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asking right questions

OMETIMES I FIND MYSELF visualizing a business as though it were a big train.The engineer-CEO sits in the cab, wearing one of those hickory stripe railroad caps. The dials in front of him display the speed, pressure, temperature, and the like. At his hand are levers controlling the throttle, the brake, and so on, along with buzzers and phones to communicate with the crew. In a childrens book,about which I remember everything except the title, theres a train that races from Kalamazoo to Timbuktu. Our familys favorite line, which we always chanted loudly whenever we came to it, was: Slam! Bam! Grease the engine! Throw out the throttle and give it the gun!

But - back to business - what if the engineer has the wrong set of instruments? What if the levers dont connect to anything? What if theres a steam pressure gauge, but the train has an electric motor? What if you have the skills and controls for a train but find yourself in the cockpit of an airplane?

Many managers partly and intuitively understand that the controls they have might not be right for their business. For example, they know its not especially meaningful to measure the return on assets for a company like Microsoft, which has relatively few assets (apart from cash). They understand that economies of scale are a big deal in the automobile industry but that scale effects are markedly smaller in advertising, law, or hotel management. They know that some familiar levers seem irrelevant; they may complain, The stock market doesnt understand us. Theyre less clear on why this is so and what they can do about it.

The Surprising Economics of a People Business takes a revealing and useful look at this issue. Felix Barber and Rainer Strack, quantitatively minded partners at the Boston Consulting Group, have looked inside different kinds of firms to see which levers connect to which cams, gears, and other drivers. What they found is a whole (and very large) class of companies that look different on the outside but are very similar on the inside. These are people businesses, where capital costs are low compared to payroll and where there arent a lot of activities aimed at creating value for the future, such as R&D. This might be true of an entire company or just one unit. IBM is a good example. The economics


of its growing consulting and services business resemble those of an advertising agency like Omnicom or an oilfield services business like Schlum-berger. IBMs hardware side, however, looks like Intel.

A rich stream of consequences flows from this insight and analysis.The most important have to do with making sure that a companys leaders are paying attention to the levers and gauges that are relevant to the businesss perfor-mance.Take a gold standard measurement like Economic Value Added. EVA gives a picture of the true economic profit of a business by recognizing the cost of the capital employed in the business. EVA is the number that tells shareholders whether theyre getting their moneys worth. Executives should care about that and about something else: the steps they can take to increase EVA most effectively. Those steps are different for people-intensive shops than for capital-intensive ones.

Im a little worried that Ive made this all sound more technical than it is. In fact, Barber and Stracks article is full of implications for line managers, human resource executives, CFOs-and the engineer in the cab.

Theres lots more in this issue, including a superb pair of articles that spotlight the strategic and operational risks of moving into new markets. I want to call your attention to one feature in particular: Developing First-Level Leaders by BP executive Andreas Priestland and Dialogos VP Robert Hanig. HBR devotes many pages to the issues senior managers face-how they develop, how they can lead more effectively, and so on. Research shows that first-level man-agers-those work-group supervisors on the front lines of the business - have an enormous effect on performance.

Developing First-Level Leaders takes us inside a major company, BP, to show how it made big improvements in the training and performance of this important group. Make sure you read it.


Thomas A. Stewart

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forethought

A survey of ideas, trends, people, and practices on the business horizon.


GRIST

The Eureka Myth

by HAROLD EVANS

Innovation, cast as the triumph of human imagination, may be the most romantic discipline in business. And the eureka moment, that epiphany of total clarity in which a breakthrough invention or discovery occurs, is the most romantic aspect of innovation. In fact,the eureka moment still looms so large in the folklore of business that it overshadows the historically far more important matter of how an invention reaches the marketplace as a practical innovation. As companies turn their sights anew to top-line growth, it is time to see the eureka

moment - indeed the whole gestalt of breakthrough thinking - for what it is: largely a myth.

Admittedly, the eureka myth is seductive. Thomas Edison, who usually stressed that invention was the easy bit, forgot his own i%-inspiration-to-99%-perspiration rule in describing to a newspaper reporter how the incandescent lightbulb came to him as a gift from the gods. The reporter wrote: Sitting one night in his laboratory, Edison began abstractedly rolling between his fingers a piece of compressed lampblack mixed with tar for

use in his telephone....His thoughts continued far away, his fingers meanwhile mechanically rolling over the little piece of tarred lampblack until it had become a slender filament. In fact, Edisons laboratory notebooks suggest that he had considered carbon early on but discarded it in favor of platinum because carbon burned up too quickly. It was a new prospect - evacuating most of the air from the bulb - that induced Edison to return to carbon.

The trouble with the eureka myth is that it causes managers and investors to

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overestimate the pace of invention and underestimate the fortitude required to move from the early stages of discovery to a marketable product. Thomas Watson, Jr., is one of the few who took -and took sustenance from - a more realistic view. In the 1950s, Watson struggled to move IBM from punched cards to computers, something a hundred times faster that we didnt understand, he later wrote. What kept him going through this grueling process? He thought of the Wright brothers, moving doggedly from one problem to the next, any one of which could have grounded them for good, as Watson told it. In the popular imagination, the Wright brothers1903 flight at Kitty Hawk kicked off the age of aviation. But as Watson, a wartime pilot, knew, it took four more years of hard, secretive labor before the Wrights were able to demonstrate flight that was sufficiently sustained to convince a skeptical world.

Some seemingly obvious innovations had much longer gestation periods. Malcolm McLean was a 24-year-old truck driver waiting for his cotton bales to be unloaded at a seaport when it occurred to him how much easier it would be just to drive the truck onto the ship. But it was 20 years before he transmuted the idea into container shipping. His IdealX containership sailed from Port Newark, New Jersey, on April 26,1956, effectively initiating globalization.

The eureka moment is a hugely attractive idea,full of drama. But the act of inventing and improving is far more often a long, hard slog. And the act of capitalizing on invention -of managing the transition from a brain wave to the bustle of the marketplace - is the really hard part.

So declare yourself an innovation company and celebrate creativity, by all means.Then treat your employees to a little seminar in business history that emphasizes real-life time frames and the numbing necessity of trial and error, trial and error, trial and error. The great busi-

ness stories make wonderful fodder for such an education, but dont neglect your own archives. (How many of your employees know what labor went into producing and bringing to market your

companys core products? Do you?) And if your innovators get discouraged, tell them about the inventor who tried 3,000 different materials - including cedar shavings, coconut hair, twine, fishing line,

HOW THEY DID IT

Outsourcing Integration c.

Postmerger integrations are tough. Generally, the acquirer puts the targets distinctive capabilities under its own management and then struggles to pull the two companies operations together. Managers often end up plugging holes in dikes instead of focusing on the core business, and, when they finally emerge from this distraction, they often find that their customers have wandered off and competitors have moved in. Its no wonder that acquisitions so often destroy value.

If integration is so hard, why not outsource it? Thats essentially what Hungarys MOL Group, a $7 billion energy company, did when it outsourced its finance and accounting, treasury, tax, and information technology processes in 2001. MOL plans to become a dominant player in consolidating the central European oil and gas industry. Outsourcing its support activities, says CFO Michel-Marc Delcommune, allows company managers to sidestep the distraction of aligning accounting systems and integrating staff during acquisitions and to stay focused on MOLs core operations and aggressive acquisition strategy. According to Delcommune, when MOL acquired full control of Slovnaft, a $2 billion Slovakian energy company, in 2004, the efficiency of the postmerger integration was palpable. Because the acquisition took place in two steps-MOL had bought 36% of Slovnaft and options for the rest in 2000-the company had time to ready itself for the full merger on the horizon and deliberately delegate postmerger integration to its outsourcing

provider.

This made all the difference, Delcommune says. To integrate Slovnaft, the management team assembled 26 task forces to address all the critical business processes, from how the company set wholesale prices to how it managed the supply chain. By contrast, MOL spent none of its management resources on integrating the back office.

Its hard to measure the value of efficient integration and undistracted management. But profits and revenues are easy to track. Between 2000 and 2003, MOLs sales doubled to $7.3 billion and its profits quintupled to $478 million; 2004 profits are expected to top $1 billion. Slovnaft turned its 2000 financial losses into a $400 million profit in 2004. That growth would have been hard to achieve, Delcommune says, if MOL had kept the back office in-house.

jane c. under (jane.c.linder@accenture.com) is a director of research at the Accenture Institute for High Performance Business in Wellesley, Massachusetts. She is the author of Outsourcing for Radical Change (Amacom, 2004). Reprint F0506B

junE 2005



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