How to make the Great Transformation happen

What I took away from the Global Peter Drucker Forum 2014

Every year in November I travel to Vienna to participate in what has arguably become the world’s premier gathering of management thinkers and practitioners: the Global Peter Drucker Forum. Every year I leave inspired, with tons of new ideas and fond memories of rich discussions with speakers and fellow participants. Yet every year I also leave slightly depressed at the same time. Depressed by the stark contrast between the possibility of much better management and much better organisations discussed at the Forum and the sorry state of organisational reality so many of us encounter every day. But this year was different. This year I left both inspired and optimistic. Optimistic that we will close the gap. And optimistic about my own ability to contribute.

From the outset, there wasn’t much to be optimistic about. I quote from the conference abstract:

“Huge structural issues are looming: unsustainable debt levels, underfunded social security systems in the Western world, currency imbalances, increasing income inequalities, bloated and inefficient public administrations, and excessive short-termism in big business driven by a value destroying and outdated shareholder value philosophy. With unemployment, and in particular, youth unemployment reaching historic dimensions, the idea of progress and continuous improvement of our living conditions is giving way to increasing future-angst.”

It goes on:

“Thus the very coherence of our societies is at stake. Incremental changes won’t suffice, it is about changing the very nature of our organisations and the way they function in a new world.”

And concludes by asking:

“Are managers, leaders, and entrepreneurs up to the task of tackling the great transformation that we face?”

Before the conference, my answer was like most people’s: sadly not. After the conference, though, it is: why not? In fact, all of us can be up to the task if we choose to.

So what happened at the Forum that made me change my perspective? In essence, this year’s Forum helped me gain clarity on a few vital questions and how they are related. I had bits and pieces of this clarity before the Forum, but now it finally all comes together in these 5 key learnings:

1. We understand very well what’s going on that leaves our organisations and our economies in the dire state they are in today
2. It is all constructed by man. It is neither an accident nor an inevitable force of nature
3. We know exactly how “better” looks like. Not just in theory but also in practice
4. The next generation of business leaders will help accelerate change
5. All of us can act and start to change right now

The following five sections of this article I will expand on these learnings and back them up with takeaways from the Forum. And I will conclude with a personal note on what this all means for me and my work going forward.

1. We understand very wellwhat’s going on that leaves our organisations and economies in the dire state they are in today

First, we optimise the use of an abundant resource: capital. Everyone agrees we should optimise the use of a scarce resource. But capital in today’s world is not scarce — it is abundant. We should use it, rather than optimise it. Clayton Christensen had an elegant and powerful explanation for this. He started by reminding us that there are only three types of innovation:

• Market creating innovation: creating something entirely new or making it available for the mass market. This is where nearly all corporate and GDP growth comes from.
• Sustaining innovation: making an existing product better to protect market share or margins. Typically does not create growth.
• Efficiency innovation: doing more with less. Does not create growth, but creates free cash flow.

All three are important and as long they are in balance, all is fine. But about 20–30 years ago the balance began to shift as we, in Clayton’s words, “began to worship at the altar of the church of new finance”. We began to measure success no longer in terms of whole numbers (eg, revenue or profit) but in terms of ratios (eg, IRR, RoNA). Success was thus no longer defined by how much profit or revenue we make, but by how efficiently we use capital. Turning to ratios also meant we now had two ways to improve our success metrics: increase the numerator (innovate and grow) or decrease the denominator (reduce investment). The problem is that market creating innovation requires investment and for the first 5–10 years makes the ratios look worse before they improve. Efficiency innovation (cutting cost) on the contrary takes 6–24 months before its effects can be seen in the ratios. And financial engineering (such as share buybacks) can be seen almost immediately. So one is hard and takes a long time, the other is easy and gets you almost instant results. No wonder the balance shifted so dramatically towards efficiency innovation and it nicely explains why so many companies and economies have a growth problem.

Second, and another major driver for short-termism is our belief in what Roger Martin called “dumb twin theories”: that stock price represents the value of a company today and that stock-based compensation is required to align the interests of managers and shareholders. The truth is, though, that stock price is nothing more than a consensus of expectations and that paying managers in stock creates incentives to manage those expectations — as opposed to manage for value creation in the real world.

Third, and it was again Roger Martin pointing this out: we allow public infrastructure to be hi-jacked by special interests. In essence, democratic capitalism relies on public infrastructure (such as physical infrastructure but also laws and regulations). Ideally, public infrastructure should aim to be broad and future-oriented (creating value for many and for the long term). Unfortunately, though, it turns out that even the most well-intended pieces of public infrastructure are perverted over time to become narrow and current (creating value for the few, right now). Gary Hamel also hinted at this during the pre-conference roundtable: “When a powerful CEO and a powerful politician sit together, you bet they don’t talk about the interests of consumers and citizens”.

All of the above create a climate that favours the short term over the long term and where (again in Roger Martin’s words) “the highest rewards in our economy go to people who trade value, not to people who CREATE value”. Andrew Keen added “10 billion dollar acquisitions of tech companies with no people and no business model are proof of the crisis of capitalism”. He also and wisely highlighted some other unintended consequences: growing inequalities and the emergence of a new class of oligarchs. More and more people are being left behind, their incomes stagnating or even decreasing.

Education is typically seen as the solution. But today education seems to be more part of the problem than part of the solution. “Business schools don’t publish much that challenges the world view” Gary Hamel noted. John Hagel agreed and with an even broader scale argument that “our education system is designed to feed people into the factory system”.

To make matters worse, these systemic problems are complemented by a myriad of problems at the managerial and organisational level. It’s what Dov Seidman aptly calls “management malpractice”. Here’s a selection:

Gary Hamel, in a nice twist on his own core competencies theory, talks about the three core incompetencies of the corporation, namely that they are inertial, incremental and emotionally insipid. In a hard to top soundbite he observed “Management is the love child of Julius Caesar and Frederick W. Taylor”. And he attributes the fact the most senior managers are so not up to the job “not primarily to these people but to the fact that organisational structures today demand too much from a few and not much at all from everyone else”. Organisations today are still built for efficiency and scalability when they should be built for learning, innovation and agility.

It’s the same phenomenon Dov Seidman describes when he says “we super-impose linear controls over essentially non-linear processes”.

At the pre-conference roundtable Roger Martin cited a study of the US labor market showing that 67% of jobs do not require independent judgement. “And that’s not in the nature of these jobs, it’s because we make them so”.

John Hagel explained how technology, through increased performance pressure and higher levels of uncertainty, leads to dysfunctional management behaviour: inflating of risks, discounting of rewards, adopting a short term view, developing a zero-sum mindset, eroding trust, squeezing harder.

Dan Pontefract made this nice analogy: “For a majority of employees going to work every morning feels like going to the dentist for a root canal treatment”.

Bill Fisher agrees: “Organisations hire great people and then turn them into average performers. And they do it fast.” He added “We’re not curating the human spirit. We’re building prisons for our souls”.

Again at the pre-conference roundtable Nilofer Merchant sharply referred to management’s cluelessness, explaining the dilemma of one of her former clients: “We wanted transformation, so we hired McKinsey. But we got Powerpoint, and no transformation”.

Finally, Pankaj Ghemawat nicely connected systemic and managerial shortcomings through the concept of market failures. He asked three rhetorical questions: “Do managers try to maximise the right objective function? No. Do managers manage to maximise their objective function? No. Does the market correct these failures? No.” And went on to observe “the system made me do it” is the perfect cop-out for managers. Market failures can dramatically expand the scope for management failures to matter a lot. Yet business schools are failing to teach students about the risks of market failures.

At the end of day one, Adi Ignatius summarised it all very succinctly: “We do a lot of dumb things and for some reason put up with it”.

Which directly leads me to my next key learning.

2. It is all constructed by man. It is neither an accident nor an inevitable force of nature

All of the above are our choices. We choose to believe that stock price represents company value. We choose to hand stock-based compensation to executives. We choose to build organisations that are inertial, incremental and emotionally insipid. We choose to let special interests capture political economies of scale.

Clayton Christensen used these powerful words to make the case: “I don’t think that God came down on a mountain to tell a gathering of managers that they have to measure their success with IRR. Someone said it, but it was not God.”

And so we can change it. We can make a different set of choices.

Better yet: we also know which ones to make.

3. We know exactly how “better” looks like. Not just in theory, but also in practice

Let’s start with the purpose of a business. Peter Drucker knew long ago. In 1954 he wrote: “There is only one valid definition of business purpose: to create a customer” (Drucker, The Practice of Management). That’s customer, not shareholder value. That’s whole numbers, not ratios. Companies who get that, like Apple or Southwest Airlines, have made the customer the centre of their attention. And that’s why they’re so successful. Shareholder value is only a consequence, but can never be the purpose. The reason is simple, as Dov Seidman reminded us in his talk: “I have never seen an employee who jumps out of bed in the morning to create shareholder value”.

Next, of course, we should simply stop the practice of stock-based compensation. As long as we do, executives will always have stock price at the centre of their attention, not the customer. Roger Martin, in his fantastic book (Fixing the Game), shows us how the NFL gets this. They make sure that no one with a stake in the real game (players, coaches, owners, agents) can at the same time have a stake in the expectations game (ie, betting). There’s no reason for us to do exactly the opposite in business. Even if Roger Martin has a point when he says “every incredibly stupid theory has a core that sounds good”. We know better by now.

We also know how to stop public infrastructure from being perverted over time. Again, it is the NFL (and again highlighted by Roger Martin) showing us how to do it: they constantly tweak the rules of the game. They know that smart coaches will try and find new plays that will give their teams an advantage over their opponents. That’s ok, but over the long run, if unchecked, that’s not good for the game and its customers, the fans. Games become boring if the same offensive play will always get you a first down. So the NFL constantly tweaks the rules to prevent this. We should do the same with public infrastructure. Assume right from the start that a piece of legislation will be exploited, and in order to prevent unintended consequences, tweak it when necessary. Patent protection laws are a case in point: intended to provide incentives for innovation they are now mainly used to prevent the competition from innovating.

That would make for a good start at the systemic level. How about the managerial and organisational level? Again, ideas and examples are abundant. Here’s a few:

Gary Hamel made a strong case that success in the future will be based on how fast we can innovate management models. And indeed on how we can create institutions that can self-renew and change as quickly as the world around us. For this we need new models of the organisation based on a different set of principles (such as meritocracy and broad participation). Companies that are doing it, like Atlassian or Zappos, are not doing away with managers, they make everyone a manager. They are also not doing away with hierarchy, but let hierarchy emerge bottom-up based on merit of ideas and value of contribution. This innovation advantage Gary envisions requires what he calls “an inspiration advantage” and thus needs an engaged workforce. One way to increase engagement is for managers to be asking “how do I increase the creative content of every job in the organisation?”

Dan Pontefract, whom I consider a true master practitioner of employee engagement, of course had a few more ideas to share when he walked us through the incredibly impressive story of how Telus increased employee engagement from 53% in 2008 to 83% in 2014. What this meant for business results is equally impressive: customer complaints went down 50% (while the industry average went up 50%). The number of CVs received went from 120’000 a year to 300’000 — clearly,people want to be part of his story. Stock price went from 28 to 71, then split and at the time of the conference was at 42. And Telus was the number one telecommunications firm in terms of shareholder returns world wide over the last 5 years. Not by maximising shareholder value, but by maximising employee engagement and customer value.

Another practitioner whom I greatly respect, Rick Goings, shared a few ingredients of better organisations with us, starting with the role of managers: “Managers must understand their job is not to build a company, but to create opportunities for people”. At the same time he was very clear about where value is created: “The value zone is at the interface between the customer and employees, not in the CEO office”. That’s a strong call for trusting people to do the right thing, which he reinforced with the simple observation that a CEO could maybe follow 5 innovation projects at a time but the entire organisation could pursue millions — if only we let them. He finally tapped into the engagement theme with what I found to be one of the most powerful statements of the Forum: “There’s no such thing as lazy people. Only uninspired people”.

On a very similar note, Pat Christen reminded us “when we drive purpose and liberty deep down in our organisations, amazing things will happen”.

Dov Seidman elegantly connected his ideas to an important observation Peter Drucker made: that we need to distinguish between doing the next thing right and doing the next right thing. Dov made it very clear that only humans (as opposed to machines or processes) could do that and that we need to make this distinction meaningful again in our organisations. Leadership then becomes a moral business, since the question of “what is the right thing to do” is a moral one. Understanding this comes in handy when we live in what he calls a ”world of inter-dependency”. In such a world, the only viable strategy becomes that of “healthy inter-dependency” which of course is driven by how we behave. We cannot control the forces around us, but we can control how we behave. And the only lasting way to elevate human behaviour is through purpose and meaning. So instead of looking for the next killer app, we should be building a trust-based human operating system. And instead of being a content business (giving answers), management needs to become a context business (asking questions).

Very nicely tying into the “more human” theme was John Hagel’s simple but powerful example of how technology today is a foe but could just as well be a friend: business intelligence (BI) technology today is used to create management dashboards which essentially enable managers to exercise more control — and of course to apply pressure if one team is falling behind on a few metrics. But why not use that same information differently? Why not openly share all this data with the entire organisation and provide platforms for people to collaborate and learn from each other? And then reward both the learners and the teachers?

Steve Denning challenged us to imagine “how organisations can surprise us by being curators of the human spirit”. Even though it has become somewhat familiar, the story of Apple after the return of Steve Jobs remains an inspiring one. It was literally an experiment in “what would happen if we created a company totally focused on the customer?”. There’s three main lessons for us. One of the first things Jobs did when he returned was to ask everyone in the company the same question: “How does your work help create customer value?”. Lesson: know your purpose and it better be a good one. Then he dramatically streamlined the product portfolio from a myriad of Macintosh models down to four: a laptop and a desktop computer, one each for two customer segments: home use and professional use. Lesson: focus. What was the result of that? Nothing much happened for four years, but then Cupertino brought us one incredibly successful market creating innovation after another. First the iPod, then iTunes, followed by the iPhone and iPad. Lesson: innovation and (re-)building a company takes time, but it’s worth the investment.

Innovation was also Rita McGrath’s main topic. She offered a different perspective on why innovation is often such an elusive goal in most organisations — and what we can do about it. First, most organisations have a dysfunctional innovation process plagued by four barriers: i) innovation is episodic, ii) resources are being held hostage, iii) new ideas are squeezed into existing structures and iv) organisations seek to be right rather than to learn. Reverse these four and you dramatically increase your chances of success. Even more so if you also understand that innovation is actually three competencies, not one: discovery, incubation and acceleration. In her words: “Ideas are not the problem. Incubation is. Acceleration is.”

Nilofer Merchant stressed the importance of collaboration and learning. In today’s world, size no longer matters, but “connectedness” does. The future is not created, it is co-created. For management, this means accepting that it is not about already knowing everything, but about extending an “invitation to play”: invite everyone in the organisation to help understand and solve whatever problem needs solving. We should be curious about what we don’t know and trust that the more questions we ask, and the more people we involve, the better the answers will eventually be. For this to work we need to “Learn. Unlearn. Repeat.” A culture of trust and a desire to unlock all of our talents are strong enablers for this. If we get it right, “we’ll see things we’ve never seen”.

Finally, Tammy Erickson made a strong case for what great leaders do: i) allow information to flow, connect the organisation, ii) disrupt the organisation, ensure it does not become complacent, iii) glue the organisation together through purpose, meaning and culture and iv) ask great questions.

The good news, of course, is that we can all learn how to do this. This definition of leadership does not require charisma or other supernatural attributes at all!

Yes, the selection above is far from making the body of a unified theory on how to create the best organisations in the world. But it’s a very good starting point of practical ideas and examples for how “better” can look like and what has worked for other people. And of course there’s many more examples like these. What they all have in common is that they are real. Real companies we can study and observe, real people we can talk to and learn from. Why don’t we?

4. The next generation of business leaders will help accelerate change

By 2025, 75% of the global workforce will be millennials. These people have a very different set of values from what is all too common in the world of business today. Through the wonderful platform of the Drucker Challenge, they were also very present at the Forum. Reading their essays and engaging in conversations with them gives me hope. They put purpose before profit. Most of the ideas above, while still seeming radical to us, are a “given” for them. They will build better organisations eventually. Or as one participant at the pre-conference roundtable observed “maybe all we have to do is not to screw up completely before the millennials take over”.

Marc Merrill, an exemplary next generation leader (although technically I suspect he would not qualify as a “millennial”), gave us a glimpse of what it means to work as part of the team at Riot Games. Two lessons in particular stood out for me. First, that if culture is weak then organisations will drift apart. I very much liked his “culture as a rubber band” analogy: culture being wrapped around the organisation like a rubber band, acting as a self-correcting mechanism to stay cohesive. It can stretch, but if it is strong enough it won’t break and keep things together. It is thus one of most important tasks of the leader to invest in building a strong culture. Second, and building on one of Peter Drucker’s key insights (“the most important thing to teach people is how to learn”) is that leaders should not be afraid to experiment. Marc shared the example of “our on-boarding process which probably went through a hundred iterations”. We don’t have to have all the answers. We can always do something, observe what works, what doesn’t and then make it better. As long as we’re prepared to learn.

If we had more leaders like this, the world would be a different place. The good news is, though, that we will have. Not just by waiting for the millennials, but by becoming such leaders ourselves.

5. All of us can act and start to change right now

“You have only one lifetime. Every minute you wait for someone else to change is wasted”. With these words Vineet Nayar, set the stage for turning to action. He went on to say “if you’re not trying new things every single day, you will not get to your optimal point”.

Yes, you might say, but the task seems so vast, where do I start? And besides, I’m not the CEO, what can I do? This is where Gary Hamel comes in, first with a moral call to action: “None of us who have a stake in the future of humanity can afford to sit on the sidelines”. Second, he also offered some practical advice. When we have an idea, we should not “go up” and try to convince (or ask permission from) our boss. We should go “across” and build a coalition, find people who share our passion, create a prototype, write a white paper, engage people and create a movement. Why? Because it is very easy for senior leaders to say “no” to one person. But very hard to say “no” to a movement. The underlying principle, of course, is that “every change needs to be socially constructive”. If we wait for the CEO to understand (or even trigger) the change it’s typically too late.

Gary also shared the inspiring story of Helen Bevan at the NHS — known not necessarily as a very dynamic, innovative institution, but more as a bureaucratic monster which regularly fails patients. Helen did not want to wait for some miraculous top-down change program that would change things. Instead, together with an initial team of a few nurses and doctors in training, she created a movement. The idea was that literally everyone at the NHS could do something to improve patient care, something that’s within their scope of control. Their goal was to collect 65’000 pledges (1’000 for every year the NHS had been in existence) from staff around the UK to do this. They started to tweet about the idea, they set up a website where people could make their pledges and the idea went viral. They collected not 65’000 but more than 100’000 pledges. It resulted in what was probably the single most impactful change at the NHS ever. And it’s now repeated every year under the banner of “Change Day”. Helen and her team did not ask for permission, did not ask for a budget — they simply convinced more and more of their colleagues that this was a good idea and then they just did it.

Dov Seidman shared a similar story. It’s the story of Scottish schoolgirl Martha Payne, who in her own words is “Changing the world. One school dinner at a time”. Martha, who was 9 at the time, did not like the meals she was getting at school: the food wasn’t healthy and nutritious enough. She was often left hungry in the afternoons. So she started blogging about the food she was getting at school. Day after day she documented her school meals with a photo, together with her own quality rating. The blog quickly gained traction when Jamie Oliver, the famous chef who’s running his own campaign to improve school meals in the UK, tweeted about it “Shocking but inspiring blog. Keep it up!”. Quickly the media gained interest and Martha was on BBC programmes talking about her cause. She began to receive small amounts of money for her media appearances and donated it all to charity helping malnourished children in the developing world. Intrigued by the possibility she set up her own fundraising campaign, with the initial goal of raising 7’000 pounds. What did her school do? They shut her down. One day, she was summoned to the headmaster’s office and was told she could no longer take photos of her meals at school and blog about it. That day, she wrote what was presumably her last blog post, titled “Goodbye”. But that only got the whole thing started. Over night, donations jumped to over 90’000 pounds, the story went even more viral. The school reversed course and finally began to address the real problem: school meals. More schools followed as more and more children around the UK confronted their schools with similar demands. Martha is eleven today. She still blogs, raises funds to help malnourished children and travels the world to talk about her cause.

So, if a 9 year old schoolgirl can have such massive impact, if Helen Bevan and a small team of initial activists can have such massive impact, why can’t we? I guess you know the answer: we can. And we can start today.

Now, if you’re the CEO, you face a different set of challenges. You might want to kill bureaucracy, or unleash innovation but no matter how often you repeat this in executive board meetings, no matter how often you talk about it at staff meetings and no matter how many task forces you create: nothing seems to change. So, how do you overcome this? Here’s a few ideas:

Nilofer Merchant asked us “if five frogs sit on a wall and one decides to jump, how many frogs are left sitting on the wall?”. The answer, of course, is five. So the first thing you need to understand is that deciding is not jumping. You actually need to jump. So how do you jump?

Rita McGrath had a simple, but powerful piece of wisdom to share: start with your agenda. Look at how you personally spend your time. If, say, innovation is the most important thing for your organisation, how much time do you actually spend on it every day, every week and every month? Next, look at the agenda of your leadership team meetings. How much time is dedicated to innovation? Is innovation item #14 on the agenda or is it not even on? Next look at what your best people are doing — are they working on bringing innovation to your company? If it’s the most important thing then surely you will have your best people working on it? The lesson it simple: you have to actually do what you said you would do. Not only is this the only way to get results, it also sends a strong signal to the organisation that you’re serious and a credible leader. Which of course makes it easier to rally the troops behind your ideas in the first place.

On the topic of innovation, Gary Hamel also had some advice for you, but the principles are applicable to any other topic of importance in your organisation as well. If innovation is what you want, ask yourself these three simple questions: have your people been trained in innovation and creativity techniques? If someone has an idea, how easy is it to get experimental capital in your organisation to try it out? And: do you actually measure and reward innovation? Again, it’s about being serious, credible and actually doing what you said you would do. By the same token, if you want to eradicate bureaucracy in your organisation, you need to open a company-wide dialogue. Ask everyone in the organisation to help identify where there’s bureaucracy, how much it is costing you and how you can eliminate it. Then ask: what, as leaders, are we NOT doing that would help you get rid of it?

This last example nicely illustrates a larger point: even as a CEO you need to find allies to help advance your cause. You typically find them in front-line employees, be it on the topic of bureaucracy, innovation or anything else of importance in your organisation. So tap into this resource, do engage the whole company in the conversations that are most important to you. Not only are you likely to find better answers, but you also create a sandwich that will help make the middle move as well. Because it is often the middle that is most satisfied with the status quo and thus most resistant to change. Or as Gary put it: “Asking your next level managers to change is like asking turkeys to vote for Christmas”.

There’s simply no excuse for deciding but not jumping. All of us can make change happen. And we can do it now.

What it all means for me and my work

First of all, I feel enormously encouraged to continue my work of helping clients design and run better organisations. Organisations that are more human. Organisations where people thrive. Organisations with a purpose bigger than making money.

In almost every talk and every discussion at the Forum I not only found confirmation that I’m working on the right stuff, but also found lots of inspiration for how to learn and become better at it.

Specifically, here’s what I am going to do, a kind of a pledge to myself as a result of the Forum:

• I’m going to stop wasting time on client engagements that pay good money but essentially have little or no lasting impact. This may mean saying goodbye to a few clients but it will create space for new things.
• I’m going to leave my own comfort zone more often. I will try out new ways of working and learn to ask more questions and give fewer answers.
• I will reach out and collaborate with others more. As an introvert, it is tempting to endlessly ponder questions all by yourself. And while this will always be part of who I am, the Forum inspired me to find a better balance between thinking and writing for myself and going out and learn what other people are thinking, having my ideas challenged and working together on a common cause.
• I will be much more outspoken about our cause. I will speak more, write more and challenge my clients more.
• Finally, I will clarify and focus more. In the spirit of Clayton Christensen’s powerful closing remarks, I will try less to find lots of new ideas, but instead try to clarify their essence through better language. In the hope that this will help me focus more on what I’m trying to do.

I’m excited to be going into the new year with as much clarity, optimism and conviction for my work. I’m grateful to all the Forum speakers and participants for their priceless contributions. And I’m particularly grateful to Richard Straub and his team for creating this wonderful platform that the Global Peter Drucker Forum has become. Thank you and see you all next year!

Originally published at www.raymondhofmann.com on December 7, 2014.