7. Transformation

“Everybody has accepted by now that ‘change is unavoidable.’ But this still implies that change is like ‘death and taxes’: It should be postponed as long as possible, and no change would be vastly preferable. But in a period of upheavals, such as the one we are living in, change is the norm.”

—Peter F. Drucker in Management Challenges for the 21st Century

Overview

In the year 2000, as companies were putting the Y2K computer bug behind them and the world was ushering in the new millennium, A.G. Lafley was appointed the new CEO of P&G after several years of disappointing growth. He soon challenged his employees to think differently as he famously announced a bold goal of tapping the outside world for 50 percent of all new ideas and innovations over the next few years in a program that became known as Connect + Develop. In the same year, General Electric CEO Jack Welch said in a letter to shareholders (also signed by Jeffrey Immelt and others) that “Globalization has transformed us into a company that searches the world, not just to sell or to source, but to find intellectual capital—the world’s best talents and greatest ideas.” These were astounding actions and statements by business leaders of two of the most enduring brands in the world. Although new global realities were certainly affecting businesses in myriad ways, ten years ago few CEOs were trumpeting their organization’s efforts to tap a whole new world of talent, resources, and innovation. Lafley and Welch were trailblazers and clearly unafraid to challenge convention, recognizing the need to innovate their business models and in many respects to remake their cultures. And based on the financial performance of their companies, history judged them the right leaders at the right time.

Today, the business landscape is even more challenging—customer expectations have increased, product cycles compressed, and aggressive new competition crowd the marketplace. Businesses are more in need of powerful new approaches than ever. Today’s business leaders face unprecedented challenges and they must boldly adapt and evolve their organizations with the same conviction as these leaders did a decade earlier, beginning with an objective assessment of their organization’s readiness to compete in coming years.

The need for change and the elevated level of CEO urgency was underscored in the IBM 2008 Global CEO Study,¹ which interviewed more than 1,000 CEOs and public sector leaders. Survey results clearly showed that leaders do not believe their organizations can adapt quickly enough to the changes ahead; and worse, CEOs believe the gap between their readiness and future business challenges is actually widening. In the face of unprecedented competition and accelerating rates of change, our organizations are failing to keep pace.

This chapter discusses the evolution of how modern firms are organized (the “bureaucratic” form) and the evolving “network” form that is replacing it, the powerful role of corporate culture in supporting or resisting the transformation, and finally the intense effort that goes into building a new organizational structure along with key considerations for CEOs and business leaders as they contemplate the change ahead.

Organizational Forms and the Emergence of a New Paradigm

Arguably, the earliest groups to organize were nomadic tribes, clans, and villages and, in a sense, these were the first organizations. They had a semblance of structure and common purpose: food, security, and some hint at order. Ultimately, some yielding of individual freedom was traded in favor of the collective good. Over time, leadership positions were established with well-defined chains of command and decision making. Eventually, more efficient and complex organizations developed across the spectrum of human interaction, including government, commerce, religion, education, and even professional guilds.

In the modern business context, organizational forms evolved to produce and distribute goods and services at increasingly large scale, which required the coordination of multitudes of highly specialized workers over great distances in order to drive efficiency and orderly execution. Organizational theorists sometimes refer to the modern corporation as the bureaucratic form and the twentieth century owes no small amount of its success to its emergence. The bureaucratic form supports and is supported by large numbers of employees, sizable capital and real estate holdings, and considerable investments in operating and technology infrastructures. In addition, there is the formidable weight of decades of accumulated policies, procedures, and corporate culture. Our corporations were designed at a time when sheer scale trumped nearly everything. In actuality, this form was rational both operationally and economically, enabling an unprecedented era of large-scale enterprise.²

These scale economies came very often at the high price of creativity, agility, and freedom to operate. As we have streamlined and mechanized our businesses to improve efficiency, we have often driven creativity and experimentation out of the system. As we hired exclusively the top talent from the most prestigious schools, we reduced diversity and non-conventional thinking. As we acquired smaller, more agile companies as sources of new products and innovative energy, we integrated them fully into our bureaucracies and destroyed the very value we were seeking. As we built physical plant, we locked our organizations into specific modes of activity and tied up capital available to exploit new opportunities. And the more we have tried to engineer inventiveness and innovation into the process, the more expensive the endeavor has become.

Many enterprises have spent considerable time and resources blending elements of smaller more agile organizations and decentralized decision making with the bureaucratic form to drive innovative thinking, better action in the field, and improved business agility while maintaining the benefits of scale. These efforts have delivered mixed results. In reality, it is quite difficult to have it both ways.

So why has the bureaucratic form persisted for so long? Firstly, given the high costs traditionally facing new entrants (acquiring talent, building factories, distributing products, etc.), large-scale businesses easily dominated their industries. In many cases, the first to scale was the winner. And secondly, at a certain critical mass, they could simply spend their way into new areas of business and new products. In the last few years, however, everything has changed. The barriers to entry and competition have fallen. New ideas can be developed, products manufactured and distributed, and customers supported on an enormous scale in minimal time at low cost. We have reached the inherent limits of the bureaucratic model as we know it. This is particularly evident in larger established businesses which are bloated and inflexible at precisely the time they need to be virtual and lean. And the financial flexibility needed to rapidly capitalize on new business opportunities is diminished by the sizable investments carried on balance sheets from years of buildup activity. Today many of our most successful corporations and heralded brands find themselves at a crossroads. The rules have changed.

So what replaces the modern corporation as we know it? In the 2001 article “e-R&D—the net@work,” it was proposed that the ‘network’ may evolve to be the successor to ‘scale’—size without weight, critical mass without massive expense.”³ And a great many business school professors have predicted the emergence of this model. In reality, that future is now. In the new economy, the bureaucratic form is replaced by the network form in which companies orchestrate their businesses activities across global ecosystems of employees, customers, manufacturing partners, distributors, and innovation networks. Companies such as Li & Fung already use globalization, outsourcing, the Internet, and other advantages to drive unprecedented speed to market, economics, and business flexibility. Li & Fung is a shining example of an established business that reinvented itself to fully capitalize on the new economy with impressive results. They had few examples to follow. In this book, the Challenge Driven Enterprise provides that roadmap for driving the needed change and is implementable on a variety of scales. It suggests a new operating system for businesses that focuses on what creates value and packages the work required efficiently so that it can be imported or exported to where it is best performed. Moving from the bureaucratic to the network form for some companies requires significant change. For other companies, it will require the deconstruction and reconstruction of the entire enterprise.

CDE has the unique benefit of substantially enhancing the effectiveness and efficiency of business performance while enabling new levels of innovation. In other words, you can have it both ways. But how should the CEO think about the transformation necessary to adopt these principles? And is change on this scale even possible?

The next section begins by clarifying the most important tools at the CEOs disposal: business strategy, corporate culture, and the senior leadership team. These are exceedingly powerful tools that are necessary and quite sufficient for the capable chief executive to not only lead great institutions, but to transform them when change is required. The overall topic of leadership and role of the CEO and senior management team in driving transformation will be addressed in the closing chapter.

The Challenge Driven Enterprise as Business Strategy

For so much management science, the diversity of approaches to corporate strategy is quite remarkable. Some businesses focus on their “hedgehog” concept, with full credit given to Jim Collins, who wrote the excellent book Good to Great. Some companies operate like investment firms constantly looking for which industries and markets will yield exemplary returns and where there are assets and capabilities that can give them an advantage. Many employ a Michael Porter approach, who literally wrote the book Competitive Strategy, which applies a number of lenses to the strategy process. Very often the business strategy itself is essentially outsourced to management consultants. All of these approaches and others can deliver successful results when applied with rigor and vision. The problem is that good strategy work is hard, and most companies do a poor job of it.

Too many organizations apply corporate strategy in name only, choosing instead to do a form of corporate planning instead. Corporate planning focuses on headcount, cost management, and growth rates, and as a consequence most strategies are incremental. And generally, budgets are more closely pegged to financial performance and market conditions than where the next billion dollar opportunity is for investors. In other words, although you can strive to be strategic, to capitalize on market potential, to identify lucrative adjacencies, your strategy processes often produce incremental results at best.

These issues are particularly acute in large businesses, where developing strategy for a multibillion dollar corporation can be like plotting a course for a supertanker. The sheer scale and mass substantially limit the freedom to operate. For these organizations, managing risk to zero is the goal and therefore only incremental innovation is possible. Companies stick with what they know and can do with a high degree of confidence. So they plan and execute consistently and with precision, keeping pace and seldom deviating dramatically from the prior years’ plans. All the while, they continue to invest, hire, and build bureaucracy as they always have. It should be no surprise that these organizations fail at creating disruptive innovation and find themselves increasingly challenged in their core markets by spirited lean agile competition. This isn’t to say that all larger companies are inefficient or unable to drive radicle innovation: Apple, Amazon, and Google, for example, consistently outmaneuver the competition. Overwhelmingly though, it is clear that our businesses are held back by the sheer weight of the institutions we’ve created. Sadly, incrementalism and bloat are the silent killers of our businesses.

Small and midsize enterprises may have an advantage relative to larger organizations as less infrastructure and bureaucracy may mean more flexibility to execute and deliver on innovative strategies. This presents an intriguing opportunity to evolve into network models and adopters of CDE more fluidly than their larger counterparts. That said, smaller organizations often emulate the behaviors of the larger companies they aspire to become. All enterprises then, large and small, must re-imagine themselves.

Interestingly, with all the tools at their disposal to drive innovative strategies, it is remarkable how many organizations choose to create a new division or even a separate company to tackle entirely new business opportunities (for example, GM and Saturn). The rationale is that new ideas or the need for agile operations will be stifled by the organization. One wonders how many excellent business strategies are never executed because companies recognize the likelihood of failure within their own four walls. CEOs are externalizing the execution in these cases, which is good for business, but for the wrong reasons. If the organization and culture are toxic to new ideas or agile execution, how can it compete in the twenty-first century? The elephant in the room is that leadership, strategy, people, and corporate culture may all need to be remade to remain viable and competitive.

Let’s now return to P&G, the subject of last chapter’s case study. The Connect + Develop initiative emerged in response to the recognition that the well-known consumer products company would need to create new business on the order of $4 billion a year to maintain their shareholder commitments. CEO A.G. Lafley recognized that this kind of sustained growth could be accomplished only by engaging a whole world of potential innovation to drive new products and lines of business. Accordingly, he bet heavily on new partnerships, technology scouting, and innovation marketplaces such as InnoCentive. This permeated throughout the P&G organization, culminating in the development of a core capability that today accelerates access to new technologies, identifies new business opportunities, and helps to ensure P&G’s dominance in the categories in which they compete. P&G recognized the power of this approach, particularly with respect to innovation, as a core element of their strategy and a vital source of competitive advantage. Today Connect + Develop and “Open Innovation” have become part of the P&G brand itself.

You must recognize that the Challenge Driven Enterprise is a foundational business strategy with broad reaching implications and one for which the Board of Directors and CEO must be deeply committed. The impact will cascade across the organization. In this brave new world, your organization is not limited by what skills and capabilities exist internally because they are available universally and on-demand. Factory construction lead-times are no longer impediments because manufacturing capacity is also available on-demand. Millions of innovators stand ready to design your products. Call centers and distribution hubs can be rented and are often better managed than owned facilities. You will focus most of your energy as a leader on the business opportunity and the application of capital that drives the best returns.

In the network form, strategy and the ability to orchestrate networks are the only core competencies that truly matter. And Challenges are both the building blocks and the glue that articulates, organizes, directs, tracks, and distributes resources and efforts efficiently. Business leaders may now focus their energies on the art of the possible. In this world, effectively managing complex ecosystems to leverage capital is the business competency that wins in the marketplace. Developing core and universal capabilities in creating new ideas, problem solving, communication, collaboration, and solution integration will become mission-critical as every opportunity is a challenge waiting to be solved. Finance managers, business development, program managers, and alliances all play elevated roles. This approach challenges major assumptions underlying existing business designs, including how you think about human capital, what assets do you own, and how much work can be externalized. In other words, this approach can dramatically impact underlying structure, headcount, and the balance sheet and, depending on the organization, the impact could be considerable. You will need to be intellectually honest by acknowledging most areas of the company are bloated and must become leaner and more agile. The temptation will be to take a traditional change management approach and to phase in elements and principles over time so as not to undermine the existing order, essentially the path of least resistance and the most likely to fail. Leaders must resist the temptation, making CDE a foundational strategy of the highest order and utmost urgency for the organization. And it may be the most significant impact this generation of business leaders will have on their organizations and the future.

Remaking a Culture

How important a factor is culture when it comes to implementing a new strategy? A client of InnoCentive’s who was reviewing an open innovation deployment plan for his organization said something so clear, succinct, and insightful that it stuck in our minds and we’ve never forgotten it. He said simply “Nice strategy. But in our business, culture eats strategy for lunch.” And he was right. Transforming an organization, particularly one that is largely comfortable with the status quo, represents an enormous undertaking and one we examine in more detail.

Wikipedia has the following to say about culture in general:⁴

In the twentieth century, “culture” emerged as a concept central to anthropology, encompassing all human phenomena that are not purely results of human genetics. Specifically, the term “culture” in American anthropology had two meanings: (1) the evolved human capacity to classify and represent experiences with symbols, and to act imaginatively and creatively; and (2) the distinct ways that people living in different parts of the world classified and represented their experiences, and acted creatively.

Although a bit abstract, the definitions applied to business are relevant. Corporate culture is the shared experiences and identity of the organization, and it is the foundation for expression and creativity. It is particularly interesting that leadership assumes you can make culture as easily as you define business strategy.

It is common today, even trendy, to talk about corporate culture and its importance to the success of organizations. We want to create winning cultures. We survey our staff and invest heavily in culture initiatives. Most will not admit to how little success senior leaders have had in harnessing culture effectively to create real business value much less changing or molding the culture.

Change Is Difficult

To be clear, culture can be made and engineered; however, the longer a culture has been in existence and the larger the organization, the greater its mass and inertia and the more difficult it is to transform. Great force must be applied to have significant impact on existing and entrenched culture. A large application of force may be applied or many smaller repetitions like small pushes of a child’s swing summing up to a large force over time. The former may be a CEO mandate, while examples of the latter may include training programs and employee culture initiatives. In actuality, both forms of force must be applied to really move culture, starting with the CEO. It is essential that each push on the organization is coordinated and drives employees in the same direction, making timing vital, just like pushes on a swing. The brutal reality is that most change initiatives will fail, not due to lack of resources, but due to lack of commitment, execution, and focus by the CEO and senior team.

As our organizations grew, significant bureaucracy developed to manage the complexity and scale of the business. Corporate culture impacts and is impacted by engagement at the top, middle, and bottom of the pyramid. Interestingly, the top may choose or even dictate a corporate culture, and the bottom may be more than willing to change and adopt with passion and conviction, but the midsection of the pyramid is the fundamental operating apparatus of the modern corporation. Mid-level management sets direction, compensation, and incentives, and has authority over the lion’s share of what happens in enterprises. Generally, these managers have created a status quo to their liking and may well prefer the status quo to the unknown. This helps explain why culture is so difficult to change in large businesses. Organizations instinctively resist change and mid-level management arguably has the most to lose.

Real Change Is Possible When Managed from the Top

When President Obama announced his open government initiative in 2010 as a follow-up to earlier campaign promises, many were surprised. He issued a presidential directive to all agencies in his control requiring them to submit detailed plans for opening up their processes and engaging U.S. citizens through use of technology and other means. He sent a clear signal and established the apparatus to ensure engagement by agency heads and administrators. Although still early, it is clear that U.S. government is moving toward the open model. W. Edwards Deming, famous for his approaches to quality and manufacturing, once said “You can expect what you inspect.” The message here is simple: Culture can be your greatest ally but is also the greatest threat to any change. Executive-level leadership is required, as is constant focus and attention to reinforcing the message, and a clear understanding and articulation of the stakes. P&G recognized it could not continue to grow without dramatic change. President Obama recognized the potential to reinvent areas of government to be more efficient, effective, and democratic (the case study subject in Chapter 9, “Leadership”).

Now we have said two things that may appear to be in conflict: first that organizations can drive their culture; and second, that corporate culture and mid-level management are enormously effective at resisting change, dooming most change management efforts to failure. But no contradiction exists. The reconciliation of the two realities is centered on the need for corporate change to be managed as a core strategy with CEO-level support and focus as well as actively managed and orchestrated programs to drive adoption, measure progress, and overcome barriers.

Empowerment and Communications

General George Patton once said, “Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.” This is a powerful lesson that many leaders know well. The CEOs must paint the vision, establish the incentives, unleash the organization to deliver on the mission, and hold everyone accountable. And then they must breathe life into the vision every day at every opportunity.

Personnel issues can be the most difficult for any leader in any organization. Get it right, and almost anything is possible. Poor leadership and failing to deal with the people issues has been the downfall of many a strategic initiative. Although the CEOs must be the visionaries, champions, and the inspiration for change, they must also bear the ultimate accountability and responsibility for the inevitable people implications. Being direct, honest, and purposeful in an open and communicative way can ease the tension of the organization. But make no mistake, some of these actions will be difficult.

Jim Collins, Stanford University academic and author of a number of highly influential business books, emphasizes that there are two kinds of employees: those whom you want on the bus and those you don’t. When the CEO of Procter & Gamble signaled in clear terms that change was coming in the organization and the need to be on the bus, he made it clear that some may not like where the bus is going. A CEO-led initiative to fundamentally transform a company in many cases requires a recasting of the leadership team and substantial adjustments in mid-level management. The uncomfortable reality is that many will need to exit the bus. The gentle pushing of the swing may simply not be enough and, for many organizations, may simply take too long. As business leaders, you are expected to make tough decisions and tradeoffs.

Talent Management 2.0

Talent management in a global and connected world is a rich topic requiring real vision and a global perspective. Understanding the impact of deploying CDE to sales, customer service, manufacturing, finance, and all areas of the organization requires business savvy, a thorough understanding of business economics, a relentless commitment to organizational excellence, and a firm hand. In the CDE, the consuming focus is on identifying the problems whose solutions advance the overall strategy and drive shareholder gains. Everything else is secondary. We must resource and connect the organization with people and capabilities to bring life to this approach. The HR function has been about managing employees, but will refocus now in ways they have not in past. It becomes the strategic owner of key elements of CDE and the tools needed to give the organization the best access to the talent in order to deliver against the goals of the corporation. This is a fundamental elevation of the role of HR in most organizations, and one for which the leadership in those roles today will often fall short.

Some organizations, if they have not already, may establish the office of Chief Talent Officer, whose responsibility is to ensure recruitment and identification, development and enrollment, and retention and engagement of all talent, inside and outside the organization. And to use those tools to maximize company performance with a particular focus on maximizing shareholder value. Organizations will seek to fill this role with a visionary business executive who will be charged with operationalizing CDE in true partnership with the CEO. In the New World, these executives will likely be among the most influential and capable executives in the organization and among the potential succession pool for future CEOs.

The Changing Nature of Work

The nature of work as you know it is changing rapidly. And labor markets are quickly moving to a freelancer economy, or a Free Agent Nation⁵ as described by Daniel Pink in his excellent book by the same name. While businesses today are suffering a recession worse than any in recent memory, and while U.S. unemployment rate has exceeded 10 percent, nearly 3 million jobs remain unfilled. Businesses are chronically unable to staff key positions, particularly in areas in science, technology, engineering, and math. The reality is that the best talent is more empowered than ever, emboldened by technology and the ability to work where and how they choose. So, businesses must not only organize themselves more efficiently to remain competitive, but must also compete for the best talent. And increasingly, that talent is not interested in becoming a full-time employee of yours or any company. To make matters worse, the current generation entering the workforce, the millennial generation, shares that same view of employment. They will have on average eight jobs in their professional careers. They don’t dislike the idea of full-time or lifelong employment, they simply choose to work when and how they want in an economy that gives them that the flexibility for the first time in history.

The changing nature of work will put additional stress on organizations designed to be operated as large monolithic institutions because these organizations have little experience managing talent outside of their employee base. The chief talent officer must think of real and virtual talent like a strategic supply chain. For example, consider Ford Motor Company that manages steel as a vital and scarce raw material whose availability and acquisition cost it cannot control. Because steel is its lifeblood, it applies sophisticated tools and methods as it actively manages its raw material supply chain. So the chief talent officer has two interrelated calls to action: He must drive the organization to an increasingly flexible and variable work model, while cultivating access to global talent, recognizing that any disruption in the supply line could wreak havoc on the business. Accessing the Long Tail discussed in Chapter 4, “The Long Tail of Expertise,” becomes a critical success factor for the business. This reinforces the strategic role of the chief talent officer as a vital player in enabling the Challenge Driven Enterprise.

The Role of Senior Leadership Is to Lead

Do not confuse commitment to effective people strategy, with commitment to every team member in the organization. The CEOs obligation is to the shareholders. As discussed, it is all too easy to ignore the long run in favor of the short run, namely protecting existing structures, people, and the status quo. Real change requires that some decisions will be unpopular. This is also why the CEO and the Board of Directors must be unified in adopting CDE principles. Leadership may change, other core strategies may change, and the organization may look very different. Virtualizing more and more of the enterprise will create agile, lean, and more dynamic organizations, boosting competitiveness and improving profits. Make no mistake; this will not be easy and will be unpopular to many.

In a survey of senior executives conducted recently by the Economist Intelligence Unit titled Global Firms in 2020,⁶ a number of results were quite striking. Respondents said that in the next ten years:

• 47% of respondents said the proportion of part-time workers would grow

• 50% said their organizations would be flatter than in the past

• 62% indicated there would be less job security

When asked which skills will be the most important to your organization’s success, the highest-rated were problem-solving skills at 42% and project management skills at 38%. Function-specific skills (for example, design and research) rated only 23%, near the bottom of the list.

And this is only the tip of the iceberg. There is no question that, intellectually, leadership teams know what their businesses must do to remain competitive. Now is the time to act.

The scale and magnitude of change needed for organizations intent on adopting this transformational approach need not consume senior leadership. And micromanaging change does not institutionalize it and too often ensures its failure. Becoming a CDE does require strong leadership. And traditionally, big projects require enormous overhead. So the conclusion, too easily made, is that the CDE requires a heavy hand and an enormous resource base dedicated to ensuring its success. Again, we assume that bureaucratic approaches are always the solution to minimizing risk of failure. There is no question that the whole of the enterprise will be impacted, but building a bureaucracy to eliminate a bureaucracy is not the answer.

The leader’s role is to set the direction of the organization while enabling the culture and leadership to execute on the vision. The right approach here is not to manage this transformation like implementing an Enterprise Resource Planning system (for example, SAP or Oracle). Rather, it is to energize and inspire change across the organization. President Obama did not develop plans for each of the agencies. He set the strategic direction, instructed government officials to remove barriers to implementation, and demanded plans from each of the agency administrators. The White House involved the private sector in learning sessions with government officials to ensure knowledge transfer to accelerate adoption. And at every turn, administrators and staff were constantly reminded that the President was personally invested in making this initiative successful. This is a powerful template for engagement. Lead and empower and, as General Patton said, they will surprise you with their ingenuity.

The CEO Conundrum

Growing great companies, delivering exceptional products and services, and creating wealth and value for shareholders are the charge of senior leadership. The essential truth is that maximizing shareholder returns over the long run is the singular goal that should matter most to the CEO and Board of Directors at the end of the day. Ironically, ensuring the best outcome in the long term and short term can be very much at odds, particularly with executive performance tied so closely to near-term company performance. It should be no surprise that thinking is so short term at most companies. And heavy use of equity and options does not eliminate the conflict. The reality is that optimizing company strategies for the short term often pushes company and CEO risk well into the future (and often to successors), while optimizing for the long term often pulls company and CEO risk into the present. Add to that the short average tenure of CEOs, and you realize the depth of moral hazard at play.

The CEO conundrum is this: Senior leaders and Boards of Directors are the stewards charged with maximizing shareholder returns over the long run. Yet when faced with making strategic decisions, their safe choice is too often the short-term view. Often it is only when their company is at the precipice, fighting for its survival, that the leadership is truly incented to make long-term decisions, and by this time it’s often too late.

This conundrum is particularly acute in industries like pharmaceuticals and automotive where planning and capital commitments may span decades. When average CEO tenures are shorter than planning horizons, what is the incentive for leadership in these industries to champion significant evolution in the design and structure of their organizations (such as fundamentally changing the ratio of fixed to variable labor or choosing not to invest in another factory)? CEOs agonize over such decisions, and for the vast majority, implementing fundamental change is seldom contemplated seriously. Tragically, the U.S. automotive industry had to be on the brink of extinction to drive any real change.

As twenty-first–century competitive pressures mount, too few companies recognize how quickly they are approaching the precipice and that their own businesses designs (yes, the ones that served them so well in the twentieth century) will be the means of their own destruction. At precisely the time these companies need to be investing in the future and remaking themselves to compete effectively, their leadership is falling short, failing to make the tough decisions. CEOs must recognize that their companies already are or may soon be fighting for their very survival and that the best long-term strategy is a short-term imperative to reinvent themselves to be lean, virtual, open, and innovative. Leaders that fail to act are putting their businesses at great risk. Conversely, those leaders who act soon enough may create tremendous opportunity to lap the competition and to dominate their spaces well into the future.

The CDE will provide a roadmap for engaging in this journey to remake the organization, and leadership will require every tool in their arsenal.

Make This Your Mission

As mentioned and reinforced throughout this book, the CEO’s role is to build a great company to deliver excellent products and services that meet the needs of customers, and most important, to deliver outstanding returns to the shareholders. We live in a dynamic global economy where products are delivered at a breakneck pace, where new business ideas can go from concept to scale overnight, and where shocks to the economy can result in the destruction of companies previously thought too big to fail. Competition is fierce. Companies’ designs are rooted in the bureaucratic form that emphasizes scale over flexibility. However leadership has an obligation to look out 10, 20, even 30 years. And in too many companies and industries, the easy decision continues to win out over the right decision. However, businesses are at a breaking point as the business landscape is evolving quickly and is unforgiving. The spoils go to the winner. Businesses and their leadership teams must now act.

CEOs have a unique opportunity to set their companies on a new path. CDE is a transformative vision of how innovative companies should operate in the twenty-first century, in a world that is global, networked, and fast-paced. Lou Gerstner reinvented IBM. A.G. Lafley set Procter & Gamble on a new course.

The contrarians will argue that shareholders have set the focus on quarterly earnings and performance in a way that discourages any form of risk-taking. They will argue that some changes are too big, and the company success in the past is the best predictor of success in the future. They will argue that no organization, its CEO, or Board of Directors would rationally consider a transformation of this magnitude, unless collapse was imminent. It would be naïve to assume this course would be easy; however, most shareholders will buy into a vision and allow CEOs and leadership teams the latitude to execute on bold visions to create value. It’s the lack of vision and forward thinking from the CEO and Board of Directors that is lacking, not the appetite to invest in the future. As we’ve said, the Challenge Driven Enterprise is a long-term strategy and vision. It is a transformation disguised as a program. And it is a unique opportunity for business leaders to leave a truly lasting legacy.

The next chapter provides a “playbook” for initiating the Challenge Driven Enterprise in your organization that we hope will provide not only a general set of tools as well as a common language, but also the basis on which begin to put thoughts into action immediately.

Case Study: Virtual Software Development: How TopCoder Is Rewriting the Code

As quoted in this chapter, General George Patton said, “Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.” TopCoder, a $20 million software developer, has done just that, using a challenge-driven approach to deliver code faster, cheaper and, most of all, better than traditionally organized companies can on their own. A testament to TopCoder’s quality is that organizations such as Eli Lilly and NASA have hired TopCoder for their projects.⁷

Here’s how TopCoder does it: TopCoder has nurtured a community of more than 250,000 software developers who provide the basis of TopCoder’s on-demand “workforce.” These coders are not TopCoder employees, and they don’t work on salary. Instead, TopCoder organizes the coding work into challenges, each with a specific end goal. TopCoder announces the challenge, the goal, and the winning prize money that will be awarded to the top two solutions. The solutions are evaluated by a panel from the community. Usually, the contributed code is tested by the community in a separate challenge, with winners in that challenge being rewarded for “breaking” the code.

Programmers can enter any challenge they chose and deliver their code. So who would want to do coding for free, on the chance of being one of the two prize winners? The answer, simply put, is “the best coders.” TopCoder founder Jack Hughes is a coder himself, and he knows what motivates software developers. “I started as a programmer,” he says, “and I knew that good developers love to compete and compare and learn from each other.”⁸ Only the top two winners get prize money, but every contributor gets feedback on their code⁹ and TopCoder tracks and posts a host of metrics on each member, including contests entered, quality, reliability, and amount won. The best coders love coding—it’s their hobby and passion, not just a profession. “They work partly for fun, and for their professional and social networks,” Hughes said.¹⁰ In short, developers love to show their peers how smart they are and compete with each other to develop the best software code.

Besides peer motivation, the prize money (often tens of thousands of dollars) is set by the market as well. If TopCoder isn’t getting as much participation in a challenge as it wants, it increases the prize money.

TopCoder also excels at setting the specifications for each challenge, namely breaking the task down into a series of discrete components that are easily communicated and can be assembled together. Getting the modularity right is essential so that programmers can participate in the challenges during their spare time. Good programmers are in short supply, and of the 250,000-strong TopCoder community, 5 percent to 10 percent participate regularly. “We provide an on-demand, variable workforce,” Hughes says. “These are people who have excess capacity, are between jobs, or want intellectual stimulation. Their incentive can be financial, community, or recognition.”¹¹ The challenges have specific start and stop dates, although the time that a developer spends on the task is never tracked. “We don’t care about that,” Hughes says, “the focus is on quality.”¹²

Orchestration of the work remains an important TopCoder function. Complex software code must be broken down into manageable modules and coordinated. As Jeff Howe, author of Crowdsourcing and credited with popularizing the term, said, “Someone needs to be calling the shots saying ‘OK you guys work on this, OK now there’s a new contest and it’s to test this winning code to see who can break this winning code’—someone needs to be setting these sorts of tasks. It’s not so much that the crowd can’t perform complex tasks, but it is the case that someone needs to be running the show; someone needs to be breaking down the problem.”¹³

TopCoder has attracted top programmers to its community. Naturally, other companies have eyed the community as a source for their own new hires. Pharmaceutical giant Eli Lilly was one of those firms. But the power of the TopCoder model is the diversity and flexibility of its workforce, not just one or two members. “We realize that [TopCoder] is truly a network of top programmers and also a very scalable way of delivering solutions where we don’t have to own every piece of the puzzle. We can still leverage all the expertise for just the pieces that we need,” said Everett Lee, manager of discovery research IT at Lilly.¹⁴ Lilly realized it was easier to tap the network, especially for large projects, than to try to create the network by hiring parts of it for its own staff. In addition, TopCoder spent three years at the outset developing and nurturing the community before it used the community for any client work. “They spent years and they served the community first.” Howe said. “What will the community think is fun? What do our people like to do? Our people like to compete. Our people like to see who’s the best coder. They like to play games with each other,” Howe said.¹⁵ TopCoder succeeded by investing the time to understand and nurture the community.

Transparency is another critical success factor. “Volunteers will not accept secrecy, game-playing and favoritism,” write Julian Birkinshaw and Stuart Cainer in their study of TopCoder for MLab. “So TopCoder plays it straight: The amount of prize money, and the rules of the game, are defined upfront. During competitions, if one developer asks a question, all of the developers see the answer. Peer review, rather than the judgment of TopCoder’s executives, is the basis for any subjective evaluations that are made in the competitions.”¹⁶

In the end, TopCoder’s on-demand workforce model gives it access to the best talent combined with a flexible cost base. The orchestration of the work includes building a library of “reusable Java and .Net components that it uses to supplement developer efforts. Its members compete to produce the best code for the catalog, and winners continue to get paid royalties every time the code is reused.”¹⁷ The transparency sustains trust. The result is that TopCoder claims that it can produce applications in 100 fewer days than industry norms, at half the cost, and at least twice the quality (based on the ‘constructive cost model’ aka COCOMO, a common software-development benchmark).”¹⁸

In true network design fashion, Hughes said that from the beginning he knew he wanted to approach software creation as a discipline. “The key to quality,” Hughes says, “is to avoid monolithic systems in favor of component-based systems.”¹⁹