The Global CEO Outlook (KPMG 2016) explores the strategic dilemmas leaders worldwide are grappling with today and reveals a certain mood: real, transformational, change is either “now or never” with many CEOs expecting their organisations to become “significantly different within the next 3 years.” Yet old dangers continue to lurk.
Seventy percent of change and transformation initiatives continue to fail with methodologies stuck in a pre-digital era. Continued efforts to reverse engineer ‘ideal’ future states in a volatile and complex world promise little improvement on these failure rates. Far from trying to anticipate what might happen CEOs must start increasing their awareness of what is happening in order to disrupt emerging threats, exploit opportunities and accelerate evolutionary growth.
The challenges facing entire industries are unlike any they’ve faced before. Consulting a major banking client on a communications program a Dutch consultancy contact of mine recognised that “due to the financial crisis, the reputation of the financial sector has been subject to extreme change. In the space of a few months the beauty transformed into a beast.” What do you do when your industry is suddenly felt to be perverse - how do you cope when the lessons of the past provide scant guidance?
As leaders increasingly “recognise that they are now handling issues that they have never grappled with before” they see that fresh approaches are needed. An example of such an approach came from a Russian oligarch I worked with following the 2008 crisis, who actively engaged his own diverse panel of experts to scan the horizon for emerging waves he could rise with, then get off before they crashed. Accessing unstructured, distributed cognition (the ‘wisdom of crowds’) in this way builds on a powerful concept: “the future is already here — it's just not very evenly distributed”
Despite the disruption CEOs remain “increasingly optimistic that they can transform their organisation[s] to enable [them] to capture the opportunity that the future holds.” Yet this new, uncertain world is witnessing record levels of corporate churn: while 50 years ago the average lifespan of a S&P 500 company was 60 years, today it’s just 18. And the KPMG Global CEO Outlook found that the less experienced CEOs are the ones who are less concerned about disruption potential, confident they have the strategies to navigate it.
Perhaps never have Mark Twain’s words of caution been more apt:
‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.’
The KPMG senior management obsession with predictive technology appears to be finally satiated. Last week's announcement of an alliance with the Formula 1 team, McClaren, is intended to help the big 4 firm evolve from its current “retrospective and subjective” business model to become “forward looking and predictive.” Which is great news - if it wasn’t such nonsense!
The desire to know in advance of chaotic shocks that could rock the firm or its market place is understandable. Yet having more data, even of the turbo-charged variety, seems less a breakthrough in predictive capabilities and more an attempt by a large organisation to differentiate its commoditised offering in an increasingly fragmented market place. “Multi-dimensional” data - the influence of weather, pit stops and wheel changes - may be able to predict the performance of a complicated machine, like an F1 car, in a known environment (a limited term event operating to clearly defined rules). But KPMG - and the clients its advising - are complex entities operating in deeply uncertain ecosystems where the rules change at random and prediction is not impossible but can be dangerous if its believed.
Complex entities, like organisations or markets, are made up of thousands of people engaging in an almost infinite number of interactions that are impossible to calculate. Furthermore, these interactions are non-linear - meaning small causes have large effects (e.g. US sub-prime mortgages and the global economy). Though events often seem obvious in hindsight (e.g. sub-prime mortgages look a bad idea now) this doesn’t lead to foresight as a complex ecosystem is constantly emerging and new patterns make past pattens obsolete. This is why generals don’t win wars by re-fighting the last one.
The futility of relying on past data for future planning was perhaps best exposed when Alan Greenspan gave testimony to Congress in October 2008. He expressed “shocked disbelief” at the global crisis unfolding because for “40 years” there had been “considerable evidence things were going exceptionally well.” The 2012 collapse of Monitor Group, the elite strategy firm of Michael Porter - the ‘father of modern strategic analysis’ - also demonstrated how rigorous analysis may explain success in hindsight but still fail to predict it.
A complex world, by definition, is unpredictable and more data doesn’t alter this reality. KPMG therefore faces a real danger of unintended consequences in adopting ‘sexy’ technology: complacency (believing the models to be right), retardation (why think for ourselves now) and ultimately worse decisions (as the outputs will only be as good as the inputs chosen and are supposedly more experienced partners going to learn how to do that or push it down the chain?). The result of a turbo-charged stream of data may be to merely obscure the key signals KPMG and its clients need under even more noise.
If KPMG truly wishes to distinguish its offerings there are better ways than embarking on (another) long, seductive foray into technology they don’t understand. Within the organisation’s engine room sits (probably 87% idly) its most sophisticated capabilities: auditors who’ve completed thousands of audits and can recognise emerging patterns of system failures and potential improvement paths. “How do you report those insights to decision-makers in the organisation” one such auditor was asked in an interview. “We don’t” was the answer. “Why not?” they were asked. “Because my manager has told me to keep my damn mouth shut” was the reply.
So, before you buy the latest snake oil to solve your organisational problems consider what underused capabilities you already have that you can bring to bear on your strategic challenges. For any increase in the amount of data being collected must be coupled with the human capability and desire to seek insights and create action. Predictive technologies alone won’t turn a complex world, prone to eruptions of chaos, into an ordered one. But while it may not be possible to make an unpredictable world predictable - it is feasible to make your organisation better adapt to this reality through harnessing the natural sense-making talents of your people.
Leaders have a unique challenge in the 21st century. The ecosystems (the countries, markets and industries) their organisations operate in are increasingly volatile, uncertain, complex and ambiguous. And missing critical signals amongst the increased noise risks exacerbating existing fault lines in their organisation. What should leaders do?
Subject matter experts solve complicated issues at functional levels. But complex questions (e.g. top line growth, corporate culture, change or risk management) cut across specialised silos. Complexity therefore is always escalated up; making managing complexity the key strategic challenge for executives in the 21st century.
Yet complexity remains widely misunderstood; described as something ‘very complicated’ or confused with chaos theory. Complexity science itself ascribes distinct characteristics (non-linearity, emergence, unpredictability) that render traditional 'solutions' (e.g. best practice, ideal leadership styles) entirely context dependent.
To face a complex issue means to deal with a ‘brownfield’ context - never a ‘greenfield’. Complexity is located in the system (e.g. the organisation, market, population) and always has a history, yet is constantly evolving. And as we engage with it, it changes - often in unpredictable ways. This is why answers in a complex system often appear only in hindsight - though this doesn't lead to foresight (e.g. it seems obvious now that sub-prime mortgages were a bad idea, but likewise, today's Quantitative Easing is variously described as the only thing saving the global economy or creating an even bigger future crash. Only time will tell).
In a complex world context is king.
Idealised futures are an illusion - as are strategies based on certainties designed to get you there. The collapse of Michael Porter’s Monitor Group in 2012 showed that while rigorous strategic analysis can help explain how excess profits were created in the past, it's a poor predictor of how to generate them in the future. Even the best formal strategising can trap leaders into believing the future will be an extension of the past. But if the future fails to conform to expectations we are left naked and fragile, exposed to the elements.
Like King Canut ordering back the tide, we discover powerful natural forces defy command and control.
Yet, the natural world itself - of which man is a part - has adapted wonderfully to exploit complexity. Evolution works through a process of increasing variation (of options), basing selection on what works now, and replication (or starvation) of options based on hard evidence of suitability. Can leaders learn something from nature about adopting a rigorous external focus, increasing awareness of options through rapid trial and error, and creating mechanisms to amplify or dampen options in order to thrive?
Effective horizon scanning uncovers emerging signals that signal where and what to act on before its too costly or too late. Technology is a great enabler in this, if one caveat is kept in mind: technology without human interpretation is meaningless. Google may find anything you ask, but can’t tell you what to ask for. Uncoupled from humans technology merely increases the noise surrounding the signals. Data is dumb - to become meaningful information human knowledge must be applied.
Humans should be at the front and back end of technologically-aided decision-making - defining the issues to explore and discovering its real meaning. Technology therefore must be designed to fit the human - the way we are now, rather than the way we'd like us to be. It must augment our natural sense-making abilities, which have supported human evolution through millennia (a best practice case?).
Critical knowledge flows through organisations in human networks. Navigating these flows effectively can reveal the origins and dynamics of change. And as humans share such knowledge naturally, extrinsic rewards aren’t required to tap this. Humans naturally create and share knowledge in the form of narratives - ‘micro-stories’ - that are both universal (every culture has them) and democratic (no barriers exist to sharing). These are the 'water cooler’ stories that spread insights and enable other people to make sense of the world around them so they can act better in it. Harnessing these narratives is critical to making sense of and navigating complexity.
Critical knowledge can be leveraged at little extra cost.
Leaders must create the conditions for contextually-appropriate knowledge to emerge. Managing for serendipity (‘pleasant surprises’) means seeking fresh insights, rapidly field-testing coherent ideas and replicating success. But as genuine breakthroughs don’t come from established thinking patterns. Leaders must learn how to break through the hard-wired autonomic brain we rely on - which seeks first-fit, rather than best-fit, solutions - and instead become receptive to novel ideas. Strategic leadership is less about engineering future visions than it is about increasing awareness of the critical factors in our ecosystem, 'identifying the biggest challenges in them and devising coherent approaches to overcoming them'. Real strategy is about seeking the truth of the current position.
Navigating and exploiting complexity means leaders must take multiple perspectives to discover genuine insights. Going beyond objective numbers to understand the why. Rapidly testing coherent ideas as ‘safe-to-fail’ experiments. and feeding success, whilst starving failure of resources. No-one can ‘cut through’ or ‘simplify’ complexity - nor should we want to. Complexity contains rich opportunities in a changing world. Leaders employing naturalistic approaches can exploit complexity profitably.
SenseMaker® - an innovative technology first deployed by the Singapore government to detect weak signal terrorist threats - taps into mass organisational knowledge flows and helps join up disparate information from silos to form actionable knowledge. It presents whole network perspectives leaders can rapidly see and understand, helping unlock the organisation’s present evolutionary potential.
For more information about how to make sense of, navigate and exploit complexity for organisational success contact email@example.com
Complexity brings existential threats to organisations. It’s a rare industry not challenged by early or advanced stages of disruption: publishing is under open-source siege; music and film industries by P2P (peer to peer) sharing; education establishments by MOOCs (mass open online courses); computers by mobile; ‘fin-tech’ (financial technology) is challenging traditional financial firms; while even the consultancy model - long protected by big brains erecting barriers to entry - is threatened by the rise of technology-based analytics and tools unbundling their value proposition.
Banking disruption is one of the most dramatic. As the cost of internet-enabled smartphones rapidly moves down the cost curve, payments by mobile phone is ‘hurtling towards the $1 trillion mark’. Mobile money is fast ‘becoming a substitute for paper-based banks as it enables people who cannot get to a branch or ATM to use financial services.’ In Kenya, two-thirds of the population use mobile-money. Weighed down by regulatory and PR burdens, banks in the developed world may struggle to compete with nimble, unencumbered competition from ‘left-field’ exploiting these new growth models.
However, incumbents would be wrong to see the challenges (or solutions) as technological ones alone. Central to markets are people, yet modern organisations, taking their lead from classical economics continues to view wo/man not as s/he is, but as they would like them to be. The efforts of Leon Walras in the 19th century to bring to economics the precision of physics in describing human social behaviour have been widely criticised for the flawed assumptions in his general equilibrium model. We are not ‘sovereign in tastes, steely-eyed and point on in perception of risk, and relentless in maximisation of happiness’ as parodied by Nobel prize winning economist Daniel McFadden in 2006. We aren’t rational, nor adept at optimising gains, and as the Dutch proverb goes ‘he who has choice, has trouble.’ We instead make decisions ‘not only cognitively, but also strategically and viscerally.’
Yet, consensus continues to accept what the general equilibrium model tells us about human behaviour, despite it’s many flaws. Consensus remains unresponsive to the insights of social scientists that can prove the real homo sapien bears little similarity to the artificial homo economicus. Even in the face of surmounting evidence this view remains entrenched; while the likes of Milton Friedman even argue that the model could be correct even if the assumptions are not.
While organisations continue to bury their hand in the sand about the real drivers of human behaviour they will continue to see the changes around us as purely technological ones. The anti-tax campaigns against the darlings of the technology revolution - Google and Apple most notably - may therefore confuse decision-makers as to the real causes (for example, endowment, aversion-loss, certainty, recency effects and sociality of choice) and blind them to the opportunities they must exploit in order to survive in our complex world.
The ‘relentless parade of new technology’ whipping up today’s data deluge adds to modern complexity. According to IBM, 2.5 quintillion (a billion billion) bytes of data are generated every day. The World Economic Forum blog put this into perspective - we are now ‘producing the same amount of data every 10 minutes as was produced in the last 5,000 years. McKinsey’s Global Institute argues this wave is still surging, as high-potential technologies ‘could have a potential economic impact between $14-33 trillion a year in 2025 - equal to almost half the global economy today.
Against this confusing backdrop executives must continue to contain increasing risks and costs and implement the right decisions that drive change to remain competitive. Yet, organisation’s whose strategies to thrive (or just survive) through efficiencies alone end up sailing ‘too close to the wind’ - risking the whip-end of ‘black swan’ events as, in a tightly-coupled world, they become ‘as weak as the weakest link in their chain.’
Now, as never before, executives put the attraction (and retention) of key skill central to their strategies for successfully navigating a highly volatile world. Yet, despite technological advances remaking the world anew ever more rapidly, workforce productivity growth remains stubbornly stagnant. Since 2005, overall Eurozone productivity has increased just 3% (and only 13% since 1995). Even in America since 2010 it’s been a measly 0.3% per year (compared to 1.5% over the previous 20). This raises the question - are organisations misusing technology advances and people’s skills?
Modern knowledge workers spend half the week on email; looking for or gathering information as tools are rarely made to fit the human. The success of Atos - a French IT-service supplier - to become a ‘zero-email’ company this year by integrating social-networking platforms for natural communication may be one the most significant - if less heralded - organisational developments of 2014.
Organisations are currently poorly structured to exploit new information, ideas and opportunities. Technology development often outstrips our evolutionary ability to ‘differentiate useful information from noise.’ This explains why even the printing press took ‘330 years and a million dead in battlefields for the advantages to take hold.’ How long will it take the modern organisation to adapt?
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