What if it turned out that best practices were not “best” after all? What if adhering to best practices actually signaled a company’s mediocrity?
Those aren’t frivolous or absurd musings. They’re central tenets of a quite serious new book, “Detonate” (Wiley, May 2018). It aims to help organizations “spot traditional business activities that need to be questioned” during an era when business is increasingly defined by disruption.
“The entire concept of best practices, by definition, means that you’re doing the same thing as your competitors,” write the authors, Geoff Tuff, a leader in Deloitte’s innovation and applied design practices, and Steven Goldbach, the firm’s U.S. chief strategy officer.
The book’s title references the authors’ desire for companies to blow up many cherished notions about how to do things. Some of their recommendations are startling.
Here’s one: “Revenue should be the last thing you worry about.” And they mean that literally.
A revenue target, the authors note, is usually based on past revenue performance, comparing that to “expert forecasts” of what the company’s industry will do next year, and plans for how to increase the company’s share.
After revenue is locked in, the company decides what profit it wants to make. “That tends to be a function of what [it] promised the capital markets” or “what [it] might need to fund obligations such as debt servicing.”
Only then does the company turn to costs: “knowing” its revenue, what can it afford to spend to hit the profit target? According to Deloitte research, 68% of companies forecast costs based on a percent-of-revenue target.
All of that is backward, the authors proclaim, and with vigor.
“This pattern reflects no reality that we’ve ever inhabited,” they write. “In fact, reality literally works in the opposite way. Costs create revenue, not the other way around.”
Here’s what they mean. Each year, a company has to give its revenue providers — customers — a reason to behave favorably toward the business, whether by continuing to buy its products, switching from competitors, or agreeing to pay more.
“And by thinking about what behavior needs to happen to cause revenue, you then naturally have to think about what your business needs to spend to cause that behavior,” the authors observe. “Sometimes this might look like it might have in the past. Many times it won’t. Unfortunately, businesses rarely ask the questions at this level of granularity.”
Indeed, it’s imperative for executives to “get out of the habit of believing they have an inalienable right to revenues because [the company has] grown at a particular rate for the last few years,” Goldbach tells CFO in an interview, a point that’s also made in the book. “It’s a risky habit, because it perhaps causes you to not spend enough to keep your customers in the wake of disruptive competition.”
Four Core Principles
Focusing activities on understanding and driving human behavior is one of four core principles the book espouses for enabling companies to challenge orthodoxy and, where necessary, detonate best practices. It calls changing human behavior — that of employees as well as customers — “the fundamental subatomic element of business.”
A second principle is to “bring a beginner’s mind” to all business activities.
Executives that have grown up in a company or industry may rightly claim some degree of expertise — in how they do things, how competitors are likely to act in certain situations, how regulators view mergers, what motivates employees, and more.
However, the authors warn, “if new competitors are suddenly showing up on the scene completely unpredictably, and new technologies appear at your disposal for various purposes in dizzying frequency, your wisdom is actually not just useless but possibly dangerous.”
Third, companies should embrace impermanence.
The archetypal corporation believes it will never go out of business. And from the early 1900s until just a few years ago, it was a reasonable belief, as “the business models needed to compete were predictable and stable,” the book points out.
Today, “impermanence reigns at all levels,” the authors write. At the personal level, no one is employed for life. At the macroeconomic level, frontier economies can leapfrog over developed economies in new and surprising ways, as exemplified by the rise of mobile-first economies in sub-Saharan Africa.
In between, businesses “have to be prepared to create structures, processes, and systems that aren’t expected to last forever.”
Fourth, with respect to “almost any business activity that is done in the face of uncertainty,” companies are best off making what the authors call “minimally viable moves.” For instance, a first-of-its-kind product must be tested in the marketplace, but the size of the test should be limited.
The book gives the example of Forbes, which in 2000 mailed nearly a million barcode scanners to its subscribers. The devices enabled the scanning of barcodes within print ads, which took users to a website for more information.
But, disastrously, users of the product needed to plug it into a computer and be connected to the Internet. Since WiFi was far from ubiquitous, most people would have to be reading the magazine at their desks in order to use the scanners. The device quickly flamed out.
Testing the device among a small portion of its readership would have saved Forbes enormous expense and saved its sales force from spending months driving advertisers to put barcodes in their ads.
What Else to Detonate?
De-emphasizing the focus on revenue, as discussed above, is among several recommendations the book offers for abandoning common business practices. Each recommendation rests on one of the four core principles.
For one, “Detonate” counsels that a strategic planning schedule, such as an annual strategy review and reset, is largely a waste of time. “We’ve always found it curious that planning needs to align with the earth’s rotation around the sun,” the authors comment.
Three-year and five-year plans are also based on arbitrary time horizons, which businesses create “without really considering when the best opportunity would be to revisit decisions.”
Again here, behavior change is the core principle at work. “For customer behavior, your planning period should reflect the minimum amount of time you need to test whether your actions are having the desired effect,” the authors write.
The book also criticizes companies for their overuse of external information. According to a Deloitte survey, 85% of respondents’ companies subscribe to published industry data reports, and 55% said executives ask for such syndicated data before making important decisions.
The core principle that applies here is keeping a beginner’s mind. A beginner might naturally lean toward deciding what measures to use based on the company’s objectives rather than on data that happens to be easily available.
In the latter case, “Over time, the strategy becomes oriented around trying to drive improvements in the publicly available data. This does not necessarily drive business performance.”
Notably, such data is equally available to competitors. Therefore, companies should seek ways to create proprietary data and insights, the authors contend. “Done properly, this allows you to make moves your competitors can’t see or wouldn’t have made.”
Another “best practice” to detonate: Companies should put much less stock in what customers say they want, according to the authors. They point out that social scientists have consistently shown a sizable gap between what customers say they want and how they actually behave.
Transformative business models tap into customer behaviors that are unknown because they don’t currently exist. “We have to create the behavior,” the authors write. It calls to mind the famous quote attributed to Henry Ford: “If I had asked my customers what they wanted, it would have been a faster horse.”
The authors are perhaps most passionate in their recommendation that companies stop celebrating failure. The practice excuses mediocrity, they say.
“We understand that organizations are trying to encourage risk-taking in an otherwise risk-averse environment, but when your license to operate is tied to your ability to generate return value to your business owners, carrying around a mindset that failure is okay is irresponsible,” they write.
But how can companies appropriately view failure when, as the authors say, experimentation in the marketplace is necessary for successful business-model transformations?
The concept of minimally viable moves provides the answer.
“It’s OK to have an incorrect hypothesis,” says Goldbach in his interview with CFO. “But design something so that if your hypothesis is incorrect, you can adjust course. In a world that’s really changing, you want to design minimally viable moves to get the learning, confirm your hypothesis, then move on and scale once you’re more confident.”
The end of the book provides one of its most startling thoughts: growth isn’t an imperative for a company. It’s a choice.
“Topline growth, in and of itself, doesn’t create intrinsic value for a business,” the authors opine. Growth requires investment in new capabilities to serve the needs of new customers. “In many cases, the cost of finding these new capabilities will outweigh the opportunity they might create.”
Many companies should simply embrace impermanence by accepting the idea that they’re not going to exist forever. That could mean “resisting the urge — when topline growth in any given category starts to trail off — to diversify into new areas.”
The authors are quite aware how odd that thought likely seems to most executives.
“For a couple of guys who have spent a good portion of their careers extolling the virtues of innovation, this may sound downright disingenuous,” they write. “But maybe there’s something to simply driving more value from your existing business.”
Illustration by Tom Fishburne. Excerpted with permission of the publisher, Wiley, from “Detonate” by Geoff Tuff and Steven Goldbach. Copyright 2018 by John Wiley & Sons, Inc. All rights reserved.