I was facilitating a group of senior leaders in a workshop environment recently and the dialogue turned to accounting. A strange twist in an innovation session? Not really, as we were talking about how the accounting systems we have in place today are based on the Taylor factory model. It was a model that made a great deal of sense when the scarce resource included assets that needed to be carefully tracked: plants, property, inventory and equipment. In this new emerging economy, however, that tracking is rapidly growing quaint.
Stock market valuations of publicly-traded firms have quietly shifted to carefully constructed forecasting models based on the expected utilization of cash, labor and equipment to create a consistent return. Operations, on the other hand, is considered table stakes, and something you hear less and less about on the conference calls explaining earnings.
In fact, the now dominant trifecta of Facebook, Google and Netflix, are all shrewdly built of people, processes and technology. Are there large real estate and data center holdings? You bet, but the valuation of these firms is all about utilizing their “soft” assets in better and higher leveraged ways.
I’m a card-carrying professional engineer and an MBA, not a FASB expert, so I’m not going to debate the long history of accounting standards across the globe. But as a strategist, I am pointing out that the “move the needle” part of the business is largely human. Specifically, talented humans organized in specific ways using specific tools to create value for their constituents.
In other words, in the knowledge economy, the means of production walks out the door every night.
We have known this for a while. It’s why ERP implementation has become such a big deal for global firms. When you have fixed and knowledge assets distributed around the world, having a strong dashboard is table stakes.
Why is This Important for Innovation?
It’s no secret that left to their own tendencies, the major functions in a firm will move to a position of comfort zone arm’s length underachievement. These groups are linked by weak ties and business systems in most firms, and its in these gaps that large amounts of value can be gained or lost. This is why cross-functional teams are so valuable.
Yet we persist in locally optimizing our teams – AGILE methods stay locked up in IT groups, rather than impacting the firm as a whole, for instance. When you step back and look, you find good transactional communication, but almost no pathways for transformative communication.
Coming full circle to our discussion, we get to the heart of the issue: that most value in any complex system is always gained or lost at the interfaces. In the modern firm, it’s not the vertical path of communication that creates huge new value, but establishing lateral paths and teamwork.
This leads to a conclusion that:
The future belongs not to the smartest senior team, but to the firm with the best lateral value development systems
For the leader looking to get a handle on rapidly increasing shareholder value, you need to look to these “softer” assets of your firm to provide geometric value increases.
So why doesn’t everyone just do this and open the value spigot?
It turns out that the legacy systems we use to manage our firms fight against releasing this value as the strategy work we do is anchored in the future, while our budgeting processes are always anchored in the past.
Recall the last time you had to establish something new. Getting a net new investment is always treated as a “negative variation” to run rate and needs extensive explanation for approval. Then there is the project selection system, which is anchored to the inertia of work currently underway. Finally we have numerous HR systems that provide subtle rewards for contributing to the core rather than championing riskier net new work.
With That in Mind, Where do I Target my Work?
My Right Project, Right Team, Right Plan framework was built to align groups across the traditional value “moats” in the organization and bring resources together to significantly multiply the value of the firm. It’s hard to quantify how much untapped value you might have in your firm due to these traditional cultural “walls” being present, nevertheless, I can share that we routinely find million dollar lines of business in complex firms that haven’t focused on the lateral value development before.
I have been doing two exercises with my teams that seems to get this really established:
- The first is a really deep dive into the business model and, particularly, what the customers are trying to tell us. When we get deep into the feedback, with first person interviewing or really incisive survey tools, we always find new emerging customer demand that the business is resisting. This isn’t because the leaders are purposely ignoring it, just that we always bias our viewpoint based on our current offerings and strengths. This confirmation bias is what makes disruption possible, and we need to push through it.
- The second exercise is getting very clear about what we need to do to align toward these emergent needs internally. The best starting point for this is an exercise we call “from, to and toward.” We first look deeply at what we’re doing now and why, then what we need to do to serve our emergent needs, and lastly, where it is taking us. By looking at the three dimensions of people, process and enabling technology, we lay the framework for a substantial value release.
The powerful contrast of emerging external demands and powerful internal alignment results in value literally being drawn out of the firm, rather than pushed out of the firm. As you can imagine, once this relationship is put in place, it benefits not only the “project,” but the larger team as well.
If this has resonated with you, and you suspect that you have a lot of value bottled up in your firm, we should talk. Please give me a call at 847-651-1014 or use this link to set up a 20-minute, (no-strings-attached) consult.
