Deviants: Learn from the world's weirdest companies

Learning from deviant companies isn’t glamorous and it isn’t easy. The trouble is, the business media does a good job of sexing up its stories of maverick executives who are on a crusade to reinvent management, and many people get swept along by these stories and allow themselves to believe that such changes are straightforward. But nothing could be further from the truth.

This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.

Where do new management practices come from? A few emerge fully-formed from the minds of academics and consultants, such as the Net Promoter Score developed by Bain Consultant Fred Reichheld. But the vast majority come from corporate executives experimenting with new ideas in their own organizations. Recent well-known examples include P&G’s Connect and Develop, HCL Technologies’ open 360 feedback, and Google’s Innovation Time off. Older examples include GE’s Work Out, Oticon’s Spaghetti organisation, WL Gore’s Lattice structure and Jack Stack’s Open Book management. In such cases, there is often an academic or consultant involved in thinking through or popularizing the new practice, but the heavy lifting is done internally – by a team of executives who are trying something new, pushing the boundaries of what is possible.

For the last decade, my research has focused on understanding how new management practices emerge. It is tempting to see the companies pushing these new models as exemplars, as beacons of best practice that others can learn from. But I have come to see them as deviants. Just like in the X-Men movies, these companies have something unusual about them –they are different to the thousands of companies around them, and this unusual quality appears to make them stronger or faster. But they are also viewed with a little suspicion –the rest of us don’t quite know what to make of them. Is their unusual way of working really something we should aspire to? A case in point is Semco, the Brazilian industrial products company. Its CEO, Ricardo Semler, has described his radical experiments with workplace democracy, including letting employees set their own salaries and choose their own bosses, in the best-selling books Maverick and The Seven Day Weekend. But the typical response, when reading Semler’s story, is “well, that’s all very well in Sao Paulo, but we couldn’t do it here.” Semler arouses feelings of inspiration and scepticism in equal measure. His ideas have been disseminated widely, but I don’t know of any company that has successfully adopted them.

In this article, I take a close look at these deviants, and I ask: what can we really learn from them? The answers turn out to be a bit surprising. While these deviant companies, with their progressive and unusual practices, attract enormous interest, they and their innovations often fall out of favour, and well-intentioned attempts to learn from them by other companies often fail as well. But there is also a bright side to this story. It turns out there are indeed ways of learning from these companies, and of making significant improvements to your own ways of working, as long as you know what you are doing.

The rise and fall of deviants
There are many different types of deviant company out there. There are the upstarts – small companies with crazy and highly informal ways of working, such as Google, IDEO or Zappos a decade ago. There are the certified weird– bigger companies with highly unusual management models and often some distinctive form of governance, such as Semco, WL Gore, John Lewis or Morning Star. There are the dancing giants –established companies with pockets of highly unusual practices, such as P&G, HCL, or IBM. And then there are the other species - organisations that don’t come from the business world – Alchoholics Anonymous, Sadlers Wells Theatre, CERN – that are seen as a source of insight. All four of these types of deviant are pushing the boundaries of management practice, and doing things others can potentially learn from.

These deviants existent in a symbiotic relationship with people like myself who research and write about the world of management. Academics, journalists and consultants love to write about the latest new management practices, to increase our own visibility and to get our pet concepts and theories across. But equally the executives running these deviant companies typically love the attention we give them – it makes their ideas more visible, and it often helps them generate support for their new practices inside and outside their company.

But this symbiotic relationship has a dark side as well, and unfortunately many new management practices become over-hyped fads that fall from favour as quickly as they appeared. The cycle is rather predictable. In the first step, the new management idea is discovered and gets written up in the popular business press, typically under a heading such as “the future of management”. In the second stage, many more journalists, consultants and academics pile in, providing additional visibility and amplification of the original story. Other companies also start to take notice, and the executive responsible for the new practice becomes very busy, meeting with his inquisitive counterparts in other companies. In the third stage, concerns start to emerge. Often the company simply grows up and the new practice doesn’t make much sense any more. Sometimes, the new practice ends up having its own limitations, and the company reverts back to its old model. And occasionally the company as a whole gets into trouble, and its management practices are discredited. This thus leads to the fourth and final stage, where boom leads to bust. The new practice turns out not to be so special after all, the company falls out of favour, and the “brand” of the new practice becomes tainted.

Danish hearing-aid manufacturer Oticon is a classic example of this cycle. In 1991, the CEO, Lars Kolind, instituted a radical new management model he called the Spaghetti Organisation, in which employees were empowered to create their own development projects in a bottom-up way, rather than in response to top-down plans. This organic model was intended to create greater flexibility and responsiveness to changing market demands, and to stimulate greater creativity and commitment from employees.

The Spaghetti Organisation was a great success –for a time. Oticon brought record numbers of new products to the market, and its sales and profits increased through the early 1990s. But perhaps inevitably the bottom-up development process brought with it costs as well as benefits, with resources being wasted on projects that weren’t going anywhere, and a lack of coherence to the portfolio of new products. During the late 1990s, and accelerating with Kolind’s retirement in 1998, there was a gradual turning back towards a traditional structure, with employees shifting between projects less frequently, and more formal reviews. While the company continued to perform well through this period, the Spaghetti Organization was viewed by one observer as a “partial failure” and the level of interest in the company gradually tailed off. Figure 1 is a count of all the articles and texts written about the Spaghetti Organization over a twenty-year period: media interest spiked quickly and then dropped off, while academic interest was slower to take off, but it too peaked and then dropped off.

Figure 1. Number of articles written about Oticon’s Spaghetti Organization over time

This is a very common syndrome. Some innovative management practices stick around – the Balanced Scorecard, Six Sigma, Lean Manufacturing, Agile software development – but these are the exceptions. The more usual outcome, as exhibited by the Spaghetti Organization but also by Business Process Reengineering, Matrix Management and Strategic Planning, is for the branded concept to fall out of favour (though it’s worth noting that even when the brand is discredited, some of the techniques associated with it still live on under a different name). I have built a database of more than 100 of these branded management innovations, and fewer than 10% are still d for more than a decade.

Learning from deviants
So what to do? Are these new management practices all destined to succumb to the principles of fashion, whereby some companies stop using them after a while simply because they are too popular? Are they mostly just empty rhetoric without any real substance behind them? Are deviant companies doomed to exist outside of the mainstream of corporate life?

My answer, built on analysis of my database of new management practices and on my experiences of working with companies trying to learn from Deviants, is that we can become much more effective at harnessing these innovations. But it takes skill and patience, and a great deal of self-awareness.

I believe there are three distinct ways of learning from Deviant companies, but each one is riddled with challenges. To describe how these three approaches work, it is useful to consider the following diagram.

What it shows is that most companies pursue an established set of management practices (A) that are made sense of through an established set of theories (B). For example, the way organisations are structured builds in part on Max Weber’s theory of bureaucracy, while the way people are rewarded builds on the motivation theories of Douglas McGregor, Frederick Herzberg and Abraham Maslow.

When a new management practise is identified (C) and made popular through the process described above, there are three different ways that it can potentially be used to help another company.

Figure 2. Three different ways to learn from new management practices

1. Observe and apply
The most obvious – but potentially most hazardous—approach is to observe how the deviant company is using the new management practice in situ, and to apply it back to your own company. For example, Google is well known for a policy of Innovation Time Off, whereby developers spend up to 20% of their time on their pet projects. I often discuss this policy with companies who are trying to become more innovative, and several of them have tried instituting it in their development labs. But the results are typically underwhelming – there isn’t enough buy-in to the policy so it is implemented unevenly, people don’t know what to do with their slack time, and the initiative gets terminated before the “20%”projects have been given a chance to succeed. What worked at Google (when it was small) does not work in a large, traditional company. No surprises there.

A more extreme example of the perils of Observe and Apply is GE’s famous “rank and yank” approach to performance evaluation. This was put in place by Jack Welch during the last few years of his tenure as CEO. The idea was simply to rate all the employees within a unit (for example, a sales team) on a curve, to reward and promote the high performers, and to move out (or provide remedial training for) the bottom 10%. This model worked well in GE’s high-performance, individualistic culture in the late 1990s. But it proved disastrous in many of the other companies who adopted it without fully thinking through its potential consequences. At Microsoft, for example, Vanity Fair editor Kurt Eichenwald found that rank and yank had contributed to a damaging internal culture that hampered collaboration:

“Every current and former Microsoft employee I interviewed—every one—cited forced ranking as the most destructive process inside of Microsoft …It leads to employees focusing on competing with each other rather than competing with other companies.”

It’s fairly obvious why Observe and Apply is hazardous. Every company develops its own way of working, and typically this involves the creation of bundles of management practices working together to support one another. If one practice is isolated, pulled out, and applied in a different context, it is very likely to fail. During the 1980s, at the height of the Japanese economic boom, there were many Western companies who tried Observe & Apply with Toyota, Honda and Matsushita. They instituted company songs. They created Quality Circles. They developed long-term plans. And most of these efforts came to nothing, because these leading Japanese companies were different on so many complementary and often invisible dimensions.

Another problem with Observe and Apply is that there are often specific circumstances that make a particular practice work in one company that simply don’t apply in another. For example, UK retailer John Lewis has industry-leading employee engagement and retention scores, thanks in large part to its generous benefits package, employee input to the election of top executives, and an egalitarian rewards scheme that gives front-line workers the same annual bonus (as a percentage of salary) as the CEO. But John Lewis is an employee-owned partnership, and most of its progressive policies can be traced directly back to the founding principles on which the partnership was established – making it almost impossible for a shareholder-owned company to emulate them.

So how can you use Observe and Apply? In my experience, it is effective in two situations. The first is where your company’s management model is very similar to the one in the company you are trying to learn from. Two software companies operating at level 4 on the Capability Maturity Model (CMM), for example, are already working with similar techniques and a common language, so if one puts an enhancement in place, the other is likely to be able to use Observe and Apply quite successfully.

The other situation where Observe and Apply works is in those few cases where a new management practice is relatively discrete – that is, not dependent on any other practices for it to function effectively. For example, GE is very well-regarded for its succession planning process, and most observers saw the transition from Jack Welch to Jeff Immelt in 2000 as very well managed. The practices underlying this transition, such as taking a long-term view, creating transparency around the process, and planning for the likely departures of those who didn’t the job, were relatively easy to codify and sufficiently discrete that have been successfully copied by a number of other companies.

2. Extract the principle
The second approach is to extract the underlying principle from the deviant company’s practice, and to figure out how to recontextualise it and apply it back in your own company. This has its own challenges of course, but as a general rule it is a more promising way of learning from deviants.

Here are a couple of examples. Back in 2000, UBS Wealth Management was seeking out ways to grow, following a successful merger. While brainstorming the various obstacles to growth, the executive team realized that its budgeting process was one of the biggest blockers to growth – it was a laborious, time-consuming activity, and it required compromises between the people building the business out in the regions, and the team at the centre who were in charge of the financial targets and bonuses. So they started looking into ways of rethinking budgeting, and one person mentioned the unusual Swedish company, Handelsbanken, which had done away with budgeting ten years earlier. The CFO, Toni Stadelmann, travelled up to Stockholm to meet his counterparts at Handelsbanken, but its retail banking model was not one they were familiar with: “…it was not what we thought it would be,” he recalled, “Handelsbanken were in different business models, so we could not learn as much as we had expected”.

But Stadelmann and his team were smart enough to realize that the principles used by Handelsbanken –greater accountability to the front line, friendly competition between peers, less oversight from the centre—could work for them. So they put together their own light-touch budgeting model, and it became an important factor in their successful growth over the following five years.

Another example is Glaxo Smith Kline (GSK), whose executives became very conscious during the late 1990s of the threat posed by the biotechnology revolution to their traditional R&D model. Some of their competitors, including Roche and BMS, spent large sums of money buying up biotechnology companies to bolster their development pipelines. GSK’s executives took a bolder approach – they decided to replicate the unusual management model used by biotech companies inside their own boundaries. This meant creating focused and cross-functional teams that were focused on a specific therapeutic area. In the words of Allan Baxter, head of drug discovery, “the challenge for GSK was to put together an R&D organization that benefited from the best characteristics that big pharma and small biotechs had to offer.” While GSK’s new “centre of excellence” model created many management challenges, it was implemented successfully, and helped GSK to retain its position as one of the top pharmaceuticals companies in the world.

But extracting the principle does not always work, and in my experience it is quite hard to do well for a couple of reasons. First, identifying the underlying principle isn’t a trivial matter. We are all prisoners of our own experience, and it’s often hard to see the forest for the trees. My colleague, Gary Hamel, recalls discussing Toyota’s success with some top executives at Ford during the 1990s. Ford benchmarked the cost and quality of their products against Toyota’s on an annual basis, and they tried many approaches, such as automation, training, and quality circles, to get closer to Toyota’s performance figures. But the problem was Toyota had built its entire system on a deep seated principle – that investing in the problem solving skills of employees would yield a positive return—that Ford’s executives couldn’t get their heads around during the 1970s and 1980s. It is often quite easy to identify mid-range principles, such as the notion that “quality is free” because it reduces reworking costs. The challenge is to peel back the onion further so that the underlying principle –the one that works across multiple contexts –is exposed.

A second and linked challenge is that even when the underlying principle has been extracted, it is often very difficult for a company to use. I recall working with a large investment bank on the challenge of cross-functional collaboration. We spent some time identifying the underlying principles that enable collaboration –shared goals, transparent communication, motivation to share knowledge—and discussing examples of “deviant” organizations that did these things well. But when it came to applying these principles, there was no way forward – the bonus culture was so entrenched, and so focused on individual performance, that it quickly became clear that all attempts to encourage collaboration were doomed to fail. Some ideas were proposed but they were superficial, because they didn’t –and couldn’t—challenge the underlying incentive structure that was shaping everyone’s behaviour.

Of the three approaches, extracting the principles behind a deviant company’s unusual way of working is usually the most powerful. As with all forms of innovation, it is rare for a new management practice to emerge through a eureka moment; instead, it occurs when someone observes an interesting practice in one context, and then makes the creative leap to see how it could be adapted to a different context. There are many cases, such as with UBS and GSK above, where this approach has been highly successful, and I often apply this thinking when working with executive groups (see the action plan in the last part of the article).

3. Know yourself better
The third approach is subtly different to the second, in that it involves learning from the deviant company as a way of improving your understanding of why you do what you do, which in turn helps you to sharpen up and improve your current practices.

Consider the Swiss pharmaceutical company, Roche. A team of executives looking into new ways of working came across Innocentive, a well-known open innovation platform, in which a technical challenge is posted online to thousands of potential “solvers” from around the world. They did a quick trial on Innocentive, with a thorny technical problem the R&D team had been struggling with, and it yielded some imaginative and useful new ideas. They then tried out a further ten technical challenges, but with mixed results: many of the solutions were interesting, but even those with potential weren’t always followed up on. As Josh Aber, the executive in charge, recalled: “technologists are always looking for options, but the nature of an option is that you don’t always use it. The sweet spot, it turns out, is more on the process technology side than the science side, because when a process problem is solved, it gets implemented immediately; there is a very clear payoff in these cases”. Innocentive, the team concluded, was not the answer; rather, it was an answer for a certain type of problem. This insight allowed the R&D organization to be more explicit in choosing among different approaches to problem-solving. “This has given us some real insights into how better to manage innovation in Roche,” explained Josh Aber, “We have figured out, of course, that there is no best way – there is a portfolio of approaches, and the trick is matching the challenge to the right mechanism. That is where we are heading now”.

As this example should make clear, the know yourself better model doesn’t happen entirely by design. And this is where the challenges lie. The executives went out on a limb to try something unusual, and to take a certain amount of personal risk in the process. So getting people in your company to put these sorts of management experiments in place is not easy. Moreover, there is the additional challenge that when the experiment doesn’t work out quite as planned – or when the first obstacles are encountered – the default mode of operation in a large company is to shut it down, and to pretend it never happened. But usually there is an enormous amount of learning in such experiments, and for those companies that are prepared to review their progress, see what worked and what didn’t, and adapt accordingly, the rewards are substantial.
Knowing yourself better may not result in dramatic changes to your management model, but it helps to sharpen up your existing practices, and also to gain self-awareness. The poet TS Eliot said it best: “We shall not cease from exploration, and the end of our searching we will return to where we started and know it for the first time.”

Learning from deviants: An action plan
So what does all this mean in practice? Deviant companies – the ones with weird and wonderful management practices- make great copy. Zappos got a ton of free publicity earlier this year after announcing its plans for managerless working. But these companies and their management innovations need to be handled with care. Part of the responsibility here lies with consultants, academics and journalists. It is always tempting to label a company with an unusual way of working as the “next big management idea” but it is a short-sighted approach, because new management ideas always need to be operating for some time before they can be deemed to be successful, and they need careful analysis before the boundary conditions around their applicability are properly understood.

But for executives in other companies – the ones who look to the Deviants as beacons of best practice—there is room for improvement as well. When a Deviant company is brought to your attention, you shouldn’t ignore it, as it might well be onto something; but neither should you fall for its charms too readily, as there are plenty of reasons to be sceptical about the applicability of its model to your context. There is a sensible middle ground here, and it is involves asking some very specific questions about what that company is doing, and how it relates to your own management model.

***

Learning from deviant companies isn’t glamorous and it isn’t easy. The trouble is, the business media does a good job of sexing up its stories of maverick executives who are on a crusade to reinvent management, and many people get swept along by these stories and allow themselves to believe that such changes are straightforward. But nothing could be further from the truth. The deviant companies themselves typically had to work very hard, over many years, to put their new ideas in place. And applying their ideas inside your own company is likely to take at least as long, and with a high degree of skill and self-awareness along the way. Hopefully this article provides a sense of realism about what the journey of change looks like, and some tactics that will increase your chances of success.

This article draws on ideas published in “Beware the Next Big Thing” by Julian Birkinshaw, published in May 2014 in Harvard Business Review