By Sankar Narayan
Sankar Narayan is Chief Financial and Operating Officer at global cloud accounting company, Xero and a Director of Bailaor Technology Investments.
So much of our lives are built on incremental change. We reflect on what we did yesterday, make a few adjustments based on the situations we face, then plan for tomorrow. Habits are formed and perceptions are ingrained. This also applies in the business world, resulting in deep inbuilt business practices, which are often incredibly hard to change.
Nowhere is this more evident than in companies with a long history of success. Planning is based on performance in prior years. Year-on-year comparisons are the norm. We know costs increase roughly with inflation, and as long as revenue grows a bit faster, margins improve -- and we go home satisfied.
But what happens when someone wants to change the game or when a new entrant, either through a new business model or technology, determines that the past is less relevant? Look at traditional media: This industry has been severely disrupted by technology. Subscription video on demand is altering the pay TV landscape, which had itself previously impacted free-to-air Television. Aviation is another, with low-cost airlines forcing changes to the traditional full-service business model. In my own business, Xero, I've seen how cloud-based accounting services have disrupted desktop accounting software.
Having been in the midst of several disruptive environments, both as the aggressor and the defender, I believe that conservatism in strategic thinking is the biggest barrier to success. There is comfort in the status quo and a tendency for management and shareholders to focus on incremental year-on-year performance.
But, often, the weight of these expectations limits a company in its ability to deal with disruption, leading many legacy companies to fail. Staff, management, board directors and external stakeholders all can fall victim to the incremental trap.
Critical steps need to be taken for disrupted organizations to flourish.
Disruption response must have shareholder buy-in.
One of the biggest challenges a legacy company’s management and board will face is building the case for disruption and communicating this to shareholders. Shareholders, especially those in public capital markets, like predictability. Once they have signed up to a particular investment thesis, they expect outcomes consistent with the articulated strategy.
Wholesale changes to strategy and business performance are disorienting. With the structure of our capital markets, where the shareholders elect board members who in turn appoint key management personnel, including the CEO, a conflict between strategy and shareholders can cripple a company.
It has been my observation that one of these has to yield, and more often than not, it’s the strategy. This is particularly common when legacy businesses have to go through short-term pain for longer-term survival. I have explained in a previous article the importance of such communication.
Alignment between shareholders and company strategy, with a clear articulation of short-term and longer-term outcomes, is absolutely vital to the survival of a company in the midst of disruption.
Go bottom-up: Focus on fundamentals.
When business models are being redrawn and new models created, an incremental approach to strategic and financial planning is fatal. Companies need to invest time and intellectual capital to redraw plans from the bottom up. This starts with acknowledging, without fear, the company’s strengths and weaknesses, the competitive landscape and changing customer behavior.
Disrupting oneself is preferable to being destroyed by another. All too often, the largest business units that are facing disruption will stifle creativity and resources that should be dedicated to emerging business models. New ideas need to be incubated, nurtured and protected from the potentially predatory behavior of larger traditional business units. This process is very challenging and takes immense courage from the senior leadership team and the board, delicately balancing the money makers of today and the market leaders of tomorrow.
Find alignment in execution.
With any change, it is widely acknowledged that a burning platform creates a sense of urgency for a response. While a startup mentality is required to tackle this, it is harder for larger organizations to achieve this culture, as today’s profits often mask future challenges.
While robust debates during strategy and business planning are vital, a total commitment to the agreed plan is a necessary ingredient for success. Great leadership teams must rally strongly around central themes, bringing team members along with them to throw their weight behind the agreed-upon plan.
Companies typically fail to deal with disruption but not because they don’t know the answers. It’s just because the status quo is comfortable -- until it’s too late.
The organization’s leadership must have the guts to deal with change. Be bold and question incremental expectations based on yesterday’s outcomes -- shrug off the status quo.