalls, It was not what we

thought it would be. Handelsbanken

were in different business models.

So we could not learn as much as we

had expected.

Were they aware of the Beyond

Budgeting Round Table, a UK-based

group that had been looking atalternatives to budgeting since the

mid-1990s? Stadelmann is almost

apologetic in his response: No, this

was not driven from a theoretical

angle at all. This was driven by pure

business logic if we want growth,

then budgeting gets in the way of

what we are trying to create.

Interestingly, UBS (the parent

company) had been part of the

Beyond Budgeting group until 2002.

So while there was some awarenessof the round tables activities, it was

not a primary driver of UBS Global

WM&BBs initiative.

In with the new

The new model was built from the

ground up, and according to the

particular needs of the UBS Global

WM&BB business in all countries

except the US, which wasnt part of

this business group at that time.

Rather than comparing the

performance of client advisors with abudget number, Stadelmann and his

team evaluated them against

themselves (their previous years

results) and against their peers. As

he explains, We set up a carefully

formulated internal benchmark. We

defined various clusters within the

bank to make sure we were

comparing apples with apples. We

created monthly measures of actual

performance on the usual criteria

revenues, net new money,

cost/income ratio. And then we

ranked all the desks (groups of

client advisors) in the cluster. In

essence, we created performance

league tables, and we made the

results available for everyone to see.

The league tables were designed

to serve two purposes. The first was

to fuel the competitive instincts of

the client advisors and to push them

to deliver higher levels of

performance than they would have

ever done under a traditionalbudgeting process. The desks

ranking was fed into the annual

bonus process.

The second function of the league

tables was, paradoxically, about

encouraging higher levels of

cooperation between desk heads. As

Ziegler explains, We use these

results to drive our coaching and

best-practice transfer processes. We

are a learning organisation, and the

primary purpose of the forcedranking is to help us to improve.

Why would desk heads choose to

share their success formula with

their peers? Isnt it like asking

Chelsea Football Club to reveal its

secrets to Manchester United?

Stadelmann laughs at the analogy.

Actually, no, it isnt. There are two

key differences. First, this is not a

zero-sum game: if we all do better,

we all make more money. And

second, bonuses are not calculated

on a formula yes, results are thebiggest single component, but we

also factor in all the soft stuff,

including coaching skills, openness

to sharing, and so forth.

But we are not so naive,

Stadelmann continues, to think

these discussions will happen

spontaneously. We know a

competitive system is likely to create

competitive behaviours that go

against our philosophy. So we

O ne issue that every big-com pany m anager can agree on isthat the annual budgeting process is an enorm ous waste of

tim e and effort.


19/28


have had to institutionalize a set

of processes for coaching and best-

practice improvement. Every week,

the desk heads get together to share

their experiences. It is a sales

meeting of sorts, but with a strong

coaching element. And every month,

there is a meeting of the desk heads

in a cluster where the league table

results are compared. People talk

about what has made them

successful or why they are lagging.And this process is repeated up the

ladder to business sectors, business

units, business areas, and even at

the executive committee level.

There is no naivet about bonuses

either. The annual performance

evaluation also includes a quality

component: is this individual willing

to pass on his knowledge, to help out

with the development of other

colleagues? This evaluation is made

at all levels from executivecommittee level down to the

individual client advisor.

One further point of clarification is

in order: no budgeting does not

mean there are no estimates of

future performance. Marcel Rohner,

deputy Group CEO and CEO Global

WM&BB, needs to have his finger on

the pulse of the business, and he

needs to know how the results are

shaping up over the coming months.

As Karin Wyss, head of planning in

UBS Global WM&BB, observes, Westill have to plan: there is a system

of high-level rolling forecasts for the

next five quarters. Ziegler adds,

These are best-estimates only,

performed by a small group of

central people, and for the

executives only to discuss future

options otherwise this would be

considered a hidden budget. But it is

remarkable how accurate these

estimates are.

Putting the new systemin place

The new system represents a massive

change for employees across the

bank. How was it implemented?

Wyss explains: First, the new modelwas demonstrably better than the old

one. Second, we engaged in a huge

communication effort, led from the

top by Marcel Rohner. We had to

show this was not just the flavour of

the month, so we had a series of

roadshows across the bank, using

Alingi, the winning UBS-sponsored

Americas Cup yacht, to evoke

images of teamwork and flexibility.

And third, we rolled out our leading

for growth seminar across the bank,which gave senior managers a

language and a rationale for the

change of paradigm. UBS Global

WM&BB also invested in a state-of-

the-art management information

system that was just coming online

in 2004, making it possible to create

the detailed and transparent league

tables that are needed for the new

model to work.

The abolition of budgeting was, of

course, part of a broader shift in the

culture of UBS Global WM&BB ashift towards greater levels of

personal accountability and

entrepreneurial leadership across the

bank. For the first time, desk heads

were free to hire new people and

increase their marketing spend

without having budgeted for them.

And as Ziegler recalls, it took some

time for this new level of

accountability to sink in. Some desk

heads would still call head office to

ask for permission to invest in a

marketing campaign.

The changes also led to a new role

for the controllers department in the

corporate centre. Rather than spend

all their time monitoring behaviour

and performance, they became morelike an in-house consultancy. As

Karin Wyss explains, My job today

is to support the business rather

than monitor its performance. We

have a sophisticated Intranet system

for comparing performance across

markets, we share ideas, and this

helps us to understand why some

markets are stronger than others.

And what about the overall results

of UBS Global WM&BB? Has the

abolition of budgeting helped? Theresults are certainly at record levels

in 2005 UBS Global WM&BB

achieved profits before taxes of more

than 6.6 billion Swiss Francs,

compared to just 4.4 billion in

2003. But as Ziegler points out, It

is difficult to say how much of this

has come from the performance

management system. What is clear,

though, is that the new system had a

very positive impact on the

atmosphere in the bank. As

Stadelmann comments,Discussions on the sales process

are of a much higher quality than

before. We spend our time

discussing clients and market

opportunities, rather than

negotiating figures.

W hy would desk heads choose to share their success form ula

w ith their peers? Isnt it like asking Chelsea Football Club to

reveal its secrets to M anchester U nited?


20/28


Design is the height of

corporate chic. It is endorsed

by management gurus as the

new thing. Car advertisements

feature designers rather than

glamorous men and women. Peopleknow who Tom Ford is. Design

superheroes, such as Alberto Alessi

and Philippe Starck, glitter on the

pages of magazines. Their Midas

touch is applied to everything from

kettles to hotels.

But, in the business world at

least, the suspicion is that the

current gushing enthusiasm for

design is as superficial as was the

manage

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