First person: Innovate or die
The Review columnist Anthony Hilton FCSI(Hon) explains why companies find it so hard to innovate in a technological era
When the FTSE 100 stock market index was launched in the mid-1980s, it comprised the 100 biggest stock market companies of the day. Today only around ten of the original list survive – bankruptcy, takeovers, and growing irrelevance have taken care of the others. They teach in business school that in a competitive economy companies have to innovate or die. The statistics suggest that most choose death.
There is a similar pattern in the United States. According to Yale Professor Richard Foster, in the 1920s the average age of the companies in its main index, the S&P 500, was 67. By 2012 the average age had shrunk to just 15 years. In similar vein, a list of the ten largest companies in the world today contains only two – Exxon and Microsoft – that were on the list ten years ago.
Technology has changed how businesses compete. Even supposedly traditional firms are dependent on modern technology for design, innovation and marketing. The real value of the business is often lodged in these soft skills more than in traditional production processes. But because these skills are knowledge-based and people-oriented, they are much harder to patent or to keep secret. People move jobs and the business’s competitive edge goes with them.
But none of this explains why companies find technical change so difficult. It is, however, a well-recognised fact that in an established company, most employees have a vested interest in maintaining the status quo, so those seeking or promoting change will always be a minority. This is rational, and the employee’s fear is justified at an individual level. In the current political climate, globalisation and offshoring are blamed for the job losses in the Western economies. In fact, technology is the real culprit, accounting for 90% of the displacement – it is hard to see that in a positive light.
Anthony Jenkins, former chief executive of Barclays, and now working in the fintech sector, says that in the financial sector in particular there is too much incrementalism. Companies will innovate in small ways, but avoid the big decisions. The result is they get innovation but not transformation. Jenkins blames this on three things: senior management is rarely comfortable with technology, however much it pretends to be, and is therefore insufficiently bold; there is too much concern about sunk costs and the money that would have to be written off legacy systems; and there is too much reverence for the past and the prosperity which has flowed from doing things the old way. Incumbent management finds it hard to accept, in the words of another futurologist, “that knowledge is so last century; this is the age of imagination”. They, therefore, need more humility and display a willingness to partner with those who do understand the new world, rather than trying to do everything in-house.
Data has been described as the oxygen that will feed the re-invention of financial services
Another issue is that few companies are organised for change. The vertical hierarchies of traditional management worked well enough in the era of command and control when information had to flow up and instructions were pushed down. Silos worked when businesses could be confident there was nothing dangerous happening outside their line of sight. Today such hierarchies struggle to respond fast enough.
Our risk-averse culture does not help either, when every setback is followed by a search for someone to blame. One of the main challenges facing senior management is to create a climate where more junior employees are willing to take risk, when they fear it will be the end of their career if their project fails to live up to its promise.
The message is that companies need to think much more clearly about their core objectives and to devise organisational structures that are best suited to that purpose. They should ask themselves if they were starting afresh what their business would look like; they should ask what markets they hope to serve in five years’ time, and what key capabilities they will need. This prepares the ground for a profound rethink, not a gentle adjustment.
They may not like the answers. Data has been described as the oxygen that will feed the re-invention of financial services. But while legacy companies struggle to mine the data they hold in ways which will help them for a clear picture of the customer, the customers themselves are becoming more aware of the value of their personal data and more willing to assert control over it.
This could empower the customer at the expense of the supplier, and mark the end of long-term relationships. Armed with the data and prompted by the predictive engines in Google that anticipate future needs, one can foresee a world where customers simply go shopping for a financial service when prompted, and buy from a list of potential suppliers also supplied by Google. So even the embrace of technology is no guarantee of survival.