Thursday, April 28, 2005

Why corporate change is hard and failure almost inevitable

Originally posted 17 October 2004

Part II

David H. Maister's book, Managing the Professional Services Firm, focuses on consultancies, law firms, and accounting practices. However, it also has application to retailers, manufacturers, and other corporations.

Many of the critical questions companies face today deal with human capital, knowledge management, and proprietary expertise. The firms Maister studies are sophisticated managers of these new economy assets because these are the only assets the firms possess. Hence, Maister's subjects are pure-form exemplars and the lessons drawn from their experience have applicability across industry.

Maister's first signal contribution is an evocative typology of client work. He divides the work of PSFs into three categories: "brains", "gray hair", and "procedure". The respective client benefit for each is expertise, experience, and efficiency.

"Brains work" involves problems with a high novelty quotient. Risks are high and the key to success is intensive, accurate diagnosis of complex, ambiguous problems followed up with creative and innovative solutions. A procedures practice is dramatically different. The problems are not novel; they are well understood. Here the key to success is intense execution with an eye toward efficiency and standardization. "Gray hair" projects usually fall between "brains" and "procedure" on most critical dimensions.

Maister builds on this to show that the most successful firms concentrate on one type of work to the exclusion of the others. This is inevitable because the key success factors for each turn out to be mutually exclusive:
We have found significant and incompatible differences between the three 'ideal' practice types in marketing, pricing, leverage structure, hiring needs, promotion structure, ownership structure, and leadership style. (p.27)
In addition, each firm type builds and leverages human capital differently. An expertise (brains) firm will have completely different approaches to professional development and employee retention than will a procedures PSF.

For example, PSFs which succeed in the procedures realm gain efficiency through repetition and the construction of templates. They achieve maximum leverage by training a body of junior professionals in the firm's methodologies and deploying them in a series of engagements that are nearly identical. There is room for average performers who can be billed out on such projects.

In contrast, "brains" firms must continuously develop new approaches and frontier expertise. They maintain their brand by hiring the most talented, ambitious professionals and subjecting them to a ruthless up or out promotion strategy. The professionals who join such firms expect challenge and variety. As Maister puts it,
while they may be content to undertake a similar project for the second or third time, they will not be for the fourth or sixth or eighth. (p.19)
Most of us are comfortable accepting one side of his analysis. We understand how important recruitment and expertise are to the success of a creative advertising agency or an elite consultancy like McKinsey. We hesitate, though, to think through the implications for procedures firms.

But there is no avoiding the fact that most companies operate as "procedure practices" and that Maister's insights into them have the same validity as his conclusions about "expertise practices." Using those insights we can gain a better understanding into the reasons incumbent firms fail to adapt and why change programs are difficult to complete even when they are started.

Most companies are procedure practices. Routinized, programmatic solutions are their raison d'ĂȘtre and represent the essence of managerial work inside their walls. Such an approach works most of the time. It produces efficiencies and profits. If this structure did not usually produce competitive advantage, the work would be carried out by another form of enterprise.

If tomorrow's problems are much like yesterday's, a procedures mindset works best. Under those circumstances an expertise approach will sink into obsolesce and anomie; its expensive investment in intellectual capital will provide no advantage and will not generate good returns.

Inevitably, if unpredictably, every industry and every firm faces periods of change. The causes are well known: demographic shifts, new competitors, technological breakthroughs. At these times, the procedures-practice model proves a disadvantage.

First, because the implications and exact nature of a particular change-event are unclear at its onset, the premium (and competitive advantage) shift to diagnosis from execution.

The real challenge in crafting strategy lies in detecting the subtle discontinuities that may undermine a business in the future. And for that there is no technique, no program, just a sharp mind in touch with the situation. Such discontinuities are unexpected and irregular, essentially unprecedented. They can be dealt with only by minds that are attuned to existing patterns yet able to perceive important breaks in them. Unfortunately, this form of strategic thinking tends to atrophy during the long periods of stability that most organizations experience.
Henry Mintzberg, "Crafting Strategy", Harvard Business Review, (July -August, 1987)
Diagnosis is the forte of the expertise-practice model and a weakness for the procedures-practice model. The latter does not evaluate its professionals on their aptitude at diagnosis nor does it train those professionals to leverage their skills in that area. Not surprisingly, the requisite talent is in short supply.

In truth, the implications of Maister's research are quite pessimistic on this score. A corollary to the idea that professionals who excel within the expertise-practice model will not willingly engage in repetitive projects is this: Professionals who succeed in a procedures environment rarely have the aptitude and inclination required for diagnosis under ambiguity and the formulation of customized solutions. This helps explain why denial is so common a response to discontinuous change.

Second, even those professionals who attempt to address the challenge of understanding the change-event find that they must fight the inertia and active (though unpremeditated) opposition of most of the organization. In a procedures firm, whole departments exist solely to produce routinized, programmatic outputs and to ensure that the rest of the organization follows uniform procedural templates. (Think of purchasing, human resources, and financial reporting.) To deal with unstructured questions on the frontier of expertise while still satisfying the demands of the guardians of procedure requires a sort of blessed schizophrenia that is exceedingly rare.

Third, the firm's formal planning systems magnify this problem instead of alleviating it. As Henry Mintzberg notes in The Rise and Fall of Strategic Planning,
planning exhibits a bias toward a particular type of change in organizations-- not quantum change, with which its procedures have difficulty coping, but incremental. [p. 192]
Many, if not most managers can relate to Mintzberg's description of formal budgeting/planning environments where
managers may be so busy discussing strategies and budgets on schedule year after year that when real change becomes necessary, they miss it. [p. 179.]
It is not surprising, then, that companies like General Motors fail spectacularly after decades of success. If this is not inevitable, it is certainly the norm. The failure of established firms to grasp the importance of technological breakthroughs is a recurrent theme in Utterbeck, Mastering the Dynamics of Innovation (1994) and Christensen, The Innovator's Dilemma (1997). As both authors point out, focusing on operational excellence today easily leads to that tunnel vision which blinds executives to tomorrow. Maister's work helps explain why this should be so.

Part II

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