Sweet Home Chicago

I'm a midwestern guy - born in Oklahoma, college in Kansas and now a long-time resident of Illinois. I love Chicago.  But, I have to admit, some things have been concerning me lately.

Illinois lost jobs last year.  In fact, Illinois has had a net job loss since 2000.  That's a Telltale of problems.  The marketplace is shifting, and it's not clear Chicago is creating an effective new Success Formula.

Across the business landscape, there are lots of signs of problems.  Former bellweather Kraft has been locked in a turnaround for 5 years, without much progress.  In 2004 the company closed 20 plants and laid off 5,500.  Recently it's announced plans to shut another 20 plants and lay off 8,000 more.  Crosstown, Sara Lee has been struggling as it has sold off business after business in search of "focus," yet it has not been able to improve results.  Revenues are predicted to halve over the next 5 years in this prolonged turnaround effort - apparently in plans to shrink itself into success.

Sears has shown misstep after misstep since being acquired by K-Mart.  It announced in 2005 it would convert 400 KMart stores into Sears Essentials - but as sales fell 20% in the first 40 conversions that decision has now been abandoned.  Sears can't even buy it's own Canadian operations, having had its offer turned down by the Canadian Board!  And McDonald's is under attack for everything from bad fat in its food, to unannounced ingredients causing asthma attacks and a 30-something hedge fund manager trying to force management to restructure its operations in order to add value to a stuck stock.

For years, I've heard people talk about "midwestern paternalistic companies,"  "mature management in mature industries," and "old fashioned values exemplified by careful management"  when talking about Chicago.  Unfortunately, these are a pleasant veneering over of unpleasantly Locked-in management teams.  Too many companies are blaming a "midwestern culture" for an inability to Disrupt their failing Success Formulas and implement White Space.  Too few new products are being created and introduced, and too few new innovations are being introduced into operations.

Do midwesterners lack innovation?  Of course not.  Go to any of a number of Chicago area angel investing groups, or entrepreneur groups, or venture clubs and you'll see, literally, dozens of new ideas for businesses of all types.  Ask those entrepreneurs where they go for corporate support and you hear "the coasts.  None of these big Chicago companies want to get involved with local innovators."  And, alas, you don't see these companies sending representatives to any of these networking events.  These venerable laggards keep looking inward for all the answers, instead of looking outward - where White Space creates a flourishing market of innovation.

I would think that the apparent Challenges - the loss of jobs, or the declining stock prices, or the frustration of limited growth - would lead these company executives to do something different.  To Disrupt their ineffective operations.  But so far, they have remained Locked-in to those old Success Formulas - and the price is being paid (quoting a famous line from It's a Wonderful Life) "by those people who do most of the working, and eating, and living, and dying in this town."

Disruptive Leadership

HP's CEO Mark Hurd is making a difference at the company.  The turnaround since his arrival has been large and successful.  I'm often asked what a leader should do when their company is in need of change.  As BusinessWeek recently reported, you should do what Hurd is doing if you want to turn around a failing Success Formula.

Many leaders have been convinced that their role was to establish a vision for the companay.  Or setting strategy and mission.  Yes, these are roles of senior leaders.  But, more than that, leaders have to be Disrupters.  Nothing will change unless the leaders step out and actively Disrupt the old Success Formula.

As reported, Mr. Hurd has been going all over HP engaging directors and managers in reviews. This has some detractors accusing him of being "nuts and bolts" and "pragmatic" or without a vision for the future.  A better view is that Mr. Hurd is helping his company recognize its Challenges and Disrupt the Lock-ins so the managers can define new solutions.  In a nutshell, he's doing exactly what he needs to do to change the behavior, and results, of HP.

Some of our greatest leaders are great disrupters.  Jack Welch, sometimes called "Neutron Jack," was a great disrupter who helped keep GE in front of competitors for nearly 2 decades.  John Chambers, of Cisco, is also a great disrupter as he constantly brings in new technologies and products which obsolete what already exists.  To keep you business ahead of competitors, it's best that you become the Disruptor - and not wait to fall behind.

What you measure matters

Recently GM announced with pride that it had reduced it's IT expenditures by 25%.  The company's IT spend to sales ration has dropped from 2.4% to 1.6% - a 33% decline.  This was held up as a sign of great progress.  But, as Baseline recently reported, because GM is looking at the wrong metrics this fact doesn't matter much.

During this same period, GM's employment declined by nearly 50%.  And the amount of work outsourced (as a percent of revenue) increased from 67.7% to 75%.  As a result, the number of transactions undertaken at GM declined markedly.  So, while IT costs declined, at the same time the business supported by IT declined even faster.  The net?  IT costs per transaction actually INCREASED by almost 74%.

Businesses tend to Lock-in on the metrics used, just like they lock-in on behaviors and processes.  If they keep looking at the old metrics, they miss the changes necessary to actually improve the business.  Often one of the most critical Disruptions is Disrupting the metrics used. In the case of GM, they were caught bragging about peformance on an out-of-date metric.  Another demonstration of Defending and Extending a broken Success Formula when what's needed are entirely different measures to drive new behavior.

View of the Swamp

McDonald's has been in the news a lot lately.  There is a hedge fund operator pushing the company to spin out its company owned stores.  They just had to re-evaluate the fat content in their products, and discovered that "bad fat" is greater than previously reported.  Then they had to report that there were other foodstuffs in their fries, which has led to lawsuits from allergy sufferers.  And, while all this is happening, McDonald's management is saying "hold the course, all is moving smoothly."

Welcome to the Swamp.  "It's always something" Roseann Rosanadana used to say on Saturday Night Live.  And so it is in the Swamp.  Even though management keeps saying things are fine, there is in fact a never ending litany of problems.  Some appear small, and some appear large.  But the fact is there are lots of unanticipated problems developing - and management seems to be forced to react from one problem to the next.  Regularly on the defensive. 

The Success Formula is in trouble.  It's no longer able to produce the desired results.  Yet Lock-in is keeping the company implementing the same formula, seemingly unable to get ahead of problems.  Because management is spending its time Defending and Extending the broken Success Formula, it's not able to see that these problems will just keep coming and coming. 

McDonald's desperately needs to Disrupt its Lock-in and create a new Success Formula.  That's the only way to renew itself and get away from all these problems.  It's impossible to predict what the next problem will be, but it's clear that from Mad Cow to bad fat they will simply keep coming.  And for investors, the best thing is to steer clear of management trying to Defend and Extend what isn't working.

Perilous Ignorance

My three weeks in India were fantastic.  I visited twenty-some companies, all developing new business models in their pursuit of new revenues.  From company to company, I saw people working in White Space as they sought out Success Formulas that would provide short-term gains and create long-term advantage.  Even for companies with tens of thousands of employees, it was clear that operations in India are constantly disrupting themselves as they seek to compete with each other, and continue driving enhanced value.

While there, I thought about all the U.S. companies that are blissfully ignoring this phenomenon.  What I saw in India wasn't just low-cost competitive undercutting, but in fact people doing the work differently - and as a result creating considerable new value for not only themselves but their customers.  I kept wondering, "why do so many U.S. and European business leaders remain so unmoved by what is happening here?"

Then I recalled the story of CSC.  Entering 2000, CSC had a robust commercial consulting business with revenues reportedly over $1B.  According to industry analysts, this consulting division was by far the most profitable part of CSC, contributing nearly 3 times the profit for its revenue base compared to other divisions.  Further, it was claimed to be growing at nearly 20%+ year.

Now, just 6 years later that same division is reported to be under $200M revenues (an 80% decline).  And insiders say it has operated at losses to break-even since 2001.  The division simply ignored the oncoming avalanche of opportunity being created by the internet and offshore IT services vendors - an avalanche they could readily see from their perch creating e-business opportunities and installing new technologies.

Unfortunately, as they missed the first wave of offshoring their revenues slumped and their profits vanished.  In reaction, they brought back a President who had left during the dot-com days in order to provide new "focus" to the business.  Upon his return, this President declared that from his 20 years of experience he knew that customers wanted their IT services to be done locally.  He re-opened a slew of local offices in the U.S. and moved the P&L from a national service line model to a geographic P&L. He expected these local offices to get into clients and "slug it out" for revenues against the competitors.  And he repeatedly said that he knew this would work - because it had worked in the 1970s and 1980s.

He was Locked-in to his old Success Formula.  Unfortunately, he was perilously ignorant of the oncoming wave of qualified IT consultants in India now available to his clients across the internet.  Year after year he, and CSC, watched as business was lost to new competitors, layoffs followed to "stabilize" the business, only to be followed by more pressure on prices, and fewer revenues and more layoffs.  A vicious circle that was inevitable. 

To this day, CSC has practically no commercial consultants in India.  While Tata has 60,000, Infosys 40,000, Cognizant 30,000 and WiPro 30,000 - the vast bulk of which are supporting U.S. clients.  Not to mention the dozens of smaller companies doing everything from IT services to business processes.  Even Accenture has nearly 20,000 and Office Tiger (both U.S. companies) has 6,000.  In reaction, CSC has retrenched to large outsourcing contracts (the profitability of which is highly doubtful) and increased its federal government business - where it can avoiding competing with Indian firms.

Lock-in leads to blinders.  Blinders lead to ignorance (as my teacher once said "ignorance can be fixed").  When CSC commercial consulting faced its Challenge (offshore competitors) leading to a big problem (declining margins and revenues) they did not use this Challenge to Disrupt their model and create White Space.  Many American companies, such as Accenture and IBM, did just that - creating large and very viable Indian organizations supporting clients competitively.  Those companies are using the White Space to develop their own new Success Formulas.  But CSC has lost the commercial consulting market.  And they are threatened in all their commercial business.  They are under attack from hedge fund operators who want to split up the company and capture value before more is lost.

Ignorance is perilous.  If we allow Lock-in to determine our behavior we lose the ability to Disrupt and face our Challenges - leading to failure.  Instead, we have to use Challenges to Disrupt and open White Space so we can find new Success Formulas.  And via that route, we can remain competitive in the new marketplace.