Enterprise Agility: Pushing Innovation to the Edge of the Organization

E L I G A Enterprise Agility: Pushing Innovation to the G Edge of the Organization N I Y APPL

Authors Apala Mukherjee Practice Head, Tata Consultancy Services Courtney Wood Director, Consulting, Tata Consultancy Services Threatened by digital competition, many companies are embracing lean-agile approaches to accelerate innovation to remain market relevant and fiscally viable. When companies master them, these approaches become a competitive advantage in harnessing talent and capability, a key tenet of what we call Business 4.0. Using lean-agile approaches to nurture innovation requires mastering the discipline of generating new ideas and managing the subsequent innovation portfolio based on strategic or other business outcomes sought. It means applying lean-agile precepts not only in those functions directly involved in the development and delivery of products and services to end customers, but also throughout support functions and shared services.

The Meaning of Enterprise Agility To match the accelerating speed with which their market sectors are changing, companies must take a broader approach to becoming innovative—an approach that we refer to as ‘enterprise agility.’ By that, we mean aan orn orggaannizizaattion thion thaat cat can n adadaappt alt all the cl the coorree elemen elementtss of it of its bus bussiinesnesss——ititss s sttraratteeggyy, pr, proodducuct at annd serd servvicice e offofferierinnggs, the bus, the bussiinesnesss pr prooccesesses thses thaatt cr creeaattee a annd fd fuullfifilll demanl demand fd for those offor those offerieringngs, s, itits ps peeople’ople’s ss skkiillllss, a, annd td teecchhnnoloologgy ay annd Id IT iT innffrraasstructructuturree—a—at the pact the pace the thaatt’’s rs reeqquuiirreed d ttoo s sttaayy c coompmpetitive and soetitive and solvlvenentt. T. hat, in turn, means adopting a lean-agile culture throughout the organization, not just in software development. While there are three broad dimensions to achieving enterprise agility—strategy and process, people and culture, and tools and technology—in this article, we discuss the elements that are conducive for innovation: 1. Strategy formulation to guide the organization’s innovation efforts; 2. Cultural transformation to change values, beliefs, mindset, and behaviors at all levels; and 3. Focused experimentation to improve everything. Let’s look at each element. Strategy Formulation A key step in enterprise agility is outlining a company’s 1 innovation strategy: what it seeks to accomplish through innovation, and how. This strategy requires executives who are aligned, engaged, and committed to innovation. They must communicate consistent messages across the enterprise about the goals, why they matter, and X X X how every employee in every function and group can contribute. Top managers must then encourage the next level of leaders to successively spread, contextualize, and reinforce those same messages in their business units and functional areas.

Strong governance is another element of the innovation foundation. This allows the right distribution of responsibility and accountability, and ensures transparency in decision-making. We recommend establishing a balanced scorecard that is consistent with the enterprise’s innovation strategy. By measuring the effectiveness of ongoing activities against a list of strategic goals, a company can focus on efforts that will deliver a continuous pipeline of innovations. Cultural Transformation But developing and communicating an innovation 2 strategy is not nearly enough. Leaders must give their people the motivation, training, and tools to make it a reality. They must encourage continuous dissatisfaction with the status quo, while rewarding creativity. Leaders must also develop competencies in lean- agile techniques: € Empowered teams who can develop minimally viable products and services to test with customers, to ‘fail fast’ and learn from iterative attempts. € Systems thinking: focusing on how a system’s parts interrelate, and how that system works within larger systems. € Design thinking: ide a-generation and problem- solving that looks at human behavior and needs, in 9 addition to business and technology factors. 9 Harvard Business Review, Design Thinking, June 2008, accessed March 13, 2018, https://hbr.org/2008/06/ design-thinking

Leaders who commit to the lean-agile approach must also commit to rethinking where they surface ideas for improvements everywhere, including those for new products and services. Such leaders will also create an entrepreneurial work environment that extends to the edges of the company—outside (those that touch customers) and inside (those that support those who touch customers). The following is what a snapshot of that environment looks like: Outside edge. Here, an agile enterprise empowers frontline people who interact directly with customers, including employees in customer services, sales and delivery, to discover unfilled customer needs. For example, it could be an idea for a new product or service offering, or a better way to deliver that product or service. Inside edge. This is about support functions such as HR, finance, legal, and procurement working to improve the ways they help their customer-facing colleagues. This means rethinking traditional ways of working that rely on narrowly defined specialized roles, predictable scope, pre-defined timelines, budgets and stang. New thinking—about improving existing systems and service—will enable faster responses not only to the internal customers, but will improve the organization’s ability to serve external customers. For example, think of a traditional contracting process with fixed terms. If a new type of customer service option requires a more flexible scope with few pre-defined requirements, adaptive procurement, and legal functions will be poised to make that a reality faster than before. By adopting lean-agile ways of working where innovation is an everyday phenomenon, the people at the outside and inside edges of an agile enterprise will be able to create and implement new ideas more rapidly.

Yet it takes more than people and ideas. It also requires lots of agile experimentation. Two internal TCS information systems (a collaboration platform and a digital learning system) are good examples. Our company needed to enable training and development to go beyond the classroom, so that employees could be located anywhere, and learn at their own pace. Teams working on the systems used both design thinking and agile development practices to collect and evaluate ideas, and apply constraints (such as information security policies, scalability at the enterprise level, and 10 technical debt ) They used agile development methods to sharpen ideas and create prototypes. They used DevOps to push minimally viable products into production so that end users could test them and provide feedback quickly. The results: Fresco Talk, the collaboration platform, grew quickly to 60,000 TCS employees without an in-house marketing campaign before spreading out across the company globally. The digital learning platform, called Fresco Play, went through fine-tuning with end users in the real world business environment before it was rolled out to 400,000 employees. Forward-looking companies are also collaborating outside of their corporate walls to harvest innovative ideas from their ecosystem partners. A leading U.S. audio equipment manufacturer and a major toy maker are each tapping partners (such as TCS) to generate new product ideas through a structured ideation process. The two companies then flesh out the most promising ideas and test them with business stakeholders before they enter product development cycles. 10 Technical debt refers to the work a team will later need to perform to address problems that were not apparent at the time the software product was first developed. See Agile Alliance, Introduction to the Technical Debt Concept, accessed March 13, 2018, https://www.agilealliance.org/introduction-to-the-technical-debt-concept/

Focused Experimentation As the initiatives above show, leaders must set up a 3 system to vet incoming ideas for market relevancy and technical and financial practicality, by testing and improving them with feedback from customers (or, customers’ proxies, such as market experts or customer service representatives, when actual end- customers are not ideal evaluators for confidentiality or competitive reasons). An approach we have seen work is the Rapid Iterative Experimentation Process (RIEP). See Figure 5. With RIEP, a company sets up a system to evaluate incoming ideas by applying criteria consistent with its innovation goals. It builds a portfolio of the best ideas that, in light of corporate strategy and market conditions, balances risk and opportunity. It can perform experiments to determine which ideas are well suited for market introduction, and then bring the best products and services into production. The experimentation stage embodies the lean-agile approach and is particularly important. It is a rapid, iterative process of solution prototyping, concept simulation, and testing to validate ideas along multiple dimensions. This process will quickly and cost effectively prove or disprove critical hypotheses about an idea’s customer attractiveness, market viability, and technical feasibility. It gives internal investors (for example, the

IDEATE EXPERIMENT MONETIZE 1–4 weeks Element Sprint Value Tests 1 1 1.X (1–5 days each) N2 1–4 weeks Proven/ 3 alue and Idea Element Sprint Value Tests Disproven Revised 3.N 4 6 V Elements 2 2.X (1–5 days each) Hypotheses Hypotheses 5 nitial wth Hypotheses 1–4 weeks I o Element Sprint Value Tests Gr N N.X (1–5 days each) Client’s Innovative Idea Portfolio 3.1 3.2 Customer Market Technical Concept Solution Pilots Attractiveness Viability Feasibility Simulation Prototyping Experimentation Planning Rapid Experimentation Techniques and Tools Figure 5: Rapid Iterative Experimentation Process CEO and business unit heads) the information they need to more confidently make decisions to pivot, halt, or continue with ideas in the portfolio. Large companies practicing RIEP often start with a centralized group—some call it an innovation lab or design studio or agile studio—to perform the experiments. In smaller firms such as startups, the culture demands an ‘all-hands-on-deck’ approach where likely everyone is involved.

Enterprise Agility at Work Empowering people on the edges of your business to see and experiment with new concepts has been a key ingredient to the rise of some of the most successful digital companies: Facebook, Amazon, and others. Take Facebook. “You’d be surprised by how much of the product roadmap over time is set, not by us talking about what we think we should do and deciding, but 11 by engineers coming with ideas,” said co-founder and CEO Mark Zuckerberg. Facebook stages regular hackathons in which its engineers develop initial prototypes of new products and product features. These have led to some of its best offerings—Chat, Live, and the platform on which developers make games. 12 Hackathons have also led to its first video player. Amazon also promotes a culture of experimentation at the front lines. Says Lean Startup author Eric Ries: “I know examples where a random Amazon engineer mentions, ‘Hey, I read about an idea in a blog post. We should do that.’ The next thing he knows, the engineer is being asked to pitch it to the executive committee. 13 [CEO] Jeff Bezos decides on the spot.” When Sun Life Financial opened its fourth innovation lab near its Toronto headquarters in 2017, the 153-year-old financial services company cited its ability to bring agile teams together to meet, not just with each other, but also with area startups to exchange ideas. The innovation labs have elevated Sun Life’s ability to connect with customers, something which Alice Thomas, chief digital technology ocer, said is emblematic of the company’s digital transformation. “It’s adapting to 14 how clients want to engage with us,” she said. 11 Business Insider, Mark Zuckerberg Reviewed the Coolest Stuff Facebook’s Engineers are Working on, December 6, 2016, accessed March 13, 2018, http://www.businessinsider.com/mark-zuckerberg-reviewed-coolest-facebook- hackathon-projects-2016-12 12 Inc., Facebook’s Engineers Are Working on 5 Pretty Cool Innovations, December 12, 2016, accessed March 12, 2018, https://www.inc.com/jessica-stillman/5-of-the-coolest-innovations-currently-being-built-by-facebook- engineers.html 13 Vox, How Amazon Innovates in Ways that Google and Apple Can’t, December 28, 2016, accessed March 13, 2018, https://www.vox.com/new-money/2016/12/28/13889840/amazon-innovation-google-apple 14 IT World Canada, Sun Life’s Chief Digital Technology Ocer Readies for Silicon Valley - Inspired HQ Launch, February 27, 2017, accessed March 13, 2018, https://www.itworldcanada.com/article/sun-lifes-chief-digital- technology-ocer-readies-for-silicon-valley-inspired-hq-launch/390998

No Time to Lose Now is the time to develop enterprise agility. Many companies face imminent threats from the changing business environment, with crowdsourcing of new ideas, open source technology, and a myriad of service providers with niche skills, products, and services that are readily available via digital channels. They are all seeking connections with your customers. And it’s no secret why. Innovation at the edge has become a way of life at companies like Google, and Facebook. Established enterprises like Sun Life Financial and many others are actively investing in creating their own agile organizations. To start, build a culture that puts a premium on creativity. Encourage innovation throughout the organization. Invest in experimentation. As digital competitors accelerate their pace of innovation, established companies must empower their employees at the edge, enabling its front lines to generate innovative ideas, and then put its weight behind the most promising ones.

E IL G Effective Leadership of Agile Organizations: Building a Culture of Servant Leadership YING A Authors L Carl Shea P Enterprise Agile Coach, Tata Consultancy Services Nidhi Srivastava P Global Head Consulting Practices, Tata Consultancy Services A The articles in this issue of Perspectives show that many C-suite leaders say they believe in agile and lean approaches to making their organizations stronger and more responsive to change in the rapidly evolving digital world. However, how they make decisions (often through a classic multi-level hierarchy), delegate the skills they value most in others, and deal with failures from below is antithetical to making their organizations more responsive to change. In other words, many senior leaders have not adopted the right mindsets and behaviors to help their organizations become more agile. For example, a global manufacturer organized an agile work team to spearhead a $50 million project to create a single global ordering system. The goal was two-fold. First, to

balance manufacturing loads and This scenario is not at all unusual output among plants, generating among large companies that try supply chain eciencies. Second, to master lean-agile approaches to to reduce redundancies in regional implementing new, digitally-enabled support systems. business processes. The work of the best agile teams can slow to a crawl The project ran into problems. when senior executives aren’t able to Making one key decision (how long change the way they lead. customers would have to cancel an order) stalled the project for months. It’s one thing to train employees The team was afraid to make a wrong on agile and lean processes and and consequential decision across tools; it’s another to change: the dozens of countries in which the € The way leaders make decisions company operated. So, it kicked the and empower team leaders question upstairs to the executive € How leaders communicate suite. After top management mulled organizational goals, and how a decision for weeks, it pushed it back they react to success and failure down, and told the team to ‘figure it € The hierarchy leaders establish out.’ But the team was reluctant to to control resources and manage do so. Work stopped, and a big and results important initiative, presumptively € The power leaders invest (or don’t using agile approaches to get its work invest) in agile teams done, ground to a halt. Unless leaders adopt agile mindsets to manage agile teams, they can create obstacles instead of facilitating the agile approaches to developing new products, services, and processes that all businesses need today.

What It Takes to Change Leadership Mindsets Changing leadership mindsets and behaviors requires effort. Leaders in established companies typically have achieved their position based on their experience, expertise, and skills. It’s common for them to sit atop a pyramid-style hierarchy. At the top, leaders are accustomed to making decisions to be carried out by those below them. As they manage from above, a ‘frozen middle’ layer—the people who work Area Traditional Leadership Competencies Agile Leadership Competencies (Change From) (Change To) Anticipatory Predict and control Sense and respond Abilities Responsibilities Making great decisions Helping teams make great decisions Source of Authority based on rank, experience, Skills in empowering others through Power and skills, expertise emotional intelligence, relationship Respect building, treating individuals as equals Focus of Focus on self Focus on others’ improvement Improvement Communicat- One-way, top-down communications Two-way communications and ions Direction peer relationships Focus of Hierarchy-driven decisions with Trust in teams to make team decisions Decisions multiple approval and verification steps Mistake Assign blame to those responsible for Learn from inevitable failures, celebrate Posture failure, creating culture of fear lessons, adapt, and move forward Leadership Focused on ‘outer game.’ Results A leader’s ‘internal operating system.’ Culture oriented meritocracy-based Focused on both the ‘outer game’ organization. Leaders’ reaction to (traditional leadership traits) and inner 15 followers: “You are only important to game (building trust with team me for what you are doing for me now. members, exhibiting emotional Our relationship really isn’t important intelligence and empathy). This beyond this moment in time.” leader says to team members: “You are important to me because of your 1 TK Footnote whole self, what you have done for me in the past, now, and in the future. Our relationship is important.” Such leadership empowers teams to focus on results. Figure 6: Changing Leadership Styles for Agile Organizations

between the very top executives and the front-line employees—typically play it safe. Fearing failure, these middle managers resist innovative ideas and new 16 perspectives. Lean-agile approaches call for the opposite decision-making style. In agile, teams organized around a product or issue make the decisions. Organizations made up of multiple agile teams are capable of quick, mid-course adjustments that enable the organization to sense and respond to customers and market stimuli. Teams experiment with solutions, learn from mistakes and improve with all subsequent iterations. For enterprises moving to lean-agile styles of leadership, individual leaders will have to bridge the gap between old styles and new. This will require training—coaching for the leaders who must empower teams to succeed—and the leaders’ personal commitment to make these changes. Teaching Successful Leaders How to be Agile Leaders are central to building and sustaining a lean-agile AaBbCc culture. Because many leaders have risen in a traditional hierarchy, they will exhibit behaviors that have made them successful in the past even as the organization commits to change its way of working. Changing those behaviors is challenging, and the reason why coaching is so important. Coaching begins by assessing an individual’s current leadership style and how that style can work in a lean-agile environment. It then helps a leader adopt new behaviors—new tools for engaging teams, empowering them to make decisions, and do their best work. Coaches help leaders who are accustomed to command- and-control, top-down decision-making, and adopting a lean-agile mindset. 15 Outer game and inner game part of the “conscious leadership’ concept cited in Mastering Leadership - An Integrated Framework for Breakthrough Performance and Extraordinary Business Results, Robert J. Anderson and William A. Adam, 2015 16 The Globe and Mail Inc., What is the Frozen Middle, and Why Should it Keep Leaders up at Night?, May 2, 2017, accessed March 13, 2018, https://www.theglobeandmail.com/report-on-business/careers/leadership-lab/what-is- the-frozen-middle-and-why-should-it-keep-leaders-up-at-night/article34862887/

Effective coaches tailor their teaching with those employees and cede to to an individual’s leadership style and them the control they are accustomed behaviors, holding a mirror up to a to having. Coaching exercises can leader so she can see both what she provide opportunities for these leaders is doing and her impact on others. to understand what it takes to invest Does she instill fear or trust in team the time and effort required to develop members? Does she possess the the personal relationships with team emotional intelligence required to members that allow leaders to engage take every team member’s personal effectively, and thereby empower team concerns and points of view into members to succeed in agile ways account as she communicates the of working. team’s priorities? Surveys show low employee engagement across the The effort to adopt an agile mindset board. Gallup’s 2017 survey found only requires building trust throughout the a third of U.S. employees engaged at organization, starting with leaders. 17 work. This is why so-called soft skills Examples of trust include: are critical. € Showing confidence in teams to Coaching sessions make a leader aware make decisions € of what he does now that can either Understanding failure as a learning enhance or inhibit the adoption of an opportunity rather than a reason to agile culture. Often, behaviors learned assign blame € over years working (and flourishing) in Cultivating individual relationships traditional cultures don’t translate to an with colleagues and appreciating agile environment. Agile organizations their value (instead of fostering a are flatter, with lower-level people superior-underling dynamic as in authorized to make decisions. For traditional work cultures) some leaders, it takes practice (and confidence) to learn how to engage 17 Gallup, State of the American Workplace, February 2017, accessed March 13, 2018, http://news.gallup.com/ reports/199961/state-american-workplace-report-2017.aspx

The Commitment The third element involves learning Required to Change about agile methodologies, and a Adopting an leader’s role in supporting the teams agile leadership implementing them. Again, the style first requires differences between traditional and a program that agile ways of working are vivid. In agile builds awareness approaches, teams typically deliver among both value in small increments, rather than in leaders and big chunks. Governance models allow teams that the organization is changing. for visibility into the process as team It’s important to seek buy-in, or members communicate continuously informed consent from both leaders about the group’s activities, progress, and teams that they not only agree to and challenges—and adapt based adopt an agile approach, but they also on needs that change regularly. Agile will engage in discussions to understand teams require strong backing from why they are moving to agile and the executive sponsors who make it challenges they will confront. possible to recruit people from across the organization as needed, including Next, organizations often bring in a product owner from the business to experienced teachers to guide the lead a team, ensuring it has the right transition. A leader going through this number of people as well as the right process can benefit from an outside tools, and a working environment that perspective to help her envision what will allow them to deliver the products she will need to do. The transition to the enterprise needs. an agile culture takes time—typically more than a year to complete—and it affects all aspects of the organization.

Lessons from Leaders at Amazon and Facebook Companies like Amazon and Facebook, which began as startups and have profited from an agile culture, provide lessons about empowering teams to do their best work. Leaders at these organizations are doing more than removing obstacles in the way of teams trying to do great work. They are leading by example. To maintain Amazon’s startup culture, Amazon founder and CEO Jeff Bezos 18 promotes ‘high quality and high velocity decisions.’ This includes recognizing and correcting poor choices quickly, and adopting a strategy he calls ‘disagree and commit’: supporting a team’s decision if the members believe in the choice even if he doesn’t. For example, Bezos approved an Amazon Studios production even though he had doubts about it. “Consider how much slower this decision cycle would have been if the team had actually had to convince me rather than simply get my commitment,” he writes. These decisions go in more than one direction. Amazon Studios is not afraid to fail fast by canceling new shows. It canceled ‘The Last Tycoon’ two weeks after 19 releasing a season’s worth of episodes. This approach embodies agile thinking. To avoid complacency, Bezos remains obsessed with keeping his company thinking that it’s always ‘Day 1’ of business. Facebook’s flat organizational structure and acceptance of failure to improve is another example of the lean-agile mindset. “You have to embrace organizational failure,” COO Sheryl Sandberg says. This goes hand in hand with making sure top executives are not driving every decision; everyone feels their input is welcomed 20 and encouraged. 18 Amazon, 2016 Letter to Shareholders, April 12, 2017, accessed March 13, 2018, https://www.amazon.com/p/ feature/z6o9g6sysxur57t 19 Variety, The Last Tycoon Canceled at Amazon, September 9, 2017, accessed March 13, 2018, http://variety. com/2017/tv/news/the-last-tycoon-canceled-amazon-1202552964/ 20 Entrepreneur, Sheryl Sandberg Shares 7 Ways to Build Resilience into your Company Culture as you Scale, June 1, 2017, accessed March 13, 2018, https://www.entrepreneur.com/article/294948

Sandberg also emphasizes the role that empathy plays in leadership at Facebook. She says she believes in team members bringing their ‘whole selves’ to work, acknowledging that employees have personal lives they bring to their jobs. “It means we are there for each other, we are flexible with what people need, and then we can form the relationships that create collective resilience.”21 Such examples show that leaders can serve their organizations best by empowering their teams, and, as companies like Amazon and Facebook demonstrate, scale, and growth, are not obstacles to maintaining a lean-agile culture. Agility is About People Embracing agility is about more than technology. It is about people. As companies and leaders embrace agile methods, it’s imperative for them to invest in their people and organizational cultures, not just in the technology stack, or in agile development and delivery of DevOps to automate technical capabilities. That investment is important because succeeding in creating a lean-agile organization requires changing how decisions are made, the way teams are formed, and the way they work together. 21 Ibid.

Embracing agility also calls for changing how organizations measure and recognize teams and leaders. That means establishing incentives and rewards for teams, not just individuals. And it means measuring the success of leaders based on how they help others grow. Indeed, embracing agility is about creating a more equal ecosystem. Rather than an organization built around departments or groups or functions that become silos, agile requires every stakeholder to contribute value to the whole organization. It calls for each individual to see that value and their purpose beyond any one function or department. When done well, the people in an agile organization see their work in a team as meaningful, and their organization’s work as making a positive difference for its customers, and, ideally, the world.

Q A The Tall Task of Getting Big Companies and Government to Innovate Like Lean Startups: Interview with Steve Blank Steve Blank has been at the epicenter of the ‘lean startup’ movement since he ignited it in 2006 with his book The Four Steps to the Epiphany. A Silicon Valley entrepreneur for 21 years who founded or was involved in the launch of eight technology startups (both successes and failures), Blank left that world in 1999 to teach and consult on startups. Today, Blank’s Lean LaunchPad approach (which he teaches at Stanford University, the University of California, Berkeley, and Columbia University) is taught at more than 75 universities worldwide. What’s more, lean startup methods have been embraced by a number of government and scientific organizations. Blank’s Stanford class became the curriculum for the National Science Foundation Innovation Corps in 2011; since that time, over a thousand scientists and engineers have taken the course to help commercialize their ideas. Blank also co-created the Hacking for Defense and Hacking for Diplomacy programs, which use lean startup methods to address critical national security problems. You can read his extensive writings at www.steveblank.com. At the turn of the century, one of Blank’s students was Eric Ries, who launched two companies that Blank had funded. The first practitioner of Blank’s lean startup method, Ries took the concept mainstream after publishing two books, The Lean Startup and The Startup Way.

Q A From his Silicon Valley outpost, Blank has continued to publish books about lean 22 startup methods as well, including the bestselling Startup Owner’s Manual (co-authored with Bob Dorf). In addition, Blank has been an author or co-author of eight Harvard Business Review articles, including a May 2013 cover article (‘Why the 23 Lean Start-Up Changes Everything’ ) and an article in HBR’s November–December 24 2017 print edition (‘When Founders Go Too Far’ ). He recently talked about his lean startup principles, the reasons why big, established companies, and government agencies need to adopt them, and the challenges they’ve had in trying to do so. TCS: Your ideas around the lean startup have jumped the tracks from the startup world to the big-company world and to the government. But before you talk about how large organizations are using them, take us back to the evolution of the ideas. Steve Blank: It started just from a very personal basis. I was a serial entrepreneur. I did eight startups in 21 years and retired in ‘99. When you’re a practitioner, you don’t have time to think about big picture stuff; you just do what you are told. If you’re lucky and good, you get to do it again. When I retired, I started thinking about the innovation of entrepreneurship. It struck th me that in the 20 century, startup investors treated startups like they were nothing more than smaller versions of large companies. It was a big idea. 22 Amazon, The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company, March 2012, accessed February 5, 2018, https://www.amazon.com/Startup-Owners-Manual-Step-Step-ebook/dp/ B009UMTMKS#reader_B009UMTMKS 23 Harvard Business Review, Why the Lean Start-Up Changes Everything, May 2013, accessed February 5, 2018, https://hbr.org/2013/05/why-the-lean-start-up-changes-everything 24 Harvard Business Review, When Founders Go Too Far, November-December 2017, accessed February 5, 2018, https://hbr.org/2017/11/when-founders-go-too-far

What [startup investors] essentially said was, “If big companies are doing [business] plans, we want a plan. Big companies do five-year forecasts, so obviously before we invest we need to see the forecast.” And “Big companies hire sales, marketing, and [business development] people on Day 1, that’s what we want you, the startup, to do.” And “Big companies build their products with waterfall engineering, which is a serial process that specifies all the features and then works for the next year or two to delivering them for Release 1.0.” Startups are not smaller versions of large companies. Large companies are large because they execute a known business model. But it wasn’t until I retired and started thinking about this that I realized it was wrong—big time! Startups are not smaller versions of large companies. Large companies are large because they execute a known business model. A known business model is 95% of what large companies do. It’s “Gee, we know our channel, we know our customers, we know our pricing, we know our competitors, we know lots of stuff.” And most of this stuff is continuing to fill the pipeline with product line extensions and new features, painting it blue or whatever. That is a known business model.

Q A By contrast, startups have very few difference between search (startups) things that are known. Startups are and execution (existing companies). searching for a business model. That kicked off the lean startup Yet business schools have built 100 movement by describing one of the years of tools and techniques for three components of lean: the customer executing known business models development process. I said a startup of existing companies. Remember, has no facts about real customers when business schools were designed to the people in that startup stay inside graduate people with degrees in their building. Therefore, they need to business administration. Therefore, get the heck outside. we were building tools to help those administrators. But no one had Then one of my students, Eric Ries, consciously said that perhaps we need a said, “Steve, you grew up in the 20th management toolset in a management century with waterfall engineering, stack for innovators. It didn’t exist. The where products were built serially, but language barely existed. startups are now using something called agile engineering, where they’re So I started reading all the literature building the products iteratively and about innovation. The irony here was incrementally. That is a perfect fit for that very little literature existed about customer development. So why don’t startups. There was literature about we combine customer development corporate innovation—Rita McGrath and agile engineering.” stuff, Clayton Christensen stuff, and so on. But I felt it was about innovation in Then I ran into someone named the context of environment that was Alexander Osterwalder, who had figured primarily focused on execution. out how to map a 40-page business plans into a single diagram called the To make a long story short, I wrote The business model canvas. So I adopted Four Steps to the Epiphany. That was the Osterwalder’s canvas as a living scorecard first time anyone ever described the for first articulating the hypotheses a

startup needs to test, and then to keep Geez! What were we thinking? track of what they learned—using my customer development process, as well TCS: So the venture capitalists in Silicon as to test the minimal viable products Valley in the 1980s and ‘90s got nervous we were building using Eric’s agile if the founders changed their initial engineering method. business model. Blank: Yeah, and [when that happened] Those three they fired the founders. Any failure was components—business treated as a failure of the individuals, not a failure of the initial hypothesis or model design, customer assumptions. That’s a huge idea. Huge. development, and agile Their belief was, “There can be nothing wrong with the plan. I funded it! It engineering—became must be an execution problem.” the lean startup. By the way, it wasn’t that the founders One key idea of this lean method was were always right. But there was no this notion that we’re learning new notion that they needed to be testing things as we talk to customers and and exploring their [company’s] test minimum viable products. And as hypotheses—about customers, about we learn, we give startups permission features wanted, about pricing, channel, to make substantive changes to their etc. … The other problem was that we business model. These changes are started stang and building a burn called a pivot. It’s hard to remember, but rate per the business plan. I remember in the old days—and this still happens being in companies where the only in corporations—once your plan is thing that [went according to] plan was blessed, any deviation is considered a our burn rate! You kind of go, “I don’t failure instead of as learning. think this is right,” even though you got three-quarters of the plan correct. So I said, “What’s wrong with this movie?”

Q A TCS: When you stopped launching companies in 1999, venture capital was abundant. So perhaps the VCs were not too worried about many of their portfolio companies failing, as long as they had a few winners that more than made up for the losers. Blank: During the last dot-com boom (around 1999), we didn’t need any of this [lean startup] stuff because we had infinite cash. Post dot-com crash, people were being pretty judicious about time and resources, and lean made all the sense in the world. The irony is that now with funds like Sequoia and even more so like Softbank, [having huge funds] makes up for everything. Their approach is “It doesn’t matter, I’ll buy my way in.” The irony is that the need for lean has now moved from startups, which had to be judicious with cash, to [established] corporations, which are actually much more threatened than startups. The real surprise for me is that some startups now have more capital than large corporations. Herein lies the opportunity of using lean startup approaches in corporations. Big companies that survive are no longer just delivering what McKinsey called Horizon One innovation (incremental features, colors,

supply chain eciencies, and so on), and Horizon Two innovation (satisfying the needs of existing customers with new products). The ones that are going to stay in business are now acting like startups by delivering what McKinsey 30 years ago called the third horizon of innovation—i.e., disruption. Apple, the computer company, getting into music. Amazon, the ecommerce company, buying Whole Foods. Large corporations have great managers dealing with Horizon One and Two types of innovation. The problem is they are facing continuous disruption; they have Horizon Three problems now, but the wrong leadership to deal with them. If you got your MBA more than three years ago, everything you know about innovation is obsolete. For the first time in the history of corporations, [established] companies are not setting the rules. The rules are changing rapidly. That’s why you see all this M&A activity and people just trying to figure out what the new rules are. There is probably more innovation and creative disruption right now of corporations since maybe in the gilded age in the U.S. [the late 1800s]. TCS: So largely speaking, how have large companies reacted to the lean startup ideas since you started publishing them? Blank: Between my work and Eric Ries’ work [who in his book wrote about their application at GE and Procter & Gamble], there has been recognition and adoption at various levels. But it’s hard to turn super tankers. Remember, large corporations can innovate not only by using lean methodologies to build internal innovation; they can also buy companies.

Q A TCS: What are the biggest challenges Did it move the top or bottom line? large companies face in adopting lean What I often get back is, “Let me show startup approaches? you our ‘Dogs at Work Policy.’” Blank: It’s the other way around. The issue is not about adoption of What I’ve learned is that companies lean. The issue is about dealing with don’t just need to build a lean startup continuous disruption. Lean is just a process. They need to build an end- tool in a tool set. It is not the answer. to-end innovation pipeline that has a It is a component of this: “How do I funnel on the left and deliverables on change the engines of the plane while the right. If you don’t know the ratio it’s in flight? Am I reconfiguring the of funnel ideas to deliverables, you’re product line? Am I going digital? Am I going to get it wrong. The big mistake changing channels? Am I reinventing is confusing activities with deliverables. the company? And am I willing to bet When I ask them about deliverables, my job, and is my strategy aligned with the answer for some 90% of them or my investors and my board?” more is they have none yet. TCS: So what five years after Harvard You’re not going to believe this, but it Business Review published your article on turns out the people who are doing it the lean startup, are big companies doing right is the U.S. government. enough to make their ventures lean? Blank: I keep telling [HBR] they ought The approach plays out slightly differently to be writing the article, “Why the for government agencies. But because Lean Startup Changed Nothing.” [He the government is being disrupted, the laughs] [The article] mostly resulted consequences are even greater than in innovation theater: a set of they are for companies. Macy’s can activities, typically like incubators and go out of business in the U.S. and the accelerators inside a company, that country will still go on. We can’t afford generate great coffee cups, posters, to have part of our Defense Department and lanyards, and almost nothing else. go out of business from being disrupted. My test [for their effectiveness] is this:

They get it. They understand it. Their disruption is pretty th clear. In the 20 century, the country was essentially facing a single adversary. Now you need a scorecard. They need to scale [their innovations] to today’s [much higher] number of adversaries. They now realize the answer is not only tech, which is machine learning and robotics and whatever, but also innovation processes that are radically different than the way they’ve been building requirements and acquiring products and services. The Defense Department has adopted not just lean but this notion of an innovation pipeline incredibly fast. The 2018 National Security Strategy, written by the Secretary of Defense, is probably one of the most important innovation st documents so far of the 21 century. It said, “Organize for innovation.The Department’smanagement structure and processes are not written in stone, they are a means to an end–empowering the warfighter with the knowledge, equipmentand support systems to fight and win. Department leaders will adapt their organizational structures to best support the Joint Force. If current structures hinder substantial increases inlethality or performance, it is expected that Service Secretaries and Agency heads will consolidate, eliminate, or restructure as needed. The Department’s leadership is committed to changesin authorities, granting of waivers, andsecuring external support for streamlining processes and organizations.” It feels a lot like the lean startup take-up that we had in Silicon Valley. It’s catching on in the U.S. government, and it’s saving lives.