If you are an executive in a global 2000 enterprise with roots as a non-technology company, this chapter and the next are for you.
Perhaps your revenue growth is brisk. Perhaps over twenty percent of your revenues are now generated from products less than seven years old, or your legacy product has been so transformed it is essentially new. You have been hard at work on digital transformation for the past twenty years, and are now digital to the core. Your technical systems are built modularly on the cloud, leveraging reactive microservices architecture. Data is democratized throughout the enterprise. Both legacy and new products exhibit digital leverage. More new, digital products are in development.
Or perhaps you are the new CEO of a company with a post-peak product line and a monolithic legacy technology infrastructure. Your technical team has the skills to maintain the monolith, but not to build modern technical systems. Your organization is siloed, the culture stodgy. Your existing products lack digital leverage, and despite numerous attempts, no recent new product initiatives have gained a foothold. Revenue is in decline, dominated by an aging product line over ten years old.
Or perhaps you are somewhere in between.
Wherever you are on the journey towards becoming a digital-at-the-center, fit systems enterprise, you probably still have a long way to go. The purpose of this chapter is to help you plot the way forward.
The first thing to remember is that a fit systems enterprise is both generativeand adaptive. To become generative and adaptive, an enterprise that is not digital at the core must undergo a digital transformation. This is a foundational requirement.
In the digital era, product value is increasingly expressed in a digital experience. You can’t create these experiences — in other words, you can’t advance your generative imperative — without development teams that have the capabilities, tools and infrastructure to build great digital products. Digital capability is also key in the pursuit of your adaptive imperative. An enterprise is adaptive when it increases system resilience (through adding feedback loops and increasing self-organization), increases scalability and increases efficiency — in that order.
At scale, technical systems support the generative and adaptive imperatives when they are elastic, responsive, resilient and loosely coupled. In the fit systems enterprise, such systems are managed on the cloud, built via reactive microservices architecture. They can process massive amounts of data quickly at low cost. They can support big data, machine learning and AI. They are flexible and mutable. They make processes efficient and ensure the right data and analysis is placed in the right hands to enable continuous improvement.
In 2018, 68% of all enterprises were running applications on AWS cloud, and another 15% were experimenting. Yet another 7% had plans in the works, totaling 90% of all enterprises. Moreover, 58% of enterprises were running apps on Azure, with 22% experimenting and 8% planning projects. Even more were leveraging Google Cloud, IBM Cloud and Oracle Cloud.¹ The digital transformation of the enterprise is complete, right?
Not so fast.
Despite all the work that has been done to digitally transform, most enterprises are still behind the curve. Digital-first competitors are faster, more nimble and build better digital product experiences. Until you are confident that no competitor is as fast, nimble and digitally advantaged as you, your work at transformation will not be done.
As important as digital transformation is to becoming a fit systems enterprise, it isn’t enough just to get the technology right. Change is required in the way you are organized, the way decisions are made, the expectations of frontline employees, the use of data and the company’s culture. To make all of this happen, the most important actor is you, the CEO. It starts by bringing the right paradigm to the problem. You must understand:
- The attributes of the at-risk enterprise
- The end in mind
- The right way to engineer change
Attributes of the At-Risk Enterprise
An enterprise is most at risk when it has lost its generative capability. In the digital era, this is due primarily to a lack of digital leverage in products and services as compared to competitors. In the at-risk enterprise, new product initiatives have foundered. Optimizations of existing products haven’t meaningfully improved customer value. The product line is mature and product value relative to competitors is in decline.
In such an enterprise, leaders do everything they can to sustain legacy products. Because business units are incented to protect and grow their existing products, new product initiatives that might disrupt existing product value are suppressed. Only “safe” initiatives that don’t threaten the core are tolerated.
When the occasional new product initiative shows promise, it runs aground. The team that developed the initiative doesn’t have the backing to scale it. As they bring their nascent product into the existing sales structure, they run into a buzzsaw of conflicting priorities. Sales incentives get in the way. Enterprise salespeople have no interest in selling a side product that delivers small commission checks when they get a much bigger check for selling the legacy product. Executives aren’t motivated either, for the same reason. In every business unit, the incentive system also defeats cross-business unit opportunities. These slip out the back door as executives argue over how to divide the spoils.
Decisions are slow and bureaucratic. Since the building blocks of self-organization and small-group decision making are not in place, most decisions need to flow up the totem pole. Function-centric executives work hard to protect their fiefdoms, which impedes holistic problem solving.
Because of its post-peak products, revenue growth has slowed or reversed. As a result, the public company investor mix is dominated by value investors. These investors are impatient for change. They press for radical cost reduction, or an enterprise breakup, or other financial engineering maneuvers to drive short term profit growth or return capital to investors. They have no appetite for a multi-year digital transformation. Pressure rises on the company’s board to take action.
For the past few years, top executives have catered to these investor demands by milking aging products. They have re-engineered internal processes to drive out cost, creating efficiency but also introducing rigidity and brittleness. Functional silos execute formal function-to-function handoffs within low-variation processes. What is done is done efficiently, but when “what must be done” needs to change, the organization can’t easily execute the change. Like its technical systems, the company’s organization is monolithic.
Functional leaders exercise control and expect workers to execute standard operating procedure. Workers can provide feedback, but the focus is on continuous process improvement of existing processes. The process is the thing.
Enterprise technical infrastructure is aging. Monolithic systems are maintained on premises. They are rigid and brittle due to a complex web of interdependencies. Technical teams are well aware of agile methods, but cannot pursue them because the existing technology won’t allow it. Any updates or changes to the software must be implemented with extreme care. There is a history of system failures caused by faulty updates. As a result, the Operations team is risk averse and acts as an intentional bottleneck to restrict the number and significance of system updates. To prepare for an update, technical teams must follow a waterfall development approach so that every dependency can be thought through up front. A handful of engineers are the “keepers of all knowledge”, the only ones with enough experience to know the dependencies and fix the monolith when someone breaks it.
Some cloud-based side projects might be underway, but these remain at the edges. The technical teams responsible for these initiatives fight to self-organize and pursue agile methods, but the culture defeats them. The IT culture values software outputs over business outcomes. Engineers are measured on code production per week, not on their contribution to achieving business outcome objectives.
The enterprise’s technical executives are well aware of the monolith’s negative business impact. But they don’t know how to mobilize a transition. They fear they will screw everything up. This lack of a mental model for change undermines courage. Leaders conclude there’s more job security in keeping the monolith untouched than in embarking on a journey to break it down and migrate to cloud-based reactive microservices architectures.
With opportunities and jobs shrinking, a scarcity mentality takes over. Executives scheme to protect spans of control. Failures are penalized. A blame-based culture emerges. External recruiters catch wind of trouble and press their attack, picking off the best. Top performers move on to greener pastures, while weaker performers remain. Lacking a narrative that could attract bright new talent, the enterprise’s stock of human competency declines.
Due to all of these factors, digital leverage is modest. Customer value degrades. As fleet-of-foot competitors rise, the at-risk enterprise stumbles towards the cliff — slow, rigid, brittle, internally focused and digitally challenged.
End in Mind
So how does one execute the shift? As Steven Covey said in The Seven Habits of Highly Effective People,² you must begin with the end in mind. You start with a systems-centric view of your enterprise:
The fit systems enterprise exhibits certain attributes. In Chapter 5 I shared a diagnostic tool that listed these:
- Executives possess a “generative first” mindset
- Executives possess an “adaptiveness next” mindset, prioritizing adaptive acts that achieve resiliency first, scalability second and efficiency third
- Executives are digitally literate
- Executives are systems thinkers
- The enterprise is viewed from a systems-centric, not function-centric perspective
- Executives seek to build feedback loops everywhere
- Leadership is not about control. Leaders define domains, select domain teams, identify domain business outcome objectives (not process output objectives), and help teams self-organize to pursue them
- Strategy is anchored in a clear vision and a bounded purpose that targets achievement of the next key value inflection point; strategy balances now, near and far
- The enterprise is organized into systems and domains; leaders focus most attention on the critical high variation domains
- Leaders seek to continuously increase the density of 10Xers in high variation domains (10Xers bring better problem definition, superior hypotheses, better execution and a more rigorous scientific method)
Externally obvious attributes
- Existing products rise in value via increasing digital leverage
- The investment in digitally leveraged new product development yields a consistent cadence of new product market launches over time
- New products repeatedly emerge that find scalable product / market fit
- The enterprise has acquired companies that add new digital capabilities; these acquisitions have been effectively integrated and have become successful
- Revenue and profit are growing, and the balance sheet is healthy
Internally obvious attributes
- High alignment between mission / vision / values and actions
- Operating and meta systems in the company exhibit stage-relevant maturity
- Inside systems and domains, low variation processes exhibit increasing digital leverage due to automation
- A diverse array of feedback loops reach into the marketplace and customers, feeding back data on market trends, competitor movements and customer needs
- The enterprise is effective in leveraging agile methods when executing change
- The enterprise exhibits a flexible organization design: uni-functional and cross-functional standing teams are the dominant structure; but these are complemented with episodic teams and purpose-based affiliation groups
- The key organization building block is the domain; standing domain teams may be operational or technical
- Inside enterprise systems, adjacent domains are loosely coupled but highly aligned; domain teams collaborate effectively with each other as required
- Domains are focused on business outcomes, not process outputs — process serves results
- All systems and domains exhibit rich internal feedback loops
- All domain teams exhibit self-organization
- Across the enterprise, there is one source of truth for every bounded context
- Data access is democratized; domain teams throughout the enterprise have access to the data they need to conduct analysis and improve performance
- At scale, technical systems are reactive, built via microservices architecture
- Technical domain teams follow the Disciplined Agile Delivery method in software development
- Data is secure, and the data of customers and other stakeholders is protected via a formal permissions hierarchy
- The culture supports fit systems enterprise imperatives: it is customer obsessed, generative first / adaptive next, systems-centric, business outcome focused, high performer focused, transparent, data driven, agile and self-organizing
- In the face of rapid change, decision velocity is high
If yours is a global 2000 company once considered a non-technology company, you may be well on your way towards digital transformation, generativeness and adaptiveness. Or you may have a long way to go. Once you understand the gap, you can begin the work to close it.
Right Way To Do It
If you are the CEO, the first step in transformational change to make sure your own leadership paradigmis where it needs to be. Are you In The Loop? The Leadership Maturity Assessment tool in Chapter 2 shows a list of attributes of In The Loop leadership. Not all of these attributes are needed on day one, but some are. From the outset, a CEO who wants to transform an enterprise must:
- Be a systems thinker
- Be digitally literate
- Think “generative first / adaptive next”
- Understand the attributes of a digital-at-the-center, fit systems enterprise
- Possess a clear and generative vision for the enterprise
- Be able to clearly articulate vision and mission
- Understand current state
- Balance now, near and far
- Define the enterprise’s next key value inflection point and bounded purpose
- Have the capacity to lead the Governance System
- Have the capacity to lead the Strategy / Planning / Architecture System
- Have the capacity to lead the Culture System
- Be able to embrace ambiguity; advocate and inquire; then think and act
- Be able to decide quickly whenever possible — it’s OK to disagree and commit
- Be able to contextualize, coach, hire well and (when required) fire fast
- Be effective at building internal alignment
Assuming you are in possession of these basic leadership attributes, you’re ready to begin.
In Zone to Win,³Geoffrey Moore puts forward an enterprise transformation framework. He posits that enterprises face three investment horizons: horizon one, with an ROI in 0 to 12 months (current product and process improvements); horizon two, with ROI in 12 to 36 months (fast scaling new products); and horizon three, with ROI in 36 to 72 months (new product experiments).
Investments in each of these horizons must drive two types of innovations — sustaining and disruptive. Sustaining innovations are backward-compatible — meaning they are incremental improvements to current products that don’t require a change in buyer and user behavior. Disruptive innovations require more fundamental change to buyer and user behavior, but deliver significant new breakthroughs. Disruptive product innovations are likely to leverage emerging technologies, such as Internet of Things, mobile, social, big data, machine learning and AI.
Horizon three investments are risky, so you need lots of them and you need to approach them like a VC would — invest in the idea and the team, keep investments small until you see signal, require the achievement of a new value inflection point before making the next investment.
Moore argues that to address the competitive threat and stay ahead, the enterprise must live in four zones:
Source: Moore, Geoffrey. Zone to Win: Organizing to Compete in an Age of Disruption. Diversion Books, 2015.
Since each zone demands a different culture, you can’t focus equally on all four of them at all times. When the enterprise is being hit by a wave of disruption, it must play zone defense: first priority is the transformation zone; the incubation zone is second and the performance zone third. When the enterprise is riding a wave, it can shift gears: transformation zone first, performance zone second and productivity zone third. In between waves, it can focus first on the performance zone, second on the productivity zone and third on the incubation zone.
This framework is helpful, though Moore doesn’t clearly differentiate between generative and adaptive investments. Where is your enterprise? Are you riding a wave, being hit by a wave, or somewhere in between?
The journey to a digital-at-the-center, fit systems enterprise is made in five stages:
- Stage 0: Preparation
- Stage 1: First Projects
- Stage 2: New Product Experimentation
- Stage 3: The Big Move
- Stage 4: Inversion
- Stage 5: Optimization
Phase 0: Preparation
In order to be ready to head out on a new strategic path, you need to:
- Deepen your understanding of the problem
- Clarify your vision
- Come to terms with the time and investment required to achieve real change
- Build support at the top
Let’s start with the first — deepening your understanding of the problem. There are actually two problems.
The first is to assess your generativeness. What’s the degree of risk you face from rising digital competitors? Are your products at a growing digital disadvantage? As CEO, you can’t delegate this assessment. You need to own it, especially at the outset.
When I was at the Star Tribune in the mid nineties, I was selected to join a strategy team whose purpose it was to take stock of our market position and confront the rise of the Internet. At the time I was a director-level mid-manager. I joined other mid-managers on this twelve person team. We met two days a week for six months, during which time we conducted research, talked with customers, evaluated data, looked at our culture, talked to employees and engaged in a series of strategy debates. The team developed a high level vision and strategy, and presented it to the entire executive team. After feedback and some adjustments, the top team acted on its key recommendations and rolled out a reorganization of the company. It was hard work, but two years later our customer satisfaction, revenue and profit had jumped significantly.
This small strategy team approach is an effective first step in strategy development. As CEO, it allows you to bypass the executive team, where entrenched resistance to change might lurk. Pull in five to ten of your rising stars — wicked smart, curious, ambitious people with enough domain and company expertise to be relevant but not so much as to be wedded to current state. Then get out of the office and into your customer’s world. Conduct both analytical and experiential research. The latter is more powerful than the former, though both are important. Look for data in the market, but also track internal data. Consider rising technologies, and how they may apply to what you do. Study competitors. Study yourself — where are you most vulnerable?
Then guide the team towards some core strategic implications and a high level vision.
When you expose the work of this initial strategy team to the executive team and upper mid management, you will encounter resistance. But their concerns will be helpful data. It will help crystalize the key issues and obstacles.
At that point, it might make sense to bring in a top echelon consulting firm, such as McKinsey or Bain, to go deeper and provide external pattern recognition. The results of this work will help you further deepen your understanding, validate and optimize the initial strategy work, and — perhaps most important — address obstacles raised by executives and managers. By engaging these executives and addressing their concerns, their own mental models will begin to evolve.
The second problem is to assess the current state of your technical systems. Your digital infrastructure is critical to gaining digital product leverage. So you need to understand what you’ve got, and what it will take to upgrade it. The best way to accomplish this is with an external consultant such as Accenture (large firm), or Slalom (mid sized firm). Consulting firms such as these have the people and methods to help you assess your current capabilities and limitations, and to provide you a high level transition road map.
These two preparatory steps should help you confront the reality of your product and technology gaps. At that point, you will need to envision the way forward. There are six possible paths:
- No obvious changes to the existing product, but digitally optimize processes to strengthen the customer experience (Costco)
- Build digital leverage directly into the customer experience, while keeping the underlying product similar (DisneyWorld — the magic wand)
- Build new products with separate teams; transition the successful ones into business units that lightly leverage the legacy business (Lego — for instance, its homegrown product “Lego Boost” features an app-based simple coding tool children can use to guide movements of Lego creations)
- Acquire a successful digital-at-the-core business; let it operate adjacent to the legacy business and integrate slowly (Gannett — acquired WordStream)
- Build a completely new and separate digital business, then integrate with the legacy business (Walmart.com)
- Rebuild the product into a digital-first business, and then let the old product die (Netflix)
Once you clarify general direction, you can begin reckoning with the cost and time it will take to execute the necessary change. As you factor in the time required, remember that behavior change is hard. How will each of your top executives react? Are they systems thinkers? Are they digitally literate? Do their incentives impact their point of view? Are they directly threatened by the changes you contemplate?
Resistance is most likely to show up as system archetypes (see Chapter 8), such as:
- Accidental adversaries
- Policy resistance
- The tragedy of the commons
- Success to the successful
- Leadership as enablement
- Rule beating
- Seeking the wrong goal
To successfully address the inevitable archetypes that will emerge, your strategy must unfold in stages. At each stage, you need to consider the people, workflows, technology and money flows that you impact. Factor into your intervention design the perspectives of all stakeholders.
Executing the shift will require investments. Digital transformation isn’t cheap. A technology transition consulting project will help you determine cost and timeline. You’ll also need to make investments in the product — some new product development initiatives, or an acquisition, or both.
Finally, you will need to build support at the top. Most of your executive team will be focused on running the business you already have, but you’ll need an inner circle of trusted top executives who share your vision to become a digital-at-the-center, fit systems enterprise. These In The Loop leaders will be your partners on the journey.
You also need to bring along your board. Are all board members digitally literate systems thinkers? Do they fully appreciate the risk of inaction? Have you helped your board understand the significance of the changes you must make, and the time and money it will take? Your board will face pressure from investors to find quick fixes. So it’s important you help them gain deep conviction that your strategy is sound. You’ll need their support through thick and thin.
Stage 1: First Projects
Digital transformation is a necessary first step in the advancement of your generative and adaptive imperatives. Since it takes a lot of time, it’s best to get started right away. The first priority is to remove any technical limitations that stand in the way of your generative imperative.
If you are behind the curve, your legacy systems are on premises or in co-location environments, and are tightly coupled, monolithic systems. If your monolith is all you have (other than rented technology), then your entire tech team is made up of people who only know monoliths. This creates a competency and culture problem.
Your first job will be to build an abstraction layer between the monolith and a new data platform capable of interfacing with new technical systems. This will require you to recruit a new team. The new team will operate with different skills, methods and culture than your existing team. You’ll need to protect the new team from monolith team encroachments.
Once you can get data into and out of the monolith without breaking it, you are ready to build modern cloud-based applications. You’ll still face a bottleneck — the monolith’s data input / output throughput. This is likely to impose a significant constraint on the new features you can build. There may also be components of the monolith that are particularly prone to failure. Over time, you will need to chip away at the monolith, moving more and more components to the cloud, so you can increase data throughput and reliability.
In advancing your generative imperative, it is best to start with your existing product. How might digital leverage improve some part of the customer experience? How will you choose the part of the customer experience to focus on first? Who will you assign to the technical domain team? The team’s effectiveness will depend on its leadership, starting with the product manager. You’ll need to hire strong team members in every function. This team will be one of your first technical teams designed to build modern digital solutions on modern digital infrastructure. It will be a vanguard of a brand new development culture. The first few development teams will need to be segregated, so they are not poisoned by the legacy culture.
Self-organization should begin right away. Assign these first technical domain teams clear business objectives, and then challenge them to self-organize and pursue development following the Disciplined Agile Delivery methodology. As they make progress they (and you) will gain confidence and build credibility, leading to yet more teams — an expanding beachhead of the new development culture.
Stage 2: New Product Experimentation, Infrastructure Improvements, Customer Experience Expansion and First Adaptive Projects
Internal innovation experiments are a great way to start the renewal of your generative nature. Innovation experiments include corporate venture investments, skunkworks projects (often run through incubators and accelerators), and other business unit new product initiatives. Initial investments are small. When an experiment shows life, you invest more. As traction emerges, you invest more again — a prove it-or-lose-it investment approach.
In the initial incubation stage, an experimentation team may be just two or three highly talented, ambitious people. You might seek to mobilize multiple teams simultaneously, with each exploring a different high level product thesis. These days there are incubators in cities all over the world, happy to welcome such teams from global 2000 enterprises.
If you are a B2B company, consider entering into these experiments with one or more of your visionary customers. That way the customer’s perspective is involved in product ideation right from the get go. Perhaps both companies might co-invest in the initial research ideation phase, or not. If you have spun up multiple simultaneous projects, you can then have them all pitch their ideas at the same time and compare. Your money will go to the best.
Just as early stage venture funds do, be sure to create enough investments to ensure diversification. A typical early stage venture fund will execute twenty investments — about five per year for the first four years of the fund.
These projects can be run as companies, separate from the enterprise, free to take outside investment; or you can retain them as wholly owned subsidiaries; or as part of an existing business unit. There are advantages and disadvantages to each approach. Once $1M or more has been invested, the small team will begin to look like a startup. It will be comprised of a cross-functional team (business owners, product managers and engineers). In fact, the more you run it like a startup (with a similar risk / reward profile for the team) the better. Be sure to protect these innovation experiments from mother ship encroachments. Your bet is that some of these green shoots will grow into bushes and trees — your company’s next generation of products. If you’re lucky some will show early indicators of success, which will help you build internal support and momentum.
At the same time, your investments in cloud-based infrastructure in this phase continue to grow. This enables you to increase digital leverage in the current product customer experience. You also make investments in projects that deliver adaptive benefits — resiliency (building feedback loops via data infrastructure), scalability (removing limits to growth) and efficiency (automation of human steps).
As a result of all this work, the number of development teams continues to grow, each working on a unique domain. These new teams have begun to create a new product and engineering culture.
Stage 3: The Big Move
By now, the migration of your technical infrastructure to the cloud is well underway. Multiple cross-functional technical domain teams are chasing domain-specific business objectives in a self-organized way, leveraging disciplined agile delivery methods, releasing weekly software updates. They are building software architected as microservices, with loose coupling between services connected via APIs. Some domain teams are at work on the enterprise’s legacy products, building digital leverage into various stages of the customer experience.
But friction is rising.
The culture and methods of the monolith team have begun to clash with the new technical domain teams. For the monolith team, it’s always been about control, risk aversion, formal approval processes, the waterfall development method and occasional large releases. Now these new teams are challenging these premises. Old and new don’t get along.
For some, a mental shift has begun. Some legacy workers see that early efforts to shift monolith components to the cloud are working. These new distributed systems, built on the cloud, are delivering dramatic improvements in uptime. It is now possible to update these systems with small releases much more frequently. Failures still occur, but they are small, contained and quickly recoverable. In fact, some components can even self-heal. The pace of software development has increased significantly.
In mid management, the legacy technical leaders and the leaders of the new technical domain teams speak different languages and share an uneasy coexistence. Debates center on questions of control, security and data protection. The legacy leaders know their skills and experience are misaligned with new expectations; the best of them have begun to bridge the knowledge gap.
Similarly, business unit leaders struggle to guide the new technical domain teams tasked with building digital leverage into the customer experience. These leaders have grown up in a control-based culture. They are used to mandating product features. They are struggling to adjust to the new paradigm, in which leadership’s role is to assign business outcome expectations and to allow the team to figure out how to achieve them. Some leaders can’t adapt. People have begun to take note that when a leader gets in the way of change, he is replaced.
At the executive level, conflict has bubbled up between the inner circle executives fully committed to the transformation, and those who have been maintaining the legacy business. As new ways of thinking and new digital capabilities expand beyond their initial beachheads into more and more domains of the business, legacy executives realize they must adapt or leave. As CEO, you are starting to figure out which leaders are becoming In The Loop leaders, and which are not. You’ve begun to act on your assessments. Executive team membership is changing.
The preparatory stages are over. Per Moore, you’re now ready to fully commit to the transformation zone. It’s time for a decisive move. There are three possibilities (not mutually exclusive):
- Execute a material acquisition (for instance, if yours is a $3B revenue company, you buy a $50M+ revenue company )
- Hire one or more top executives with a mandate for change
- Reorganize the business
The right acquisition can superpower your transformation. In 2016, General Motors acquired autonomous vehicle technology startup Cruise Automation, which now comprises the core of its self-driving unit. Walmart has acquired a number of ecommerce retailers, including Jet.com, Moosejaw, Bonobos and Modcloth. In 2017, IKEA acquired TaskRabbit. In a 17 day span in 2015, Boeing bought an aerial imaging company, Spanish bank BBVA bought Spring Studio (a company focused on the online user experience), and Mastercard bought an analytics company (Applied Predictive Technologies). In all cases, these acquisitions were central to enterprise transformation.
The primary objective of any acquisition is to receive a positive return on invested capital. There are four types of acquisitions. One of them is particularly relevant to enterprise transformation.
A scale acquisition is one in which you buy a company similar to your existing company. The thesis is to “buy revenue and customers” and gain cost synergies. Roll-up strategies depend on scale acquisitions. A round-out acquisition is usually small; here the enterprise buys a company that boasts a feature that neatly augments the enterprise’s existing product. Similarly, a talent acquisition (acquihire) is a small acquisition that brings into the enterprise a small cohesive team with unique talents — such as when a failing tech company sells for a low price to an enterprise who wants to discard the product but keep the team.
The type of acquisition most relevant to enterprise transformation is the scope acquisition. In a scope acquisition, the company you acquire possesses product capabilities and other assets your enterprise needs and doesn’t possess. A well conceived scope acquisition can become a decisive lever for change. But there’s a problem: most acquisitions don’t work. Research shows that a high percentage of acquisitions fail. Indeed, Harvard Business Review researchers quipped that M&A deals should come with a warning label: “Acquisitions can result in serious damage to your corporate health, up to and including death.” ⁴
The key to success with a scope acquisition is to protect the acquired company from being subsumed into the enterprise culture faster than its leader thinks is wise. Simple things like hiring processes, compensation boundaries and security and compliance requirements can tie the newly acquired team up in knots. This heightens the risk that post acquisition, the most important people in the acquired company (flush with cash from the sale) will leave.
I have written about acquisitions in two previous books (People Design — Chapter 20; Funding & Exits — Chapter 14), so I won’t repeat myself here. Go online and find these chapters of my previous books. Suffice it to say that in an acquisition you need to overcome the following risks, the leading reasons why acquisitions fail:
- Lack of clarity in the acquisition thesis and its strategic implications
- Inadequate pre-acquisition due diligence, resulting in negative surprises
- Failure to define the desired degree of autonomy (from mostly separate and stand-alone, to highly integrated)
- Failure to establish a new vision for the culture, both within the acquired entity and the acquiring company
- Failure to develop a comprehensive integration plan
- Failure to adequately resource the integration team and project
- Failure to place the newly acquired company under a leader who is aligned with the planned degree of integration and the sustaining culture
- Failure to execute ongoing management decisions consistent with the agreed degree of integration and culture
- Failure to communicate effectively at all levels, throughout the acquiring and the acquired company
- Failure to maintain momentum in executing the integration plan
New leadership and enterprise reorganization are two other ways to shake things up.
Legos is a seventy year old company. In the 2000s, home video games began to cut into traditional Lego sales. The company’s initial attempts to respond (such as Lego theme parks, a Lego clothing line and toy changes such as bionic toys and toys focused on girls) were largely unsuccessful. Jorgen Vig Knudstorp was brought in as the new head of strategy. He first sought to drive changes within the existing structure, with some success — but the external headwinds were significant enough that the board made him CEO in 2005. Knudstorp broke the company down into separate business units, each of which was challenged to stand on its own. He hired new leaders, moved from a fancy headquarters into a warehouse, advocated a startup mentality, recruited Legos customers into the product development experience and began a digital transformation.
To create transformative change, you will need to execute some bold moves. It may be a new CEO or senior executive, a big reorganization or one or more large acquisitions. No matter what the big move is, it is sure to carry risk as well as opportunity. You will need command of all your capabilities as an In The Loop leader to realize its full potential.
Stage 4: Inversion
At some point in the journey, a shift will occur. On the executive team, everyone is finally bought in. Every executive is working hard to increase her digital literacy and systems thinking skills. As CEO, you have begun to articulate to all employees new cultural values and expectations: customer obsessed, generative first / adaptive next, systems centric, business outcome focused, high performer focused, transparent, data-driven, agile and self-organizing. Mid managers throughout the company have taken note of the changes around them, and are seeking to adapt.
You will know you have hit the inversion point when you begin to see mid managers and teams acting on their own to drive the change you seek. Business units begin to reorganize into a systems-centric organization structure, with both uni-functional and cross-functional domain teams. These teams begin to demand access to better data to track their own performance. You find yourself spending less time achieving buy-in, and more time working to uplift the meta systems: the DataOps system, engineering system, culture system, strategy / planning / architecture system, and the governance system.
You’ll begin to observe people throughout the enterprise acting in defense of the vision. They react with righteous indignation when they see people:
- Placing process above results
- Focusing on efficiency at the cost of resiliency and scalability
- Trying to measure engineer productivity
- Slowing down the transition of the monolith to the cloud
- Requiring new technical domain teams to integrate with central IT
- Seeking a return to waterfall development methods
- Seeking three year plans or ROI performance thresholds from experimental innovation teams
- Fighting innovation projects that threaten the core
- Pushing a functional agenda that conflicts with system requirements
- Seeking to centralize decision making
- Killing new acquisitions with excessive hiring, compensation, compliance and budgeting processes
There’s an inversion. Change is now driving upward and outward, not downward from the top. Domain teams and their leaders are pressing you and other top executives for new investments and support to accelerate change.
Stage 5: Optimization
And then one day, years after your first baby steps, you wake up and realize you are now a digital-at-the-center, fit systems enterprise. The attributes shown on the list in the “Fit Systems Enterprise Maturity Assessment” tool (Chapter 5) are largely present. Of course, your company is far from perfect. Problems small and large continue to arise. But now you have feedback loops throughout the ecosystem and enterprise that alert you. And you have leaders who see the integrated nature of things, and possess the digital literacy to know where technology can help. They act on their own to improve.
McKinsey & Co., in a recent report on digital strategy,⁵ compares top performing companies to all others in their development and execution of digital strategies:
Source: Bughin, Jacques, Catlin, Tanguy, and LaBerge, Laura. “A Winning Operating Model for Digital Strategy Survey”, McKinsey & Co., January 2019.
As CEO, most of your attention is now paid to the meta systems. You seek to push data to every corner of the enterprise (the DataOps system). You work hard to ensure technical teams possess the tools and agile methods to build and maintain great digital solutions (the engineering system). You evangelize the culture, and work to ensure you increase the density of 10Xers in all high variation domains (the culture system). You regularly revisit your bounded purpose, and then build strategy informed by outside in, bottom up and cross-system feedback. You then cascade strategic imperatives into system and domain OKRs, continuously working to increase alignment (the strategy / planning /architecture system). And you work with your board and executive team to continuously advance your vision, always balancing now, near and far (the governance system).
The biggest problems come to you, the CEO. But because you are now a fit systems enterprise, the problems have become more interesting.
- RightScale Inc. and Flexera. RightScale 2018 State of the Cloud Report, 2018. https://www.rightscale.com/press-releases/rightscale-2018-state-of-the-cloud-report
- Covey, Stephen. The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change. Free Press, 1989.
- Moore, Geoffrey. Zone to Win: Organizing to Compete in an Age of Disruption. Diversion Books, 2015.
- Lewis, Alan, and McKone, Dan. “So Many M&A Deals Fail Because Companies Overlook This Simple Strategy.” Harvard Business Review, 2016. https://hbr.org/2016/05/so-many-ma-deals-fail-because-companies-overlook-this-simple-strategy
- Bughin, Jacques, Catlin, Tanguy, and LaBerge, Laura. “A Winning Operating Model for Digital Strategy Survey”, McKinsey & Co.,January 2019. https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/a-winning-operating-model-for-digital-strategy