Take a dare! Why corporates struggle with transformation. And what might help them.

What can give companies the courage to take the plunge and jump out of familiar waters to adapt themselves to new circumstances?

I was recently asked during a debate with students how I as a manager deal with this new age of increasing uncertainty: competition with North America and Asia, disruptive innovations emerging from digitalization, and growing political nationalism and protectionism. My answer was that uncertainty is actually the greatest reason for the existence of managers.

Our job is to adapt organizations – to emerging markets, to new technologies, to the demands of employees, and most of all to new customer requirements.

The same goes for Deutsche Telekom. Not only are we working to shape the process of digitalization, we are also in the midst of transforming ourselves. We, too, must continually adapt to the changes that are sweeping through our world at increasing speed. For our part, it means we have to ask ourselves questions like what have we learned from WhatsApp? It means taking projects like Internet via satellite by SpaceX seriously and not laughing at them condescendingly.

The major challenge is that organizations tend to act like frogs. And the bigger the organization, the bigger the frog. What do I mean? You all know the old fable: If you put a frog in a pot of water and heat it up slowly enough, the frog will be boiled to death. But throw the frog straight into hot water and it will jump right back out. So, the frog is perfectly capable of perceiving the danger. But when it is sitting in the water, it doesn’t notice the water heating up until it’s too late to escape.

It is simply too strongly inclined to remain inert.

There are plenty of examples of businesses that failed to adapt when necessary, many of which have become text-book cases of what not to do. Like Kodak, which came up with the first digital camera in 1975 but stubbornly stuck to using film rolls. Or Nokia, which missed the smartphone revolution in a big way. Or Yahoo! and Lycos, which failed to adequately diversify their search engines or comprehend the value of links as a major online currency. Or the telecommunications businesses that didn’t develop WhatsApp themselves.

What stops us from jumping out of the water?

Given how important it is for companies to adapt, I asked myself instead what makes companies frogs. Of course, there are always very specific reasons in each case, but I feel the following handful of points, while not being exhaustive, seem to apply generally:

1.   Wrong horizons.

The world of business sees life on three horizons. The first relates to current business or the current quarter. The second extends to the coming year: What products will I use to earn revenues? And the third goes even further to ask how money will be earned in five years’ time. The problem is that, despite its importance, the latter horizon is often blanked out. It’s an all too familiar picture: Daily life in the office is busy, with so many e-mails to deal with and so many meetings to attend that mid- and long-term planning tends to get neglected. What goes for the individual also goes for organizations, but to a far greater extent. They concentrate on day-to-day operations, with efforts focused on making (step-by-step) improvements and meeting next quarter’s figures. The prospects for medium- and long-term developments get lost in this daily grind. The risk here is failing to recognize new business models or make the right investment decisions.

2.   The "Karl Marx problem".

Everyone knows everyone else in small organizations. Problems can be addressed at the source and changes agreed together. This is how start-ups do things. YouTube was originally to be a dating site, and Facebook an online alumni yearbook. Famously, that’s not how they ended up. But this approach won’t work in large companies.

The division of labor theory originated as a way of keeping on top of the complexity inherent in large organizations. Work is broken down into several smaller chunks. The result? Strong departments (not to say kingdoms) with powerful representatives and strong alliances. The price of such professionalization is that ultimately nobody feels responsible – in the same way that Marx suggested an “alienation of labor,” an “alienation of responsibility” is taking place. Put another way, you could say:

A lack of responsibility is a dyssynergy of economies of scale.

This is exacerbated by functional units perfecting and optimizing their work in isolation from one another. To some extent, these departments look more closely to their counterparts in other businesses (and form communities with them) than to the success of their own company. This might produce an innovative IT department with the best compliance record and most efficient procurement systems, but the problem with this way of working is that the big picture gets lost along the way. The ones who suffer are ultimately the customers. 

Change projects thus do not obey the laws of logic of even the most convincing rationale. Instead, they are all about power games. Because the levers to be pressed are so large, orders from above have little value. Rather, it needs to be about achieving alignment on the basis of shared convictions and a common vision, and getting rid of hierarchies.

3.   The pesky brain.

An idiosyncrasy of the human psychology is that we tend to accord greater weight to information that confirms our beliefs than to that which contradicts them. This preprogrammed behavior is known as confirmation bias. Every study that seemingly confirms the value of the existing business model is gratefully devoured, shared throughout the company, and passed on to the next level up as a decision-making basis. By contrast, all contradictory studies are reviewed for validity and picked apart. Given the huge levers that must be pressed in organizations, this alone can stop people from recognizing that change is essential. After all, the company’s internal “evidence base” tends to favor existing models, functions, processes, rules, and products. All of which makes alignment conducive to change a difficult task.

4.   The much-maligned gut feeling.

Companies are driven by a sharp focus on figures. (Encouraged, incidentally, by the rules on management liability that tend to take a critical stance on gut feelings). Every new product must be heavily rooted in a business case – most of which turn out to have been nothing more than a gaze into the crystal ball to come up with forecasts that rarely reflect reality in the end.

There are two types of mistakes made in business. The first is failing to identify risks. The second is failing to identify opportunities.

We concentrate mostly on the former, trying to minimize risks. It’s why we tend to base decisions in uncertain situations on apparently rational logic. But the figure as such is not the pivotal argument; it’s how we go about getting there. The solution will not be found by quantifying every conceivable problem, it is found by taking a dialectical approach.

Incidentally, start-ups often take a very different tack. Rather than bothering with a business case at all, they believe in the solution to a customer problem. That’s what they work to achieve. In many cases, the business case comes later on.

5.   The roulette dilemma

Organizations tend to make optimizations within existing value chains. Their know-how in this area makes them feel safe and confident. It’s how they grew up. But in doing so, companies neglect to put themselves under the microscope at a fundamental level. And in the worst case they also fail to adapt themselves and their expertise to emerging markets.

In part, this is down to the fact that, just like in roulette, there are so many numbers they could bet on. And the larger the organization, the greater the range of topics to focus on. Thus, innovation along the number of possibilities becomes arbitrary. So, the key to success is not just in enabling step-by-step innovations, but in being rigorous and establishing a focused pipeline of innovations in line with a clearly defined strategy.

How can we counter this risk?

As difficult as it may be for companies to adapt and as numerous the examples of failure as there are, it is possible to succeed. Even large organizations are capable of change. Take Fuji, for example. After finding itself in a similar situation to Kodak, Fuji applied its knowledge of chemicals to establish a cosmetics arm. IBM started life with punch cards, before constructing typewriters and computers. Today, the company enjoys success principally in cloud and consulting business. Even Deutsche Telekom has an impressive history of change to its name: From the German telephone authority to an international Internet and mobile communications giant with business areas for TV, Smart Home, business customers and Internet security to name just a few. In light of all the factors mentioned, it is hardly surprising that this transformation did not always go without a hitch. But neither is the transformation complete; it is an ongoing project.

So, what can give companies the courage to take the plunge and jump out of familiar waters to adapt themselves to new circumstances? Some pointers:

1.   Install a good trend radar.

Looking into potentially disruptive innovations outside of your own company is essential to survival. It’s about identifying new business models at an early stage and, in case of doubt, integrating them into your own company. It’s also about finding out the dangers posed to your company by innovations from elsewhere, like Google Loon or StarLink by SpaceX.

At Deutsche Telekom, we now have a whole network of trend scouts in place, from the Strategy department, our T-Labs research facility, management consultants Detecon, the capital venture arm DT Capital Partners, to our start-up incubator hub:raum. But none of this is a replacement for keeping track of industry trends yourself. I travel to Asia, North America, Israel, or other centers of innovation in our industry at least once a year.

2.   Build innovation islands and keep them separate from the complexity of the company.

It is often useful to develop new units away from the complexities of the Group in order to sidestep departmental politics. This policy has since been adopted by giants of Silicon Valley such as Alphabet: “Jigsaw” is an in-house innovation unit that develops technologies to “tackle some of the toughest global security challenges facing the world today.”

Deutsche Telekom has set up similar units in the form of T-Labs, DT Capital Partners, and the hub:raum incubator. Deutsche Funkturm, which develops antenna sites, is now also run independently of the Group. The first positive outcome has been the idea to establish a Germany-wide “gas station network” for electric cars – 12,000 of our gray boxes are theoretically suited to use as charging stations.

Incidentally, over Deutsche Telekom’s history the T-Mobile unit also followed its own path, developing outside of the conventional Group structures. Thus, at a certain point another question is whether and how new units, upon reaching a relevant size, can be re-integrated back into the Group as a whole in order to tap synergies.

3.   Find innovators for core business.

Major innovation must always come from those at the company responsible for classical value creation. Bringing in CDOs or nerds from outside the company can only work where managers in conventional value creation structures call for and implement innovation. That’s why it is key to pay managers not only according to what they do in day-to-day business, but also in terms of what innovations they set in motion.

4.   Employ different personalities.

This point might sound hackneyed. Look at any study and it will tell you that teams with diversity are more successful than ones without. Despite this, businesses tend to (see confirmation bias) favor people similar to those already on career paths within the company. The result? Existing know-how is not enhanced by outside perspectives. And the lack of new ways of thinking means no new solutions. We are already seeing nerds take over the business. These are the inventors of new products, who only get help as an afterthought from traditional managers to turn ideas and technologies into marketable products. We need to attract these nerds to the company.

5.   Get the capital market on side.

It’s no wonder that start-ups need venture capital. No bank would give them financing, because banks (see above) also want to see business plans. But we are also seeing developments in corporations, along with business plans that are not immediately transparent or are focused on the long term, while the capital market continues to think in shorter cycles and is also subject to trends. Put another way, capital is a deer that spooks easily. You have to create a basis of trust to prevent it from flitting away. Credible pitches that convince decision-makers that investment generates lasting success for a company are essential. These are needed to create the opportunity to implement projects that earn little return or even cost money in the short term.

6.   Acquire new skills.

This doesn’t just apply to individual employees; it extends to the entire DNA of a business. Take Deutsche Telekom, for example, which used to be one of the largest employers of photographers. They would photograph the meter readings in the gray boxes for billing purposes. That is no longer the case today, of course. Nowadays, Deutsche Telekom needs extensive expertise in the field of software and IT, the Internet of Things, and in cyber security. (Don't Apply! ;-) )In the worst case, simply making staff reductions – as essential as this may be – is a kind of death by a thousand cuts. Rather, it is about restructuring the workforce. Some departments will be eliminated to create the opportunity – however necessary efficiency may be – to build new ones.

The purchase of other companies can also be a way of acquiring new skills. For example, Apple recently bought up German tech company SensoMotoric, which specializes in the innovative field of virtual and augmented reality.

But all of these aspects are still no guarantee of a successful transformation. At most, they are pointers. As Thomas Edison said:

“I have not failed. I have just found 10,000 ways that won’t work.”

The important thing is that we still try these ways. You might not know exactly where you will end up, but you will certainly get there one way or another.

And even if you start down the wrong path, a comeback is often only a day away. Kodak recently made headlines for using blockchain technology to manage digital image rights. The share price increased tenfold. All just hype or a former “frog” that jumped big? We’ll have to wait and see.