This special Podcast is brought to you by Barclays Africa, and John Hagel, whoâs with Deloitte, is here, with Singularity University giving some updates to South African businessmen. They gave a fabulous presentation yesterday, which weâre going to get into in a moment, but you obviously know the co-founders, Peter and Salim, of Singularity pretty well. I see you were mentioned extensively in Salimâs book.
Yes, Iâve been great admirers of their efforts to try to build broader awareness of exponential technologies to the business world. I think itâs a very important mission.
Now, what got you into focusing on the area, the whole area of exponentiality (you gave us a lot of examples, which Iâm going to tap you on in a moment), but where did you get into that area in your own research?
Well, itâs been a long journey. I actually came out to Silicon Valley 35 years ago, to do a computer start up, and I had a complete liberal arts background. I had no computer experience at all, and even at the time, 35 years ago, I was seeing year-to-year, dramatic improvements in the technology. I said, âthis is something to pay attention tooâ, and Iâve been following it ever since.
So when did you get exponentiality?
It was literally within a couple of years, in 1980, early 1980âs because you were looking at chips and the exponential improvement and performance of computer chips. Now, at that time, it was just limited to computers. Now, weâre seeing this exponential trend occur in more and more technologies, over time.
Are you an investor?
Oh, yes.
Because thatâs been the âholy grailâ for investment thinking, not understanding exponentiality but those who do, early on have done terribly well.
No, absolutely, so itâs a key indicator for me of investment potential, is what technologies are they harnessing and do they truly understand the exponential capabilities of these technologies and building appropriate business models around them.
But how do you, when youâre assessing a potential investment, save, (weâll just come from that angle)? How do you decide whether a company is exponential or not?
Itâs really ultimately about mindsets of the founding team. The extent to which the founding team really has the sense of the pace of improvement in the technology, and also the extent to which they are looking ahead, in terms of âwhatâs the relevant market going to look like ten to 20 years from nowâ? As opposed to just focusing on âwhat market can we address todayâ? Obviously, you have to have both. You have to have something thatâs going to be bought today, but position yourself for whatâs really going to be needed in ten to 20 years from now.
And you donât have to be a start-up, Li and Fung.
Li and Fung is one of my favourite companies. I think itâs a very old Chinese company, in the clothing and apparel industry and, basically, whatâs intriguing about them is they have mastered a set of management techniques to coordinate very complex business activities across a very large network of 15 thousand business partners around the world. They actually use relatively little technology. Their focus has been on âwhat are the management practices to manage rapidly expanding networksâ? That have that kind of exponential network effect, as well. Real power comes from when we combine those kinds of management techniques, with the technology platforms that are exponentially advancing as well.
You mentioned the name of Bill Joy, and you said that he inspired you a great deal.
Yes, Bill Joy, was one of the founders of Sun Microsystems in Silicon Valley, and he once made an observation that has always stood by me, which is he said, âNo matter how many smart people you have within your organisation. Just remember there are a lot more smart people outside your organisation, and if youâre not working to connect and learn from those smart people, beyond your organisation, youâre never going to learn as fast as those who do, so donât get siloâd by those who do. So donât get siloâd by just the four walls of your enterprise, and focus on the smart people within the enterprise. Find ways to connect and learn more broadly.â
And itâs so much easier today than in the early 80âs, when you got going.
No, exactly, it was a real effort and even with a lot of effort, it was very hard to do it on a global basis. Today, again, with the digital technology infrastructures, you can truly connect to smart people wherever they are, and build relationships, where youâre both going to learn faster.
One of the things that was particular interesting about your presentation was that even banks can change.
Yes, exactly, thereâs a sense that because banks are such traditional institutions they have so much regulation. That it is really very challenging and maybe even impossible for a traditional bank to go through a transformation. I talked about the example in the U.S., thereâs a company called State Street Bank, which was founded back in 1793, so by U.S. standards, at least. Theyâre a relatively old bank and back in the 1970âs, because of some changes that were going on in the banking industry. They ended up transforming. They started in most of their history, was as a very traditional retail branch. They had branch banks, and took deposits and gave loans but because of increasing pressure, they decided that they had back office, transaction-processing capability. That would be very valuable to other banks. Smaller banks who didnât have a lot of expertise in that area, and they started renting out their back office to these other banks, and within a relatively short time, the demand for that grew so much. It became their core business and they basically, shutdown their retail branch bank operations. It was no longer as profitable or as interesting as this new business that had emerged from within.
Itâs a fascinating process. You also said that itâs fairly political and particularly, when youâre talking about big corporations needing to change.
Yes, Iâve been involved in large-scale transformation of traditional organisations for a long time and the one thing Iâve taken away from it, is an extraordinary respect for the immune system, of large institutions. They are very adept at identifying potential change threats and crushing those threats as rapidly as possible.
How do they do that?
Well, typically, they donât do it in direct confrontation. One of the things that makes the immune so effective is they do it behind the scenes. They donât do it public meetings, where they challenge the executives, who are wanting to change. They wait until the meeting is over, and then they come together because they know other executives are also going to be threatened by this, and they conspire to figure out how to undermine the process of change.
How do you fix that? How do you, as the executive who wants to change things, identify those antibodies?
Yeah, well I think part of it is recognising theyâre there, even if you canât see them in the meetings but then, adopting a set of practices. We call it scaling edges, which avoids confrontation with the core part of the business, so it avoids confrontation with the immune system, but simply goes off, on the edge of a company and identifies an area that can scale very rapidly. To the point where it could become the new core of your business, and rather than trying to push that edge back into the core, over time, as the edge scales, you want to pull more and more of the people, in resources, from the core out to the edge. As they start to see the opportunity thatâs being created there. Theyâre more willing to join the ship. Than if, youâre saying âno you have to change todayâ.
I guess we all need to go through various processes before we change, and this would be a less disruptive way of doing it, within an organisation.
Exactly, and I think part of it is just recognising. You know, psychologists have done a lot of studies of how we react to mounting performance pressure, and itâs a very human reaction. Unfortunately, it can be very dysfunctional, but we tend to become very risk averse. We tend to be very suspicious of other people, and so thereâs a whole psychological dimension that I think needs to be understood, if youâre serious about driving change. How do you address those psychological issues?
Yes, but youâve got to find an edge first. Youâve got to find the right business that isnât going to fail, otherwise, I guess, the âchange agentsâ or the antibodies would get even more ammunition.
Exactly, and thatâs the key challenge is being a, but I think the good news of all this exponential technology and the changes that are going on in the business world. Is the ability to scale businesses today, is dramatically greater than it was ten to 20 years ago, and so if you picked the right edge, you can scale it to the point where it is actually realistic to say âit could, very quickly, become the new core of your businessâ.
But the edges, do you have a number of bets on the table or do you try and identify one particular edge that you think will win?
Typically, from our experience, the winning approach is to pick an edge, in the sense of a broad business arena or opportunity, and then do a lot of experimentation within that edge, so youâre not just saying âthereâs one way inâ. Youâre saying âthere are multiple approaches that we need to pursue in order to figure out which one is going to give us the greatest potential but itâs on this edgeâ. This is the edge.
It reminds me a little bit about, in the Steve Jobs biography, where Walter Isaacson talks about him establishing a unit of pirates, and they even had pirate flags around there. Is that what an edge should look like, within a big corporate?
Yes, I think that in Steve Jobs case they had the benefit of the CEO of the company actually being their sponsor, so they could be even more, kind of aggressive or blatant about the piracy that they were pursuing. Often these scaling edges initiatives may not even have the support of the CEO. It may be a Senior Executive but not the CEO. In which case it is probably better not to be quite as âin your faceâ, with the pirate flag as these edge players were at Apple.
John, just for an overall kind of assessment of this, how many of the companies get past the immune system, and are able to change, in your experience?
Well, I would say, in terms of pursuing traditional approaches to change. The academic studies say anywhere between 70 to 80 percent of efforts to transform a traditional business fail. So the failure rate is extremely high. Now the scaling edges approach is a relatively new approach, so not a lot of good evidence at this point, in terms of numbers, but thereâs certainly interesting examples you can point to, of companies that are pursuing and succeeding with these scaling edges initiatives.
I guess the inability to transform would also correlate with how many Fortune 500 companies are not around anymore. That were on the list ten to even 20 years ago.
Yes, thereâs a great study that was done by a former colleague of mine, Dick Foster, who looked at companies in the U.S. that made it to these Standard and Poorâs 500, the most successful companies in the U.S. Back in the 1930âs, if you made it onto that you would have about a 75 year life, on that list, so you were pretty much set. Today its 15 years, so thereâs been an 80 percent reduction in the lifespan of the most successful companies in the U.S. At the same that our human lifespan is dramatically expanding, our corporate lifespan are shrinking.
John, as a person who understands exponentiality, as an investor yourself, can you give us some insights into the kind of companies that you think we should be putting into our portfolios as a long-term bet? Uber, Airbnb, well they arenât listed yet, but are those the kind of companies to go for?
My daughter works at Airbnb, so I have to be a very enthusiastic supporter of that venture. I do think they have great potential. I think that, actually the biggest opportunity right now is, still on the edge (if you will), but itâs an opportunity to become, what I call âthe trusted advisorâ. As individuals, weâre just overwhelmed with more and more choice. More and more change, and having somebody who knows us really well, who can be a trusted advisor, not just to wait for us to ask for something, but to reach out and say, âBy the way, you havenât asked about this but you really might want to consider it.â I think that opportunity, today, is only available to the very wealthy, your wealth manager or your personal shopper. With technology the ability to take that kind of insight about the individual and drive it to the mass market and make it really affordable to virtually anyone is, I think, a very interesting opportunity.
What would that be, in medical, in financial, any specifics?
It can start in many different arenas. I think certainly, financial and medical are two of the most promising areas, because thereâs certainly a sense of, again, more and more change, and more and more need, to keep abreast of whatâs going on, and find out whatâs really most relevant to me. Whatâs interesting is, even though they might start in the specific areas. Ultimately, my value to you, as a trusted advisor, is the more I know about you, the more helpful I can be, so if I just know your financial aspects, I canât be as helpful to you as if I also know your health situation, and combine that with your financial. Then maybe combine that with your family needs and aspirations, so having that holistic view of the individual, ultimately, is, I think going to drive the true value of the trusted advisor.
John Hagel is with Deloitte and this special Podcast was brought to you by Barclays Africa.
