If only there was a simple answer to the conundrum of stimulating creativity and innovation all boards would achieve transformational success.
Alas, the business environment is more complicated and there is no silver bullet to kill the spectre of disruption.
Boards sit and watch as their advantages are chipped away by nimbler, stronger or cleverer contenders. They are feeling what the dinosaurs felt. Unlike the fossils they wish to avoid becoming, they have the ability to transform themselves. So why don’t they?
And why, when management, front line staff, and even customers, are agitating for change, do they continue to lumber on their doomed course?
The Hollings Model classifies the lifecycle of an ecosystem into four stages: Exploitation, Conservation, Release, and Reorganisation. It can equally well be applied to the fluctuating fortunes of corporate existence. At each stage of life a company needs to innovate to remain relevant and survive to and through the following stages.
During the exploitation phase the company’s primary focus is on improving efficiency to deliver more and slightly better. As competitors are attracted by the company’s success the rate of growth slows and strategy turns defensive; blocking and countering are the order of the day. Conservation becomes a primary driver of activity. Eventually something has to give; disruption cannot be denied and, although it is a wrench, dead wood is cleared, uncompetitive activities are closed down and attention is turned to stopping the rot. This release allows resources to again turn towards creation of new ideas and activities in a reorganisation. Renewal will follow reorganisation as the company transforms before (hopefully) entering another period of exploitable growth.
This is all great in theory but hard to do in practice. Boards sit and watch as their advantages are chipped away by nimbler, stronger or cleverer contenders. They are feeling what the dinosaurs felt. Unlike the fossils they wish to avoid becoming, they have the ability to transform themselves. So why don’t they? And why, when management, front line staff, and even customers, are agitating for change, do they continue to lumber on their doomed course?
What can the board do?
At the AICD Company Directors Conference in Kuala Lumpur a panel of eminent leaders considered the role of transformational innovation and the practical steps that boards can take to establish a culture of transformational innovation which transcends mere rebadging to create a sustainable new platform of advantage. Subsequent conferences have advanced this thinking. Successive governance failures and requirements for boards to be more effective in detecting and avoiding failure have, however, had the unintended effect of reducing innovation and hence transformational success.
Governance rules, driven by the desire to conserve shareholder wealth, are clearly not going to deliver transformation; the best they can do is improve efficiency and reduce waste. This is why above trendline growth remains an elusive concept for mature businesses. It is also why a traditional ‘governing board’ focus is eschewed by many fast growth companies – it simply doesn’t deliver. When a board wants different outcomes it must do things differently. This is especially true for boards in industries that are facing disruption. This need for difference in the activities creates a need for different skills. In exploitation and conservation phases boards may have the luxury of time to reskill existing directors and manage orderly succession plans. In release and reorganisation that is not the case. Rapid change requires radical overhaul of board composition.
A Five Point Plan
Life at board level is not simple and ‘steps to success’ models rarely lead to more than just a better managed failure. However the Kuala Lumpur panel did identify five things that a board can do that will usually make a positive difference:
· Employ the best talent
· Give innovators the chance to work outside the core business
· Sustain investment in innovation
· Demand oversight of the ‘innovation pipeline’
· Set and monitor KPIs that support innovation
These are easy to say and not too difficult to feign. Doing them properly is somewhat harder.
Employ the Best Talent
We are all familiar (sick to death?) with companies that say they employ the best talent. This is a spurious claim for line managers in a stable business but when applied to the acquisition of people who are dramatically different it is more fantasy than strategy. Identifying the skills required for an unenvisioned future is hard. It often comes down to character traits. How does a board ensure that curiosity, resilience and insight are actively sought let alone successfully acquired? The wrong innovator will squander resources and ignore warning signs. The right one will persistently pursue objectives even when faced with hardship or scepticism. How does a board distinguish between these?
One helpful suggestion was to seek out people who naturally focus on the whole corporate ecosystem; the wide thinkers who naturally thrive in a connected universe. These are people who engage across a range of disciplines and functions rather than becoming the single source of reference on one particular topic. Another was to identify those who can empathise with the customers’ needs. Innovations in ‘the customer journey’ rather than in products and services (for which customers must then be sought) are particularly prospective for established businesses (which already have customers whose needs they can (hopefully) envisage. Improving choice without increasing confusion and sharing power with other parts of the value chain were also highly rated traits that, once identified could be recruited.
People that have demonstrated an ability to build support from others, especially in the absence of formal authority over them, are more likely to nurture their innovations through to implementation than those who succeed in spite of the people around them. Recruiting prospects with ideas and advocates is another sound strategy.
Degrees of Separation
The white blood cells of the corporate immune system will attack transformational innovation just as a body may reject the transplant that was given to save it. Change is threatening and a radical change in the way business is done will threaten loyal staff who have built success by doing business in a certain way. When the transformational innovation is a different business it is easy for the board to see the value of setting up a separate venture.
When the transformation is to the way value is delivered it is tempting to ‘seed’ the current organisation chart with innovators who will ‘change the focus’, ‘rewrite the narrative’ or ‘change the culture’. Giving in to temptation is rarely the way to build strength.
Keeping innovators out of the clutches of cultural and commercial restrictions is necessary to allow development to proceed to a stage where it becomes self-sustaining before exposure to the rest of the organisation.
Innovation requires sustained investment. Culture and control can be weaponised to resist innovation in practices: Budgets can be turned into an innovation disorder akin to bulimia, where investment is lavished then famished, or anorexia, where funding is low enough to risk overall survival by damaging critical organs. Innovation is not a quick fix. Budget support must be maintained and consistent. A famine and feast approach is a damaging as a trickled insufficiency.
To deliver a firm commitment over a long time frame requires strategic focus on the areas of innovation selected and diligent divestment or closure of projects that cease to align or fail to deliver so that the necessary funding can be sustained for the qualifying projects.
Watch the Pipeline
Board attention is precious; it signals that something is important. When the most senior team in the company chooses to spend some of its scant hourly resource focused on an issue that choice is noted. What interests the board fascinates the executives.
Too many boards direct their attention based on the current percentage of revenue and profit rather than the future potential to be derived from any activity. Board engagement is essential to signal importance and prevent management from quietly strangling innovation, especially when it is inside their normal reporting and control structures.
A structure for innovation including formal gateway approval for clearly identified stages within the innovation process is essential. This should include formal oversight at appropriate points and informal oversight to build skills and awareness within the board as well as to put core management on notice that innovation is a priority and any lessening of commitment will be noticed immediately.
Keeping a focus on potential new growth initiatives is essential if the organisation is to continue to invest time and effort looking to supersede its own success and transform to achieve levels of growth and innovation that will prove, temporarily, unassailable by competitors. Boards that maintain a focus on emerging innovations rather than promising near-term successes will drive a similar focus in their executives. This must, however, be balanced against a focus on progress of projects through the gated innovation process so that a steady flow of transformational ideas is generated and maintained.
Keep the Culture
More than any other facet of a boards’ impact on the organisation, the culture that the board creates, nurtures and demands will impact on the likelihood of successful transformation. If the culture is one of recognition of merit, acceptance of failure and truthful reporting of progress there is a greater likelihood of success in transformation efforts.
Summing it up the collective wisdom of governance ‘gurus’ and experienced directors suggests that there is no single, simple process or focus that will lead to success in transformation. Successful boards will create an ecosystem that requires measured and balanced interventions and inputs to coax forth the green shoots of growth. Know which elements to focus upon at each stage of the Hollings cycle is as much an art as it is a science. Culture of honest endeavour is perhaps the most that can be asked of even the best board.