Rod Collins's Blog, page 19

Four Ways Payers Can Optimize Exchange Plans And Operations Portfolios in 2014

By Bryant Hutson

 

On January 1, millions of Americans received new health coverage when the health plans sold on the exchanges mandated by the Affordable Care Act became effective.  As health insurers prepared for this historic date, regulatory compliance has served as a major theme in formulating corporate strategy and building operations for health plans over the past few years. 

Because payer organizations were preoccupied with digesting multiple rounds of regulatory releases and interpretations to prepare for 2014, they were understandably focused on meeting minimum compliance thresholds as they designed, priced, and filed new exchange plans.  At the same time, they stretched their resources to prepare back office operations for new capabilities and processes.  Unfortunately for many payers, ever-changing requirements meant 2013 was a year when workarounds became commonplace as process discipline took a back seat to regulatory compliance.

In 2014, the strategic and operational focus for payers will begin to shift dramatically.  High performing organizations will move beyond compliance and will redirect their strategic focus to evaluating the new membership and competitive landscape.  At the same time, payers’ operational focus will move to improving newly created IT capabilities necessary to support post-reform plan design and management, automating manual processes used to quickly achieve exchange compliance as new products are developed, and validating quality of exchange contracts and products quickly filed and built in the months before the exchanges opened.  The Affordable Care Act’s medical cost ratio mandates have increased pressures to reduce administrative costs.  Payers can begin to realize cost savings by focusing on four key areas to quickly identify and improve exchange plans and operations in 2014. 

Employ Early Exchange Enrollment Analytics to Improve 2015 Plans and Identify High-Risk Members

Although health insurers have received some high-level demographic data from exchange enrollments in the fourth quarter of 2013, the most valuable medical and pharmacy claims data will begin to arrive in January 2014.  Only when they receive these claims data will insurers truly understand whether they have enrolled high-risk or healthy individuals.  Insurers will see pharmacy claims for patients with chronic conditions very early in January as well.  Claims received in January will help to show the mix of disease states of high-risk members and demonstrate the level of pent up demand from previously un- or under-insured members.  Medical management teams can use early claims data to rapidly identify candidates for engagement programs and focus on cost-effective delivery of care.  And most importantly, early analytics will help actuaries digest claims histories as they begin setting appropriate rates for the 2015 plan year.

Find a Permanent Home for Exchange Operations in Your Organization

Many health insurers have treated their health reform and exchange programs as one-off corporate initiatives or special projects.  The uncertainty surrounding health reform leading up to the Supreme Court’s recent decision further separated these initiatives from traditional operational areas.  Now that the Affordable Care Act is the law of the land, health insurers can begin integrating these exchange operations into traditional functional areas such as marketing, contracting, compliance, claims, and customer service to recognize operational economies of scale.  Insurers can use this time of organizational redesign to not only fold in exchange operations but also build a business case for process improvement opportunities as enrollment, customer service, and claims volumes increase.

Automate Business Processes and Improve IT Capabilities Developed for Exchange Compliance

With significantly compressed requirement definition and application development timelines, many payers chose to only develop or remediate the bare minimum functionality necessary to build, price, file, and sell new products on and off the exchanges for 2014.  Furthermore, the ever-changing nature of federal plan filing templates in 2013 meant that most filing activities across carriers were completed manually.  While this extraordinary effort worked in 2013, carriers cannot rely on the error-prone nature of manual filing in future years.  Health insurers can use 2014 to further refine and build out functionality for plan management as the number of regulatory releases slows and eventually stabilizes.  However, IT capabilities used for product development and plan management should allow for future flexibility as regulatory changes will continue to occur through 2020.

Ensure Quality in Exchange Plan and Benefit Administration

In 2013, insurers across the country raced to create, build, and educate staff on brand new exchange plan designs.  For almost all insurers, these newly designed plans look very different than traditional medical products.  For example, new exchange medical plans contain ancillary benefits like pediatric dental and vision, adjudicate with cost sharing reductions for essential health benefits under the Affordable Care Act, and cap members’ maximum out of pocket costs.  The complexity of these new products and the rapid pace at which they were built present a prime business case for contract audits and claims payment accuracy review.  High performing organizations will constantly review claims paid in 2014 to ensure the application of sound payment rules and correct core payment system logic quickly as errors and defects are found.  Health insurers can also increase employee knowledge of new plans by continuing to educate customer service and claims administration staff of plan and benefit changes throughout 2014, and ensuring all policies and procedures have been updated to reflect those changes as well. 

 

Bryant Hutson is a Senior Associate based in Optimity Advisors’ Washington, DC office.  He is an expert on the Affordable Care Act and has served leading health care organizations as they develop strategy, design products, manage plans, train employees, and optimize analytics for succeeding in a post-reform environment.

Organizational Excellence Is About Being Perfect Together

by Rod Collins

 

The effective large organization is one of the most important human accomplishments. There are few greater satisfactions than being part of an effort that makes a contribution and a difference that none of us could do alone. If we want of be part of something extraordinary, we usually need to partner and work with other people.

When organizations work well, they allow ordinary people to do extraordinary things. That’s because they can be powerful vehicles for combining our strengths in a way that makes the whole far greater than the sum of the parts. As individuals, each of us brings both strengths and weaknesses to the group effort. The special power of highly effective organizations is they render our weaknesses insignificant by combining only our strengths and creating collective excellence. As long as there is a diversity of strengths, each of us can do what we do best and not have to devote either time or worry to the things we don’t do well. Perhaps that’s what the late Peter Drucker had in mind when he observed that the unique purpose of an organization is to make strength productive.

The wonderful thing about effective organizations is that we do not have to be individually perfect to succeed. We just have to be perfect together. Thus, the closest most of us ever get to perfection is when we mutually experience the benefits of each other’s strengths. Unfortunately, few workers experience this level of human engagement because most organizations are not designed to make strength productive. Perhaps that explains why, in Deloitte’s most recent Shift Index report, they found that only 11 percent of people are passionate about their work.

The typical organization is not designed to leverage collective strength. Instead, it’s built to leverage individual intelligence. Most business leaders continue to ascribe to the belief that the smartest organizations build top-down hierarchies and give the people at the top command-and-control authority over the people at the bottom. They assume when hierarchical leaders give directions to the rank-and-file, the employees will behave smarter than they otherwise would on their own. When the prime value of an organization’s operating system is compliance, it’s not surprising that few workers experience passion in the workplace.

However, the danger with leveraging individual intelligence is that nobody is perfect. Everyone has weaknesses as well as strengths. When companies are organized to leverage individual intelligence, the individual weaknesses of senior leaders become problematic—and sometimes even fatal. Perhaps, this explains why the traditional focus of performance appraisal tools has highlighted not only strengths and accomplishments, but also key weaknesses, which are usually referred to as opportunities for improvement. These supposed opportunities often become the prime emphasis of the appraisal process. That’s because when the few have the power to shape the work of the many, we can’t afford for those few to have any weaknesses. Striving for perfection is viewed as an individual phenomenon.

Unfortunately, individual perfection is an unattainable pursuit. While we can perfect our strengths—whether it’s athletic ability, a knack for numbers, a beautiful voice, or the gift of persuasion—very few, if any of us, can perfect our weaknesses. If someone is tone-deaf and can’t carry a tune, she is never going to become an accomplished singer. That’s reality and not an opportunity for improvement.

In the past few years, the Gallup organization has been on the forefront of aligning with reality by emphasizing the importance of building individual strengths rather than improving individual weaknesses.  Their popular StrengthsFinders tool has struck a chord with innovative organizational practitioners and has had a large impact on how we view the relationship of the individual and the organization. Gallup understands that perfection is not an individual pursuit, but rather a collective achievement.

Today’s best-run organizations, such as Google, Wikipedia, Linux, Zappos, and Whole Foods, understand this wisdom. That’s why, in building their organizations, they don’t leverage individual intelligence by building top-down hierarchies. Instead, they build collaborative networks designed to leverage collective intelligence because they understand that organizational perfection happens when ordinary people do extraordinary things by being perfect together.

 

Rod Collins  (@collinsrod) is Director of Innovation at Optimity Advisors and author of Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World.

IPOs Let Companies Raise Capital: Myth or Reality?

by Robert F. Moss

 

Over at Slate, Matthew Ygelsias calls out four interesting points from Twitter’s recent S1 filing, and all of them are good ones. His fourth point, though, did make me pause: “IPO’s aren’t about raising capital.”

In a sense, he’s absolutely right. Almost all tech IPOs–and Twitter is certainly no exception–are not undertaken because the companies need to raise capital to fund the business. Indeed, they are exit vehicles for the original investors–generally venture capitalists–to get their money out of the business (along with, in most cases, a handsome profit.)

IPOs like Twitter, Yglesias argues, puts the lie to the old myth that the purpose of the stock market is to let firms raise capital. But, I don’t quite buy that. The stock market is doing exactly that for tech firms, only in an indirect way.

No one could create a start up in his or her garage, hire a few people and make a splashy demo, and then file an S1 and go public. No one would buy the stock. Instead, early investors are willing to take a risk and invest multiple millions of dollars in the company because the stock market is out there as one potential “exit strategy,” providing an opportunity for a “liquidity event”, as the jargon goes.

An IPO is not the only way for investors to cash in. For instance, they could always sell to another larger company, which frequently happens. But, without the prospect of a potential IPO out in the future, it would be far, far harder for tech entrepreneurs to raise the money they need to get their big idea off the ground. So, although it might be an indirect path, it seems to me that IPO’s are one way for the stock market is do exactly what it’s designed to do: let firms raise capital.

 

Robert F. Moss (@RobertFMoss) is a Senior Manager at Optimity Advisors

The Manager’s Paradox

by Rod Collins

 

Today’s managers are confronted with a challenge that previous generations of business leaders never had to handle: navigating between two worlds. Whether we realize it or not, one of the consequences of the sudden and rapid emergence of the technology revolution is that we are in the midst of a massive paradigm shift that is changing all the rules for how the world works, especially the world of business.

For well over a hundred years, managers and workers have shared a common paradigm that assumes that the best way to organize the work of larges numbers of people is to build top-down hierarchies. Regardless of how they feel about their working arrangements, most people assume that projects are best handled when we break them into discrete parts, divide the labor, and then reassemble the finished work under the direction of a cadre of supervisors. Accordingly, the longstanding visual model for this century-old management paradigm has been the organization chart. Until recently, hierarchical organization charts have been the one thing that all companies had in common.

However, that began to change at the start of the new millennium when the technology revolution spawned an entirely new paradigm for organizing the work of large numbers of people. Thanks to the proliferation of the Internet, people began to discover new ways of working together by doing something that was never possible before: self-organizing their own work. Up until this time, the working assumption was that large numbers of people could not effectively coordinate their activities unless there was someone in charge. However, two of the earliest incarnations of self-organization, Wikipedia and Linux, disproved that assumption when they demonstrated that self-organized online networks are capable of working smarter, faster, and cheaper than their bureaucratic counterparts.

Managers who hold onto old assumptions and deny the realities of a post-digital world may be doing so at their own peril. Regardless of managerial preference, the arc of today’s technology clearly favors networks over hierarchies. That’s why the fundamental paradigm for effective management has already begun an inevitable shift from top-down organization charts to peer-to-peer networks. Going forward, companies are more likely to look like Google than General Motors.

Whenever dramatic change like this happens, there is a period of time when both the fading and the emerging world-views coexist. Coexistence is rarely smooth because large-scale paradigm shifts, by their nature, are highly disruptive. Right now there is a unique and unprecedented challenge for many managers because they suddenly find themselves caught between two worlds. On the one hand, because they work closely with younger workers who are fully versed in digital technology and its new ways of thinking and acting, managers intuitively grasp—even though they may not fully understand—that the world is rapidly changing. On the other hand, these managers must continue to please the corps of senior executives who remain fully invested in the old ways of a fading paradigm.

According to a recent study by CEO.com , only 32 percent of top CEOs have at least one social network account. This means that two out of every three CEOs have no social media presence and are essentially clueless about the dynamics of the most significant economic transformation since the industrial revolution. Bridging the paradoxical gap between these digital strangers and a growing workforce of digital natives is the single most important management task for today’s middle managers. The successful managers are those who resolve this paradox by skillfully learning how to navigate the digital divide.

Until business leaders come to terms with the reality that networks really are smarter and faster than hierarchies, managers who understand the paradigm shift have to find ways to resolve the manager’s paradox. One way to bridge the digital divide is for middle managers to leverage their combined authority by building their own internal networks and involving younger workers in discovering new ways to achieve better business results.  Building politically acceptable networks, where possible, inside traditional companies is a useful strategy for resolving the manager’s paradox, provided these internal networks can clearly create better results. Senior leaders tolerate behavior that produces results. They’ll tolerate new—even “weird” ways—of managing from managers who can effectively navigate between two worlds by leveraging networks to create extraordinary performance. 

 

Rod Collins  (@collinsrod) is Director of Innovation at Optimity Advisors and author of Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World.

What Business Leaders Can Learn From Online Gamers

by Rod Collins

 

In the summer of 2011, Firas Khatib, a biochemist at the University of Washington felt something needed to be done to accelerate the progress of solving a molecular puzzle in AIDS research that had stumped the world’s best scientists for more than a decade. A few years earlier, the University had developed an online community, called Foldit, which used video gaming technology to solve difficult biochemical problems. Khatib thought the molecular challenge was a good fit for the Foldit game community and invited the gamers to have a crack at solving the puzzle. Remarkably, what had evaded the world’s best individual scientific experts for ten years was solved by the gamers in only ten days. In our post-digital world, we are discovering that sometimes the best way to work is to play a game.

That’s the premise of Jane McGonigal’s recent book, Reality Is Broken: Why Games Make Us Better and How They Can Change the World. According to McGonigal, twenty-first century technology has transformed games from entertainment diversions into innovative strategies for solving the most complex problems of our time. Unfortunately, traditional organizations and their leaders are missing out on the benefits of this new strategic capacity because most people born before 1990 think games are merely recreational distractions and have no relevance for business productivity. However, those born 1990 and later and who have grown up with the Internet have a very different perspective. They understand that games are a powerful and highly productive venue for mass collaboration.

McGonigal suggests new developments in online video games can make significant contributions to boosting the productivity of many business organizations. That’s because today’s online games are increasingly collaborative efforts and have two things in common with successful businesses: “a clear goal and actionable steps toward achieving that goal.” Furthermore, well-designed online games enable all the same attributes that businesses need to create engaged workplaces: having a clear sense of purpose, making an obvious impact, experiencing continuous progress, enjoying a good chance of success, and, most importantly, sharing the pride of mutual achievement.

McGonigal cites a real world example of how one business used gaming technology to quickly solve what appeared to be an insurmountable problem. In the early summer of 2009, the Guardian newspaper had obtained leaked documents that pointed to widespread expense fraud among the members of the British Parliament (MPs). To appease public outrage, the MPs engaged in a bit of gamesmanship by providing the newspaper with an unsorted electronic data dump of more than a million expense forms for claims from the previous four years.  Knowing it was impossible for their reporters to make any sense of the data dump, the Guardian decided it would crowdsource the effort by developing a game called “Investigate Your MP’s Expenses,” and invite all British citizens to participate.

The response was astounding, Within a few days, more than 20,000 participants were able to quickly sort through the records and identify several probable perpetrators among the MPs. The collaborative work of the game players led to the resignation of at least twenty-eight MPs, criminal proceedings against four MPs and the repayment of 1.12 million British pounds by hundreds of other MPs.  Much to politicians’ surprise, the Guardian’s online game solidly trumped their clever attempt at political gamesmanship.

McGonigal’s book is clear evidence that our newfound capacity for mass collaboration has suddenly thrust us into a new world with a very different set of rules, and one of these new rules is that nobody is smarter or faster than everybody. As we’ve learned from both the Foldit and the Guardian crowdsourcing successes, there are definitely times when gameplay can be a highly productive platform for doing business.

 

Rod Collins  @collinsrod is Director of Innovation at Optimity Advisors and author of Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World.

Wiki Management is Published!

By Rod Collins

 

This week’s blog is a departure from the usual format. For those of you who have been following these weekly blog posts and are interested in exploring the principles and practices of innovative management, I am delighted to announce that my new book, Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World, has been released and is now available at local bookstores as well as on amazon.com and barnesandnoble.com.

Wiki Management is a practical guide for managers who understand that managing great change is only possible if we change how we manage. Revolutionary advances in digital technology are rapidly ending the world of work as most of us have known it. We now live in a “wiki” world, one in which mass collaboration is not only possible but often the best solution, and a new breed of vanguard, network-based organizations like Google, Whole Foods, Linux, and Wikipedia have embraced a radically different management model built for speed, innovation, and collaboration.

Through practical examples of how innovative managers are using the values of this new paradigm to master the unique challenges of our unprecedented times, Wiki Management examines five key disciplines essential to thriving in this “flatter,” highly collaborative landscape:

1. Understand what’s most important to customers. In a hyper-connected world, the best companies are customer-centric…and built around processes that make the task of delighting customers a higher priority than pleasing bosses.

2. Aggregate and leverage collective intelligence. Today’s most intelligent organizational leaders no longer leverage individual intelligence by constructing functional bureaucracies. Instead, they cultivate collaborative communities with the capacity to quickly aggregate and leverage their collective intelligence.

3. Build shared understanding by bringing everyone together in open conversations. Companies that successfully manage at the pace of accelerating change create innovative processes to effectively integrate diverse points of view, co-create a powerful, shared understanding, and drive clarity of purpose across the entire organization.

4. Focus on the critical few performance drivers. Management is about creating the future. Smart leaders don’t focus on outcome measures but on driver measures that create the outcomes.

5. Hold people accountable to their peers. The secret to mastering the unprecedented challenges of the wiki world is to make sure that no one in the organization has the authority to kill a good idea or keep a bad idea alive. Holding people accountable to peers rather than supervisors enables the collaboration necessary for speed and innovation.

The power of collaborative networks is dramatically reshaping both the work we do and the way we work. In this book, you will learn what it takes to succeed in today’s fast-paced and exciting business environment.

I hope that you will find great value in Wiki Management and that you will continue to visit this blog every Tuesday morning for its weekly updates.

 

Rod Collins  @collinsrod is Director of Innovation at Optimity Advisors and author of Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World.

A Management Lesson From Healthcare.gov

by Rod Collins

 

As the bureaucrats struggle to fix the failed HealthCare.gov website, fend off the protestations of an engaged press, appease the concerns of a confused populace, and all the other things you need to do when you’re in full damage control mode, there’s an important lesson to be learned for all leaders, whether they are in the public or the private sector: A nineteenth century management model doesn’t work in a twenty-first century world.

While there is much public outrage over the meanderings of the stewards of the website, there aren’t many who can honestly say that they are really surprised. Had we taken bets a few months ago, the money would have been on the result we got. That’s because, while the components of the website were distributed to various contractors, the overall management of the project was the responsibility of the government managers inside the Department of Health and Human Services, and government managers are not generally known for their prowess in leading innovation. However, if the bureaucrats had taken a very different approach and fully outsourced both the management and the engineering of the website to the people at Amazon, Google, Kayak, or Zappos, it’s probably a safe bet that the money would have been on the side of a successful launch because we know from our own experience that these online giants know how to manage innovation. Perhaps that’s why the government managers, in a much-publicized move, have enlisted the aid of Google and other technology experts in a tech surge to salvage their ailing website.

Whether it ultimately works or not, the Affordable Care Act is the most significant attempt at innovating the health insurance market in decades. What the managers at the online giants understand that the bureaucrats have yet to grasp is that managing great change is only possible if we change how we manage.

The digital revolution has suddenly and rapidly thrust us into a new world with new capabilities that operate by a very different set of new rules. Website purchasing is a twenty-first century phenomenon, and when managers venture into this space, they need to let go of traditional ways of managing and become familiar with the radically different management system that has become common practice among the leaders of innovation. We call this system Wiki Management.

Wiki Management is a management system that assumes that the best way to organize the work of large numbers of people in a post-digital world is to build collaborative networks rather than top-down hierarchies. Unlike traditional organizations whose mantra is “plan and control” and where the preoccupation of their leaders is centered upon making sure that everyone knows that they are in charge, the leaders of collaborative networks follow a discipline of “iterate and co-create” and build working arrangements where people are highly connected. These innovative leaders fully understand that, in the twenty-first century, real power comes from many people being fully connected rather than one person being in charge.

As the bureaucrats, contractors, politicians, and pundits all point fingers at each other to ascribe personal blame for the failure of this website, we should keep in mind the sage observation of W. Edwards Deming: “If most of the people engage in the wrong behavior most of the time, the problem is the system not the people.” If the same people who worked on HealthCare.gov, whether they are government employees or outside contractors, had been assigned to work for Amazon using the retail giant’s management system, we would have likely had a very different and more favorable result. There would have been a deeper focus on creating a smooth customer experience, continual cross-functional learning, and a firm focus on the end-to-end process. When the motto of your basic management system is “iterate and co-create,” there’s continual learning and real-time improvements.

Instead, the government managers employed traditional command-and-control management, segregated tasks among the various contributors, and invested heavily in the belief that they could centrally bring all the parts together at the end of the project. Things don’t work that way anymore. We do live in a new world with new rules. And one of those rules is, when organizing the work of large numbers of people, build a collaborative network not a top-down hierarchy.

 

Rod Collins  @collinsrod is Director of Innovation at Optimity Advisors and author of Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World.

Uh, Oh. Here Comes the Cavalry

by Robert Moss

 

Given the developments of the past few weeks, everyone from the press to Obamacare’s critics to the Obama Administration themselves have quickly come to the same conclusion: the issues with healthcare.gov are not just a few glitches that can be resolved in a few weeks but rather large-scale, fundamental system design problems that are going to take an awful lot of work to fix.

Thus, the recent  announcement from Kathleen Sebelius that they are sending in the cavalry: a “technology surge” that includes a management expert to provide executive-level guidance for the massive project and “additional experts and specialists” that include “veterans of top Silicon Valley companies” to diagnose the issues and help fix them.

Rather than filling me with confidence and making me think “Great, now things are finally going to get done,” this announcement left me saying, “uh oh.” For, boy, have I ever been there.

It’s a natural response to a technology crisis: throw everything you’ve got at it, bring in strong leadership, and get in as many experts as you can to iron things out. The problem is, they’re not, metaphorically speaking, taking a defective car back to the shop to inspect, overhaul, and fix it; instead, they’re trying to diagnose what’s wrong with the car as it careens down a freeway and repair it without taking the foot off the gas.

When you bring in the proverbial army of experts, the first thing they need to do is get up to speed on the whole project and the whole complex system. They don’t have the context, the history, the background into why whatever decisions were made ended up being made the way they were. At best, trying to bring the new experts up to speed just distracts the efforts of the team that’s already in the weeds and trying their best to fix the issue. At worst, it throws a whole bunch more cooks into a kitchen that’s already way too crowded.

Any bright software engineer can take a look at the work of another engineer and identify a zillion problems in the technical design and in the code, and a zillion things that could be changed to “make it better.” (The classic “not invented here” bias.) But, how many of those changes would actually improve the overall system performance versus making just slight improvements that are insignificant in the grand scheme of things?

It takes a very rare engineer indeed to be able to look past all the warts and knots and be able to find the small handful of changes that can bring stability and improved performance to a very troubled system. And, if you quickly determine–as I’m sure many of the experts will–that the whole system was architected wrong, well, how do you fix that, without going back to the starting line and rebuilding the whole thing?

My hope is that all these specialists and experts are truly cream of the crop and that they have the exceptionally rare capability to bring perspective and balance to the fire-fighting operation. My hope is that they can support, mentor, and guide the many teams of engineers as they frantically try to right the ship instead of just second-guessing and distracting them and sending everyone running off in all sorts of new, chaotic directions.

My experience, unfortunately, suggests it’s far more likely to be the latter and, if so, healthcare.gov is in for a very long, bumpy ride.

 

Robert Moss @RobertFMoss is a Senior Manager at Optimity Advisors

 

The Key to Innovation: Serendipity

by Rod Collins

 

When was the last time you saw the label “New and Improved!” on a product in the grocery store? If you were born before 1980, you may realize it’s been a long time since you’ve seen the label that was a staple of product marketing just a few decades ago. Thirty years ago, change was incremental and driven by corporate planning departments searching for competitive advantage in markets of look-alike products. Business change was so subtle in the later decades of the twentieth century that consumers had to be told when things were new.

Those days are long gone. Thanks to the sudden and rapid emergence of the technology revolution, change is fast, furious, and ever-present. In fact, the very nature of change has changed. Change is no longer incremental; it’s now radically disruptive. For example, while the people at Blackberry were thinking of ways they could incrementally improve their wildly successful product, Apple introduced the iPhone, and, in an instant, reshaped the personal device market. In the wake of the technology revolution, the cadence of change has shifted form “new and improved” to “replace and displace.” If companies want to keep pace with this cadence, they need to be designed for innovation.

Designing companies for innovation is not as easy as it may sound. When managers realize that innovation is mission critical, their first instinct is often to set up a new department, put somebody in charge, and hold that person accountable for the new function. Unfortunately, while well intentioned, these so-called innovation initiatives rarely produce real results. That’s because innovation is not a department; it’s a way of thinking and acting that radically alters the fundamental DNA of a business and its management so that creativity becomes the fundamental fabric of the enterprise.

Traditional organizations are not designed for creativity; they’re designed for planning and control. They assume that the future is an extrapolation of the past, business success is primarily about executing business plans, and the best way to organize large numbers of people is to distribute them into discreet functional departments. Innovative companies, on the other hand, operate from a very different set of assumptions. They understand that, in rapidly changing times, the future is likely to be very different from the past, business success is about having the wherewithal to quickly adapt to changing markets, and the best way to organize large numbers of people is to enable the constant cross-pollination of ideas. Setting up innovation departments doesn’t work because innovation isn’t something that’s planned and manipulated; it’s something that’s facilitated and emerges. Functional organizations have trouble innovating because they kill the key ingredient of innovation: serendipity.

Serendipity means finding things that we are not looking for that turn out to be very valuable. Serendipitous discoveries are not usually random events, but rather connections or insights that occur when we are searching for one thing only to find something else. In moments of serendipity, we discover what we didn’t know we didn’t know. That’s what happened when Larry Sanger, the editor of a struggling online encyclopedia, learned about wikis from a friend over dinner and renamed his revamped project Wikipedia.

Serendipity is what happens when we make unusual connections and create possibilities that never existed before. For example, the idea of combining a phone and your library of music is an unusual connection that no one had ever thought of until the iPhone. Steve Jobs understood that serendipity was the pathway to creativity and innovation, which is why he never divided Apple into functional divisions. He wanted the engineers and the designers to be in constant contact to enable the serendipitous possibilities that could emerge from constantly bumping elbows. Promoting serendipity is also the reason that Marissa Mayer ended telecommuting at Yahoo. She had learned from her days at Google that physically being together is a necessary venue for the cross-pollination of ideas.

If innovation is important to your company’s business success, don’t set up an innovation department. Instead, change the fundamental DNA of your organization so that it becomes a breeding ground for serendipity. The innovation that will flow from the unusual connections among all your people will far exceed the best-laid plans of any departmental leader.

 

Rod Collins is Director of Innovation at Optimity Advisors and author of the upcoming book, Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World (AMACOM Books, November 1, 2013)

The Purpose of a Business is NOT to Create Shareholder Wealth

by Rod Collins

 

Anyone who has ever taken a business course remembers being taught that the purpose of a business is to create shareholder wealth. This fundamental and often unquestioned assumption has guided management theory and practice for well over a century. According to this assumption, business success or failure is a function of one prime driver: profitability. This notion is continually reinforced by a mercantile priesthood of Wall Street analysts who worship at the altar of profitability. For the Wall Street analysts it’s very simple: the best performing companies make money; the poor performers don’t.

This simplistic focus on profitability has spawned a pervasive management culture that believes the primary attribute of good management is making profits. Accordingly, managers spend a great deal of time focused on the numbers, doing everything possible to make those numbers the best they can be. When the purpose of a business is to create shareholder wealth, the focus of management is riveted on managing the numbers.

However, there’s a fundamental flaw with this thinking. For something to be manageable, you must be able to directly influence its behavior. Because profitability is a reflection of product or operational performance, when things go wrong, the right action is to better manage the products or the operations. Making better products or improving operations are the places where managers can directly influence behavior. If there’s a problem in the numbers, there is very likely a problem in the workings of the business. Fix the business problems and the numbers will follow.

This understanding of the relationship between business delivery and profitability led Robert Kaplan and David Norton to create the Balanced Scorecard in the 1980’s. They noticed that poor performing companies were those who were most focused on their short-term financial results. In contrast, the better performing companies tended to focus their attention on what was most important to their customers and then found ways to delight those customers by building outstanding delivery systems.

In constructing the Balanced Scorecard, they defined four primary sections that serve as the container for 12 – 20 key measures: customer, internal business processes, learning & growth, and financial. These sections represent the flow of managerial work. First, you choose your customers and find out what they value most. Then you build business processes to deliver that value. Finally, you keep close to the market to see what’s changing and how you need to change and grow to keep your customers satisfied. Those three things are what managers can directly influence. If managers do those three things well, then profits are the rewards the market pays a company for its efforts.

The implicit logic in the Balanced Scorecard is that profitability is not accomplished by managing the numbers; it’s accomplished by continually delighting customers. The purpose of a business is NOT to create shareholder wealth: it’s to create customer value. The great irony is that companies, such as Google or Apple, that are clearly focused on creating long-term customer value and not beholden to the short-term thinking of Wall Street analysts are the ones who are more likely to enrich their shareholders in the long run.

 

Rod Collins is Director of Innovation at Optimity Advisors and author of the upcoming book, Wiki Management: A Revolutionary New Model for a Rapidly Changing and Collaborative World (AMACOM Books, November 1, 2013)