How Process Killed Scale

Yes, of course innovation is important. Just count the number of times it's mentioned in the typical CEO's speeches. 

But the reason that so many large enterprises have invested so much in technology and continue to scratch their heads when asked how they measure the benefits they received in return is because so few of them bothered to change their processes in order to optimize the impact of all that creative engineering.

Many managers simply thought that technology would make their work force faster meaning that they would turn out more widgets or contracts per day. Most focused on the way that it would make what they do cheaper by reducing the number of people or plants or offices they would need. But not enough concentrated how changing the way they actually do things - and even whether doing what they had been doing was necessary.

The result, as the following article explains, is that many big companies were - and are - too enamored of what they got for their investment in innovation rather than figuring out how they could get more of it. JL

Greg Satell comments in Digital Tonto:

Upstarts use platforms to access ecosystems and enjoy many of the same capabilities that large firms do.  That’s why big organizations are broken.  They incur many of the same organizational costs as a generation ago, but at the same time their scale advantages have diminished.

It’s no secret that big corporations aren’t what they used to be.  In recent years, we’ve seen paragons such as General Motors, Kodak and Blockbuster have go bankrupt even as upstarts like Tesla, Instagram and Netflix rocket forward. The average lifespan of a company on the S&P 500 has fallen from more than 60 years to less than 20.
Power has, in large part, shifted from large organizations to platforms.  It used to be that only large enterprises could access crucial resources, such as financing, distribution, production and so on, but the digital economy has leveled the playing field.  To compete, today’s corporations need to match the agility of startups.
Throughout its history, IBM has played a special role in helping companies adapt to changes in the marketplace.  It has a rare ability to not only develop advanced technology, but to design, implement and manage systems at scale.  These days, however, technology is not enough and IBM’s new initiative seeks help to companies move at the speed of a lean startup.

Why Big Organizations Are Broken

We’ve gotten used to the idea that large enterprises dominate the marketplace, but it wasn’t always that way.  In fact, before the 20th century, large organizations were few and far between.  It wasn’t until the communications and logistics technology of the second industrial revolution came along that large organizations became ascendant.
In 1937, a young economist named Ronald Coase sought to understand the new phenomenon in a paper entitled The Nature of The Firm.  Coase pointed out that organizations played an important role in minimizing transaction costs, especially informational and search costs, therefore firms could grow until organizational costs grew to the point where they nullified that advantage.
The post-war period followed along these lines and organizations grew to enormous scale. They created large bureaucracies to manage massive resources, along with sophisticated enterprise and strategic planning processes.  New firms, lacking the same financial, production and distribution assets found themselves at a distinct disadvantage.
Yet today, upstarts can use platforms to access ecosystems and enjoy many of the same capabilities that large firms do.  That’s why big organizations are broken.  They incur many of the same organizational costs as a generation ago, but at the same time their scale advantages have diminished.

Four Waves Of Disruption

When we look at upheaval within industries, we usually notice disruptive technologies—digital technology changed the nature of Kodak’s business just as the Internet transformed Blockbuster’s movie rental industry—but that’s misleading.  In actuality, Kodak  invented the digital camera and Blockbuster invested heavily in online rentals.
A much greater challenge than a change in products is a change in process.  That’s where large corporations, with thousands of employees highly trained in outdated methods, are at a distinct disadvantage.  They can always tap into their vast resources to invest in new technologies, but changing the way they work is far more difficult.
More specifically, there have been four waves of disruption that have transformed industry over the past thirty or forty years.
Lean Manufacturing:  Pioneered by Toyota, lean manufacturing combines “just in time” operations, smart automation and data driven evaluation of processes to eliminate waste and drastically reduce production time and cost.
Agile Development: Over the past fifteen years, Agile software development has rapidly replaced the more modular and sequential waterfall methods.  It thrives on close collaboration (including with customers), an iterative approach rather than strict planning cycles and emphasizes adaptation over prediction.
Design Thinking: Largely developed at IDEO (and described in David and Tom Kelley’s recent book, Creative Confidence, design thinking replaces the traditional “features and functions” approach to product development with a more solution-based model.
The Lean Startup: Originally developed by Steve Blank and popularized by Eric Ries, the idea of the lean startup is predicated on the belief that business plans rarely survive first contact with customers.  The lean startup method focuses on developing minimally viable products and then continually improving them as data from customers comes in.
All four of these have one thing in common:  They involve more than just a change in methods and procedures.  They require a change in culture.  And that’s what makes it so hard for large enterprises to adopt them.  In effect, to compete today firms not only need to update their technology, but to change how their organizations function.

IBM Reinvents Itself

IBM is, in many ways, a unique company because it has been at the forefront of every business revolution for the past fifty years.  From the personal computer to the Internet, to mobile computing and now the cloud, the company has had to transform itself and then help its clients adapt to each technological upheaval.
The cloud, as I’ve noted in an earlier post, might be the most disruptive technology of them all, because it makes valuable resources highly distributed, greatly nullifying scale advantages.  It also requires incumbent players to transform their business models.  Unlike earlier technologies, it takes more than just installing a few systems to adapt to the cloud.
Phil Gilbert, IBM’s head of design, arrived at IBM in 2010 and launched the IBM Design Thinking initiative in 2012 to address these challenges.  It incorporates elements of agile development, design thinking and the lean startup method.  Gilbert sees the program as “not just a new way of acting, but a new way of thinking.”  In large part, it shifts gears from a from features first to users first approach.
To do that, IBM has learned to bring in users at the beginning of the product development process instead of at the end.  As the team iterates through a series of prototypes, “playback sessions” are conducted that include not only engineers and designers, but people from sales, marketing, finance and other places in the company, as well as users.
Much like Toyota and lean manufacturing, the IBM Design Thinking program has been extraordinarily effective at cutting down production times and improving quality.  It’s been so successful, in fact, that now the company is helping to train others how to do it.

Learning To Compete At The Speed Of The Cloud

IBM, which competes with Microsoft’s Azure, Amazon Web Services and Rackspace in the cloud arena, bought Softlayer back in 2013 to bolster its infrastructure offering.  Last year it launched Bluemix as “a platform as a service” to provide a full cloud solution for its clients. Now, it is also sharing what it has learned from Phil Gilbert’s design thinking initiative.
Bluemix, in effect, works very much like an operating system for the cloud.  It provides developers with the tools they need to create new applications, while also offering access to in house resources like Watson for cognitive computing services as well as to dozens of third party services like Twilio for hosting cloud communications.
Yet all of that technology won’t be effective if corporations continue to develop using traditional methods with long development cycles.  So IBM is rolling out a series of Bluemix Garages that are geared to train customers to develop and deploy services with the speed that today’s cloud-based environment demands.
So in addition to working with startups, Bluemix Garages help more traditional companies to act as if they were startups.  Gamestop partnered with Bluemix to fuse mobile and in-store experiences for its gaming marketplace.  Citibank is using it to extend its mobile banking services and even NASA is teaming up with Bluemix for its Space App challenge.
Meg Swanson, a director at Bluemix told me, “Over the past year we’ve hosted dozens of companies at our San Francisco and London garages who have been able to develop real applications in a matter of days that were able to go to market in a matter of weeks, rather than the usual development cycle of 6, 12 or 18 months.”

The Return Of Scale Advantage?

These days, large organizations have lost much of their former advantage.  While they used to be able to leverage  their control of resources—such as financial assets, talented employees, production facilities, shelf space and the like—today’s startup companies can access many of those same resources at competitive cost.
Digital technology has enabled just about anyone to wake up with an idea, design it on CAD software online, print out a prototype on a 3D printer, launch a crowdfunding campaign, promote it on Google and Facebook and contract a production facility before lunchtime.  A generation ago, almost all of those things required significant organizational resources.
Yet that doesn’t mean that big organizations cannot compete, just that the nature of scale advantage has changed.  As Mark Bonchek and Chris Fussell point out in an extremely insightful article in Harvard Business Review, large organizations represent larger networks with more information.  Bigger can, in fact, mean faster.
Yet to benefit from this advantage, today’s large enterprises will have to shift mental models and that’s what makes IBM’s Bluemix Garages so exciting.  Having transformed itself, it can now help others do the same.
Who says elephants can’t dance??