The Physical Side of the Job-to-be-Done

Last Friday was a big day for me. Specifically, it was my last day formally with SAP.

I was lucky enough to couple the big event with a strong experience that both echoed and reenforced my emotion; my younger sister's graduation from medical school. After years of focus, both of us are setting off on journeys in new areas. More than just setting out on those adventures, the ritual of meeting, drinking, and reminiscing seemed appropriate. It even convinced me of the merits of setting out on a drive across country. The physical, mental, and emotional pilgrimage is a tribute to what I feel to be leaving some of the good people I've worked - and it's also a experiential representation of the journey to a new location and industry.

The trek west will be the real thing. More than the intellectual experience of deciding to uproot, it's the most primal representation I can force on myself.

Over the last two days, I've been thinking a lot about this. Why it seems important? And what it's importance means?

I keep coming back to the concept of the Job-to-be-done.

The theory of "Jobs-to-be-done" is a rather straightforward one. Humans have a basic set of jobs. They want to be good parents and providers. They want to communicate effectively with their loved ones and colleagues. They want to beaccomplished and appreciated. And so on.

Over time, the theory suggests, that the products we hire have changed, but the jobs stay the same. For instance, while I might have hired a buck knife to "Get me safetey" in the 1800's, today I might hire a satellite phone for the same job.

The basic understanding of what a job is probably feels like it has no relevance to the journey west. But it's the next level of the theory that's helpful. Bob Moesta and Clay Christensen, who developed the theory of Jobs-to-be-done, often say that understanding the job is only the first step. Once you understand the job, you can start to outline the experiences required to complete the job. These experiences fall into three buckets:

  • Functional
  • Social
  • Emotional

For instance, the Satellite phone I might hire to get me to safety may not need to be any bigger than a pen... but for it to have the right emotional appeal, Iridium may want to house its antenna in a large rubber device that feels indestructable to me.

Many marketers have written on the non-functional characteristics of products and services. Ted Levitt (who famously coined the "You don't buy a quarter inch drill, you buy a quarter inch hole" line) used to talk about the difference between the product and the "whole" product. With the theory of the job-to-be-don, Moesta and Christensen gave us all a framework for understanding what we needed to put in the "whole" product.

To me, the physical drive west seems more and more to satisfy a part of the emotional job of transitioning. While posting to Facebook, Tweeting to the world, and writing good bye notes do me some good, there is something truly different about subjecting yourself to a real experience outside the confines of a computer screen. There is something real about sweat, about discomfort, and about effort. Without it, the respect I'd hope to show (whether it's rationally necessary or not), just can't be enough.

It's a very primal thing. Physical representation supercedes digital displays of emotion.

And that makes sense. We humans are simple things that evolved to exist in a physical world. As complex and brilliant as we come, it will take millenia of evolution (or at least few decades of borg like digital reprogramming) to change that.

But despite the sensibility of the statement, I get the sense that modern products and services are evolving without enough consideration for some of our anamalistic tendencies. Worse yet, the trend is only poised to continue as more of our commerce, communication, and community is brought online. As this change occurs - it's vital that we recognize the value of physical experiences. We need to remember the job that we're doing for our customers and get beyond what they need on paper, appealing to their basic humanity. It might not be the most cost efficient option, but providing tangible experiences can be critical in getting the job done right.

So the questions I'd pose to all the entrepreneurs out there are:

  1. What jobs are you doing for your customers? 
  2. And how can you enhance the emotional and social experiences they require by engaging through their physical world?

5-years is too short

Successfully building new things requires a mental model of the future. It doesn’t matter whether you’re investing your time, your labor, or your your mind to do so.

Anyone who angel invests, works at a startup, or even helps to build products and services at enormous companies needs to be able to accurately gauge what the future is going to look like. People at Procter & Gamble need to understand how folks will buy soap and wash themselves in the future. Folks at McDonald’s need to understand how health trends will impact their customers diets. And companies like Hertz need to successfully forecast the role autonomous vehicles will play in the transportation market.

But more often than not, when I see people predicting what the future holds, it’s on an awkward 5-year planning horizon. It’s my belief that 5 years is just about the worst planning horizon you can choose.

For most people, 3-years is incremental. 5-years feels long. And 10-years seems unfathomable. If most people are changing jobs every decade, the thought of planning their pursuits around a vision of the world that far in advance may feel ludicrous.

So we end up in 5-year planning cycles.

But the problem is that we think we can see 5 years in the future. We feel like we have enough insight into what changed and how it played out in the last 5 years to successfully project how the world should work from here. We work forwards, not backwards.

On 5-year timelines the world seems linear. You remember buying your first iPhone. You remember looking down at your pocket. And you remember imagining, wow… this thing is going to be really cool. On 5-year timelines, we feel like we can forecast change.

Just take a look at the below chart (US GDP growth quarterly from 2010-2014). None of those growth rates looks too big. The US Economy wasn’t growing more than 5% annually during any quarter in the past 5 years. And in some quarters it’s even been negative.

It’s not dramatic growth. It’s slow and steady.

The problem is that over time, change compounds. It’s exponential, not linear. And it’s incredibly difficult to forecast out the future from an expectation of incremental, linear change.

Just look at US per capita GDP from 1920 to today. That same incremental growth that seems so easy to predict has led us to GDP per capita that is almost 10 times larger in just a 90 year period. If we follow the same trajectory, we'll see that number close to 500K annually. Every American could own a Tesla, a loft in Manhattan, a beach house, and so much more.

It sounds fantastical. But it’s probably not too far from the truth. With the advances in robotics, machine learning, and networking that we’re seeing today, it’s not unreasonable to imagine a world of abundance. (Obviously, we’ll have some social challenges along the path - but that’s an entirely different challenge).

When you start thinking about the ways the world will change on a 10, 20, or 30-year time horizon, it stops looking linear. We know that 30 years from now, driverless cars will be a reality. On that timeline, we can very clearly see a path towards using renewable energy to power our transportation and our homes. We presume that even the smallest household items will be networked.

And when you start planning based on that world, you have a very different perspective. The questions you ask yourself are fundamentally different. You’ll question whether your business, strategy, or profit model are at all relevant. You’ll challenge yourself on the types of talent needed in this future economy. You’ll force yourself to think about how the very lives of your consumers will evolve.

On a 5 year timeline, we miss all of that.

We might slightly underestimate the the scope of change on a 5-year time horizon if we start imagining based on the world that exists today. But we drastically underestimate the scope of change 20 years from now if we start at that same point.

Your SaaS business probably isn’t being “disrupted”

Every company desires to win profitable customers. The bigger the contract, the higher the margin, the better. And that’s why companies across the board are drawn to “upmarket” customers.

Upmarket customers are the ones that are simultaneously the most demanding and most profitable. As a CEO, upmarket customers are the ones with the biggest problems your company can solve. For that reason, they’re willing to pay you the most for your solutions. They typically have needs that are more complex than much of your base – forcing you to quickly build new capabilities to satisfy them.

When it comes to the world of SaaS, these are the customers with huge MRR. One upmarket customer can make up for a hundred volume customers. They're the logos you put on your website. They're the Global 2000 - businesses that everyone recognizes. You constantly feel their allure as you grow your business.

Figure 1 - Revenue per customer over time (sample public companies)

But, as anyone who has read The Innovator’s Dilemma can remind you, upmarket customers come with their own risks. Listening too exclusively to your most profitable, most demanding, customers often causes companies to build features and distribution models that simply can’t compete over long periods of time. Listening to the demands of these unique customers often provides managers a false sense of confidence that they're headed down the right path.

Over time, upmarket customers unintentionally lead businesses astray - opening the doors to disruption.

For all these reasons, it’s been easy for Venture Capitalists to predict the constant cycle of disruption in technology markets. Not only is technology changing at an ever more rapid pace, but we're also seeing a slew of cloud software vendors march upmarket - increasing their revenue per customer by winning large enterprise contracts. The gut reaction of most observers then is to believe these vendors should be constantly subject to disruption. That's certainly been the sentiment shared by a number of bloggers, investors, and pundits who focus on the software sector.

Unfortunately, it's not quite that simple. And VCs heralding continuous disruption in SaaS should keep that in mind.

There are thousands of ways companies can fall victim to attack by new market entrants. Disruption is a specific one. It also happens to follow a powerful pattern – when the pattern of disruption begins it’s difficult to change the end result. But when companies follow the siren’s song of their upmarket customers it doesn’t necessarily mean all the other conditions that facilitate disruption have been satisfied. Just one.

What actually enables disruption – an Extendable Core

In 2012, Clay Christensen and I published an article in the Harvard Business Review discussing how to forecast the extent to which disruption would impact large businesses. To any sort of recommendation, we had to be pretty prescriptive about what actually drives disruption. So we spent a lot of time discussing what we called the extendable core.

The extendable core of a disruptive business is the technology or business model innovation that allows a disruptive entrant to enter a market and scale up their operations in ways that incumbent players can’t replicate. It’s a way of operating that allows them to improve their product or service but maintain an intrinsic structural advantage.

Originally, SaaS companies found their extendable core in multi-tenant cloud architectures. They could write code once, deploy it to infrastructure they purchase at scale, and manage it in a more efficient model. It wasn’t just the revenue model of subscription – anyone in the license software world could have changed the billing process for their products.

When Marc Benioff coupled his subscription software with a means of delivering software that made it cheaper and easier to manage, he hit the disruptive home run out of the park. His extendable core allowed him to deliver basic software to overlooked members of the market (small and medium sized businesses that couldn't have shouldered the burden of high implementation costs). But the business' extendable core also provided the same cost and service advantages as he slowly crept upmarket. As he added features and functionality to compete with offerings like Siebel CRM, he still maintained an intrinsically advantaged position.

Textbook disruption.

Low Cost Doesn’t Mean Disruption

There is a large difference between price competition and disruption. Consider economy hotels.

Why? Any traveler can attest that no one really needs the luxury that brands like the Ritz, the Four Seasons, or even the Marriott offer most customers. What most people truly need when traveling is a bed and a lock on the door to make certain your goods aren't stolen by the random marauder. Everything else is bonus.

Because millions of travelers choose to opt out of the luxury options available, a slew of options exist for the more fiscally conscious traveler such as Econolodge, Holiday Inn Express, and so many more. But just because those hotels serve downmarket customers at a lower price point doesn't make them disruptive. It just makes them cheaper.

The reason? Each of the low cost vendors share the same basic business model as their upmarket competitors. They own and manage a physical inventory of rooms. Because the underlying foundation is similar, for each of the economy hotels to move upmarket they must adopt the same cost structures as their upmarket competitors. As they add the luxurious spas, pools, and restaurants, they lose their ability to under-price their competitors -- effectively losing their competitive advantage.

When Salesforce adopted a multi-tenant cloud model, they changed the game. They could improve their product, add functionality, build their sales organization, and still maintain many advantages that traditional on-premise software vendors could not compete with.

That extendable core is what made their inevitable victory so perfectly predictable.

Companies without this core can still carve out strong positions. Their entry into markets, however, simply can't be trumpeted as the inevitable downfall /  disruption of their upmarket brethren. Just because Xero is cheaper than FinancialForce, doesn't mean that FinancialForce is being disrupted. They could be out-producted, out-executed, out-marketed, or out-maneuvered... but they won't be disrupted.

In today's SaaS landscape, there are definitely some disruptive entrants (e.g., Zenefits with a profit model that enables the company to subsidize free software). But there are also numerous examples of simple price competition (e.g., Zoho). And when you're managing a business, it's vital that you know the difference.

Three implications for the SaaS CEO

If the cycle of price pressure in technology isn't resulting necessarily from disruption, the question is what does that mean for SaaS CEOs? With an eye towards three things, this can actually be quite empowering.

1) Know the Competition’s Business Model

If disruption finds its roots in being able to sustainably scale an advantaged position, knowing the strength of your competitors (and your own) business model is key. If you’re a burgeoning SaaS executive, it’s your job to know how your competitors operate. Understand their profit model and their technological foundation.

If you have someone nipping at your ankles you need to be aware whether they're playing the same game as you, or if they're playing a different one. What about an entrants model would allow them to maintain a cost or quality advantage over as they scale.

For example, just because Workday is selling larger and more complex HCM contracts in the cloud along with the bread and butter contracts that helped them grow through their IPO, doesn't mean that an entrant can just walk in and steal their base. But they should keep an eye out for Microsoft, Netsuite, and FinancialForce, who are all trying to win greater share of the ERP market by offering deep integration with the front office applications they own.

Keep an eye out for new technologies, programming styles, or business models. Ask very deep questions when someone emerges like Zenefits giving your core product away for free. The key is to dig deep and understand whether these competitors can keep their position as they move upmarket.

2) Pursue Different Models for Different Customer Segments

Being disrupted is a terrible thing. When it starts in reality, you can't expect to hold the low end of your market without a different model. But when you're facing simple price competition - as is the case in most SaaS environments - part of the challenge is ensuring you address your different types of customers with the sustainable models.

As young technology firms add the features and functionality to appeal to large enterprises, it’s enticing to increase focus on winning contracts in that segment. It can be a grind to sell 30 contracts at 10K in annual value each to medium-sized businesses. To those businesses, the 10K is often a large commitment. That commitment drives difficulty in the sales process. It’s often easier to trade that high volume, lower value, focus for a focus on lumpier (but far more valuable) enterprise sales where your average contract value may be 300K. Each contract in that segment might drive 30 times the revenue but only be 15 times as complex to close, meaning the overall job is easier.

But just because SMB and mid-market sales are a grind doesn’t mean they’re not worthwhile. The chairman of Taiwan Semiconductor once said, US CEOs love to talk about improving margin, but “so far I have not found a single bank that accepts deposits denominated in ratios. Banks only take currency.” He advocated pursuing any ROI positive sale and simply building piles of cash. If you have a population of customers that clamor from your services, it can be quite lucrative to manage different go-to-market models for those segments.

Both Netsuite and represent shining examples of this practice. Each is driving ever larger contracts in large enterprises and corporate subsidiaries around the globe while continuing to grow their volume base of customers. It requires true discipline and a willingness to do things differently for different customer segments. But with the right sales ops team and good channel and ecosystem, it’s definitely possible.*

Figure 2: Estimated Recent Netsuite and Salesforce Revenue per Customer1

3) Listen to Everyone

Disruption sneaks up on those that stop listening. And more specifically, it sneaks up on those that stop listening to ALL of their customers. Even as your business builds capabilities and breaks into new segments of the market, keep listening across your portfolio. Understand why new products appeal to different members of your customer base and respond accordingly.

Andy Grove famously said that only the paranoid survive. He’s right. If you’re not fearful of the types of businesses that are starting to appeal to even your least valuable customers, you’re creating a chink in your armor. Anyone can execute you out of your pole position if you give them the opportunity.


1 Customer count estimates for derived from Jeff Grosse. Should be directionally correct, though not perfect.

*The added benefit to not retreating from your base is that you can often use your volume to improve your ecosystem. Channel partners and ISVs flock to platforms with high numbers of potential customers. When you have volume, you’ll find yourself with extensions to your solutions that go a long way in defending all segments of your market.

Bet on "What Could Be," not "What Is"

A few days ago Tesla unveiled their ambitious home battery. Since then, I've had many conversations with friends, family, and colleagues about Tesla's potential to transform the energy markets. I even ended up having a small debate with Clay Christensen and other members of my former think thank on the topic.

Now, I should caveat that I travel very deeply in technology circles. I'd guess that about 20% of the folks I interact with have either founded or worked for venture backed software companies. Typically, they're at the bleeding edge of early adoption. So I was deeply surprised when so many folks echoed the same response back when we started discussing Tesla: "Tesla is incredibly overvalued."

The statement itself isn't what's surprising. It very well might be true. The surprise is that so many folks made the statement quite nonchalantly. As if it were blatantly obvious that Tesla was a company that investors shouldn't be touching with hundred foot poles.

When I pushed each of them further on their thinking, it became obvious that many of the folks I'd been discussing the company with shared a similar characteristic; they sought to rationally justify a $26 billion dollar valuation for one of the world's smallest mass-producers of cars.

And there was the rub. They were analyzing what was directly observable. They were asking themselves how much profit every Model S might generate and what they thought Tesla could produce 3-years down the road. They weren't asking themselves what the world of transportation and energy production might become... and who would be successfully positioned in that future state.

"What Is" can change fast...

Many people regularly estimate what the future will look like based on what they see today. It's a simple way of forecasting. And humans naturally gravitate towards simplification. So it is perfectly understandable that when we are asked what to expect from a person, project, or corporation, we have a tendency to look to the past few years and extrapolate out a few more.

That approach is more than reasonable in some situations. When we're looking at companies that are positioning themselves as leaders in a world that hasn't quite arrived, we do ourselves a dramatic disservice by thinking too short term and too linearly.

Companies like Tesla, Uber, AirBnB, Box, Twilio, SendGrid, and so many more are impossible to value or evaluate based on an evaluation of the current business. Because the business environment that's there today will change fast.

Part of the reason for this change is that often these types of businesses are dealing with compounding growth. Today, they might be have small absolute numbers for revenue and profit. But with growth, that could all change. And growth has a habit of sneaking up on folks quickly.

Take Tesla for instance. This year Tesla is forecasting to sell around 55 thousand vehicles (or roughly a sales volume increases of approximately 50%). Even, if you estimate dramatic decreases in annual sales growth, Tesla can become a fairly significant player fairly quickly. Consider the below scenario

  • 2015 -- 55K (50% Growth)
  • 2016 -- 77K (40% Growth)
  • 2017 -- 100K (30% Growth)
  • 2018 -- 125K (25% Growth)
  • 2019 -- 150K (20% Growth)
  • 2020 -- 173K (15% Growth)

Even cutting Tesla's growth rate dramatically over the next 5 years, we find ourselves with a car maker that is close to as large as Porsche was in 2014.

Many people look at these types of growth numbers and suggest that it makes sense on paper, but it's not realistic. But the truth is that we live in a world where observing this type of exponential growth repeatedly is increasingly more feasible. In today's business environment, companies have access to global pools of capital, production resources, and distribution channels from day one.

We see the trend everywhere. It takes less time than ever before to see great technologies adopted around the world. Where it took nearly half a century for a quarter of the US population to see their homes electrified, it took just 7 years for the same diffusion of the Web.

There are certainly true operational challenges related to growth for young companies. But it's quite conceivable that if a company can overcome those hurdles, its founders can build a truly global organization in less time than it takes most professors to win tenure at Universities.

When you're working with compounding growth and new technologies, it truly is realistic for numbers to get big fast. And in these types of situations it's almost never appropriate to judge what a business might achieve by starting with what exists today.

Starting with "What Could Be" and working backwards...

In my experience, the better way to judge businesses in these rapidly growing markets is to start with what the markets could become and work backwards.

Namely, whenever I'm approached with a question about a company like an AirBnB, Zenefits, or Tesla, I generally force myself to analyze three things:

  1. The Problem(s) the Company is Addressing
  2. The Size of the Problem Space
  3. Potential Barriers to Growth / Profitability

The first step is to determine what problems each company in question is actually addressing. Uber, for instance, is creating an on-demand solution for transportation. They don't just compete with taxis and limousines, but they successfully position their drivers as an alternative to private carpools, public transportation, and even personal car ownership. When you look at Uber as a transportation company, it's opportunity space becomes far larger than simply as a substitute for hailing a cab.

It's not about what aisle a company's product sits in or what search terms its products show up underneath. Understanding potential opportunity is all about understanding the scale and scope of the problem being solved.

The second step I take in evaluating the potential of a business is judging the upper bound of its success.

If, for instance, you were starting a company company that made the perfect food substance (e.g., Soylent), the upper bound of your success might be serving three meals a day to all humans on the planet. Perhaps it might be even larger because maybe your perfect food substance were actually also suitable for animals.

We all know that an assumption like this is unrealistic. But setting the upper bound helps paint the picture of all the value and players in a company's market. For Uber, for instance, setting the upper bound would force you to think about all the situations where people are transporting themselves from one location to another. It would force an investor or potential employee to identify different types of situations where on-demand transportation might be sought out. Only once that complete set of circumstances had been laid out, would it be possible to start winnowing down the opportunity and making a more realistic estimate.

Finally, comes the "real" work. Consultants and bankers revel in modeling out complex market scenarios. They determine how distribution or sales might be impacted by any number of macro-economic issues or competitors in their clients' markets. Unfortunately, these highly paid MBAs almost always add this layer of computational complexity to the wrong foundation.

When you start to look at businesses by determining "what could be," it's a lot easier to peel back the onion. It's almost impossible to guess what a market's growth rate will be 7 or 12 years from now. It's a lot easier for someone to think logically about what geographies would be less susceptible to Uber's model because population density is too low - removing that segment from the upper bound of Uber's market. Similarly, it's a lot easier to think about impediments to Tesla's transformation of the energy and transportation markets than it is to accurately forecast how many cars they'll ship in 2023. 


And that brings us back to the impetus for writing this piece. The Tesla conversations of this week reminded me how common it is for folks to forecast markets based on what is directly in front of them. It's the natural tendency. But despite the apparent simplicity and defensibility of predicting what will come based on what's there today, starting with what could be is a much better approach.

It's not clear that taking this approach would lead folks to come to any other conclusion on Tesla. The company may well still be overvalued. But I'm certain of one thing in particular...

If you really thought long and hard about the topic, the answer wouldn't come so easily and so nonchalantly.

Heading West to Play the "Long" Game

4 years ago my life took a particular twist. At the time I was running, a company dedicated to helping young performing artists get on stage. It was a wild ride, but a difficult one. More on that later.

But towards the end of our adventure with nuevoStage, I was randomly invited to join one of my idol's, Clay Christensen, in his think tank. I skipped giddily into the experience knowing very little about what I was getting myself into. It turns out that it was probably the best experience of my life. We researched, we wrote, and I met extraordinary people. I built a tiny blog following with the HBR and went heavy into the rabbit hole that is twitter. I sucked up books left and write. And I thought. I built a perspective; oddly, something I'd gone my entire life without having. More on that later too.

And as someone with the eyes of young entrepreneur in consumer technology, I really started to see a bunch more of the world.

Enterprise software was one of the areas I saw. I got involved with SAP and ultimately was brought into the company to be one of its youngest Vice President's in history. It was a big business and a wild ride. My charge was to help them think about the long term. To obviate disruption and invest in meaningful programs over a 3-10 year timeline. It was an incredible experience. But -- as it is with all good things -- it is now coming to an end.

After years with the business that touches more than 70% of global GDP, I realized it was time to start applying that perspective that I'd picked up and grown so passionate more broadly. Really... with the ultimate goal of helping to fill in the gaps around the future. Asking myself, "what type of change can I embrace and accelerate?"

So we're picking up and heading west. To the land of software companies doing incredible things.

But with the change in location, I also wanted to change some of my vehicles for communicating with you: the world. Over the last two years, I've really retreated to writing only for the HBR. It's great from a reach perspective to some degree... but it's also incredibly limiting. One medium means boundaries. Multiple mediums allows for creativity.

So here we go. I am rekindling the personal blog. (Technically, retiring the old personal blog and starting this one fresh). Expect frequent updates and a lot of stream of consciousness... but hopefully some good thoughts sprinkled in the mix.

Why Data is Tripping up Old Businesses

Co-authored with James Allworth & Aaron Levie

This post was originally published by the Harvard Business Review in April of 2015

Ask anyone in technology. Sometime soon, the world around us will be smart. Everything frommugs to mailboxes will be context-aware. Our email inboxes will guide us to the highest priority action items. Online investment portals will automatically advise us to optimize our tax returns with the accuracy of the best financial advisor.

Despite the inevitability of this “smart” future, today only a small portion of businesses regularly merge data and physical products. Most large companies struggle to get the most out of the vast amounts of data they’ve collected. That’s because even after they determine the right ways to use information to delight their customers, managers must address one equally important challenge.

They must update decades-old management systems so they can embrace new digital opportunities.

In this article we will present three ways that information-based competition is challenging existing management practices. We’ll also offer some examples of how digitally native businesses have addressed these challenges. But the solutions described won’t be comprehensive. What’s important is that your management team is aware of these issues and can use that understanding to develop a solution that fits your business and allows you to deliver the most value to your customers.

The Challenge of Investing in Digital Assets

Almost any business school professor will explain to her students that there are differences between managing organizations that are capital-intensive and those that are not. That fact becomes apparent when you juxtapose the balance sheet of a company like Microsoft with the balance sheet of a company like Siemens. To adjust for these differences, managers of capital-intensive businesses have developed all sorts of tools and heuristics to help ensure that they’re building their balance sheets in the right way. If they accomplish the task, their businesses will pay dividends for years to come.

Unlike their industrial peers, managers of asset-light businesses focus little on the balance sheet. Instead, they’re taught to focus on their income statement and optimize their operations around preserving profitability. It’s as simple as that.

The challenge? While we have tools and financial statements that help us manage investments in physical assets, we don’t have the same for digital assets and information. There’s no line item for information on your company’s balance sheet — despite the fact that we know information can be extremely valuable. There’s no depreciation schedule for data — despite the fact that we know data can become obsolete over time. And there are certainly no “digital ratios” to help your shareholders value your business’s future earnings potential.

Combine all of those missing managerial components together and the natural reaction is for executives to under-invest in information. On a short-term basis, the only thing they can expect in return for focusing on data is the headaches that follow from explaining, justifying, and evaluating their operations to colleagues and investors.

Yet, we know there is also clear value in information. Consider the 2.4 billion dollars invested in Facebook during its growth phase. Where did that investment impact its traditional financial statements? It didn’t acquire factories, milling machines, or property. It didn’t generate profits or preserve margins…just losses. The most significant asset it did acquire was user data. And today, the nearly two billion user profiles it captured serve as the backbone for one of the largest advertising businesses ever created. But before those records were converted into advertising revenue, there was no spot for them in any financial statement. Even today, with more than $200B in market capitalization largely derived from that same data, investors struggle to value the company’s information.

Where we land is firmly in the face of a management paradox. We know that information can be used to create value. But the tools we have to evaluate and reward managers point them away from the strategies that leverage information. So we’re left in a situation where information-based strategies rarely get the attention they deserve (or require).

What our teams need are the same sorts of techniques that we use in capital-intensive businesses to monitor and evaluate our asset value. We need to mark our information assets to market or depreciate them as they become obsolete. We need to have an ongoing understanding of what’s being used and what’s not. We need to have investment plans put against different types of information and also run pilot programs to test the usefulness of newly targeted information. Just like procurement specialists will make sure that expensive CNC machines are tested by factory managers before they’re rolled out across a manufacturing organization, we need the same rigor applied to investments in information infrastructure.

Often, venture capitalists help young, digitally native businesses achieve this rigor by identifying key metrics surrounding user activity, registration, and engagement that will help approximate the value of data over time. Things like lifetime customer value are closely monitored so data can be appropriately re-evaluated over time. As such, you rarely see lengthy discussions of traditional financial statements in board meetings. Instead, there is a new focus on the acquisition of return on digital assets. It’s this type of focus on information that needs to become more common inside established businesses.

The Challenge of Determining What’s Core

For years, management consultants have encouraged executives to understand and focus on what’s core to their business. Often, the last thing managers are encouraged to do is think outside of their industry. They’re reminded that conglomerates with diverse industry focus tend to underperform in their markets (at least in industrialized nations) as compared with focused firms. However, determining what’s core and what’s not core is getting more difficult in an era where information is serving as a basis for competition.

Take FedEx for example. Everyone knows FedEx as a logistics behemoth. Its global scale and distribution makes it a critical service vendor for businesses around the world. But since FedEx also has records of its customers’ shipments, it knows how order volumes change based on the date, the weather, and past growth patterns. It’s not far-fetched to imagine this data allowing FedEx to deliver compelling sales forecasting software to its customers.

So would FedEx’s use of its data be a core or non-core activity?

Today, FedEx has some software offerings — but they all revolve around shipping solutions. FedEx isn’t in the business of optimizing supply chain activities using global benchmarks. But there’s no doubt that FedEx’s data would be valuable in the task. And the type of information that FedEx has in this respect isn’t readily available to any of the major players in the supply chain software business.

Honestly, there is no clear answer as to whether this type of opportunity is close enough to core to pursue, or too far away to try out. Similarly, ten years ago, it would have been impossible to predict or justify Amazon becoming the leader in cloud computing simply as a consequence of its own scale in online retail.

The best response is to recognize that the rules used to determine which activities our organizations should pursue are less relevant these days. Some companies will make thoughtful decisions to monetize their digital assets by simply charging for access to data. Some companies will expand into new industries using the information they naturally collect from their traditional business operations as a foundation.

But to optimize your business, you must acknowledge that your information should change what you consider to be adjacent markets — and your business leaders need to make active decisions about which of these “information adjacent” markets to pursue and how.

The Challenge of Building an Ecosystem

At the beginning of the twentieth century, even basic tasks were fairly complex. Figuring out how to send bars of soap efficiently from Ohio to New York required excellent managers who were well versed in the most modern operational techniques of the day. Over the course of the century, businesses slowly mastered the arts of managing the production of physical things to the point where consumers across the globe were able to find products of all variety with costs kept low due to fierce competition. But in the information age, the world has changed again – in particular for businesses that leverage information as core to their competitive position. Instead of using traditional tools to compete in an environment of clear customers, suppliers, partners, and competitors, we find ourselves in an era of “Co-opetition.”

Every modern business operates in a highly networked economic environment. In this economic environment, managing product becomes a small facet of our overall challenge. Among other things, managers also need to manage the development of ecosystems. Ecosystems that require investment, profit sharing, and ongoing care. Ecosystems that can’t be measured based on traditional unit economics. And ecosystems that often require information to be shared across porous corporate borders.

Information is malleable and scalable — but it’s also defensible. Often, after we finally convince our organizations to capture and experiment with information that is useful for satisfying our customers, we find ourselves wanting to keep that information all to ourselves. We especially don’t want to share it with competitors. But in an era of information, sharing what we have is regularly the only way to get people to join our ecosystems — using, enriching, and growing the value of our products.

Consider Bloomberg. For years, Bloomberg has been been building an empire on the back of its real-time market information. Bloomberg terminals are a staple of financial institutions — their comprehensive market intelligence has been what’s differentiated their performance. However, as information becomes ever more accessible via the Internet, lower performing (but good enough) competitors have started to emerge, innovating around the types of core financial data that has long set Bloomberg apart.

As a forward-thinking institution, Bloomberg embraced this change in 2012 and worked to start opening their information treasure troves to a new wave of partners via the Bloomberg API. Bloomberg realized that the ease of information sharing made innovation in consumption a key form of differentiation in the industry. And even if you have access to the best real-time data, it’s impossible to compete without an ecosystem of partners building around your information. Getting that ecosystem meant sharing the data that had powered the core business. So the media giant took its market information and standardized a programmable interface, allowing others to access and enrich the data with other functionality. Its openness streamlines innovation for its customers, but runs contrary to the “walled-garden” strategy that has dominated the industry for years.

Companies in legacy industries as different as retail and financial services all have major opportunities to take the data that is generated by customers and partners to securely help them build new digital experiences. But these opportunities will require openness in many situations. Alliances between partners and competitors will often need to be struck in order to deliver the most value from data. And while these kinds of partnerships are starting to happen more and more, they’re nowhere near the scale that is possible.

In this era of information-based competition, sometimes sharing today is core to profiting tomorrow. And sharing a critical competitive asset is not something we’re used to doing. Developing the systems to help you determine how to build the case for when to share, what to share, and when to stop sharing is vital for managers trying to win in the information economy.

Information is a challenge for your management team because it’s intangible, difficult to quickly value, and can quickly lead you into adjacent markets. And once you have unique data assets that differentiate your business, it’s often tempting to clutch them too tightly, assuming that the value of monetizing those data directly is more than the returns to sharing it and growing your ecosystem. Sometimes it is — but often it’s not.

Every day, people are finding ways to use information to improve our lives, let our machines know us as we approach them, automate basic decisions in our organizations, and improve our relationships with our customers and employees. But while data offers endless possibilities, it also offers real management challenges. To take advantage of data’s opportunities, managers must get out in front of these problems.

Stop Worrying About Consensus

This post originally appeared in the Harvard Business Review in October of 2014

Consensus is a powerful tool. When CEOs set out to conquer new markets or undertake billion-dollar acquisitions, we’d hope they’d at least sought out some consensus from their trusted advisors. We hope they’d be as sure as possible that their teams are ready, that their strategies are sound, and that they’d done their diligence.

The problem with consensus is that it’s expensive. And while it’s worth the cost of consensus in the pursuit big, bold moves, it’s often crushing to small experimental ones.

Consider the story of Nick. Nick is a typical manager at a one of the world’s most successful widget companies. He’s well respected, but far from the top of his organization. The good news for Nick’s company is that Nick has some great ideas; ideas for new ways of producing and distributing widgets that have never been thought of before. Nick’s company is also lucky that Nick has read The Lean Startup. Nick readily grasps the value in testing his ideas before asking for any full-scale operation.

Like a good student of the lean start-up, Nick plans out a cheap test for his latest idea, “Widget 2.0.” He determines that he can take just $10,000 to determine if Widget 2.0 has legs. If the test goes well, he’ll figure out the next step. If not, he’ll get back to his day job.

Inside most companies, this is where the problem kicks in.

Nick’s company is like most companies — only a small number of key executives have real authority to distribute cash and try new things. Everyone else is happy to defer responsibility (generally terrified of approving a failed experiment). But like most hierarchical organizations, Nick’s managers and their managers expect to be informed of his ideas before they make their way to the big boss. Even though there is only one check writer, there are a lot of potential naysayers. So Nick sets out to convince his key “stakeholders” to support his test plan for Widget 2.0. He has meeting after meeting and slowly gets people on board. Finally they approve his $10,000 dollar test.

The test fails, and Nick goes back to his day job. Success, right?

Not really.

In the last few decades executives have started to get wise about the value of systematically testing new ideas. Whether it was Rita McGrath explaining the importance of identifying risk in inherently risky ventures, Rosabeth Moss Kanter encouraging leaders to let their small experiments proliferate, or Eric Ries and Steve Blank teaching us the value of systematic experimentation and innovation accounting, the message has been clear: constantly testing new ideas is vital in the search for organic growth.

The reason testing is so vital is because it minimizes the investment required to eliminate uncertainty. In so doing, you increase the speed of innovation and decrease the cost of failure.

In the case of Widget 2.0, Nick’s company appeared to understand the value of his experiment… but their process got in the way. Consensus didn’t just slow Nick down, it dramatically increased the cost of his test. If Nick made $120,000 a year and he spent just a month trying to drive consensus around the project, the cost of his salary during the month of meetings doubled the cost of the experiment. If Nick had a small team working for him, seeking consensus may have quadrupled the cost of the experiment. And that’s not even accounting for the executives’ time that he had to sit down with.

Again, consensus can be a powerful tool. Consensus can be used to ensure multiple perspectives are looked at in any decision process. Consensus can help us honor fiduciary responsibilities. But it’s is slow, it’s messy, and it’s expensive. It eats away at the value of experimentation.

Milton Friedman once argued that the beauty of private capital is that it streamlines the act of experimentation in a capitalist society. Instead of driving consensus, “the market breaks the vicious circle [of having to convince a variety of stakeholders].” Individual entrepreneurs only need to persuade a few empowered parties that their ideas “can be financially successful; that the newspaper or magazine or book or other venture will be profitable.” To drive those same benefits inside our firms, consensus needs to be sought only where necessary.

So the challenge to managers is determining how to manage the consensus tax. How do you avoid investing in mediocre ideas, but still act with the speed and efficiency that helps you increase your ROI and get more at bats?

1. Acknowledge that not all investments are the same. Some investments are inherently complex and difficult to test systematically or at low cost. Often, these investments require that we drive consensus and be as sure as possible before we experiment. Others, however, are far less risky. If I can spend $10,000 for a one-day experiment that will tell me if a product won’t work in the future — that’s cheap. (That’s basically the same cost as the pro-rated salaries of a 100-person business unit on a 90-minute call.)

Managers in the modern organization need different processes for different types of investments. If your organization has one pathway for funding you’re doing it wrong. Either, you’re not considering the complex investments deeply enough or you’re crushing the small ones.

2. Push decision authority as low as possible. Senior executives are busy. As much as they want to control everything in the organization, it’s simply not realistic. To be nimble and innovative, part of the key is pushing decision authority as low as possible (but not lower).

What’s as low as possible? That’s going to change from situation to situation. But the key is acknowledging that the more senior you make your decision makers, the more waste you’ll require of those looking to experiment. It’s much better to have a slightly less qualified decision maker that is empowered to act on a much shorter timeline than to force decisions all the way to the top. If the latter is your approach, the only thing that will happen is your execs will end up drowning in a sea of meetings and nothing will ever get done.

To push decisions down, you need to limit your downside. Make sure that you hire smart people who you’d trust to make a good decision (not just order-takers). Make sure that you clearly define what success is for an experiment. And make your corporate mission and boundaries well known and well defined. If you do each of those things and distinguish between experimental investments and more meaningful operational investments, you’re already going to be in a good spot.

3. Don’t punish failure. Punish waste. Most executives are happy to point up the chain in order to avoid retribution. They’d rather not make a decision, because decisions can fail to pay off. It’s a lot easier to coordinate an additional meeting than to take the heat for another investment.

If you truly want to innovate, it’s important not to punish failure. Similarly, it’s not alright simply not to punish people at all. The type of punishment that I’ve seen work well is punishing waste; those who waste resources by failing twice the same way or those who waste time by being satisfied sitting in meeting after meeting without getting anything done. If you have an intrapreneur out there pushing the boundaries, learning new things, and adapting, you’re likely to have success in the future.

As Joe Bower once explained to me – “In pursuit of the novel, small is beautiful.” I’m more convinced than ever that he’s right. In part because small limits downside. But in part, because it also limits the need for consensus. In your search for innovation, it’s vital that you use consensus with some discretion. It’s a powerful tool, but it’s not for every occasion.

Say no to "Innovation in General"

This post originally appeared in the Harvard Business Review in January of 2014

I had just arrived at a conference on entrepreneurship and the only panel I wanted to see was starting. I looked down at my watch and realized that I was already 5 minutes late so I dropped my bags and ran to the next building.

The subject was intrapreneurship and it seemed like the organizers had collected an all-star panel; two Googlers, an early Facebooker, one of the recent additions to the Paypal team, and one of the IBM leads on the Watson project. For over an hour, the panel discussed all of the innovative projects they’d worked on — spanning projects from Google Fiber to ad bidding technologies at Facebook.

Now, while I can’t speak for everyone else in the room, I found myself leaving the discussion disappointed.

Yes, all of the panelists were speaking broadly on innovative projects. But innovation is a word that means a wide variety of things to a wide variety of people. Without more specification, “innovation” is simply too broad to execute against. It’s like talking about creating art, without specifying between medium. Are you painting, sculpting, filmmaking, or rapping?

At its highest level, innovation is simply where ideation meets commercialization. Innovation is both the new color of Crayola crayon as well as the iPad app that completely replaces the need for Crayola crayons in the eyes of children everywhere. Because of the vast space between these, the astute manager shouldn’t simply aspire to innovation in general. It doesn’t give his team enough to go on. One employee might come back with a thousand different colors for new crayons, while another suggests strategic adjacencies with construction paper, while the final suggests a partnering with Adobe to deliver a drawing application. Yes all three are innovative. But simply claiming that they are innovative projects neglects the point that they really are entirely different in nature.

Without differentiating between things like sustaining and disruptive innovations, the conversation never directs managers to the nitty-gritty details where new products and services live or die.

It’s no wonder there is such widespread backlash against innovation today. Everyone from the Wall Street Journal to Techcrunch has an opinion on innovation overload. But I’d argue that the real problem with our innovation zeitgeist isn’t that the quality of ideas is diminishing, it’s that we’re talking about the bold audacious bets in the same way we’re talking about the unheralded incremental ones. We’re considering little league and Major League baseball the same, just because they’re both baseball.

In the research world, innovation is a term one rarely hears in a vacuum. Instead of rolling off the tongue by itself, academics modify the term innovation with all sorts of other words that specify exactly what phenomenon they’re talking about. And while not all lessons from academia do apply to the business world, this is certainly one place that hard-nosed managers and pointy-headed intellectuals should agree; because when it comes to innovation, our muddled-generic language represents muddled-generic thinking — not the clarity of thinking that should be driving multi-billion dollar investment decisions.

It’s easy to poke fun at the lengthening list of specific types of innovation, from Continuous to Reverse to Sustaining to Disruptive to Platform and beyond. But as we accept that leadership comes in many forms, from managing crises to coaching employees, we need to do the same when it comes to innovation.

Our lack of thoughtfulness on the subject has kept us from investing and concentrating on the innovations that matter most. Increased attention on innovation by businesspeople has led to millions more executives with “innovation” in their sights, but far fewer with a deep understanding of what the word means.

Innovation simply isn’t one thing. It’s a wide variety of things. It’s the sustaining innovations that will drive profitability across your core business units. It’s the continuous technological innovations that will exploit your fixed asset base. It’s the disruptive innovations that will help you drive your business into the next era of your industry’s evolution. It’s the reverse innovations to help you penetrate new markets and return lessons from different geographies.

And your business needs all of it. But each aspect of it needs to be managed distinctly. Build a shared language for innovation in your organization, set up the structures to pursue each type of innovation correctly, and invest in the team that can guide you through the process.

If you’re feeling burned out on innovation, don’t let your new years resolution be to say no to innovation… let it be to say no to innovation-in-general.