“Everything we do in most firms on leadership development is designed to make the next professional manager into a more senior manager. I don’t think the firm of the future will succeed by doing that." — James Root, partner, Bain and Co.
James Root is a partner in Bain and Co.’s Hong Kong office. He heads the Bain Insights Forum and its organization practice in the Asia-Pacific and is also the lead author of the Bain report The Firm of the Future, which identifies the challenges to companies and recommends steps that need to be taken to meet these. The report’s key theme is that four converging forces—the 4th industrial revolution, breakdown in the post-Cold War global system, shifts in workforce structure and motivations, and business complexity—will significantly reshape how firms are managed, operated and financed. Root, who did his BA in Classics from Cambridge University and holds an MBA from London Business School, spoke at length about what the firm of the future will look like. Edited excerpts:
For the last 25 years, various management gurus have come to India and every few years they have told us there is a big change in the offing. How is the change you’ve talked about in your paper any different?
I don’t think it’s me saying it. I’m reflecting what others are saying to us, clients and people who I talk with. The best angle into that is to describe in some detail the drivers of change as I have understood them. What is different is I am going to talk about four things.
The focus we have had in the last 40-50 years on shareholder value as the be all and end all, and it has been a very positive thing in many ways, I characterised it as a golden ghetto until it wasn’t good. And I don’t think there is any doubt that there is a clear rejection of the unequal distribution of the spoils of that version of capitalism and in particular, on shareholder value that is focusing on the short term. There is tremendous pushback from governments, voters and employees who witnessed this jobless growth. That’s different. The whole edifice why companies exist is different.
The second thing is that big companies are too complicated, the meetings are overwhelming the whole matrix is overwhelming, the sheer complexity in the way organizations have evolved in the last 50 years, the way companies have been scaling up is historic. To make it to the Fortune 500, you have to be 11 times bigger than you had to be in 1960.
The third thing that is different is that people are different. People’s relationship with their employer is changing. This varies a lot from country to country, and culture to culture. But the traditional career path where one spent 30 years with the same firm, climbed the pole in pursuit of shareholder returns, that really seems to have changed. Most people will not salute that anymore. They demand that the firm that they work for has a higher purpose of some sort and this doesn’t have to be to the exclusion of making money for shareholders. The millennials want salary, yes, purpose, yes, career path, yes, but they will not trade off more of number 1 for less of number 2 or 3. I think that makes them different probably from my generation. Many people want to participate in a much more transactional relationship, the gig economy if you want to use that term. The concept of a permanent job is also evolving, so flexibility is important. I think it’s remarkable what mortgages and young children can do to people when reality bites. Nearly 15% of US adults are selling themselves transactionally and these are journalists, investment bankers, engineers, every discipline that you can imagine.
The fourth big change is technology. Every generation has its own version, the invention of railroads, telegraph, ocean liners and each time, it has disrupted. Post-2007, Cloud, Hadoop, Facebook, Google, everything just went nuts. How do I compete now?
If people’s relationship with their employers is no longer what it was, where does that leave the concept of loyalty?
That’s a very profound and interesting question. Are they loyal to themselves or to their aspirations? There is tonnes of data to show that the idea of employee loyalty is fundamental to customer loyalty. When your employees are loyal, your customers are loyal and any erosion of employee loyalty is then a threat.
Can you get the same kind of loyalty from people who are gig economy workers? I don’t think so. That’s what the firm of the future is going to figure out.
You also write about shareholder activism and how it is increasing and how this is forcing companies to take decisions which are more short term rather than long term. In India, most business are run and owned by business families and promoters and they control majority of the shareholding, yet we still see focus on the short term rather than the long term?
My emphasis is less on shareholder activism but more that the systems we put in place at the end of the previous era, around time management incentives to shareholders, that was new. That concept has become powerful in many firms and has become toxic in many firms. But the manipulation of a stock price is possible and in some cases it may be motivating the behaviour of some leadership teams who may be awarded for stock price movement.
In privately held environments, the economic incentives move differently. Wealth is being created by a founder but often there is a motivation to preserve, but there isn’t an external metric that says that you won and I lost. One of the things I like to talk about is the emergence of new and other sources of financing as distinct from selling public debt or stock.
Tell us more about this.
The stock markets have failed to deliver what most companies want, which is an anchor long-term investor who cares about the long term and the short term.
At the same time, the invisible hand has created alternatives, activist investors, private equity funds, start-ups staying private, choosing not to go public. Even more interesting is the emergence of investment opportunities that allow a much better marriage between a company’s business, strategies and objectives and the investor’s risk profile and time horizon.
Many companies are mixtures of projects—for example, General Electric’s latest jet engines called GE 9X. Canadian pension plans wanted to invest in it so they created a vehicle just for that. For Sanofi’s Type 2 diabetes drug, it created an investment vehicle to finance the late stage trials, $250 million just for that drug. This is new.
Green bonds is another one. If I care about it as an investor, then I invest in that, and the debt goes into whatever plants or projects they build. I get a greenhouse gas emission report on waste management, water management because that’s what I care about as an investor.
I am sensing there is a blurring between public and private companies in the way they are financing. Two latest examples: The SoftBank Vision fund which you are getting in India because of its investments in Paytm is $100 billion of private capital, mostly tech focused.
Then there is investor Chamath Palihapitiya, an early employee of Facebook who’s set up a fund Social Capital and has invested in four of the 10 unicorns. He is a genius investor. He’s taken Social Capital, teamed up with another company, listed on the NYSE a couple of weeks ago and they raised $600 million in an IPO. They have no revenue, no earnings, they don’t do anything. His proposition is ‘I’m going to raise money from public investors and I’m going to put that money in private companies; so I’m doing service on two fronts: I’m giving public investors a chance to invest in relatively early-stage tech start-ups and I am removing the need for those tech start-ups to go public, I’ll do it for them. They can do what they just do which is be an amazing tech start-up, funded by us’. This is incredible innovation against the backdrop of short-termism and dissatisfaction.
You talk of companies focusing on just mission-critical tasks while looking to outsource everything else. Help us understand this.
This observation has to start with the background that what we call professional managers are the heart of every organization. Most organizations exist to perpetuate professional managers. The mission-critical role as opposed to that task is something different. And it is based on the fact that the more things will be automated and can be outsourced, more of the roles left inside the firm are going to be the mission-critical roles, whatever they are for you. For example, at American Express, it’s the customer service reps who is on the phone helping people find their lost cards.
It’s usually the roles that are most directly involved in delivering whatever you promise your customers. Those kind of roles and the people that are in these roles, I believe will work on project-based teams in the future and many of these teams will be self-managed because they can be. If you believe all that, headcount will shrink and we may not need professional managers. After all, what do they do but structure assignments, hand out tasks, evaluate, performance manage through standardized methods, aggregate info and send it up and back down.
I think we are going to see a shift in focus from professional managers to mission-critical roles and I think we are completely unprepared for this. Everything we do in most firms on leadership development is designed to make the next professional manager into a more senior manager. I don’t think the firm of the future will succeed by doing that.
Most big firms today are working in teams but the difficult part will be cohabitation of that style of working agile teams with the traditional type of business like banks or finance. How do you bridge the two styles? How do you manage career paths? What is the mechanism to help firms bridge the two types of system? In the middle of that is the mission-critical role or roles.
You’ve talked of a Bain study according to which companies are generating far more revenue from far fewer people. Where does that leave countries like India whose primary preoccupation today is creating jobs?
India has a combination of old line industry and deep manufacturing and services expertise and a burgeoning start-up sector that is relatively new and those produce jobs. One of my themes is that headcount of the average firms is going to shrink. Large companies tend not to be the job creators in most economies. It’s the smaller companies, the start-ups that do. So if you have an active start-up environment, you will create jobs. Of course, you have a whole set of other issues in India around low income and subsistence but that’s a whole different discussion.
Are there companies today that have started resembling the firms of the future? Do you think Google and Facebook are run like firms of the future?
There are parts of what we imagine the firm of the future might look like. Little bits of GE, Amazon, bits of Microsoft, bits of professional services firms, venture capital firms are all doing pieces of this. No doubt there is not one blueprint of what it will look like. But there is enough observations of things that are different from what normally has been going on that seem to be working so there is no one company that I am thinking of. You can be born as a firm of the future (agile) like Valve, the video game platform firm.
Five questions for leaders to ponder
■ What combination of scale, speed and customer intimacy do we need, and how can we deliver this better than current and potential competitors? This is partly about strategy (what is the relative importance of these elements for your business, and how do you make investment trade-offs?) and partly about ways of working (how do you use technology and organization to minimize these trade-offs?).
■ How close are we to getting full potential value from our mission-critical roles? Answering this question requires alignment around what these roles are, deployment of your best talent in these roles and understanding what you are doing to support this talent vs. holding it back.
■ What type of firm are we—platform, outsourced service provider, or product and service provider—and how are we partnering across this ecosystem? As technologies continue to evolve, as outsourcers develop more capabilities and as gig economy platforms expand, ecosystems will grow and present more partnership options than ever.
■ What would we do if capital and investor requirements were not a constraint? Said another way: Are you able to identify more good ideas than you are willing or able to fund? If so, it’s worth testing whether this is really an unbreakable constraint.
■ What are we doing today to position our business for 10 years from now? This question is not just about long-range scenarios but about how you build flexibility into resource allocation and develop the capability to see around corners.
An excerpt from a Bain and Co. report ‘The Firm of the Future’
What we learned from looking back was that, similar to other human endeavors, the idea of a business has evolved slowly but profoundly through a series of what we can now see as definable eras: periods when particular strategies, corporate forms and styles of management became the dominant norm. We have observed five distinct eras since the industrial revolution. These eras include the current period, which we call the “shareholder primacy" era.
Transitions between eras play out over decades. The edges are fuzzy and often become clear only in hindsight. Some elements of the previous era remain in place, while others evolve into something quite different. The shareholder primacy era, for example, retained and enhanced several features of the previous period, including the importance of professional managers and the pursuit of scale to achieve leadership economics. But companies in the current period refocused on their core businesses, shed non-core assets, outsourced more and more functions, and made their remaining assets sweat harder. That focus, combined with a high rate of mergers and acquisitions, fostered increasing concentration within industries. CEOs and management teams, often holding significant equity stakes designed to align their interests with those of other shareholders, dedicated overwhelming attention to delivering shareholder returns. The ones who succeeded earned substantial rewards.
Today, the shareholder primacy era is under pressure from multiple sources. Technologies, markets and customer expectations are all changing rapidly."