From startup to incumbent: the innovation cycle (Part Three)

Having written that the start-up soon becomes the incumbent, a great question on twitter was asked: “so how does the incumbent maintain the innovation culture?” The answer is that they can’t.

Any start-up will eventually gain momentum and size that means they need structure.  Structure, historically, meant organisation and organisation, historically, meant hierarchy.  That’s certainly true of most organisations I’ve worked for and particularly true for most banks I’ve worked with.  Hierarchical organisation structures were managers manage managers manage workers.  This is required to ensure targets and objectives are met.  After all, it’s all about Management By Objectives, or MBOs for short.  We have Key Performance Indicators, KPIs and SMART goals and such like.  Then we talk about empowerment, enrichment, diversity and ethics and all those other good corporate things and that’s how we realise we’ve become the incumbent.

Now the new giants of this world don’t talk this way. 

GAFA – Google, Amazon, Facebook and Apple – have two-pizza teams and customer obsession, but they can still fall into the trap of management hierarchy.  Equally, they can be accused of megalomaniac leaders who are hated, corporate cultures that are bullying and structures that are chaotic.  It doesn’t matter, as most of those accusations are made out of jealousy.  The fact is that some companies do rock, and some companies can still be innovative even when they have 1,000’s of people.

So what’s the difference between a company that rocks and one that stagnates?

Leadership.

The fact is that most of the young firms are led by people unconstrained by the disciplines of the past.  When Peter Drucker came up with The Practice of Management in 1954, firms needed structure.  We had just started to move from the Industrial Age to the Office Age, and management was relatively unknown.  We needed performance schedules and maps of management structure in order to absorb 1,000s of people into suits and cubicles.  That was the age of the post-War era, when most banks grew into global powerhouses and, take note, Drucker was a former financial guy.

Now, we need agility and speed.  A global powerhouse built upon formal structures of power and operation does not cut the cloth in the digital age.  A hierarchical management structure is slow and unwieldy, and we have known this for a while.  So we try and adapt.  Maybe we create a Matrix Management Structure which, to be honest, is even more unwieldy and slow.  Show me any Matrix Management Organisation and I’ll show you a company that cannot make a decision.  In a Matrix structure, all you have is 10 people who can say no and not one that can say yes.  Get out of there!

So what we really need in the age of the internet where speed, agility and innovation are key, is small, decisive groups who can act upon opportunity and move fast.  It’s why I like the two pizza idea of Amazon so, just to repeat and focus this dialogue, here’s the two pizza team idea.

Two-pizza teams are so named because they’re small: 6 to 10 people; you can feed them with two pizzas. The most important aspect of a 2PT isn’t its size, though, but its fitness function. A fitness function is a single key business metric that the senior executive team agrees with the team lead. It’s the equivalent of the P&L for a division: a single metric to provide focus and accountability. In some cases, the fitness function is literally a P&L: for instance, the contribution profit from the sales driven through sponsored links minus the cost of those clicks. In other cases, it’s something more clever: e.g. metrics related to the efficiency of picking, packing, and sorting.  Once approved, the team is then free to execute relatively autonomously to maximize its fitness function—to pursue creative strategies and to set its own internal priorities. A handful of engineers, a technical product manager or two, and maybe a designer all report directly to the 2PT lead; there’s I need to coordinate even across teams, let alone across divisions, to get something done. This model has helped Amazon stay nimble and innovative even as it has grown.  

Imagine this idea in banking and it seems completely incongruous.  Banking is all about structure, control and discipline to avoid risk, exposure and sanctions.  A two-pizza team structure where no group is larger than ten people and they all work to a singular specific objective is not going to work.  Or is it?  Banco Original in Brazil reckon they can make it work.  A digital-first bank thinks that the two pizza structure is critical to their operation, so maybe it’s not impossible.  I just can’t imagine this thinking in many other financial institutions however.