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62 Organisational thunderboltsWhen a management innovator is set loose insidean organisation, watch out! Management innovationcan have thunderous results.

66 From R&D to Connect + Develop at P&GChallenged by its CEO to source ideas fromoutside, Procter & Gamble decided to blaze a newpath for its research and development function. Inpursuit of inspiration, its R&D becameturbocharged by using “insourcing” to expandP&G’s horizons.

70 Perfectly in balanceArt Schneiderman pioneered what later becamethe concept of the balanced scorecard while a vicepresident of quality and productivity at AnalogDevices. We talked with Schneiderman to find outmore about the early evolution of a managementinnovation.

72 Making the firm flexibleHow companies operate has been established overtwo centuries. Is it possible for a firm to break theestablished rules of organisation? Eden McCallumdid just that.

76 Death to budgetingIt’s considered one of the basics of management.If you don’t have a budget, you aren’t reallymanaging. But, UBS has made budgetingsecondary to performance and customersatisfaction.

79 Designing the cultureWhen the design firm, IDEO, opened for business,its three founders designed an organisation low onhierarchy, big on communication, with a minimalamount of ego. Forty years on, it still works.

82 Employees firstInnovation is often focused on products. Yet theleader of one Indian company is shifting thebusiness model of a 30,000-employee company.HCL Technologies reveals how innovation canapply to organisational systems as well.

Written by Julian Birkinshaw, Stuart Crainer andMichael Mol.

Special report

ManagementInnovation

© 2007 The Author | Journal compilation © 2007 London Business SchoolBusiness Strategy Review Spring 200762

Most people considermanagement a tool of thestatus quo. They consider

the good manager as someone whokeeps things running smoothly; or, ifthere’s a problem, as someone whorestores the status quo so that thebusiness can keep humming along.Consequently, when a managershakes up the status quo and actuallyimproves the way things run, theimpact (especially in largeorganisations) can be thunderous.Boeing’s Debbie Collard shares thestory of the manager who thought theC-17 jumbo transport plane could bebuilt in a radically different way.

Collard tells of the revolutioncreated by “Koz” (most likely, DonKozlowski), the executive newlycharged with leading the productionof the C-17, a plane so gigantic thatits tail is four stories high. Planesthat huge require hundreds of peopleto assemble them, and the traditionis that such a plane is built instages, by moving it from oneposition to another as the successivework is completed. The norm in theindustry was for movement fromposition to position to occur per theset timetable, whether everyproduction detail was attended to ornot. At least in the case of the C-17,prior to Koz, that’s the way it always

was. Everyone thought, that’s theway it’s supposed to be.

But, as Collard told John Kotterand Dan Cohen, in Heart of Change(Harvard Business School Press,2002), everything changed when Kozrattled the status quo. “We are notgoing to move an airplane,” sheremembers Koz saying, “until it iscomplete in position. Quality isnumber one, so that’s what we aregoing to focus on. Until the plane isdone and done right, no movement.Period.”

Collard then relates how workersand managers alike responded to Kozand his revolutionary way of doingthings:

Everyone thought he was off hisrocker. You didn’t do things thisway. I think some of his directreports, in particular, thought hewas crazy. They were convincedthat we would never be able todeliver on time if we did it this way.Never. Wouldn’t happen, anybodyknows that. Something wouldalways bring everything to a halt.You’d have employees twiddlingtheir thumbs at great expense tothe company. You might as wellexpect cars to be made bysecretaries on the fifty-ninth floorof the Sears building in Chicago.

As you probably surmise, Kozchanged not only the company butthe rest of the industry. Collardcompletes her story by attesting thatthis one management innovation“transformed the place, and, as aresult, quality has gone up and all ofour aircraft have not only been ontime, they’ve been early!”

It’s rare for management to hurlan organisational thunderbolt, but itsimpact can be enormous.Management innovation – theimplementation of new managementpractices, processes and structuresthat represent a significant departurefrom current norms – hastransformed the way many functionsand activities work in largeorganisations. Ford’s introduction ofthe moving assembly line in 1913and Western Electric’s invention ofstatistical quality control in 1924changed businesses forever. Everymanagerial process we now take forgranted was created by inventive andfar-sighted individuals: double-entrybook-keeping was invented by LucaPacioli in 1494, and the limitedliability company was created in1856.

But management innovationremains poorly managed and poorlyunderstood. It is typically left tooccur in an ad hoc fashion, and

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Organisationalthunderbolts

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. When a management innovator is set loose inside an organisation, watch out, management innovation can have thunderous results.


successful management innovators –like Boeing’s Koz – have to work veryhard to get others to understandwhat they are doing, or why they aredoing it. While academic studies ofthe diffusion of existingmanagement innovations arecommon, there is virtually noliterature on its origins, that is, onthe generative processes throughwhich management innovation firsttakes shape.

In search of...a process?Management innovation has someobvious commonalities withtechnological innovation as aprocess: it involves key individualspulling together ideas and resourcesin novel ways, championing theirideas inside their organisation,building coalitions of seniorexecutives to support them andusing their political skills to

overcome internal resistance. Butour research suggested there werealso two important points ofdifference that made managementinnovation a distinct process.

Change agents The first distinctionwas a much more significant role forexternal change agents. Theseindividuals were a mix of academics,consultants, gurus and ex-employees. They often provided theinitial source of inspiration, and theyfrequently helped to shape andlegitimize the managementinnovation as it took hold. Whileexternal agents rarely developed newpractices themselves, they offeredimportant inputs at all steps alongthe way. The process thus had ahighly interactive quality. It typicallytook place on the fringes of theorganisation rather than in the corethrough the relations betweenconceptually oriented managers andmanagerially oriented externalchange agents.

Distant horizon The second point ofdifference was the amount ofuncertainty and ambiguity in theprocess. Most managementinnovations took several years toimplement, and in some cases it wasimpossible to say with any precisionwhen the innovation actually tookplace. To some degree this can alsobe the case with technologicalinnovations, but the subtle nature ofthe process was particularly acute inthe management innovations westudied.

How it happensOur research suggests managementinnovations occur in five stages.

Dissatisfaction with status quo Incases we studied, the internalproblem that management innovationaddressed was always some level ofdissatisfaction with the status quo.

We use the word dissatisfactionbecause it covers a multitude ofsituations, from a nagging operationalproblem through a strategic threat toan impending crisis.

One classic example: in 2003 UBSWealth Management, the privatebanking arm of the Swiss giant, waslooking to grow after several years ofpainful cost cutting. The executivesstarted looking into the blockers –the things that were standing in theway of the growth agenda – and theyrealised that the budgeting processwas a key problem area. As CFO ToniStadelmann notes, “Budgeting ishighly defensive – it is cumbersome,and it is fundamentally againstgrowth. It is about negotiating downthe targets that are proposed by thecentre. And it causes people to talkabout numbers, not about clientsand market opportunities.” Thisrealisation led to a complete re-thinking of how individual clientadvisors worked and the eliminationof the traditional budgeting process.

Wealth Management has beengrowing rapidly ever since (and thefull story is explored on page 76).

Inspiration from outsideManagement innovators needinspiration – examples of what hasworked in other settings, analogiesfrom different social systems orunproven but alluring new ideas.Managers with thunderbolts revealeda breadth of thinking that allowedthem to strike out on their own path,rather than just adopt a provenmodel applied by a competing firm.For example, Dee Hock founded Visawith a unique cooperativeorganisational model that drew morefrom the principles of JeffersonianDemocracy than from traditionalhierarchical thinking.

More generally, we observed thatmany management innovators hadunusual backgrounds or they had

worked in a wide variety of differentfunctional areas or countries. ArtSchneiderman, the manager atAnalog Devices who in 1987developed the prototype for whatbecame known as the BalancedScorecard, was strongly influencedby Jay Forrester’s system dynamicsconcepts during his MBA training atMIT’s Sloan School, then spent sixyears as a strategy consultant withBain working on quality managementprojects in Japan before joiningAnalog Devices. This backgroundgave Schneiderman insight intocontinuous improvement techniquesthat were being used in Japan plus asystem-wide perspective on thefunctioning of the organisation. Sowhen asked by CEO Ray Stata todevelop a quality improvementprocess for the company’smanufacturing, he quickly developeda set of metrics that included bothfinancial and non-financialcomponents. (Art Schneiderman isinterviewed on page 70.)

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It’s rare for management to hurl an organisational thunderbolt.Why so?


Invention It is customary toassume that every innovation has a“eureka” moment – when theinventor makes the key conceptualbreakthrough or proposal thateverything else follows from. 3M’sArt Fry famously came up with thePost-it Note concept at his localchurch as he sought to keep track ofmultiple pages in his book of hymns.And people at Boeing still tell the“Koz C-17” story because eurekamoments are legendary. However, ourevidence suggests that such eurekamoments are rare. Invention is aprocess in which the innovator bringstogether the various elements of aproblem (dissatisfaction with thestatus quo) with the various elementsof a solution (which involves someinspiration from outside plus a clearunderstanding of the internalsituation and context), but the

manner in which these elements arebrought together is typically iterativeand gradual.

Consider the case of Connect &Develop, Procter & Gamble’s radicalapproach to building an externalnetwork of scientists around theworld as a means of “turbocharging”its internal R&D. This majororganisational innovation (analysedin our article on page 66) took thebest part of 10 years to put together.Larry Huston, the key architect of themodel explains:

Back in the mid-1990s I wasinterested in how to develop a neworganisation form where peoplewould be fluid and could swarm tothe good projects, yet protect thebase business. We spent timeactually thinking through thedetailed, entire organisationdesign and I actually made aconcept video. I then tried to getone company off the ground,called Company Way, where youwould get rewards for participation

and your peers could give yourewards for participating on a web-based innovation model. Then in 2000 my boss said wewant you to create the newbusiness model of innovation.Building on my earlier work Istarted to create the conceptualpositioning for connect anddevelop. A lot of it starts withexperiments, making concepts andstoryboards and films, just like youwould do if you’re making aproduct. People just think thisstuff falls to the ground: they don’trealize that these big managementsystems are constructed, and youhave to be smart about it; it takesa lot of skill to do that.

Internal validation In one importantrespect management innovation isjust like every other form of

innovation: it involves change anduncertainty, and as a result itencounters resistance from peoplewho don’t understand or don’t valuethe proposed innovation. And it isimpossible to accurately predictwhether any innovation’s benefits willexceed its costs. A critical stage inthe process, then, is for themanagement innovators to generatevalidation for their new idea. Wedescribe the process of validation toexternal parties below; but the moreimportant step, at least in terms ofthe initial implementation, is for theinnovation to gain internal acceptance.Management innovation is eventrickier to validate than technologicalinnovation because the innovationitself is less easily codified, requiresthe willing participation of manypeople for it to work and oftendelivers its results only several yearsafter implementation.

Consider Oticon, which in the early1990s developed a radicalorganisation model with no formalhierarchical reporting relationships, a

resource allocation system builtaround self-organised project teamsand an entirely open-plan physicallayout. This new model helpedOticon to achieve dramatic increasesin profitability over the rest of thedecade. Lars Kolind, the CEO ofOticon and architect of thesechanges, got his inspiration for thisnew model from his deepinvolvement in the scoutingmovement:

The scouting movement has astronger volunteer aspect, andwhenever scouts come together,they cooperate effectively togetherwithout hierarchy. There is no gameplaying, no intrigue; we are onefamily brought together throughcommon goals. My experiences inscouting led me to focus ondefining a clear “meaning” for

Oticon employees, somethingbeyond just making money, and tobuild a system that encouragedvolunteerism and self-motivation.

Kolind’s experiences at Oticon weretypical. His first challenge was topersuade the owners of the company(primarily a foundation) that aradical change was necessary toconfront the challenge posed bygiant competitors like Siemens andPhilips. Once that had beenachieved, he embarked on a massiveinternal selling programme toexplain the nature of his proposedchanges to the employees. He usedradical slogans such as “think theunthinkable” and visual symbols,such as a large transparent chute inthe middle of the building downwhich all shredded documents fell.

Inevitably there were someemployees who chose to leavebecause they were not comfortablewith his changes, but most werequick to see the benefits andbecame involved in implementing

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We found that there were also two important points of differencethat made management innovation a distinct process.


the transition to what became knownas Oticon’s “spaghetti organisation”.The management innovator may be abrilliant inventor initially, but it isequally important for that inventor tothen build a support coalition tocarry the invention into theorganisation. Effective managementinnovation requires determinedindividuals as much as it does thecreation of a fertile breeding groundfor their ideas.

External validation One of thedistinctive features of themanagement innovation process thatemerged during the research waswhat we came to call “externalvalidation” – essentially a stamp ofapproval from an independentobserver, such as an academic, aconsultancy, or a media organisation.Again, the reason why externalvalidation proved to be so importanthad to do with the uncertain andambiguous nature of mostmanagement innovations. Becauseof a lack of hard data to prove that aparticular innovation was working,companies frequently soughtexternal validation as a means ofincreasing the level of internalacceptance. This process ofvalidation also typically increasedthe visibility of the innovation tocompetitors or companies in otherindustries, which tended to reinforcethe innovation further. Four types ofexternal actors were identified duringthe research:

● The business school academicwho typically acts as a thoughtfulobserver of the emerginginnovation and who sees his/herrole as codifying the practice inquestion for use in research andclassroom teaching.

● The consulting organisation thatsees its role primarily in terms ofcodifying and documenting theinnovation so that it can then beused in other settings.

● The media organisation that seesits role as broadcasting the storyof the innovation to as wide anaudience as possible.

● The industry association thatseeks to develop improvedpractices across its memberorganisations. Remember thatTotal Quality Management cameabout when W.E. Deming andother 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 yourcompany’s capacity for managementinnovation? A number of commonthemes emerged from the researchthat should serve as useful pointersfor a company that would like to takeits management innovation effortsmore seriously.

Become a conscious managementinnovator Every company todayknows that it needs to continuouslycreate new products and services tomeet customers’ evolving demands.And these firms have all set up somesort of innovation function, whetherit is in the form of a physical R&Dlab or a new venture division. If youwant to become a managementinnovator, selling the importance ofmanagement innovation to yourorganisation is a crucial first step.

Create a questioning, problem-solving culture When you or youremployees are faced with an unusualchallenge in your company, lookdeeper into the problem: see theproblem in new ways and start tohypothesize about new ways ofsolving it. Only the latter path cantake you towards managementinnovation, so you need to encourageemployees to explore the unexploredand to avoid the easy answers.

Seek out analogies and exemplarsfrom different environmentsDepending on the problem you aretrying to solve, the types of solutionsyou might want to consider will vary.Exposing your employees to manydifferent types of environments and

different ways of operating is alsoinvaluable as a means of opening uptheir minds to new alternatives.

Build a capacity for low-riskexperimentation In one company weknow, there is a sustained effort toencourage individuals and teams tocome up with managementinnovations to tackle everydayproblems with the existingbureaucracy and processes. Buteach innovation must be tested witha limited number of people and for alimited period of time. This hasensured that every idea gets a shotat implementation without cripplingthe ability of the organisation as awhole.

Make use of external change-agentsto explore your new ideas Outsidersfulfil three primary roles. Theyrepresent a source of new ideas andanalogies from different settings,they can act as a sounding board formaking sense of your emerginginnovations, and they can help tovalidate what you have done.

Become a serial managementinnovator The real success stories inmanagement innovation are not thecompanies who have innovated onceor twice. The serial managementinnovators (like GE, which has beena pioneer in many new approaches,from strategic planning to executivedevelopment to divisions observingboundarylessness) are the ones toemulate.

These six points are certainly not arecipe for management innovation.The process of developing radicalnew ways of working will always havesome dose of luck and randomnessto it. But you can certainly tilt theodds in your favour by working onthese points and by creating agreater understanding in yourcompany of how managementinnovation happens. To be sure,thunderbolts seldom happen incompanies in which managersworship the status quo. ■

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In 2000 Procter & Gamble (P&G)was at a crucial point in its longhistory. One of the world’s best-

known corporations and creator ofsome of the world’s most famous andsuccessful brands was at acrossroads. Its CEO, Dirk Jager, hadleft after a mere 18 months in thejob. In March, the companyannounced it would not meet itsprojected first quarter earnings. Thestock price was spiralling downwards– falling from $116 in January to$60 per share by March. The massiveloss of $85 billion in marketcapitalization was matched by theloss of confidence within. It provokeda media frenzy. Perhaps mostpoignantly, Ad Age headlined its frontpage story: “Does P&G Still Matter?”It was one of many column inchesdevoted to the apparently impendingdemise of the company.

P&G’s new CEO, A.G. Lafley,provided an instant dose of reality:“We weren’t delivering on goals andcommitments to analysts andinvestors. Major P&G businesseswere underperforming – only three ofthem accounted for 80 per cent ofthe total value created inthe 1990s.Competitors were swooping in andgobbling up market share. We wereoverinvested: we overbuilt capacity,hired too many people, funded toomany aggressive introductions of newproducts and expansions of existingbrands. P&G brands were notdelivering good consumer value: we

weren’t consistently leadinginnovation, and prices were too high.We had priced-up big establishedbrands to pay for new products andaggressive geographic expansion. Ourcosts were also too high. We hadfrayed relations with importantcustomers who were frustrated withincompatible strategies, poor servicelevels, and P&G’s inability to createvalue for them. We were toointernally focused. Consumed withthe massive reorganisation, and withso many people in new jobs, we wereall spending too much timemanaging internal transactions.”

In addition to this litany of internalproblems, P&G had the abidingcorporate challenge of achievinggrowth. A mature company, such asP&G, is usually expected to deliverorganic growth rates of around fourto six per cent every year.Historically, this growth had beendelivered by the company’sformidable research anddevelopment resources – thousandsof researchers spread worldwide. Butwith the proliferation of newtechnologies and intensifyingcompetition, P&G’s standardapproach to R&D was under threat.Only 35 per cent of its new productsmet their financial objectives. R&Dproductivity was stagnant.

Lafley’s prescription for the ailingcorporate patient was wide-reaching.Estimating that it would take threeyears to get P&G back on track, he

focused the company on four corebusinesses (accounting for 54 percent of sales and 60 per cent ofprofits); its big, established leadingbrands; and P&G’s top 10 countries(80 per cent of sales and 95 percent of profits). Costs, which hadrocketed under Jager, were cut.Capital spending had leapt to eightper cent of sales and was trimmed.Nearly 10,000 jobs were lost aroundthe world as underperformingbusinesses were closed and thecompany left businesses nowregarded as non-strategic. Someproduct lines were discontinued,investments were written off andbrands, such as Comet, Crisco andJif, were sold off.

And, perhaps most boldly of all, inthe midst of establishing the newP&G order, Lafley announced anentirely new approach to innovation.P&G’s corporate innovation fund hadincreased seven-fold in four years.Two-thirds of these projects werecut. Lafley announced that, in thefuture, instead of relying on itsinternal research and development,P&G expected that 50 per cent of itsinnovation would come from outsidethe company. R&D numbers wouldremain the same, but the onuswould be on maximizing ideasinternally and externally.

The logic was simple. For everyone of the company’s researchers,P&G calculated there were 200people – scientists or engineers –

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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&G’s horizons.


outside the company who hadtalents the company could utilise.Instead of 7,500 people in corporateR&D, P&G recalculated that therewere 1.5 million worldwide whoseknowledge they needed to tap into.Research and development wasreincarnated as Connect + Developwith an organisation of 1,507,500people.

Green lights; new dawnFor Larry Huston, then 26 years intohis P&G career, Lafley’sannouncement was a crucialmoment, a green light for his workstretching back much of the pastdecade. He told his team: “We’re inbusiness, things are going to starthappening.”

Huston’s state of readiness wasunderstandable. Tracing back theidea that became Connect +Develop, he goes back to the mid-1990s and draws parallels withartists. “It’s just like the way someartists will develop models andsketches before they commit tocreating the final painting,” says

Huston. “Thomas Hart Benton, forexample, a US-based social realist,would create clay models and thenmore models of what he waseventually going to paint and thenhe would start working on theperspectives with all kinds ofsketches. He would work on theconcept for a long, long time beforehe ever actually created a successfulpainting. That’s the way most artistswork; look at all the study piecesthat everybody does. And, in thecase of this new innovation model,we worked, probably, five or six yearson creating the studies that led to itcoming together, ultimately, in theyear 2000.”

Huston, along with colleagueNabil Sakkab, was initially interestedin how to develop a new organisationform that combined the ability to

deliver high-performing results, yetbe adaptive. He spoke, amongothers, to Dee Hock at Visa, who hadinstigated a unique organisationalform labeled the “chaordicorganisation”. His attention thendeveloped to embrace chaos theory.Huston sought to understandwhether there was a way to attractthe best people to projects with agreater chance of success and toallow bad projects to die becausethey would go unstaffed. “I wantedto create an organisation wherepeople would be fluid and movearound and could swarm to the goodprojects, yet protect the basebusiness.”

Huston made contact with StuartKauffman at the Bios Group andspent time thinking through anddeveloping a detailed organisationdesign. This was captured on thewalls of a large conference room inSanta Fe, and Huston was thenfilmed giving a guided tour to theorganisation design of the future –with Kauffman following with hisown commentary.

By way of further experimentationHuston then worked with a start-upsoftware company to launch acompany to facilitate a “flow to thebest opportunity” model. This web-based investigation lasted a yearwhile Huston and his team studied ahandful of innovation projects thathad been brought in from outsideP&G. External connections createdabout twice as much value asinternal initiatives when factors suchas success rates and time to marketand after costs were fullyconsidered. Huston extrapolated thata connections model of innovationcould create a breakthrough indriving P&G’s business and itsproductivity.

Gilbert Cloyd, P&G’s ChiefTechnology Officer, approachedHuston with a challenge: could he

create a new R&D model for thecompany?

“This was a moment in time thatallowed us to really consider a wholenew operating method,” Hustonsummarizes. “I had run six years ofexperiments, and went out andstarted studying real worldinnovation networks and how valuecould be created. Then we createdthe conceptual positioning forConnect + Develop, around the ideaof turbocharging our already strongbase organisation. I had therationale and some ideas about thetools and how to get it off the groundand created a new role calledtechnology entrepreneurs. Lafleyannounced that we were going to gethalf of our innovation from theoutside. That was a majorintervention and so we were off andrunning.”

Importantly, Lafley’sannouncement was a very publicone. He put the stake in the ground.Reactions were decidedly mixed,Larry Huston recalls: “Some people’sfirst reaction was, wow, P&G is

getting rid of its R&D. Should wesell the stock? This is a science-driven company, what are theydoing, have they lost their minds?They didn’t realize that what wewere doing was substantiallystrengthening our R&D capability.”

Reality and developmentThe positioning of Connect +Develop was important. First, it wasmade clear that Connect + Developwas not a matter of outsourcingP&G’s research and developmentcapability. Connect + Develop wasabout finding good ideas andbringing them in to enhance andcapitalize on internal capabilities. Inessence, an insourcing strategy.

The second point was thatConnect + Develop was not a“transformation” programme.

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The Connect and Develop model of innovation is nascent andlikely to become the dominant innovation model of our times.


“I think transformation is a dirtyword,” says Huston. “If you go andsay to a company, ‘I’m going to gotransform you’, they’ll say, it’s goingto be impossible and we’ll neverfinish. In the case of Connect +Develop we were careful not toposition it as transformation – eventhough now it is. We said, we have astrong, powerful, global organisation,we’ve built outstanding capability allover the world, we have world classpeople, what we’re going to do istake this already strong capabilityand turbocharge it. And so the coreidea is based upon how do weturbocharge? And then, what are theaccepted beliefs that people haveabout this kind of thing? How do wecreate its credentials?”

Connect + Develop focused onthree areas: the needs of consumers(each business and the company asa whole identified the top 10 needsof consumers); adjacencies (productsor services which could help P&Gcapitalize on existing brand equity);and, what the company labels“technology game boards” (aplanning tool which enables P&G toevaluate how technologies in onearea impact elsewhere in thebusiness).

At the heart of Connect + Developis using networks to gain connectionsto new ideas. In the old inventionmodel “know-how” was key andreally this is what was focused on themost. In the new connections model“know-who” would become critical.The networks P&G keys into arevaried. Among the most notable areproprietary networks developedspecifically for Connect + Develop.For example, P&G’s leading 15suppliers have around 50,000people employed in R&D. P&G builtan IT platform to share technologybriefs with suppliers. Closer workingrelationships and the sharing ofinformation have brought a 30 percent increase in projects with stafffrom suppliers and P&G workingtogether.

Even competitors offer sources ofinspiration. Huston recalls meeting acompetitor from Japan. “He said,‘Are you comfortable with talking?’ I

said, ‘Of course I’m comfortabletalking. I consider your 2,500 R&Dpeople to be my R&D lab.’ And thisreally blew his mind.”

P&G also created a network ofwhat it labels “technologyentrepreneurs”. “They are seniorexperienced people who have seeneverything, done everything. They arefocused on being the growthprovocateurs for the organisation,”Huston explains. The technologyentrepreneurs number 70 worldwide.They are effectively the eyes andears of Connect + Develop makingcontacts within industry andeducation, with suppliers, and withlocal markets. To date, thetechnology entrepreneurs havebrought over 10,000 products, ideasand technologies to the attention ofP&G. Each is then evaluated.

Elsewhere, P&G taps into anumber of open networks. It isinvolved with YourEncore, whichconnects companies with highperforming retirees from over 350companies; InnoCentive, which dealswith more specific technical

problems; and Yet2.com, an onlineintellectual property marketplace.

Once ideas emerge through thenetworks they are rigorouslyevaluated by P&G before deciding toproceed with further development.

The innovation dividendP&G accomplished its goal. Over 50per cent of the company’sinnovations now originate outsidethe company. When Lafley firstannounced his bold target in 2000,the figure was under 15 per cent.Connect + Develop has helpedturbocharge more than 250 productsinto the marketplace, and hasgenerated billions of sales.

Now Procter & Gamble’s vicepresident for innovation andknowledge, Huston believes thatConnect + Develop offers broaderlessons on how to developmanagement innovations. “The onething that is really important is toget the concept right,” says Huston.“P&G is a concept-driven company.A concept for us is how the product’sgoing to make the consumer’s life

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Larry Huston: well connected


better and providing strong reasonsto believe in it. So we practiceconcept development here every day,because we have to move hearts andminds. We have to win the battle atthe store shelf and getting theconcept right is enormouslyimportant. In fact, most productfailure, 75 per cent of productfailure, is not because the productdoesn’t perform, but because it wasthe wrong idea. It didn’t providedesired consumer benefits at theoffered price. Many organisationfailures are due to both a poorconcept and poor execution.”

For a number of innovations thatHuston has been involved in, hewent through the formal conceptdevelopment storyboarding process,applying what P&G does for products,to management concepts andbusinesses. One of the new businessideas tested was called YourEncore(www.YourEncore.com). The conceptwas to take the experience andexpertise of people who have retiredand to utilize it in organisations.Huston and his team createdstoryboards for the concept and thentook them to 21 prime prospectcompanies. They commented on andcritiqued the idea, how it would work,and the value proposition. Hustonnext ran financial models to see ifthe desired concept was capable ofmaking money. YourEncore now linksover 1,800 retired scientists andengineers drawn from 350companies to organisations in needof their experience and expertise.“It’s all about bringing in newinnovation DNA to create newsources of growth. That’s the coreidea,” says Huston.

Clearly, Connect + Develop offersfurther lessons on how companiescan utilize external expertise andmaximize internal resources. Thecommitment of the company’sleadership was important. SaysHuston: “This is all aboutleadership, number one, being clearabout where to play, how you’regoing to win and where you want togrow. That’s the job of the CEO andthe top management to really figure

this thing out. But, it is trite to saythat this is all about starting with theCEO and changing the rewardssystem. For me, it starts with anidea, one that is proven, one thatcan be scalable. Then it moves tothe top leadership for support. Then,on to making the necessary changesin the culture, like rewards, toenable adoption at scale.

“Second, it’s about building a lotmore muscle. Connect + Develop isabout muscle, it’s about giving usmany more hearts, minds, hands andfeet to do the work. And the thirdthing is, it is about equipping peopleand mindsets. For the most part ourpeople have good ideas. We don’treally have an idea problem. We havepeople who are smart and motivated,but mostly organisations are under-led around innovation. It’s the topofficers that have to really create agrowth culture based on innovationrather than just acquisition.”

There are also cultural challengesinvolved in moving any organisationfrom an emphasis on findingsolutions internally to tapping intobrilliant minds elsewhere. Mostsenior managers at P&G have beenwith the company for the vastmajority of their careers. “You relyon people outside, to some extent, tohelp challenge you and put ideas inyour head about what mighthappen,” Huston admits. “Inrefining your ideas and ideas ofwhat’s possible, you have to exposeyourself outside. Whether it’s goingto see Dee Hock or Stu Kauffman orsome little entrepreneurial companyor studying the movie industry or thetoy industry, or whatever it might be,you have to. The problem is peopledon’t know the right questions toask. And if you’re inside a companythe only questions you know to askare those within your frame ofexperience. It’s hard to ask aquestion outside your frame ofexperience so you have got to bemoving to other frames of experienceto come up with good questions.”

Huston believes that the Connect+ Develop model of innovation isnascent and likely to become the

dominant innovation model of ourtimes. “It is like developing thetelephone system. If Procter &Gamble developed the telephonesystem and only we had it in theworld, yes, it would benefit ouroperations. But, if the world has thetelephone, look how much moreeffective we are and what’s mostimportant with the telephone systemis not the utility but theconversations. So we’ve been tellingour potential partners, here’s theutility, here’s how you do Connect +Develop, because fundamentally webelieve that our competitiveadvantage is knowing theconsumers, leveraging the strengthof our brands, and the quality of theconversations that we have. It’s notwhether or not there are networksout there or people know that we arelinking to scientists, it’s the qualityof the conversation.”

Today, for many companies, “theinnovation phone system, theinnovation phone book, and the ideaof innovation conversations barelyexists”. For Procter & Gamble,management innovation has been animportant driver of its enduringsuccess. It pioneered brandmanagement in the 1920s, it wasone of the first companies toimplement a transnationalorganisation in the late 1980s inR&D (also led by Larry Huston), andit is now leading the world in itsapproach to open innovation. Andthe beauty of such innovations isthat they are sufficiently deep-seatedthat competitors take a long time tocatch up. As Huston observes,Connect + Develop is a long-terminvestment: “I think P&G will run onthis model for 20 years, and one-by-one many other companies willembrace it.” ■

ResourcesLarry Huston and Nabil Sakkab,“Connect + Develop”, HarvardBusiness Review, March 2006.

A.G. Lafley, “Getting Procter &Gamble Back on Track”, speech atthe Rotman School, April 21, 2003.

www.pg.com

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How did you come to a “scorecard”point of view?I was an aerospace research scientistfor 15 years and decided that Iwanted to change careers. So I quitmy job, attended B-school, andworked in a strategy consulting firm.Ultimately, I became aware of TotalQuality Management (TQM) on a tripto Japan. And that’s when I becameso interested in it that I decided Ireally wanted to focus attention onTQM rather than strategy consulting.

Were you also interested ininnovation at this point?Yes. I wanted to make sure that Iworked in companies that had arecord of innovation and wereparticularly responsive to innovation atthe management level, because TQMis a kind of innovation. As I searchedfor American companies that wouldmeet the test of being both innovativeand receptive to TQM principles, Iincreasingly focused on AnalogDevices, and I wrote to Ray Stata.

Why that company?Ray was and is one of the rare CEOswho is really curious and interestedabout management innovation. Iremember when I first went to seehim, it turned out that it was quitetimely because he had just gotten offthe phone with one of Analog’s majorcustomers who was irate because akey shipment was late. And so I

talked about TQM and it made for agreat dialogue. It seemed to me rightaway that Ray and Analog wereblessed with an innovative culture.

Did you say “culture”?After years of working withinnovation, there is no question inmy mind that the number oneingredient is to have an innovativeenvironment. You can’t innovate inan environment that is not open toinnovation, and that means from thevery top, from the CEO all the waydown through the organisation. Andit was clear that Ray was interested:he recognized that TQM was animportant thing, that it had animpact on any and every industry,but that it would acutely affect thesemi-conductor industry, of which hewas a part. There’s no question that Iimmediately liked and respected RayStata and so that ended up being thechemistry of my going to Analog. Itwas the right environment for meand it was the right time for him.

Was everyone inside Analog ascommitted to TQM and innovation?No. And, in time, Ray was succeededby someone who has more of atraditional approach to management,the kind of executive who makesdoable promises to Wall Street andthen tries to deliver on them. Thelesson here is that the leader of acompany is essential to innovation;

yet, after a company has becomeinnovating – and if the industry doesnot demand that you innovatefurther – someone of a differenttemperament can lead the company,with a much more status quodemeanour.

When you worked on beinginnovative, what kind of time horizonwas in your mind?One of the first assignments that Raygave me at Analog was to developfive-year strategic plans.Traditionally, once every five years,they would develop a strategic plan.Curiously, they would not revisit thatplan until the five years were up. SoI started to think of innovation withat least this kind of time horizon.

But five years ...does that work intoday’s marketplace?Obviously in today’s world that’s nota viable approach, and it did changeeven while I was at Analog moretoward a continuous strategicplanning model. That’s what’sneeded now. If the market demandsconstant innovation (and just aboutevery market does), you have tofocus on innovation constantly.What’s most relevant to note here isthat innovation is not something thatis always defined by numerics. Evenat Analog, I came up with somethingthat was called the CorporatePerformance Audit, an annual audit

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Perfectly in balanceArthur M. (Art) Schneiderman pioneered what later became the concept of the balanced scorecard while a vice president of quality and productivity at Analog Devices. We talked with Schneiderman, now an independent consultant, to find out more about the early evolution of a management innovation.


that used what I called a “half-lifemethod”. The plan we devised usedan annual context and focused onseven or eight non-financial thingsthat we needed to manage in orderto get to where we wanted to be infive years, numerically andotherwise. In fact, one of my tasks atAnalog was to manage the agendafor the monthly business meetings.

There was always a battle with othersenior managers whether we shoulddiscuss, first, the non-financialparameters of the business or thehard numbers. Many companies fightthat same battle today.

How did you resolve this battle?I can’t put my finger on where orwhen it happened, but I suddenlyrealized the best thing to do was totry and combine the two items inwhat became the overall scorecardfor the business. In trying to meetthe demands of the hard numberexecs, I agreed that we would haveno more than three financialmeasures at the top of the scorecardand then non-financial measures forthe rest. So that is how the AnalogDevices scorecard was born. Thegeneral manager urged that weabandon the fancy name ofCorporate Performance Audit andcall our performance tracking,simply, the Corporate Scorecard. Andguess what? Divisional Scorecardssoon followed, which gave us aweighted average of each division’sonline performance. What wouldchange over time are the things thatwent on the scorecard, not thefinancials but the non-financials. Atthe time, as far as I know, no othercompany was doing it this way.

The balanced scorecard has evolvedover time, and it seems that thereare variants of the concept you

originally created. Is there one rightscorecard?Some of my colleagues over theyears have concentrated on creatingthe “perfect” scorecard, but I’m notsure it’s helpful to insist on just oneform of scorecard. The big problemthat organisations have is inimplementing the scorecard; theydon’t have tools in place for

achieving the goals. And so they fail.They have a scorecard but they don’tachieve the results they desire, so itnever makes any strategicdifference. In the end, they waste alot of effort and a lot of energy thatcould be spent elsewhere. Some saythe scorecard itself is the big thing; Isay the real power of the scorecardconcept is in how you’re going toimplement the changes. That’s thekey thing.

Along those lines, if it’s importanthow you implement the scorecard, isit also important to think about howyou develop the scorecard?Absolutely. The process by whichyou develop the scorecard is ofcritical importance. Most of thetime, measures that people add tothe scorecard are politically chosenmeasures, not strategically chosen.So you have to have a well-documented, well-understoodprocess that you refine each cycle.This means that you not only have towork on the scorecard, you also haveto work on how you are going tocreate it and how you’re going toensure that it is widely known andthoroughly understood, which leadsyou to how you are going to achievethe goals that you come up with.

So having worked with scorecards forso long, do you have any favouritelessons learned?Let me offer three. First, I think that

any time you come up with aninnovation in management that hasnumerical targets as its basis, it isunlikely that it will ever be acceptedwith enthusiasm throughout theorganisation. The lesson is that youshould focus on rate of improvementrather than specific end results.Second, I believe the scorecard isprobably somewhat less important

than the half-life method: you haveto test everyone’s sense of makingsolid progress and thus you have toestablish sound improvementprocesses in the organisation. Andthen the third thing is to cultivatethe mental process for processmanagement. On my website,www.schneiderman.com, I list 7-Steps of Process Management. I dothis for a very important reason: it’svitally important how you approachinnovation or the end results will befar less than optimal.

Are your seven steps the same asTQM?My 7-step model for processmanagement encompasses TQM, butit also tells you when, if necessary,to redesign a process, to re-engineerit. It also has control built into it,which basically says that it doesn’tdo you any good to improve aprocess if it has random applicabilityor otherwise is out of control. Interms of the steps I recommend, Idon’t care where you start, but I docare that you have an open processthat allows you to ask questions fromtime to time, questions like: How arewe doing? Are we on course? If not,why not? A scorecard is an essentialcomponent to running a business,but only if you know how to play thegame very well. In the end, thescorecard tells you whether thestructure and processes inherent inyour business are helping or not. ■

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I can’t put my finger on where or when it happened, but Isuddenly realized the best thing to do was to try and combine thetwo items in what became the overall scorecard for the business.


The origins of the modern firmcan be traced to the 19thcentury. Yet the nature of

business enterprises remains aconstant work in progress. Over thelast decade, in particular, technologyhas opened up a wide range ofopportunities to change thefundamental shape of the traditionalfirm. This potential has beenenthusiastically charted bycommentators and academics alike.

In 1998, Thomas W. Malone andRobert J. Laubacher of theMassachusetts Institute ofTechnology (MIT) looked at how anew kind of organisation could formthe basis of an economy in which theold rules of business are overturnedand big companies are renderedobsolete. Drawing on their researchat MIT’s Initiative on Inventing theOrganisations of the 21st Century,Malone and Laubacher heralded “thedawn of the e-lance economy” – aworld where freelance workers wouldcome together in temporary or virtualconstellations rather than astraditional employees. Malone andLaubacher were not alone inpredicting that technology wouldchange the shape of organisationallife. There has been an array ofvariations on the theme of creatingand managing virtual and networkedorganisations. Yet, despitecontinuing technological strides, thepredictions of revolutionary changeremain largely unfulfilled.

In parallel, the 1990s sawincreasing interest in professionalservice firms as a uniquely fertilearea for discussions of organisationalstructures. For example, Tom Peters,a former McKinsey consultant turnedmanagement commentator,celebrated the multi-functionalglobal teams speedily assembled bythe consulting firm to tackle clientproblems. Their speed and flexibility,coupled with their strongly definedculture and their ability to manageand maximise knowledge, convincedPeters that it provided a partialblueprint for how business firmscould be constructed and behave inthe global economy.

InspirationsThe London-based consulting firmEden McCallum provides aninnovative take on the nature of thefirm as well as potential futurescenarios for the organisation ofconsulting firms.

Launched in 2000 by Liann Edenand Dena McCallum, EdenMcCallum is a network-basedconsulting firm. Rather than having alarge headquarters and all theoverheads associated with aconventional consulting firm, EdenMcCallum retains a minimal centralstaff and utilises a network offreelance consultants. Eden is aformer McKinsey consultant who alsoheld international marketing roles atUnilever and Siemens. McCallum

was formerly an international vicepresident and director of planningand strategy for the publisher CondéNast – as well as being a formerMcKinsey consultant.

The inspiration for the firm beganwhen McCallum was working atCondé Nast and Eden was working atMcKinsey. McCallum realized thather budget did not stretch to hiringone of the big-name strategyconsulting firms – McKinsey & Co.,Boston Consulting Group, Bain orBooz Allen Hamilton – but she stillneeded that calibre of support. Edenobserved that many strategyconsultants, particularly in the dot-com era, were reassessing what theywanted from their work – andflexibility and control were key. Soonafter, the former INSEAD MBAclassmates came up with the idea ofcreating a pool of experienced,independent consultants.

Six years later, turnover of thecompany is over £10 million and ithas delivered more than 300projects. The firm has grown by morethan 80 per cent per year. It now has24 full-time staff and around 200freelance consultants, making it thesecond biggest strategy consultingcompany in London after McKinsey.

Trends and opportunityAs with many other businesses,Eden McCallum’s evolution wasbased on the benign convergence ofa number of factors. “In hindsight, a

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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.


lot of things came together at once,”explains McCallum. “First andforemost we wanted to create abusiness. So, we looked at themarketplace in a business we knew:management consulting. And we sawa couple of major trends – thematuring of the consulting market,and professional people wanting totake more control of their careers.These then led us into our uniquebusiness model. And in creating thisbusiness, we also ended up comingup with an entirely new organisationmodel. Business innovation begetsmanagement innovation.”

The first change was the maturingof the management consultingmarket, with clients seeking morecontrol and value in their consultingspend. The dominance of the bigplayers in the business was – and is– largely unquestioned. It hasspawned an entire generation ofcompanies and senior executiveswho are comfortable with the notionand value of managementconsulting. They are aware of itspotential value to the business. Inthe past, companies hired topconsulting firms to tap into theirbright, business-school-educated,

minds. With MBA graduates andformer strategy consultants nowcommonplace among the seniorechelons of multinational firms,there is a resistance to formulaicconsulting products and neatlypackaged solutions. Instead,companies want consulting advicethat is genuinely tailored to theirsituations. “Companies aresophisticated buyers. They can pickand choose and shape. Clients wantthe same flexibility as consultants,”says Eden.

The second trend Eden McCallumhappily tapped was amongconsultants themselves. Manyconsultants were bitten by the neweconomy bug and left consultingfirms in search of entrepreneurialexcitement and the opportunity tomake a lot of money. When the neweconomy fizzled from rocket to dampsquib, many one-time consultantshad reassessed what they wanted outof their careers and were loathe tore-enter the corporate world on thesame terms as before. At the timewhen Eden McCallum began life,many experienced consultants werecontemplating their next careermoves. “At one point everyone

wanted to be partners, then they allwanted to be entrepreneurs,” recallsEden. “The dot-com thing createddemand for flexibility. People lefttheir traditional careers and thendidn’t come back.”

At an operational level, too, EdenMcCallum recognized anopportunity. Large consulting firmstypically focused on high-level boardissues at FTSE 50 companies. Fortheir part, client companies oftenwanted continued consulting supporton specific strategic issues orimplementation but were put off bycontinuing high costs. EdenMcCallum offered a market-breakingalternative: consultants with thesame high-level skills and rigorousapproach at approximately half thecost. After the dot-com crash, thiscombination of quality at lower costwas particularly alluring as manyfirms had scaled down theirconsulting budgets.

Innovative solutionsEden McCallum’s proposition wassimple but scary: a consulting firmwithout any consultants on thepayroll and without any proprietarymethodologies. Instead, they

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Liann Eden and Dena McCallum: flexible friends


would employ consultants on acontract basis as demanded by theirclients, and they would use whatevermethodologies were appropriate tosolving their clients’ problems. Asone former Bain consultant observed,this approach appeared to challengeeverything consultancies held dear: itwas “like the sky falling in”.

To make this model work, EdenMcCallum had to rethink many of thestandard precepts of managementthinking:

Tailor the offering Eden McCallumfocuses on tailoring the consultants’experience, skills and personalitiesto the clients’ needs. The firm makesit clear that it is not in the businessof creating its own distinctiveintellectual capital and that it isagnostic when it comes to particularmethodologies, despite the fact thatnovel ideas and tools are thelifeblood of most big consultingcompanies. “We rely on what ourconsultants bring to the table and letour clients choose their preferredapproach by interviewing andselecting the consultants,” reflectsMcCallum. “Clients want to workwith a person they trust; they don’tnecessarily want a particularmethodology. They just want theproject to succeed.”

Outsourcing the delivery channelEden McCallum’s core deliverymechanism is effectively outsourced

to freelance consultants. On thesurface, at least, this appears to be adangerous strategy. The company isclearly reliant on the quality of theservice offered by the consultants. Tomake it successful, Eden McCallumworks hard to ensure the quality ofthese people. Only one in 10applicants makes it into thecompany’s talent pool. The secondsafety element is that consulting is

built on relationships rather thantransactions. Relationships arebetween clients and Eden McCallum,and the firm endeavours to retaincontrol and oversight over therelationship with the client. SaysEden: “If we structure the project upfront and we have a long-termrelationship with the client, then wedon’t have to own the deliverymechanism. The keys are trust-basedrelationships, clear problem-structuring and careful selection ofconsultants.”

Involve the competition The standardorganisational model is to start smallwith the intention of emulating orovertaking an industry’s big playersover time. Not so in the case of EdenMcCallum. From the start, Eden andMcCallum were clear that theirlivelihoods, and the future of theirbusiness, depended on what wasostensibly the competition: big-nameconsulting firms. “We exist becausethey exist,” says Eden. “Companieslike McKinsey, Bain and BCG createthe market on both the client andconsultant side.”

Before the firm was launched,Eden McCallum began a dialoguewith the big players in the market.This alerted them to the potential ofworking with Eden McCallum ratherthan regarding the company asanother upstart strategy consultingboutique with eyes on their ownmarkets. And this symbiotic

approach has worked. EdenMcCallum has referred business tobig-name consulting firms, and theyhave returned the compliment.

Elevate the process behind thenetwork The idea of a networkedorganisation is not new. Brokers andagents are commonplace. Whatmarks out Eden McCallum is that theprocess behind the network is where

a great deal of the value lies.Indeed, in a business without itsown consultants and without its ownintellectual property, this is the heartof Eden McCallum’s value-added.

Consequently, about half of itsfull-time staff are fully employedensuring that its consultants are theright people in the right jobs. Theother half of the full-time staff aretotally dedicated to developing andnurturing client relationships. “Ourfull-time employees are eitherworking on the supply side so theyare consultant-facing or on thedemand side which is client-facing,”explains McCallum. And it is theskills of these individuals, and theirability to match top-qualityconsultants with the right projects,that define Eden McCallum. “Everyconsulting company works hard tomatch its consultants to the rightprojects;” reflects Eden, “thedifference is we don’t have to worryabout capacity management, so wecan always make a good match.”

Initially, to build awareness amongpotential consultants, EdenMcCallum placed advertisements inthe Financial Times and TheEconomist – a statement of intent asmuch as anything. The adsemphasized that the company waslooking for consultants who wereindependently minded withexperience in a top consulting firmand who had an MBA from a leadingbusiness school. These basic

recruitment benchmarks remain inplace. In addition, Eden McCallumconsultants are evaluated againstfive core competencies, their CVs arescreened, all references are checked,and they go through multiple roundsof partner interviews. The peoplewho recruit the consultants are,themselves, former consultants whounderstand the dynamics anddemands of the business.

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Eden observed that many strategy consultants, particularly in thedot-com era, were reassessing what they wanted from their work– and flexibility and control were key.


When they actually go to work,Eden McCallum puts two to threeconsultants from its talent pool infront of a client. The client thenevaluates with whom they think theywould work best. On the completionof projects there is an extensivefeedback process focused on theindividual consultants and EdenMcCallum’s performance. “Bigconsulting firms put forward a team

and the client generally doesn’t havea say about who is on it,” saysMcCallum. “Because our clients areinvolved in choosing the consultantsthey work with, they have a vestedinterest in making it work with thosepeople.”

Redefine the employmentrelationship Eden McCallum’snetwork of consultants are notemployees in a traditional sense, norare they entirely freelancecontractors. They lie somewhere inbetween: they have considerableloyalty to Eden McCallum, and theyget most of their work from thecompany, but they define their ownterms of engagement. This includeschoosing which sectors they willaccept projects in, how many daysper week and how many months peryear they work, the logistics aroundtravel and many other elements aswell. “We are constantly puttingtogether a new puzzle for eachproject,” explains Eden. To be sure,this arrangement requires constantbalancing to keep everyone happy,and it is not for everyone. But, by

letting their consultants choose theirown terms of employment, EdenMcCallum has a much morededicated and committed workforcethan would have been possible witha traditional hierarchicalorganisation structure.

Create transparency Eden McCallumworks very hard on creatingtransparency in its management

model so that everyone knows wherehe or she stands. This ensures thatthere is a good relationship betweennetwork members and avoids thesense that some people may begetting favourable treatment aheadof others.

One complication lies in financialarrangements. To avoid this, EdenMcCallum is very open about its feestructure. For around 100 of itsconsultants, the firm is their mainsource of income. Another 100 workon about one project a year. Initially,fees were put forward by theconsultants. Then the company triedto allow clients to determine fees.Now, how much consultants are paiddepends on a banding system inwhich consultants are paidaccording to their seniority andconsulting skills.

Another common concern innetwork organisations is how theavailable work gets shared. So thefirm tries to be clear about the likelylevels of demand for people withdifferent skills sets. “It is aboutcalibrating expectations,” says Eden.“We’re honest with consultants we

don’t anticipate using a lot. We tellthem that we anticipate using themonce a year. Our interviews actuallyprovide great career coaching forthem and the network offers them alot of information. Often they will tellus what their targets are in terms ofworking with us. Some will work forsix months and then go travelling ordo something else – others areworking full-time on back-to-back

projects. There is no exclusivity inthe relationship.”

Reinventing the firm Eden McCallum’s experiences helpto shed light on the age-oldquestion: What is the real raison d’être of the firm? In an era ofoutsourcing and virtual working,what are the minimum few thingsthat the firm has to do to justify itsexistence?

The answer is three things. First,the Eden McCallum brandrepresents a particular valueproposition to its clients and itsconsultants, and for the founders akey part of their job is to continue tonurture and sustain that valueproposition. Second, Eden McCallumis a nexus of relationships: it gainsvalue from the social capital thatbuilds up over time in that set ofrelationships. And third, it is amechanism for structuring the workand managing projects. These are, inessence, the core competences ofEden McCallum and are the thingsthe company has to sustain as itgrows and evolves. ■

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Eden McCallum’s experiences help to shed light on the age-oldquestion: What is the real raison d’ être of the firm?


Most large firms are victimsof their own enthusiasm fornew ideas and new

practices. Whatever the latestmanagement idea – knowledgemanagement, re-engineering, six-sigma, 360° feedback – it is quicklynoticed. Soon, a working group isformed to evaluate its potential; and,straight away, the idea is being testedin a pilot project.

But, once brought to life, projectsare hard to kill; new ideas, oncediscussed openly, are hard tosuppress. So “what’s new” is usuallypiloted on top of an existing set ofprocesses and alongside the vestigesof several earlier projects, none ofwhich really succeeded or failed.Much like the sandwich made withdozens of bread slices stacked everhigher, the result is an organisationin which multiplied processes createstaggering complexity, limiting theability of any one initiative to deliveron its potential. The end result is anenterprise choking on innovationwith widespread scepticism amongemployees.

So the biggest challenge facingmost large firms is not how toembrace the latest thinking; it is howto cast off the old. We need to createways of working that are fit for thefuture, but we also need to become

more effective at identifying andjettisoning the old ways of workingthat had value only in the past.

UBS Global Wealth Management &Business Banking (UBS GlobalWM&BB), the private banking, retailand corporate banking division of thegiant Swiss bank, offers a fascinatinginsight into how change can befacilitated by getting rid of aredundant and value-destroyingprocess. But the bank did not focuson just any process; it picked onethat is considered core to almost anybusiness: budgeting. One issue thatevery big-company manager canagree on is that the annualbudgeting process is an enormouswaste of time and effort. The UBSexecutives didn’t just bemoan thefutility of budgeting, however; theydecided to abolish the wholeprocess. In doing so they achieveddramatic changes in the culture ofthe organisation and helped to reachrecord levels of growth.

Building a platform for growthUBS was the product of a megamerger of two of Switzerland’s oldestbanks (Union Bank of Switzerlandand Swiss Bank Corporation) in1998. As Dominik Ziegler, controllerof the Wealth ManagementInternational business recalls, “At

the time of the merger, we were notin the best shape. Morale was low,and our cost base was too high. Wewent through a long period ofrationalisation and cost cutting. Andduring that time we had a very strictbudgeting process with very tightnumbers and strict accountability.”

By 2002, the cost-cuttingmeasure had created huge savings,and the company had integrateditself around its single global brand.And with the financial servicesmarket recovering from its post-dot-com hangover, UBS was wellpositioned to move back into growthmode.

UBS Global WM&BB is the biggestand (together with UBS InvestmentBank) the most profitable businessgroup of UBS and the world leaderin the private banking industry. Withonly about four per cent of a highlyfragmented market, the potential forgrowth is enormous. So the businessgroup executive team, led by MarcelRohner, began in 2003 to shift theemphasis away from cost control. AsToni Stadelmann, CFO for thebusiness, comments, “Our strategicchallenge at that point was to shiftthe focus on costs to a focus ongrowth and efficiency. And thatrequired a different culture, adifferent attitude.”

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Deathto budgetingIt’s considered one of the basics of management. If you don’t have a budget, you aren’t really managing. Not true: UBS made budgeting secondary to performance and customer satisfaction.


The 20 top executives of thebusiness group held an off-site in awindowless room in London at theend of 2003. They developed a clearagenda for growing the business,and then they started looking intothe blockers, the things that were

standing in the way of the growthagenda. The usual suspects were allthere – centralized structures andprocesses, not enough scope forinitiative taking and budgeting. AsStadelmann notes, “Why do we dothe budgeting process when we arelooking for growth? Budgeting ishighly defensive. It is not justcumbersome, it is fundamentallyagainst growth. It is aboutnegotiating down the targets that areproposed by the centre. And itcauses people to talk aboutnumbers, not about clients andmarket opportunities.”

Ziegler takes an even moreemotive position: “The old budgetingprocess was basically aboutwithholding information. I go in tothe process arguing that I can make30 per cent less than what I think Ican; and my boss pushes for 30 percent more than he thinks I can do.Then we have some kind of a‘bazaar’ and the one who cannegotiate more convincingly wins.How does this help us achieve ourgrowth targets in any way?”

Out with the oldFollowing the off-site, a workinggroup was set up for enabling anddriving growth, with the abolition ofthe budgeting process as one topicon the agenda. This was easier saidthan done, however. The processcould not just be thrown out withoutreplacing it with something; clientadvisors still needed to be motivatedto grow the business.

And most tricky of all, there wereno role models for UBS to follow. A

Swedish bank – SvenskaHandelsbanken – had pioneered ano-budgeting model back in the1970s, so a couple of UBSexecutives took a trip up toStockholm to compare notes. But asZiegler recalls, “It was not what we

thought it would be. Handelsbankenwere in different business models.So we could not learn as much as wehad expected.”

Were they aware of the BeyondBudgeting Round Table, a UK-basedgroup that had been looking atalternatives to budgeting since themid-1990s? Stadelmann is almostapologetic in his response: “No, thiswas not driven from a theoreticalangle at all. This was driven by purebusiness logic – if we want growth,then budgeting gets in the way ofwhat we are trying to create.”

Interestingly, UBS (the parentcompany) had been part of theBeyond Budgeting group until 2002.So while there was some awarenessof the round table’s activities, it wasnot a primary driver of UBS GlobalWM&BB’s initiative.

In with the newThe new model was built from theground up, and according to theparticular needs of the UBS GlobalWM&BB business in all countriesexcept the US, which wasn’t part ofthis business group at that time.Rather than comparing theperformance of client advisors with abudget number, Stadelmann and histeam evaluated them againstthemselves (their previous year’sresults) and against their peers. Ashe explains, “We set up a carefullyformulated internal benchmark. Wedefined various clusters within thebank to make sure we werecomparing apples with apples. Wecreated monthly measures of actualperformance on the usual criteria –

revenues, net new money,cost/income ratio. And then weranked all the “desks” (groups ofclient advisors) in the cluster. Inessence, we created performanceleague tables, and we made theresults available for everyone to see.”

The league tables were designedto serve two purposes. The first wasto fuel the competitive instincts ofthe client advisors and to push themto deliver higher levels ofperformance than they would haveever done under a traditionalbudgeting process. The desk’sranking was fed into the annualbonus process.

The second function of the leaguetables was, paradoxically, aboutencouraging higher levels ofcooperation between desk heads. AsZiegler explains, “We use theseresults to drive our coaching andbest-practice transfer processes. Weare a learning organisation, and theprimary purpose of the forcedranking is to help us to improve.”

Why would desk heads choose toshare their success formula withtheir peers? Isn’t it like askingChelsea Football Club to reveal itssecrets to Manchester United?Stadelmann laughs at the analogy.“Actually, no, it isn’t. There are twokey differences. First, this is not azero-sum game: if we all do better,we all make more money. Andsecond, bonuses are not calculatedon a formula – yes, results are thebiggest single component, but wealso factor in all the ‘soft’ stuff,including coaching skills, opennessto sharing, and so forth.”

“But we are not so naive,”Stadelmann continues, “to thinkthese discussions will happenspontaneously. We know acompetitive system is likely to createcompetitive behaviours that goagainst our philosophy. So we

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One issue that every big-company manager can agree on is that the annual budgeting process is an enormous waste of time and effort.


have had to institutionalize a setof processes for coaching and best-practice improvement. Every week,the desk heads get together to sharetheir experiences. It is a salesmeeting of sorts, but with a strongcoaching element. And every month,there is a meeting of the desk headsin a cluster where the league tableresults are compared. People talkabout what has made themsuccessful or why they are lagging.And this process is repeated up theladder – to business sectors, businessunits, business areas, and even atthe executive committee level.”

There is no naiveté about bonuseseither. The annual performanceevaluation also includes a qualitycomponent: is this individual willingto pass on his knowledge, to help outwith the development of othercolleagues? This evaluation is madeat all levels – from executivecommittee level down to theindividual client advisor.

One further point of clarification isin order: no budgeting does notmean there are no estimates offuture performance. Marcel Rohner,deputy Group CEO and CEO GlobalWM&BB, needs to have his finger onthe pulse of the business, and heneeds to know how the results areshaping up over the coming months.As Karin Wyss, head of planning inUBS Global WM&BB, observes, “Westill have to plan: there is a systemof high-level rolling forecasts for thenext five quarters.” Ziegler adds,“These are best-estimates only,performed by a small group ofcentral people, and for the

executives only to discuss futureoptions – otherwise this would beconsidered a hidden budget. But it isremarkable how accurate theseestimates are.”

Putting the new system in placeThe new system represents a massivechange for employees across thebank. How was it implemented?Wyss explains: “First, the new modelwas demonstrably better than the oldone. Second, we engaged in a hugecommunication effort, led from thetop by Marcel Rohner. We had toshow this was not just the flavour ofthe month, so we had a series ofroadshows across the bank, usingAlingi, the winning UBS-sponsoredAmerica’s Cup yacht, to evokeimages of teamwork and flexibility.And third, we rolled out our ‘leadingfor growth’ seminar across the bank,which gave senior managers alanguage and a rationale for thechange of paradigm.” UBS GlobalWM&BB also invested in a state-of-the-art management informationsystem that was just coming onlinein 2004, making it possible to createthe detailed and transparent leaguetables that are needed for the newmodel to work.

The abolition of budgeting was, ofcourse, part of a broader shift in theculture of UBS Global WM&BB – ashift towards greater levels ofpersonal accountability andentrepreneurial leadership across thebank. For the first time, desk headswere free to hire new people andincrease their marketing spend

without having budgeted for them.And as Ziegler recalls, it took sometime for this new level ofaccountability to sink in. Some deskheads would still call head office toask for permission to invest in amarketing campaign.

The changes also led to a new rolefor the controller’s department in thecorporate centre. Rather than spendall their time monitoring behaviourand performance, they became morelike an in-house consultancy. AsKarin Wyss explains, “My job todayis to support the business ratherthan monitor its performance. Wehave a sophisticated Intranet systemfor comparing performance acrossmarkets, we share ideas, and thishelps us to understand why somemarkets are stronger than others.”

And what about the overall resultsof UBS Global WM&BB? Has theabolition of budgeting helped? Theresults are certainly at record levels– in 2005 UBS Global WM&BBachieved profits before taxes of morethan 6.6 billion Swiss Francs,compared to just 4.4 billion in2003. But as Ziegler points out, “Itis difficult to say how much of thishas come from the performancemanagement system.” What is clear,though, is that the new system had avery positive impact on theatmosphere in the bank. AsStadelmann comments,“Discussions on the sales processare of a much higher quality thanbefore. We spend our timediscussing clients and marketopportunities, rather thannegotiating figures.” ■

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Why would desk heads choose to share their success formulawith their peers? Isn’t it like asking Chelsea Football Club toreveal its secrets to Manchester United?

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Design is the height ofcorporate chic. It is endorsedby management gurus as the

new thing. Car advertisementsfeature designers rather thanglamorous men and women. Peopleknow who Tom Ford is. Designsuperheroes, such as Alberto Alessiand Philippe Starck, glitter on thepages of magazines. Their Midastouch is applied to everything fromkettles to hotels.

But, in the business world atleast, the suspicion is that thecurrent gushing enthusiasm fordesign is as superficial as was themanagerial enthusiasm for re-engineering or any other fad. As aresult, the embrace of innovativelydesigned Parmesan graters andhotels with no nameplates andexquisite atriums is likely to beshort-lived.

Unquestionably, design isimportant; but companies that reallyunderstand the power of designrecognize that it is more than anaesthetically pleasing get-rich-quickscheme. There is more to designthan placing a funky computer in the

office and declaring yourself welland truly plugged into the zeitgeist.

There is another way. Take theapproach of the design companyIDEO. The company emerged from abusiness begun by Bill Moggridge inLondon in the 1960s. As Britishindustry hit the rocks in the late1970s, Moggridge looked elsewherefor work. He found himself in SiliconValley where things were justbeginning to get interesting.Moggridge hooked up with anotherdesigner, the American David Kelley.Before long Moggridge and Kelley’scompanies were supplemented by aspin-off company run by anotherBritish designer, Mike Nuttall. Thecompanies then combined as IDEO.

IDEO has quietly thrived. Alongthe way, it has survived beinglabelled as one of the world’s coolestcompanies to work for and hassurvived eulogies from the Americanguru Tom Peters. “It’s finallyhappened. I’ve seen a companywhere I can imagine working,”pronounced Peters on visiting IDEO’sPalo Alto office for the first time.

The Clerkenwell, London-based

company is different not because ofits designs – innovative though theyare – but because of its culture.While it is largely pointless andpotentially illegal to copy IDEO’sdesigns, seeking to emulate itsculture may make a great deal ofsense – while being, of course, themost demanding thing to copy.

Just the way it isIDEO practises grown-upmanagement. Its managementinnovation is the way it works andthe way it is.

The first notable thing about thecompany is that it has not expandedat breakneck speed. Indeed, by mostmeasures, it has hardly expanded atall. Despite being internationallylauded and profitable, IDEO hasfewer than 500 employees worldwide– up from 140 people in 1991.

Nice and steady does it. Keepingit small is a conscious decision saysIDEO’s Mat Hunter: “We know thatso much of this is about human tohuman contact and we keep ourteam small. A typical project teammight be three or four or five

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the cultureDesigningWhen 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. Over forty

years on it is still working.


people at the core, bringing inexperts as needed. We have 50people based in London and thatmay reach 60 or 70 in the next fewyears. Beyond that size we know thatsometimes you do begin to fracture abit but, at the same time, we needcritical mass.”

IDEO’s Palo Alto office has 280people. All other locations have fewerthan 60. In an age of corporatebehemoths anxious to gorge on thelatest prey, IDEO is hardlyexpansionist. It has four locations inthe United States as well as branchesin London, Munich and Shanghai.

The second key to grown-upmanagement is that IDEO is basedaround projects. In keeping with itsunwillingness to embrace growth forits own sake, multi-skilled project

teams change from project toproject. Projects are its culture.

The company’s folklore (capturedin Tom Kelley’s book, The Art ofInnovation) is brimming with storiesof supermarket trolleys beingredesigned in a week and how thecompany developed the first Applecomputer mouse. Amid stories ofdeveloping the first single-useinstant camera, all-terrain eyewearand reinventing the light switch,there is no mention of costs andprofits. The unspoken understanding

is that brilliant, problem-solvingdesign makes money for thecompany and its clients. It is user-based design. At the heart of thebusiness is using design thinking tohelp clients be more valuable.

Open studioAnother core of the IDEO culture isthe concept of the studio. The studioIDEO-style is not a production linewith an all-knowing, all-seeing fontof creativity standing at one end. Thestar designer does not breeze in andout while a tribe of assistants labourover his latest creation. Most designcompanies are based on a singleindividual and fail when theindividual moves on. Others arebased on confrontation. IDEO worksaround open critiques of people’s

work. Its belief is that part of being astudio is defending what you believeto be true.

The make-up of IDEO staff hassubtly evolved, particularly overrecent years. “It started off with onecluster,” Hunter explains. “IDEO wasformed, basically, in order to bringdesigners and engineers together.David Kelley ran the engineeringcompany and Bill Moggridge andMike Nuttall each ran designcompanies and so IDEO was formed.To this was added what we call

‘human factors’. Now what you gotwas designers, engineers, andconsideration of the human element.This was not the ‘usability police’ asergonomists and psychologists weresometimes viewed, but an inspiringconnection between the designersand engineers and the consumersthey were serving.”

The power of IDEO was to takewhat otherwise might have beenquite a “siloed” issue – designersdon’t talk to engineers and none ofthem will talk to human factorspeople – and create a culture inwhich team members respect oneanother.

To this has been added a finalelement: business acumen. IDEO isnow hiring MBA graduates. “We havepeople in IDEO who know the waybusiness is thinking about issues weencounter. It’s still relatively few,perhaps one per cent of the team,but it’s growing very fast. Thesepeople are highly entrepreneurialand inspiring and will work withteams. All of our ideas have to bedesirable, feasible and viable –translated as humans, technologyand business,” says Hunter.

The experienceIDEO now brings its design expertiseto a wider marketplace. Its work isincreasingly focused on improvingcustomer experiences and, even more

broadly, on transformation. This, itsays, is actually a natural developmentfrom its early design work.

“Our approach is all about goingout into the world and looking at realpeople. Hypothesis number one isthat companies don’t understandtheir consumers well enough andthey don’t go out and observe theiractual behaviour. It’s all down to thethings that you notice; you’ve reallygot to sharpen your eyes and ears,”says Hunter. “What we now see isthat the level of disruptive innovation

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There is more to design than placing a funky computer in the office and declaring yourself well and truly plugged into the zeitgeist.

IDEO at work

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required is greater. It’s a muchblanker canvas and to navigate thisblank canvas you’ve got to come upwith slightly more powerful insighttechniques about how the world is. Itis not just a matter of saying we’vegot the opportunity here to change a

few features on a product or service,you’ve got to create morecomprehensive frameworks forunderstanding what consumers wantfrom a particular industry.”

Pegs in holesIn many ways the design studio, aspractised at IDEO, is anorganisational model in tune withour times. It is small and creative fora start. It is also low on hierarchy,big on communication and requiresa minimal amount of ego. IDEO’sdesigners may take the starring rolein a particular project and then findthemselves back in the chorus onthe next project.

Sustaining this culture requiresdedication rather than innovativewackiness. It starts in therecruitment process. In comparisonto many other organisations, IDEO’srecruitment process is long anddrawn out. There are three or fourinterviews. Applicants then showtheir work and discuss it with agroup of IDEO people. Then they getto meet everyone and look at theprojects underway to see how theyinteract. Time consuming, butessential, says IDEO. It wants toknow how well people will fit. Theteams have a say. “We rely on eachother. It’s a human business and youhave to know how to work togetherand respect each other. People whoare egotistical won’t make it,”reflects one.

And those that do, tend to stickaround. This, of course, is highlyunfashionable. In the age of the freeagent, spending more than a coupleof years with one employer smacksof complacency or lack of ambition.“They want to spend their career

here,” said Colin Burns when he ledIDEO’s London operation. “Peoplewho have been here a long time haveoften reinvented themselves andchanged over time. Sometimes staffneed new challenges and mightmove to another office to satisfytheir curiosity. It’s a good thing. Itmeans you could work on verydiverse projects – a service projectone day, a retail space or a product.It’s important to have variety to stayenthusiastic.”

The rigour that IDEO brings torecruitment is increasingly matchedby the attention it pays to evaluatingperformance. It has annual formalreviews based around a matrix of fiveelements: content, culture (teamworking and team leadership),client, commerce, and mentoringand leadership. Hunter distils theessence: “It’s not just what you do,it’s the style in which you think.”

Another key element of IDEO’sinnovative culture is its approach toknowledge sharing. Everyoneparticipates in the “IDEO 101”induction course when they first jointhe company, to help develop acommon language and anunderstanding of the company’smodus operandi. And cutting acrossthe seven locations are seven“practice areas” that focus onparticular client offerings andencourage the development ofspecific expertise (in addition to thebreadth of perspective that is the

hallmark of all IDEO employees).And these practice areas provide thefocus for knowledge sharing. “We’reconstantly monitoring things andseeing how, for example, we can getthought leaders in food andbeverages in California over here to

London so that they can shareinformation with the London team,”explains Hunter.

There are also ad hoc mechanismssuch as the all-IDEO e-mail.“Somewhere up to 10 times a weekyou will see an individual or aproject say, ‘Hey, we’re just about totry and understand baby nutrition,what do you know?’ Or one thatcame last week was: ‘What are yourthoughts about DIY [do it yourself]versus GSI [get someone in]?’” Overthe years, employees have becomesmart about how to use the all-IDEOe-mail. People use it selectively toensure that inboxes are not floodedwith ill-thought-out requests. And adhoc rules emerge, such as the sendersummarising all the findings andsending them round for review, ratherthan everyone copying everyone.

IDEO has built a justifiably strongreputation for innovation – ranking inthe top 20 in BusinessWeek’s list ofthe world’s most innovativecompanies. Much of the power ofIDEO’s model comes from what onemight call its small-company values:its dedication to a proven businessmodel, its informal culture and thestrong personal relationships thathold its cross-disciplinary teamstogether. And IDEO’s leadersrecognise this. Despite thetemptation to grow rapidly or todiversify into new business areas,the company has stuck to its knitting– and reaped the rewards. ■

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The power of IDEO was to take what otherwise might have beenquite a “siloed” issue – designers don’t talk to engineers andnone of them will talk to human factors people – and create aculture in which team members respect one another.


The trouble with seeking out thefuture of management is that,even when you find it, it looks

– to most casual observers –suspiciously like the past. Most trulyradical management models areeither highly situation-specific (Linuxwould not have happened without theevil empire, Microsoft, threatening totake over the world) or they don’tsurvive (remember Volvo’sexperiments with team-based carassembly?). The managementinnovations that matter are usuallymore prosaic in nature and typicallybuild on ideas that have been tried

out in other contexts. As a result, thesceptic could be forgiven fordismissing them as more of thesame.

But it is worth remembering thathuman DNA and dinosaur DNA are97 per cent the same. What mattersis the three per cent of DNA thatseparates the two species, not thevast majority of things that arecommon. And it’s the same withmanagement practices: the losersand the winners have many points ofsimilarity but a few key differences.We need to focus on those points ofdifference, particularly on their

source. New management practicesare emerging all the time, but youoften have to look quite hard to seethem.

HCL Technologies, the fifth largestIT services provider in India withclose to $1 billion in annualrevenues and 36,000 employees, isa case in point. To the outside world,HCL is just another big Indian ITcompany, and on paper its structureand its processes look remarkablysimilar to everyone else’s. Butscratch the surface and you see thebeginnings of a new model ofmanagement. Through the

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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. The work of HCL

Technologies reveals how innovation can apply to organisational systems as well.

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Vineet Nayar: “the scarce resource is not customers”


pioneering efforts of its president,Vineet Nayar, HCL Technologies isputting in place a series ofapparently small changes that willpotentially have a dramatic effect onhow people in the company work.And already these innovations arestarting to get noticed. As Fortuneeditor David Kirkpatrick observedafter talking to Nayar, “I have seenthe future of management, and it isin India”.

The drivers of innovationVineet Nayar joined HCL in 1985 asa management trainee and workedhis way up through the company,becoming president of HCLTechnologies (there is also a sistercompany, HCL Infosystems) in 2005.So he has lived through the boom inIT investment, the shift tooutsourcing and offshoring, and thegradual maturation of the IT servicesindustry. As he recalls:

“The history of HCL is a bet on thegrowth of technology services. Backin the late 1990s, 45 per cent of ourrevenues came from technologydevelopment. We were very good inwhat we did. But when thetechnology meltdown happened in2000, technology spending vanishedovernight. So we had to reinvent ourbusiness model.

“We took a look at our marketspace, and the key trend was thatthere was too much emphasis onvolume and people had forgotten theconcept of value. Everybody wasrushing to India, but no one wasasking, ‘Am I getting value?’ Ibelieved that down the line clientswould get frustrated: ‘I have got my

30 per cent, 40 per cent cost saving,now what?’”

HCL decided to position itself as avalue-centric company rather than avolume-centric company. “Wedecided to chase deals where wewere both important to the customer

and creating value for them,” Nayarexplains. “And we announced this ina global customer meeting. We said,‘We will surrender our existingcustomers if they don’t feel we areimportant partners for them’.” Thismeant giving up $35 million inrevenues, but it allowed HCL tofocus on the customers that werealigned with its strategy.

The second strand of HCL’sinnovation-led strategy was the allureof uncontested market space – the“blue oceans” in Chan Kim andRenée Maubourgne’s phrase wheremargins are high and competitors arenon-existent. “We have to createmarket space either in the way wedeliver the service or what we deliver– this is what makes us unique andmakes us big.” HCL was the firstmover in remote infrastructuremanagement (managing data centresand network services out of India)and became leaders in that marketspace. And now the company ispushing a new offering in the IToutsourcing market in which thecustomer generates major costsavings while retaining control. Byoffering flexibility and transparencyto the customer, HCL avoids head-oncompetition with the big players likeIBM and EDS (whose approach is totake the entire system off thecustomer’s hands). Major deals,including those with Dixons,Terradyne and Autodesk, attest to thepotential in this new market space.

Building an innovativeorganisationTo deliver on the promise of adistinctive market position, Nayar

realized he needed to make somefundamental changes inside thecompany. “We were creating aninnovative company, but you can’t dothat unless your internal organisationstructure is innovative. If you don’tperpetuate innovation, it is not going

to happen.” His objectives in doingthis were not unusual – he wanted toinvert the pyramid and put the powerin the hands of his employees, andhe wanted to make managersaccountable to their employees,rather than the inverse. But hismethods are original, radical, andperhaps even a little risky.

Nayar has a few overridingprinciples that shape all the changeshe is putting in place at HCL:

● Employee first, customer second.“The scarce resource is notcustomers, it is great employees,so if we spoil them and makethem realize that HCL is a greatplace to work, they will delivervalue.”

● Transparency reduces the gapbetween the manager and theemployee. Many traditionalorganisations create problems byrestricting the flow of informationand setting up artificialboundaries between people. Byincreasing transparency theseboundaries are removed, andemployees are more likely to actresponsibly and creatively.

● There are no half measures. Youcannot change a 30-year-oldcompany culture without extrememeasures. Dramatic changes areneeded to get the pendulumswinging.

So what are the managementinnovations Nayar has implemented?Three in particular are worth a closerlook:

360-degree feedback HCL’s annualsurvey of 20,000 people across thecompany rates 1,500 managers on

20 aspects of their performance –strategic vision, ability tocommunicate, problem solving skills,responsiveness, and so on. There isnothing unusual in running such aprocess. But what is unusual is thatthe results of the survey – the

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HCL decided to position itself as a value-centric company ratherthan a volume-centric company.


numbers and the comments – areaggregated and published online forevery employee to look at. Forexample, according to hisemployees, Nayar’s overall score was7.8 on a 9-point scale. Theemployees can see his scores andsee that he has a higher score onmotivating employees compared togetting resources together to getthings done on time.

This is a simple change inpractice, but one with profoundconsequences. For the manager,there is nowhere to hide if he or she

gets negative feedback. Mostmanagers take the feedback veryseriously and make changes; a fewchoose to move on. As Nayarobserves: “This system is importantbecause it shows the manager isaccountable to you, the employee,not the reverse. We are trying to adda new definition to the wordaccountability.” And importantly, the360-degree feedback is not linked tothe annual appraisal or to thecompensation package. It is open foreveryone to see, and that is enoughto encourage changes in behaviour.

Service tickets Any employee with aquestion, a problem, or a gripe isencouraged to open a “ticket” withthe relevant department. If there is aproblem with the air-conditioning,she opens the ticket with thefacilities service desk; if she doesn’tlike her new salary, she opens theticket with the HR service desk.

As soon as the ticket is opened,“people start running around tryingto solve that problem”. And,importantly, the only person who canclose a ticket is the employee whoopened it in the first place. Servicedesks, such as HR, are measured ontheir ability to resolve tickets, andthe expectation is that tickets will beclosed within two days. Daily reportslist the number of open tickets, andhow long they have been open, forthe 15 service desks.

When the service ticket systemwas introduced, there were 30,000tickets per month being opened, ona whole range of issues from brokenchairs to travel policies tocompensation matters. Graduallythis number has dropped as bigareas of concerns have been sortedout, but there is still a steady streamof tickets. For example, the HRmanager in the UK has closed 234tickets in 2006 and has zerounresolved tickets.

So what has the introduction ofservice tickets done to the HCLculture? First of all it has improvedthe “hygiene factors” in theworkplace. The environment “hasbecome extremely conducive for anemployee to work in, because he

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He wanted to invert the pyramid and put the power in the handsof his employees, and he wanted to make managers accountableto their employees, rather than the inverse.

HCL’s new Gurgaon home →


is seeing the organisation asbeing responsible to him”.

Second, it underlines the conceptof reverse accountability – the ideathat managers and support functionsare serving the employees, not theother way round. And this is all partof the employee-first mentality. “We

are spoiling the employees,” saysNayar. “It is like five-star treatment;they are getting used to a certainlevel of service, and they havetrouble going to other companieswhere they can’t even raise theseissues. So we are creating a uniqueexperience for the employee.”

A third benefit of the service ticketsystem is it acts as a barometer ofill-feeling or problems in theorganisation. As the company’s UKHuman Resource managercommented, “Whenever weintroduce a new HR policy, thevolume of tickets goes up. We knowfrom the volume of tickets whetherwe have communicated effectively ornot.”

There is a risk that the servicetickets create the wrong sort ofbehaviours: what if employees startraising tickets on trivial or sillyissues? What if they start raisingtickets on the online system ratherthan talking directly to theirmanagers? Nayar is conscious ofthese risks. “We want to letemployees choose when to raise aticket. If it is important enough tothem, they should raise it, even if Ithink it is trivial. We don’t wantpeople to be scared of speaking up.But we are also trying to push achange in behaviour here: we arenow looking for a department whocan give me one day without a ticket.This doesn’t mean suppressingissues: it means you need to beproactive with your employees sothat they have no need to open aticket on you.”

Recognition for added value Nayardeveloped a clear point of view oncompensation and recognition duringhis 20 years with HCL. “The industryused to pay 30 per cent variablecompensation to the employee linkedto the company’s performance. Wefound the idea quite ridiculous,

because if you are a softwareengineer you have no meaningfulinfluence on the performance of thecompany. So we said we will turn allthat into fixed pay – ‘trust pay’ as wecall it. Now, having established that,we switched to value: we said nowwe will start measuring you on thevalue created for the customer.”

So far, so good. But everycompany wants to measure andreward its employees for creatingvalue for their customers, and moststruggle enormously with how to doit. Again, HCL has developed asimple but innovative solution to the

problem. In Nayar’s words: “We said,the guy who wants innovation themost is the customer, so why don’twe make the customer the judge? Sowe created a simple tool: wheneveran employee thinks he has donesomething that goes above andbeyond the contract, he logs the

value created in the value portalwhich shoots off a note to thecustomer describing what he hasdone – perhaps unexpected costsavings, perhaps increased serverutilisation – and the customer isasked how much he values this. Thecustomer responds on a one-to-fivescale, the results are fed back intothe system, and at the end of aquarter we count up how many‘innovation points’ each person hasreceived. These innovation pointscan be cashed in for a gift, perhapsa bike or a holiday.”

Again, it is important to think

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HCL Technologies is a work-in-progress, but with some clearsigns that it is heading in the right direction.

HCL’s Belfast sales floor


through the implications of thisinnovation. Getting the customer’sinput is a brilliant move, but it isstill highly subjective and it has tobe handled in a non-intrusivemanner. So the innovation pointsand reward system have enormoussymbolic value, but they aredeliberately not linked directly tocompensation to avoid game playing.

Putting it all togetherThe three innovations discussed arejust the most visible manifestationsof the unique organisation Nayar istrying to create. A glance at thecompany Intranet reveals a host ofother neat twists, including a directQ&A link with the president himself(“Vineet replies”) and a lot ofinvestment in employee-focusedresources (such as practical guides

for Indians who are moving abroadfor the first time). Indeed, it is notincidental that all the managementinnovations HCL has introduced areIT-enabled. While they would allhave been possible in an earlier era,technology increases theirtransparency and responsiveness byan order of magnitude.

HCL Technologies is a work-in-progress, but with some clear signsthat it is heading in the rightdirection. Revenues in 2006 areexpected to top $1 billion for thefirst time. Employee turnover, alwaysa big problem in the IT industry, isdown to single digits. And major newcustomers are coming on board allthe time – recent additions includeCelestica and Skandia.

So what’s next for HCLTechnologies? Does Nayar have a few

more tricks up his sleeve? He laughs.“Yes, we are still making changes tothe organisation. But I have a deepconviction that this is the right thingto do. Fundamentally, where we arecoming from is right. The method isnot finalized, but the direction [inwhich] we are going is right.”

And rather than keep hismanagement innovations secret,Nayar would like to spread the word.“I am frustrated by how companieshave approached innovation andchange. Everyone knows how tocome up with a new product. Buthow to fundamentally shift thebusiness model of a 30,000-employee company, I think there arevery few who have done that.Hopefully by the time we arefinished, people will have a betterunderstanding of how to do this.” ■

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Julian Birkinshaw ([email protected]) is Professor of Strategic and International Management at LondonBusiness School. He is a Senior Fellow of the Advanced Institute of Management Research.

Stuart Crainer ([email protected]) is the editor of Business Strategy Review.

Michael Mol ([email protected]) is a Senior Lecturer at Reading University Business School.

London Business School Regent’s ParkLondon NW1 4SAUnited KingdomTel +44 (0)20 7000 7000Fax +44 (0)20 7000 7001www.london.eduA Graduate School of the University of London

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Management Innovation

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