Models Are Mind-Sets

A working business model is a mind-set—a rich, tacit understanding of how all the pieces of an enterprise work together to create value. When an organization is at the top of its game, this understanding is shared broadly as ‘‘the way we do things,’’ and the company operates with single- minded clarity. Take Mary Kay Cosmetics, for example. It hasn’t changed its highly effective business model in decades, and managers up and down the chain know exactly how things work.

When markets change, however, the same mind-set can make a company seem completely out of touch. Especially when a company has been successful, business model mind-sets can get in the way of growth. One very profitable global-insurance company, for example, had tried several times unsuccessfully to tackle the low end of the commercial insurance market. A company executive recounts: ‘‘They failed because of their view of the world—their model. They knew very well how to manage difficult risks and work through high-end brokers. In the low end, the whole process is different—the way you market, sell, and underwrite. Instead of a raft of financial specs, reports, and a staff of highly paid underwriters, you need a few people and a computer. They just didn’t know how to do this.’’

When executives change organizational structures, what they’re frequently after are new mind-sets. By carving out new units, mashing existing units together, and redrawing the boundaries, they give their managers both the incentives and the space to reconstruct their mind-sets. For example, Teradyne’s CEO decided that the product line was ready for a disruptive technology, and he set up an internal start-up to develop it: a handful of people with a radical charter, $12 million in investment funding, and a lot of autonomy. Freed from the company’s established practices, they created a new product platform, a new market, a new price structure, and a new business model. Explains Hap Walker, manager of advanced development: ‘‘We would never have been able to do this within an existing division. Establishing an internal start-up let us focus people’s full attention on the product and quickly free them from their existing mind- sets, rules, and traditions.’’^[9]

Outsourcing has the same effect. Executives agree almost unanimously that their own organizations could never have accomplished what the outsourcing partner did. Peter Bareau justified the extensive changes in his senior team by saying the previous incumbents were ‘‘associated with the old way of doing things.’’ MOL CFO Michel-Marc Delcommune explained that his own organization might have been able to implement a shared-services center, but it would have been ‘‘inside the old envelope,’’ rather than ready for more changes.

Consider this. In some outsourcing initiatives, the individuals actually doing the work do not change at all. The people who were answering calls in the call center before the transition are still sitting there after the smoke clears. There may be fewer of them; they may have new tools and technologies. But what has really changed is that they are under new management and they are serving a customer, not a boss. They have moved to a new organization to get a new mind-set.

What many executives fail to realize is that a single organizational unit doesn’t have to mean a single mind-set. Fluid companies avoid the cost and trauma of repeated structural change by inviting each organizational unit to master multiple mind-sets and the ability to switch among them at will. Let’s first talk about how this works in general, then look at how it applies to transformational outsourcing.

Your Organization Already Knows How to Change Mind-Sets Quickly

Whether they know it or not, almost every organization has experience managing multiple mind-sets and changing them quickly. Some of these may not be as all-encompassing as business-model mind-sets, but they make the point.

What happens in your company when there’s a hurricane, a flood, or a product-tampering threat? Most companies have crisis teams and planned approaches for situations like these. When disaster strikes, the members of the team switch hats, assume their responsibilities, and begin to manage the situation. In the military, soldiers know exactly what to do when the commander signals for ‘‘battle stations.’’ And these transitions take minutes, not months.

People switch mind-sets when they switch roles, change tools, or step into a new situation. In the early days of artificial intelligence, for example, a CIO I know wanted to learn more about it. He took a course and hired an expert for his staff, but he knew he needed to get his hands dirty to really understand the potential of the new technology. So he bought two hats—a red one and a blue one. When he had the red hat on, he was in his CIO role and the AI expert reported to him. When he wore the blue hat, he was a member of a pilot AI project, and he reported to the AI expert. This is an unusual approach for an executive to take—many could not tolerate being so vulnerable to a subordinate—but this executive actually got the learning he was after.

I have another story about hats to illustrate how people change mind- sets when they change tools. This one takes place at midnight in the back office of a large East Coast bank. The bank had been on the acquisition trail for years. The signage had been changed on the front door of the latest conquest, but it had not yet been operationally integrated. That meant there were two separate systems running in the back office for processing the day’s transactions. Management issued two hats to the people encoding checks and entering transactions. When they wore their red hats, they were doing the parent bank’s work. When they switched to the acquired bank’s transactions, everyone put on a blue hat to help keep things straight. No one would mistake this for the right way to run a bank back office, but it helped this organization function until the systems caught up with the signage.

Nimble Companies Drive Growth Through Mind-Sets

A few companies have learned to leverage the power of multiple mind- sets to frequently and fluidly change business models without changing organizational structure or undergoing transformational upheaval. For example, a large distribution company we’ll call Zing anticipated dramatic changes in its market as its retail customers consolidated. Suppliers shifted more than 50 percent of their volume out of the channel and direct to the retailers, but Zing didn’t miss a beat. They opened up a new line of business by offering to provide Internet retailers with pick, pack, and ship services along with a virtual store and database catalog support. Zing’s vice president of business development said, ‘‘It was easy to offer these services for the products we already sell—videos, DVD, TVs, consumer electronics. Now we’re expanding to other products as well. This is all very profitable.’’

What makes Zing distinctive is that it did not create a separate Internet division to tap this new opportunity. It runs lots of different strategic business units—the core distribution business, publications and advertising, Internet fulfillment, two e-commerce sites, and a business that specializes in the grocery trade—all with the same core people under the same leaders. Instead of dividing its business into multiple organizational units with one unit per business, Zing’s leaders have chosen to cultivate multiple business model mind-sets, all of which reside in each of their employees’ heads.

Zing’s vice president explains: ‘‘We are growing phenomenally, but we haven’t built a huge infrastructure by maintaining separate organizational units. This has kept our costs down, and has enabled us to prevent the layoffs that our competitors have been forced to undergo.’’ Managing mind-sets instead of organizational units has also enabled Zing to adapt more quickly to a changing environment. ‘‘This way,’’ explains the vice president, ‘‘we can more easily make the moves and experiment as we go.’’ The result? Zing’s two closest competitors have gone out of business, while Zing remains quite profitable.

In an example from another industry, Eli Lilly and Company has taken a fluid approach to innovation over the past two or three years. In the past it focused on vertically integrated operations: discovering, developing, and commercializing drugs that address unmet patient needs. With the spate of consolidations in the industry, Lilly has adopted an explicit strategic decision not to join in the fray. Instead, it aims to create an abundance of innovation—‘‘having the stuff,’’ as senior executives say. They reason that having distinctive intellectual property will give Lilly the strategic position to capture more of the industry’s value than other companies will. And it plans to exploit its innovations through a holistic process it calls ‘‘discovery without walls.’’ It will partner with universities, strategic partners, competitors, private research labs, and even individuals in a wide variety of ways to bring in new ideas, turn them into patentable products, and commercialize them.

Peter Johnson, Lilly’s vice president of corporate strategy, explains the flexible process it will use to move resources to the right opportunities. He admits, ‘‘We’re not terribly good at deciding what the big markets are going to be 10 or 15 years out. By the way, our competitors aren’t very good at that, either. So we’re trying to work with as many different and potentially valuable compounds as possible.’’ In addition, Lilly is positioning itself as the partner of choice for collaborations of all types. That way it will have the broadest possible visibility and access to new discoveries, specialized development capacity, manufacturing resources, and commercialization capabilities. It will be able to move deliberately toward any market that shows promise.

Internally, the Lilly organization must be ready to shift gears from inside discovery programs to collaborative ones and even to out-licensing intellectual property. Each of these represents a different way of creating value—a different model. Senior executives will set the priorities and call the plays, and Lilly’s multitalented workforce will switch hats as appropriate.

When Should You Use a Fluid Approach?

If your business environment is demanding and you’re after growth, you’ll want to consider managing mind-sets. You’ll be able to change and add business models faster with this approach than with the oneorganization, one-model limitation, and you’ll also be able to experiment with new models without sacrificing profitability.

But managing mind-sets as opposed to organizational blocks does exact a cost. First, your employees may incur some switching cost as they shift from one mind-set to another. This is the same kind of deliberate transition we all go through as we wind down from work at the end of the day. In addition, attention management becomes even more challenging. Explains the vice president at Zing: ‘‘People often get frustrated because they have to constantly shift their attention between different mind-sets. If managers don’t carefully help people focus attention where it belongs, this approach could be a disaster.’’

Finally, most individuals can master and use many different mind- sets, but developing a new mind-set often takes a great deal of attention. For example, a few years back, the CEO of a traditional newspaper decided to redirect his organization to consider itself a multimedia communications company. To accomplish this, he had to change the way they wrote stories. Instead of traditional, linear news stories, they had to produce a set of related vignettes that could run in the paper but could also be hyperlinked on the Internet. And they had to ‘‘accessorize’’ the pieces with video and audio clips as well as photographs and graphics. The CEO recognized that mastering the new mind-set would take effort. He first pulled the writers, editors, graphic artists, and photographers into a single bull pen so they could work together intimately. Then he asked them to write—and rewrite—every story in the new way, as a group, for a year. That was what it would take, he reasoned, for these experienced journal- ists to master a new way of working.

^[9]Jane Linder and Susan Cantrell, ‘‘It’s All in the Mind (Set),’’ Across the Board, May/June 2002, pp. 38–42.