Continuous Improvement Through Learning: Run-Transform-Innovate
Anyone who has never made a mistake has never tried anything new.
—Albert Einstein
Service Thinking embraces continuous improvement in service quality and service productivity. Customers are continuously searching for the best providers of top quality service experiences, and linking and delinking providers in their service system, aiming to better meet their goals or to do so with greater efficiency. Providers are continuously refining and elevating their value propositions in order to establish or maintain absolute advantage relative to competitors. They do so either via internal specialization, always adding to their specialized knowledge, or via external specialization, identifying specialists who can provide services more effectively or efficiently (perhaps innovative new start-ups), freeing up internal resources to further improve the value propositions that the producer’s modularized business components are best at.
This continuous dynamic swirl of improvement can be a challenge to manage. It requires a culture that embraces the demands of continuous improvement stimulated by externalities—the preferences of the customer and the dynamic changes of the category and the market. And it requires a governance model that can allocate resources appropriately for an environment of continuous, dynamic, and occasionally disruptive change.
The New Governance Model
Such a governance model is rare in business. In fact, the norm is the opposite—favoring asset allocation and investments in maintaining the status quo. Geoffrey Moore eloquently and accurately identified the problem as “escaping the pull of the past.”1 The overwhelming tendency is for companies to focus their investment, effort, and people on maintaining the businesses that can reliably and predictably deliver quarterly revenues, margins, and earnings. Salespeople, marketers, operations, IT, finance, and all the major enterprise engines are dedicated to making those numbers with proven businesses, products, and services. Innovation tends to be underfunded and quickly abandoned if it does not deliver current period revenue and profit increments.
The result can often be stagnation (stuck in the same place in low growth markets) or even corporate failure—the enterprise is disrupted, surpassed, and replaced by an innovative solution from an unexpected source. Kodak is a prime example—a former industry leader that did not anticipate the full impact of the digital photography revolution and could not escape the pull of its historical highly profitable business model.
Service Thinking, properly applied, enables enterprises to escape the pull of the past. There are three reasons why:
1. Service systems have an inherent natural energy of continuous improvement. The service customer is continually asking, “How can I make my service experience better?” The customer evaluates all the service components in the service system in this light. If there is a constraint to greater productivity or service quality in the service system, the customer seeks to solve for that constraint, and works with the incumbent partner to co-create a resolution, or finds a replacement partner to co-create a new solution.2 This energy is constantly flowing through service systems. Current providers and new aspiring providers are highly incented to improve.
2. Service Thinking uses analytical approaches to assess the opportunities for improvement in the service system, giving the service provider a tool to assess the current value proposition and identify the opportunities for new value co-creation. We’ll visit these tools in more detail in Chapter 8. The continuous improvement energy in the service system can be measured with the right analytics. The essence of the approach is continuous learning: running frequent experiments to learn how customers respond to new or enhanced value propositions, and rapidly transitioning to expanding the propositions that meet with the customer approval.
3. Because co-creation of value is the operative norm in service system productivity, the service provider and service customer are equally and effectively bound together in both the identification of service improvement opportunities and the innovation path to realizing the improvement. Both must analyze their constraints, both must make changes to achieve the improvement goals, and together they must collaborate; otherwise, new value will not be co-created. This symbiosis of service productivity is the reason why service science promises to achieve a new level of global productivity and value creation growth.
The enabling framework is in place but, as Geoffrey Moore would say, that in itself does not result in an escape from the pull of the past. Service systems require a governance model to guide investments to support the enabling framework; the model is Run-Transform-Innovate.
Run: Do More with Less
The first principle is to continuously free up investment from the task of maintaining and sustaining current operations and businesses. Efficiency in delivering proven value is the goal. This is not where new value is created, but the current value can be delivered at lower cost, with fewer people and fewer assets. The most ruthlessly competitive firms are continuously squeezing costs out of “Run” to transfer capital to “transform/innovate.”
Transform: Enhance with Elevated Value Co-Creation
While the value co-creation level delivered via current operations and businesses can be maintained at high efficiency by doing more with less, improvement in quality and effectiveness is required to stay competitive. The continuous improvement energy of the service system means that businesses that are merely efficient will fall behind the ever-evolving standards of the service system. The Transform function is one of best practice adoption, constantly scanning the service system for emerging service improvements and adopting them quickly and applying them at Glo-Mo-So scale. In this mode, the enterprise is implementing the innovation of others for the good of the service system as a whole.
Innovate: Disrupt and Replace via New Value Co-Creation
Innovation is the creation of new value through new-to-the-world best practices and new-to-the-world solutions. It is high risk, and successes may be rare. However, the rewards in revenue and profit growth are substantial. Based on a study by Robert Litan, Vice President of Research and Policy at entrepreneurship-focused Kauffman Foundation, if 30–60 innovative, high-growth firms were launched every year in the United States of America, there would be a one percentage point increase in economy-wide GDP.3
The R-T-I Ratio
Leading practitioners of the Run-Transform-Innovate (RTI) governance model pay close attention to the ratio of the three components. Early in the decade of the 2000’s, IBM’s IT organization significantly shifted the percentage of its budget allocations; they reduced the allocation to “Run” by 10%, and shifted the freed-up resources toward “Transform and Innovate.” The baseline was an analysis that the company was spending 73% of its IT budget on keeping systems and services running, and 27% on transformation/innovation. In 2009, the ratio was 63% allocated to “Run” and 37% to “Transform/Innovate.” The goal is now to shift a further 2% from “Run” every year.
Some basic principles were applied to the job of run efficiency. One was simplification—for example, an organizational shift from 128 business CIOs to 1 enterprise CIO, and a reduction in applications from 15,000 apps to 4,500. Another was centralization—for example, consolidating 155 data centers into 5. Additional areas of cost reduction range from energy savings to business process simplification. The capability to massively reduce “Run” costs enables the shift of investment to “Transform/Innovate.” IBM business managers have become highly skilled at operating on a 5% reduced budget compared to year ago—a massive contribution to the innovation success of the company. Reduced operating budgets and “Run” efficiencies become the norm and are embedded in the culture.
This also creates the opportunity for organizational innovation to play a bigger role. In addition to the “Run” organization that’s responsible for keeping systems running smoothly at lower cost, IBM’s IT department includes a “Transform” team focused on business process simplification and business transformation through the adoption of new best practices, and an “Innovate” unit that pursues new value-creating technology initiatives. The Transform and Innovate teams are empowered by the efficiency advances of the Run team and the R-T-I ratios can be shifted by a collaborative effort between the three teams.4
Geoffrey Moore cites the example of Akamai to illustrate the power of applying the R-T-I model. Akamai runs a network on top of the Internet to dynamically route and reroute traffic in order to minimize A-to-B point delays. In 2006, the company had an established core offering in the form of its content delivery network and an emerging technology platform called EdgeSuite used to accelerate interactive applications such as e-commerce. It was hard for the new technology to escape the investment pull of the dominant content delivery business.
To create the environment for change, Akamai reorganized from business units based on technologies to market-facing units built to serve vertical categories such as media and entertainment, and retail commerce. Then it regrouped its initiatives to align with the vertical categories, in a way that enabled the EdgeSuite technology to flourish. Content delivery was the core business (equivalent to “Run”) and was particularly appropriate for the media and entertainment vertical. Two new businesses represented the “Transform” initiatives, based on the EdgeSuite technology: Dynamic Site Acceleration focused on serving retail commerce customers, and Web Application Acceleration focused on serving enterprise CIO’s supporting remote mobile applications running over the public Internet. A third new business based on a novel technology (“Innovate”) focused on serving advertisers seeking better yields from web-based campaigns.
With these new initiatives appropriately organized into R-T-I groupings and aligned with target verticals, Akamai was able to direct investment to shift the R-T-I ratio. The result was growth in the new businesses which, combined, eventually surpassed the total revenues in the core content delivery business.
Similarly, IKEA’s supply chain management boasts a number of operational (i.e., “Run”) efficiencies. For example, the company reduced transportation costs and enhanced transportation capacity by implementing best practices like flat-packed products. Flat-packed benefits included not only increased storage capacity in warehouses, but also reduced construction costs and reduced inventory losses through damage, as per a business essay on UKEssays.com.5 Operational efficiencies were also introduced through the implementation of a “Demand Planning” and “Replenishment Planning” platform (“Transform”). The implementation helped IKEA in quicker and more accurate decision making and forecasting, besides a significant reduction in inventory carrying costs.
Burberry Group PLC is another good example of the breakthrough growth opportunities that become available when cost-reduction from operational efficiencies (“Run”) are invested in transformative innovation. It is among the most efficient in its industry at managing inventories, with only 183.23 days of cost of goods sold tied up in inventory, compared to an industry benchmark. The retailer invested 60% of its annual marketing budget in becoming a digital brand, connected with its consumers across all devices (“Innovate”). In 2012, for the second consecutive year, the brand earned the No. 1 spot in L2 Digital IQ Index®: Fashion. One of its innovative strategies includes offering digital product customization for its customers via its microsite “Burberry Bespoke,” shareable across social media channels like Facebook and Twitter. Multichannel strategy is emphasized via digital in-store integration. Some Burberry merchandise now carries RFID chips for customers interested in more information and full-length screens at its Regent Street store in London stream visual content while doubling up as mirrors.6
Commenting on Home Depot’s acquisition of Black Locus, a start-up that develops pricing and other algorithms to help retailers optimize their web sales, Hal Lawton, SVP at Home Depot, made a clear statement of the R-T-I principle. “Gone are the days where we’re building 50–200 stores a year,” he said. “We’re shifting that capital to technology that can help us advance our business at a much faster pace.7”
Mayo Clinic is another good example of R-T-I. Mayo initiated learning about the transition to a paperless system by implementing a hospital management software from an obscure vendor, Cerner. By 1998 the clinic had entirely eliminated paper from its out-patient department. Mayo spent $16 million on medical practice automation over the first 5 years of operation and has realized savings of $3 million to $7 million annually thereafter.8
Transforming Government with R-T-I
Federal, state, and local governments are realizing that they have the same opportunity to run more with less.
Craig Newmark, founder of Craig’s list, is a keen champion of e-government and e-citizenship. He has noted some of the changes in government operations that incorporate many of the Cloud-based best practices, including specialization and integration, we have been advocating for enterprises. Here is what he has to say about VistA:
VistA is the Department of Veterans Affairs health record system, and it’s been a huge success. VA has open sourced it, which is a remarkable achievement for Washington, a really big deal. It means that anyone can improve it or interface with it. Check out the Challenge.gov VA Medical Appointment Scheduling Contest
What they’re now saying is that the Department of Defense is considering a health records system, and that VistA should be considered for that.
That sounds right to me, it gets the job done, has been working well for years, and is already available publicly to better help veterans. That means people can find ways to add function to better help active service troops.9
The expanding adoption of R-T-I may be the opening market opportunity for many entrepreneurs and specialists, who might think that large multinational corporations and governments are too rigid and cumbersome to be open to innovation, to apply for contracts to serve the larger customer base these entities can offer.