The Legacy Problem With Innovation

Why legacies find it tough to innovate

90% of executives believe that organizational agility is critical for business success. (Economic Intelligence)

Agile working methods are more successful than traditional (waterfall) methods (71.5% and 62.8% respectively). (Ambysoft)

So, why do 73% of business transformations fail? (McKinsey)

Traditional — or legacy organizations think in terms of efficiency as opposed to innovation. This made sense before digital, when the customer lifecycle consisted of few, broad steps, these being discovery, exploring, buying and engaging. Today, with numerous digital channels and a new level of connectivity, this customer journey has transformed into something much more complex and is developing constantly.

Mobile in Retail Conference 2017

These newer, digital services understand this greater complexity of today’s customer journey, and answer by being adept at changing with trends and evolving expectations. They continuously offer up shortcuts and new possibilities for once time-consuming steps such as acquisition, identification, transactions and so on.

Legacy businesses simply were not built for transformational growth, they were built for this efficiency and cost-effectiveness. They (often) can only imagine that their growth will come from improving these pillars, with the result being a more gradual growth rather than transformational.

Compare this with how a start-up’s success is measured today. Investors look for how well they identify a problem in the market and match it to a solution. Unburdened by existing processes and “the way things have always been done.”

Legacy companies fail to successfully experiment with disruptive innovation, primarily because their business culture prevents them from doing so. Here is the road to irrelevance that is unfortunately true for most legacy organizations as a result of their classic, fatal characteristics:

Legacy organizations are often:

1. based on risk-mediation (minimizing the amount of risk encountered to protect current customers, employees, shareholders etc.)
2. technology-dependent (system changes are likely expensive, require more resources than they can spare and risk breaching security regulations). Research by Vanson Bourne revealed that 44% of IT leaders believed their legacy systems held them back on every or most projects (this number was 28% for medium-sized firms)
3. filled with regulatory constraints which maintain efficiency, and so dampen imagination and creativity
4. have a large, sticky (for now) customer base

In many cases, this all results in a slow and steady increase in revenue, and while this increase exists there is no need to switch things up…at least that’s the widely held belief within these organizations.

However, all these characteristics of a legacy organization also contributes to the business not noticing the need for change to still be relevant tomorrow. They also contribute to a failure to acknowledge their own limitations.

By the time the need for change becomes visible in the market (often in the form of a disruptor) it’s too late and the organization — and potentially the industry — is disrupted.

“No company ever created a transformational growth product by asking: “How can we do what we’re already doing, a tiny bit better and a tiny bit cheaper?”” - Maxwell Wessel, GM of SAP.IO & business writer.

“Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.” — William Pollard

Taking these points into account, we will now apply the insight that a positive correlation exists between the number of actions taken by a business and the success of a transformation. It’s no wonder legacy organizations struggle and more often than not, fail at business transformations in a bid to keep up with digital and evolving customer expectations.

Let’s take a step back, before businesses even have to consider making changes and battling regulations. A key reason they tend to shy away from trying to implement a culture of innovation in the first place is that they often have a sticky customer base — which is good, for now.

This is that they usually have a pool of customers who rarely leave, keeping them ticking over, and bringing little motivation to do anything game-changing until it is absolutely necessary.

We have seen before that more often than not, when done out of necessity, big business attempts at innovation are rarely successful. Often due to the mindset of employees, misleading expectations and general internal culture of the business.

“It’s not these real-world constraints that inhibit innovation. It’s business culture.” — Henry Doss, Managing Partner of Rainforest Strategies & Author

Bringing some real-world insights and applications into the mix, we’ll take a look at the Telecommunications industry. It serves as an example of legacy organizations who — in the past decade — have seen enormous market shifts, accelerated change and a call for something new from the incumbents of yesterday.

The Telecom Problem With Innovation — And How Some Have Overcome It

“Digitization could enable telecom operators to improve their profits by as much as 35 percent, yet the average improvement achieved is just 9 percent.” — McKinsey

Why does innovation seem tougher today?

First came the mobile revolution, and telcos profited by converting everyone to the mobile way of life. Then came smartphones, and again, telcos profited by converting everyone. Now, growth has stagnated, revenues slipping and everyone’s waiting for the telcos to make the next innovative move.

When speaking to Telecoms.com on the lack of innovation coming from telcos, Bengt Nordström, CEO of consultancy Northstream says that

“The turning point is when the market stopped growing. A growing market hides a lot of the problems because everyone is making money. You are not penalized in an obvious way. It is post growth that the situation becomes much more clear.”

We see most innovation emerging today from the likes of Apple, Huawei and Samsung, but they are fundamentally different from the average telco. They have a fail-fast attitude, an entrepreneurial environment and a culture that encourages innovation.

67% of telcos said innovation was among their top 3 strategic priorities. Only 34% are highly satisfied with their innovation activities. (Match Maker Ventures survey)

While those who embarked on transformation journeys did suffer temporarily with their free cash-flow generation, today they are outperforming competitors by 4 percentage points in revenue growth and 3.5 points in EBITDA growth.

Does it have something to do with top-level leaders?

Telecom CEOs actually take less responsibility for innovation than CEOs in other industries (23% said they took personal responsibility for fostering innovation vs. 35%).

Telecom CEOs put more emphasis on new product development than business model innovation (a.k.a improvements in the effectiveness and efficiency of core processes). This isn’t surprising when the success of telecom businesses has long depended on keeping up with new releases, the latest features and winning value.

However, analysis of the industry has revealed a strong positive correlation between business model innovation and faster-than-average operating margin growth. This means telecom CEOs may be under emphasizing this potentially important way of adding value and increasing profitability.

Companies that have grown their operating margins faster than competitors put twice as much weight on business model innovation than those who are underperforming.

What are some examples of telecoms fostering an innovative culture?

Korea Telecom — Complete culture shift to foster innovation

Korea Telecom acknowledged the importance of bottom-up innovation, and recognized the huge potential in their own employees to bring the company to the top, as well as implementing a “learn by doing” approach to innovation.

You can read in-depth on the changes made here, and a case study written by London Business School here.

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Virgin Media — Creating a culture that fosters innovation through collaboration

Virgin Media had the goal of creating more business agility in order to be more responsive to change in the industry, and introduced flexible working for employees to further encourage a culture of innovation.

“The best way to transform a company is to create connections between people who previously did not interact.” — Colin Miles, Director IT Technical Services, Virgin Media

You can read into the specific changes made here in a detailed case study by Cisco here.

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What Legacies Can Do To Tackle The Innovation Problem

So we’ve touched on the most common problems legacy organizations encounter when considering innovation, but what can they do about overcoming them?

Firstly — and most importantly — legacy organizations should understand that innovation is not about trying to be something you’re not i.e. a large business trying to be a start-up, or simply trying to do something new for the sake of it.

Innovation for legacy organizations is about benefiting the business by benefiting the customers.

It’s about recognizing that just because things have “always been that way” does not mean they will always have to be. By working that bit closer with customers and that bit faster within the organization, legacy organizations can achieve a level of recognition, loyalty and growth a start-up can.

They can lessen the fear of becoming irrelevant to their customers and at the same time, can discover the full potential of their often highly skilled and under-appreciated employees.

Secondly, before jumping right in and attempting to push change on a large business very familiar with their way of working, it’s good to start small and initiate change from within. When working with legacy clients, we start out on an innovation project by forming a pilot team.

This team will be interdisciplinary, have the support of management and are given the training to understand and tackle a specific challenge using a faster and more effective approach. Namely Agile.

More often than not, by simply trying a new approach to working in a completely transparent way for the entire organization to see, together with results-driven methodologies, people recognize, more genuinely understand and are inspired by the benefits of a more innovation-focused mindset.

“If at first the idea is not absurd, then there will be no hope for it.” -Albert Einstein

Want to learn more about how we work with legacy orgs to face innovation? Check out our site or contact us directly.

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