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CHAPTER V - Business Practice Redesign to Foster Learning

If the key to success in the 21st century is to scale learning, and the best way to scale learning is to maximize opportunities for people to learn while doing, then how can organizations be structured to optimize this kind of learning?

John Hagel offered a framework for the discussion by summarizing the differences between a 20th century company focused on achieving scalable efficiency and a 21st century organization committed to scaling learning (see chart below). He noted that the first big step toward scalable efficiency occurred in the early part of the last century with Taylorism—the attempt to achieve “scientific management” by rigorously measuring and specifying the components of each task in a production process in order to standardize business activities to ensure that they would be carried out as efficiently as possible. The second major step came in the 1990s, when Michael Hammer attempted to move beyond a focus on discrete tasks with the concept of business process re-engineering that took a larger end-to-end view of business processes but with the same goal of specifying and standardizing these processes and eliminating all inefficient buffers between activities in order to maximize operational efficiency.

Contrasting Centuries: Scalable Efficiency vs. Scalable Learning

20th Century: Scalable Efficiency

21st Century: Scalable Learning

Improving function to maximize efficiency

  • Early 20th Century: Taylorism focused on specifying and improving individual tasks
  • Late 20th Century: Business Process Re-engineering shifted focus from tasks to optimizing processes
  • Both approaches assume individual workers are homogeneous, can be fit into processes

Accelerating learning to increase adaptiveness, accelerate innovation

  • Focus on understanding and improving business practices, which is where learning takes place
  • Focus on maximizing learning from exceptions rather than trying to minimize exceptions
  • Harness matching algorithms to configure more productive teams (more diverse = more productive)

Eliminate buffers between activities to improve efficiency through process standardization

Create buffers to modularize activities to allow workers to improvise within each module

Seek harmony

Seek productive friction

Seek constant linear improvement

Strive for exponential performance improvements

Top down, centralized control

Scale growth from the edge

By requiring workers to fit into closely specified, highly standardized and tightly integrated processes, these traditional approaches leave no room for improvisation or experimentation and therefore provide no opportunities for on-the-job learning. The only way to do training in such an environment is through formal programs that are separate from work. In fact, virtually every large institution today is following this model for corporate training.

If the alternative to pursuing scalable efficiency is to seek scalable learning, how can this change be made? What does an organization that is consciously designed to facilitate learning look like and how does it actually function? While acknowledging that his thinking on this subject is still evolving, Hagel offered several ideas:

Shift from process to practice. A key to encouraging scalable learning is to shift from focusing on business processes—explicitly defined sequences of tasks that yield specified results—to focusing on redesigning business practices—the ways that organizations—or, more accurately, the people working in organizations—actually respond to an issue or problem in a particular context. Practices are a matter of how one perceives and thinks about an issue and how one acts on it, actions that are often based on tacit knowledge that may be difficult to communicate explicitly and are not amenable to tight definition or standardization.

Learn from exceptions. One way to encourage learning on the practice level is to focus on exceptions. Remarkably, despite all the efforts to standardize business processes, exceptions that have not been anticipated by these processes or are outside of the boundaries of these processes account for 60 to 70 percent of the time spent by an organization’s workforce. Yet exception handling remains a kind of “shadow activity” that provides evidence of the failure of automation to rationalize all processes, but often is not acknowledged.

One of the reasons that exceptions take so much time is that they are handled inefficiently. It generally takes a group of people to resolve an exception. And typically, the goal of the organization is to reduce or eliminate exceptions (i.e., turn them into processes). Organizations that recognize that exceptions are the norm can decide to make the most of them and treat them as opportunities for learning and innovation.

Make the invisible visible. Providing workers with appropriate metrics can play an important role in helping them improve their performance. LiveOps enables companies to outsource call center operations by employing more than 20,000 people who work from home but are linked by a powerful routing platform. In addition, LiveOps provides each worker with a “dashboard”—inspired by World of Warcraft game players—that provides continuous feedback on their performance. By inviting workers to seek help from others when they find themselves falling behind and rewarding those who provide help to others, LiveOps was able to create a powerful peer-to-peer learning environment.

Tap the power of diversity. Organizations seeking to scale learning will also emphasize diversity in an organization’s workforce rather than seeking homogeneity. Research by people like Scott Page at the University of Michigan, who has shown how diverse perspectives are the key to making breakthroughs,1 and Tom Malone at MIT, who has identified the characteristics of teams that contribute to their “collective intelligence,” have established the value of diversity in the workplace and provide useful guidance about what that diversity should look like.

Fortunately, there are technology-based tools available that can help organizations to build effective teams. In particular, matching algorithms can be used to build teams that are optimal in terms of creativity and productivity—a sort of eHarmony for businesses.

Seek friction not harmony. The goal of diversity, however, should not be to achieve “harmony,” but rather to encourage the productive friction that arises when people from different backgrounds, experiences and perspectives come together to pursue a shared goal. When people are able to argue and to vigorously challenge each other in an environment of mutual respect, the result is often insights that no one on their own would have come up with.

Modularize. While business process re-engineering attempts to eliminate all of the buffers between activities, an organization that is dedicated to learning should deliberately “modularize activities” by creating buffers that provide opportunities for people working within particular modules to experiment and improvise how they work without disrupting adjacent modules as long as they meet the requirements of the interfaces between modules. (More on this topic appears in Chapter 6).

Rapid iteration. Another characteristic of learning-focused organizations is a commitment to investing the minimal time and resources needed to deliver some output, then rapidly iterating that output in order to improve it, refining and enhancing it over time based on the feedback obtained through each iteration. To ensure that learning does happen during this process, organizations need to create spaces for reflection in order to carry out what the military calls after-action reviews that consider what worked and what did not work and how positive experiences can be captured and extended.

Go exponential. A final principle for enhancing learning is a focus on the trajectory of performance. In an exponential world, linear improvement is not sufficient to ensure success. Accelerating improvement requires a relentless focus on the performance metrics that really matter and that can support an ongoing process of reflection: what are we doing to accelerate performance? What else do we need to do?

Hagel concluded by offering four unconventional principles for scaling edges:

  1. When you find an edge, starve it. Do not flood an edge—however promising—with money, because it will foster complacency. Rather, force it to engage in partnerships with outsiders, which will strengthen external support.
  2. Recruit for passion, not for skills.
  3. Avoid cannibalizing an edge in its early stages. Let it grow its own revenues and earn its own profits.
  4. Do not try to get an organization’s entire leadership to support an edge, but find one senior executive (either the CEO or a direct report) who is convinced about the importance of scaling an edge, and will defend it when resistance occurs.

Making Change Happen
Assuming that an organization’s leadership is convinced that it needs to shift from pursuing efficiency of scale to focusing on scaling learning, how can such a big change be brought about? John Hagel cautioned against attempting to impose such a transformation from the top down. Such a sweeping change almost always triggers an organization’s immune system that can be extremely effective in defeating an effort to change. An alternative approach that is frequently used is to incubate a major innovation in a skunk works that is separate from the rest of an organization, and then once an innovation has been developed, bring it back into the core of the organization. Unfortunately, this approach has also experienced a high rate of failure since corporate immune systems are also good at detecting and crushing foreign bodies before they have a chance to change the core.

A more effective strategy is to grow opportunities at the edge of an organization and then scale those edges. An example of this approach is the transformation of State Street Corporation, which was founded in 1792 and is the country’s second oldest financial institution. Since its founding, it had functioned as a traditional bank. Starting in the 1970s, the company began to invest in technologies for securities management and by the 1990s, the company was responsible for managing several trillion dollars in securities for third parties. In 1999, the company decided to exit entirely from retail banking to concentrate on securities processing and management, which became its new core business.

Target has been described as a “tech laggard,” but the company achieved a notable technology win with the development of Cartwheel, a mobile app that encourages customers to shop more often by offering them discounts and deals. Users pick discounts that interest them, then use a barcode generated by the app to claim the discount when checking out at a Target store.

With shopping apps heavily dominated by online retailers Amazon and eBay, Target has been one of the few success stories among brick-and-mortar retailers in getting customers to download and use its app. After Cartwheel was introduced two years ago, it quickly became one of the most popular apps in Apple’s App Store. Between mid-2013 and mid-2014, customers spent more than 100 million hours per month browsing and shopping at Target, an increase of 251 percent. More importantly, Cartwheel users visited Target stores more often and spent 30 percent more per visit on average. According to Casey Carl, Target partnered with Facebook to develop the app, and users are encouraged to share deals they have found through Cartwheel with friends on Facebook.

Another example of a major corporate transformation is Ericsson, in this case spurred by a crisis. The company began in 1872 with a telegraph repair business opened in by Lars Magnus Ericsson in Stockholm. By the early 1900s, the company had grown into a global supplier of equipment for the rapidly growing telephone industry. In the later years of the 20th century, Ericsson had become an important player in mobile phones and by 1997, the company controlled nearly one-third of the global market for mobile handsets. But the company lacked experience in building consumer products and, despite teaming up with Sony in 2001, the company failed to respond effectively to the emergence of smartphones. In 2011, when its share of the global handset market had plummeted to just two percent, Ericsson sold its 50 percent share in its joint venture to Sony and exited the handset business entirely to concentrate on providing infrastructure technology and services to the telecommunications industry.

Caterpillar would seem to be the epitome of an old-line hardware company, but the company has realized that software is an increasingly important component of its products. According to Greg Folley, the company began several years ago to put sensors on its tractors, which generated a lot of data on such things as fuel efficiency, idle times and mechanical diagnostics. It eventually became clear that this kind of data could be highly valuable to its customers if it could be quickly analyzed and made actionable. In March of 2015, Caterpillar, a 90-year old company, announced that it was partnering with Uptake, a one-year old data analytics start-up. The announcement stated that, “Caterpillar has made a minority investment in Uptake and will jointly develop an end-to-end platform for predictive diagnostics to help Caterpillar customers monitor and optimize their fleets more effectively.” Caterpillar Chairman and CEO Doug Oberhelman was quoted as explaining that the partnership would enable the company to “transform the quintillion bytes of incoming data we see every day into useful information we feed back to our customers for on-the-spot decisions and planning purposes”—a novel role for a manufacturer of heavy equipment.

While owning a newspaper was once viewed as tantamount to having license to print money, perhaps no other industry has been as deeply challenged by the rise of digital media. Virtually all major newspapers have struggled to respond to the onslaught of digital media, but few have been able to replace rapidly shrinking revenue from print with income from new sources. Many have had to undergo repeated downsizings while others have disappeared completely. Two publishing companies that have been unusually successful in making the transition—the Deseret News in Utah and Axel Springer in Germany—demonstrate the power of starting on the edge, even though they have followed quite different paths to change.

The Deseret News, which was founded by the Mormon Church in 1850 and has the distinction of being the first newspaper publisher and the longest continuously operating business in Utah, has been more successful than almost any other newspaper company in adapting to the new digital environment. Rather than trying to add digital capabilities to its existing operations, the Deseret News decided to set up an entirely new company—Deseret Digital Media—to pursue new opportunities online. In addition to serving the company’s flagship newspaper, it also took responsibility to playing the same role for the parent’s other properties, which include a television station and several radio stations. Because it was separate from the existing media, Deseret Digital Media was free to take a fresh look at the opportunities available to it, and respond quickly to them. Thus, rather than simply attempting to shift to creating digital content, the company decided to focus on creating “social spaces” built around the interests and passions of its readers.

Axel Springer has been Germany’s largest print publishing company, with two newspapers, Bild and Die Welt, which have been among the largest in Europe. When Mathias Döpfner became CEO, he worried that “the company’s management culture was too hierarchical and risk-averse” to move quickly and boldly to respond to the digital challenge. So, in 2012, he sent three of the company’s top managers to live in California for nine months in order to “network with Silicon Valley executives and study the habits and mores of American start-up culture.” Upon returning to the company’s offices in Berlin, one of the sojourners told his staff that they must be prepared to make mistakes and realize that “failure can be a precondition to success”—attitudes that are definitely not typical of German businesses. As a result of a series of investments in new companies, digital ventures now account for more than 60 percent of the company’s revenues and fully 70 percent of its operating profit, and Döpfner has been quoted as saying that he “would not exclude that, in 10 years’ time, our company could be 100 percent digital.”

Innovation in the public sector. Several Roundtable participants pointed out that promoting innovation within government poses special challenges. The FCC’s Jon Wilkins noted that the agency has been strongly committed to increasing connectivity of schools. The Commission’s E-Rate program has helped almost every K-12 school and library in the country to get connected to the Internet. But the average school today still has less connectivity than the average home, partly due to the high prices schools have been paying for their Internet connections. As technology and the marketplace have grown more complex, the FCC’s statutory mandate to ensure low connectivity prices for schools and libraries proved difficult to apply through traditional regulatory means. As an alternative strategy, the Commission was able to bring attention to the high prices paid by schools by collecting data from schools on their connectivity costs, then making the data publicly available, which allowed others to analyze the data and make comparisons—an example of what Wilkins described as “massive transparency with open analytics.”

Another barrier to progress in using new technology to improve education is a lack of sophistication among buyers of educational technology, a problem epitomized by the firing of the superintendent of the Los Angeles Public School System over the botched rollout of educational tech (iPads) to students. One solution proposed by Harold Levy would be to form a consortium of large school districts to allow them to pool their knowledge and raise their level of sophistication in making tech-related decisions.

1 Scott Page, The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies, Princeton University Press, 2008.

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