‘People’s relationship with their employer is changing’
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 missioncritical 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 missioncritical 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 projectbased 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.
Source | Mint | 16th October 2017
Regards
Pralhad
Jadhav
Senior Manager @
Knowledge Repository
Khaitan &
Co
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