Change and Transformation – Is There a Difference?
Digital Transformation is not an IT project
This time around, I take the opportunity to sit down with Dr. Christof Horn, Executive Director at the P3 Group, an innovative, international management consultancy with a special focus on the automotive, aerospace, energy, and telecommunications industries. We talk about the significance of digital transformation, leadership and organizational structures.
Christof, how would you size up the notion of business transformation?
Well, in contrast to change, which involves a normal and essentially neutral and open-ended departure from an accustomed state, I regard transformation as a deliberate process that leads to a state that is fundamentally new and different. I tweak some features of something, and something else arises in its place. For instance, a business unit does mechanics today and winds up doing software tomorrow.
I take a cautious approach to using the term because I think its use implies that transformation is possible and necessary. What I see are an abundance of natural developments – continuous changes and improvements in existing units – and other developments that lead to fundamentally new things. I think the term transformation is often used to describe situations for which it would be more appropriate to use the terms startup or restructuring.
We currently find ourselves in midstream, transitioning from one phase to another. We experience the transition as highly dynamic, and marked by mercurial currents and confluences. The rules of the game have changed for all of the stakeholders involved. The power of position and seniority has lost its relevance . . . because a 25-year-old somewhere out there in the world might attack our core business at any time. It’s an entirely new experience, and one that can have grave consequences.
Have you experienced anything of this sort in your work?
One example would be price-comparison apps – for insurance policies, power, computers . . . you name it. The app operators have come to have a degree of leverage when it comes to the cost of whatever is on the market. If you refuse, you vanish from the app. Given their ability to insert themselves between service providers and customers, the app operators can predefine the product. This represents a shift in the food chain.
Disruptive . . .
Yes, but also positive, intrepid. In the German weekly Der Spiegel, I just read that 40% of young Germans on the verge of completing their studies would prefer to work in the public sector. That’s really astonishing. Young people all around the world are becoming entrepreneurs, and young Germans want to become civil servants because it’s safer. This same tendency is also evident in many German companies. Too few of them are willing to take a risk. The message: maintain the status quo, better to not make a decision at all than to make a decision that could entail vulnerability. This attitude is prevalent in Germany – and it acts to deter important developments. What a contrast to other countries where people accept risks and take a more aggressive approach to enterprise!
What role does leadership play in transformation?
Innumerable books have been written about how to establish, organize and lead an enterprise. Some authors espouse post-hierarchical, democratic structures. As it turns out, there are a number of successful, albeit very small, enterprises that operate on the model of a collective. Apprentices and managers earn the same salary and have an equal voice when it comes to forming management teams. Such arrangements require a large dose of idealism. That being said, the problems these enterprises run into are entirely predictable. I think they’re destined to remain very rare exceptions.
At the end of the day, you need to make informed business decisions. While the significance of networks has grown tremendously, and more attention is being given to application programming interfaces (APIs) and the degree to which organizations can be configured on the model of an API, none of this entails the dissolution of everything else.
What exactly are APIs in this context?
API is a term used in software development. An API is essentially an encapsulated interface that requires very little input to perform designated tasks. Hidden behind the interface is a complexity that you don’t need to comprehend. All you need to know is how to activate the interface to get what you need from it. Some have seized on the notion of setting up entire enterprises on the model of an API. We already have an abundance of subunits that perform their tasks with a high degree of independence. So, indeed, I think APIs and networks can be used as a kind of blueprint for organizational structures of the future in many fields. But I’m not sure whether innovation and product development can really thrive in systems based on modular blocks.
The biggest challenge here is the task of reintegrating startups and new technology into the organization. What’s the best way to do it?
Dr. Christof Horn, CEO, P3 Group
How do you view robust attempts to go agile?
Ever more enterprises are testing solutions based on large-scale scrum (LeSS) and scaled agile framework (SAFe). Some enterprises have switched entirely to agile structures. They’ve systematically replaced their team leaders and department heads with purpose teams whose members have essentially the same status. Instead of team leaders, scrum masters assume the role of managing the process of information exchange. This kind of restructuring often results in an exodus of management-level employees who are either unwilling or unable to get with the program. Are the right ones leaving or are valuable human resources being lost?
One has to be careful. Agile methods are not a modern form of project management. They’re based on clear principles of organization, roles and processes. If you introduce a form of scrum light, you’re likely to do no more than give a new name to your meetings. You will not be creating a self-learning organization. And the function of a scrum master is fundamentally different from that of a team leader. This means that anything short of a fundamental change will probably not do justice to the issues at hand, and will likely only lead to frustration and waste.
Do you think we’re bound to face a deficit of leadership?
When it comes to leadership, the biggest problem is authenticity. To what extent can we really stand for something that we don’t embody? To what extent do we abide by the same principles we preach to the team? Many people have a hard time finding their bearings when their enterprises decide to abandon conventional hierarchies and status symbols. They feel people are being called upon to do away with themselves. Some can do it when it just happens to line up with their journey through life. Others are unable to take it in stride. The labels change. The currency for fame and honor is no longer the same. And it’s not as if network organizations don’t have status symbols. They’re just of a different kind. In any case, it seems clear that executives inclined to go in that direction need to go full speed ahead and not look back.
And what’s your approach to leadership at P3?
We have a very unusual structure. We have over 30 subsidiaries. We’re fond of say “down is up.” The actual power to shape things is invested in our subsidiaries, with the holding providing no more than the framework. And while that inspires our action and our self-concept, it too has its limits. P3 is a good example of the successful “downward” delegation of authority and responsibility. Naturally, it makes a difference whether your organizational scope is ten people or a thousand. We attempt to embody a very participatory style of leadership based on strong principles. However, we’re also engaged in a continuous process of trial and error. Yes, we keep ourselves in motion.
Do you see any special barriers to transformation?
Enthusiasm for digital transformation is often powered by exaggerated and completely nebulous expectations. People don’t yet know what it is, but are convinced that it has to be something great. Somebody once likened it to a conversation among young teenagers about sex. Everybody is waiting in hopeful anticipation, but no one has done it yet. What prevails under the surface is a sense of uncertainty. And in any case, the stage is being set for disappointment.
Another problem is a feeling of being ill-equipped to meet the task and losing out. Think about the conflicting targets in car sales today. Car manufacturers would actually like to do away with car dealerships. They make the cars and they would now prefer to sell them directly with digitalized approaches. Maybe both are right. But you can’t assign dealerships the task of doing away with themselves. This is a case where restoring forces tend to reassert themselves in organizations. We see this again and again in corporations. As long as acquired startups don’t do anything relevant, everyone thinks they’re great and innovative. But as soon as they become relevant and successful, and have a legitimate claim to resources and core processes, the restoring forces emerge. People start playing defense.
Another problem I see is the case of disappearing skills. People are too satisfied with what they know today, which is likely not enough in light of new capacities and opportunities. They lack curiosity. In many areas, corporations fail to promote an entrepreneurial spirit. There are no rewards for risk-taking. Instead, there is an emphasis on staying the course with what has already been planned. In Germany, a premium is placed on not making mistakes. And that means time is not on our side.
What role does top management play in this regard? Are any changes necessary?
Enterprises tend to have their own rules and their own ways of shaping their employees. When I start out at an enterprise, I need to learn how the system works. Then I maneuver within this framework to optimize my experience and prospects. Some people have pronounced thespian skills. They know how to smoothly navigate the corporate system and leave others with a favorable impression although they have no extensive understanding of the business at hand. Now, such skills shouldn’t be underestimated. After all, I need to know how to advance within a system. My impression, however, is that the typical corporate career, namely, from the bottom to the top, is changing. I don’t have the figures to back this up, but I have the feeling that the number of people making lateral entries is on the rise.
How would you compare transformation in Germany to transformation elsewhere?
We find ourselves in Germany and Europe in a certain sandwich position. Tech giants in the United are driving disruption. With their size, war chests and brand prominence, their influence is profound. Conventional companies have gotten in on the action by arranging outside partnerships. General Motors and Cruise are a good example. Here we have two companies that have moved forward in a space outside the GM factory premises to make advances in the field of driverless technology. In doing so, they’ve increased their value by many billions.
In contrast, the Chinese state has become a driver of disruption. The state sets the goals and the parameters and uses legislation to enable Chinese companies to hoist themselves to an internationally competitive technological level. In particular, China has effectively forced western companies to partner with Chinese companies as a condition for gaining access to the Chinese market. There are also corresponding rules and quotas to promote driverless technology.
So, it’s more a matter of outsourcing than real transformation?
Exactly. The biggest challenge here is the task of reintegrating startups and new technology into the organization. What’s the best way to do it? I test something new, make good progress and then return to the old structure to transform it. How do I make a network organization compatible with an organization that has a lot more structure? In my view, the so-called hybrid approach isn’t going to work. It’s tantamount to insisting that would like to be agile, while at the same time refusing to give up the comfort of your accustomed practices.
Our experience in recent years shows greenfield projects are unlikely to succeed. Starting small does usually work out, but the issue of scale that follows is the real hurdle. That is why we need more courage in our companies – and in society in general – to take a radically different approach to doing things.