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5 Questions with Freek Vermeulen
Faculty Director, David Slocum talks to Associate Professor of Strategic & International Management at London Business School and Author of "Breaking Bad Habits", Freek Vermeulen about his new book and the nitty gritty truths of Change Leadership.
Your new book, Breaking Bad Habits (Harvard Business Review Press) opens with a critical discussion of ‘best practices’ – those behaviors, techniques, choices, and activities that shape and drive organizations. While some live up their name, you write that others are ‘inefficient,’ ‘stupid,’ and ‘plain harmful.’ What makes some best practices ‘bad’?
Measuring whether something is good or bad in organisations can be difficult. You can debate it in various ways, by what metric is it good or bad in the short term, and in the long term, and so on. I’ve done quite a bit of academic work on this. For instance, I’ve measured bad practices by their outcomes – specifically, on their impact on an organization’s survival. Most firms don’t live forever, and I have measured when the life expectancy of an organisation decreased if it engaged in a practice and then, if they eliminated the practice, when the life expectancy would go up.
In the book, I give an example from my research in the IVF industry, which offers in vitro fertilization in fertility clinics. One important reason that I chose the industry is precisely because with IVF, the success rate is very objective: you cannot debate whether the procedure was a success or not because, well, a woman is either pregnant or not. We could therefore examine success rates based on the percentages of pregnancies that resulted from the treatment. That very objective success rate is a big advantage of this industry. With it, we were able to show that a particular practice in this industry – carefully selecting patients before you admit them based on their probabilities of success – was bad because in the long term it harmed the success rate of organisations.
So what makes some best practices bad? I would say it is simply in terms of their outcomes. While that’s sometimes difficult to determine, when you look at the life expectancy of organizations or look at specific industries like fertility clinics, it is possible to do research and generate hard numbers about outcomes.
Turning to the identification and eradication of bad habits, you cite several helpful examples of how businesses produce innovations that allow them to succeed either in the market or in their business model for employees. How can we identify which bad habits predominate in given organizations and most urgently require innovation?
Even before trying to measure bad practices, managers face the practical challenge of identifying them. In fact, one might say that an inherent characteristic of bad practices is the difficulty of identifying them in everyday business in the first place. If such practices were obviously bad and unambiguously produced whatever harm to the organization, well-meaning and able managers would eliminate them.
Of course, there are places one can start to look. In the book, I discuss some necessary characteristics of bad practices which may help. For example, some practices are easy to replicate, spread easily, and have some short-term and measurable consequences of success, like efficiency and productivity. Yet these very practices can have potential long-term consequences that are negative in their influence on tacit processes like innovation. I also identify steps you can take in your organisation to try to prevent and move beyond bad practices on a continuous basis (like being varied but selective and change for change’s sake, which I will come back to shortly).
Let me highlight one step that is simple but effective. Whenever I get to know a new organization, I look at their processes and systems and I always make it a point to ask people in the organisation, “Why do you run this process this way? I understand how you run it but I don’t quite understand why it has to be done that way.” Sometimes I get a good answer but people will often say, “Well I don’t know, that’s how we’ve always done it, that’s part of how we do things.” They also typically add, “And actually all our competitors in our industry also do it that way, that’s just the way we do things.” If that’s the answer, I become suspicious because if you cannot explain the reasons for running this key process in this way for your own organisation, you might have just identified a bad habit.
I give related examples in the book that some habits come about for all the right reasons at a certain point in time and under certain circumstances but then when circumstances gradually change we just maintain our habits. We forget why we started it and we continue doing it the same way we always have. Questioning those habitual practices is a great place to start.
Freek Vermeulen - FIVE REASONS WHY MANAGEMENT MYTHS PERSIST.
You discuss how many practices, good and bad, come in bundles. While potentially complicating efforts to eliminate, you also write that bundles of practices can represent opportunities for organizations seeking productive innovations. Can you say more about how?
That practices often come in bundles rather individually can indeed complicate efforts to eliminate them. To give a very brief example, I recently did a case study on the rather successful South African bank called Capitec, voted the best bank in the world by Lafferty for the last two years in a row. They have an innovative business model with which they aim to eliminate some outdated industry practices.
In South Africa, for financial transactions from one consumer to the next, a bank would ordinarily charge a percentage of that transaction as a fee. Capitec decided that they would do that differently by charging a fixed fee. Whether you transfer £10, £100 or £1,000 or South African Rand, it wouldn’t matter; they would charge you a fixed fee. Consumers really liked the innovation. Yet while Capitec expected its competitors to shift to the fixed fee model, the other banks struggled to imitate and emulate them. Why? Having its origins in the era of transactions done by cheque, banks initially had to charge more for a cheque of £1,000 than for one of £10 because of the greater risk of fraud or insufficient funds. Now that transactions are all electronic, it’s no longer more costly or risky to transfer £1,000 than to transfer £10, but existing banks still found it difficult to switch because charging a percentage remains intertwined with many other aspects of the business. The seemingly simple fee is tied with many other things in the organization – head counts, departmental budgets, resources, financial remuneration, and so on – and therefore it’s quite difficult to change just this one practice.
If you’re the innovator, being able to avoid the legacy burden can obviously be an advantage. The hotel chain citizenM, which I describe at some length in the book, removed some seemingly simple and standard industry features, like a check-in desk (in favor of a machine that dispenses keys when you insert your credit card). They also eliminated very large rooms and created very small rooms. Importantly, the latter change had knock-on effects because the small rooms, which were essentially the size of a shipping container, could be manufactured offsite and transferred to the hotel location more affordably and efficiently than being built at the location. That cost savings could also be passed on to guests who would pay a relatively low price for accommodation in a prestigious area. Using this building block approach also meant citizenM could more easily build a hotel in expensive locations like central London or on Fifth Avenue in New York because they could adapt the shape of the hotel to specific available spaces.
Again, many of these seemingly simple individual practices become intertwined with lots of other things that make it very difficult for competitors to imitate. While they might be able to offer small rooms, for instance, it’s unlikely they would be able to reproduce all the types of knock-on effects – of location, production costs, types of customers attracted, and so on. In this way, because practices come in bundles, they can therefore lead to a more sustainable competitive advantage.
Running through the book is the reality of ongoing change in organizations. And in the final section, you even advocate embracing change for change’s sake. Has this always been an imperative for successful leaders or are today’s conditions, potentially including those related to bad habits, somehow different?
I should say, first, that I find it relatively unimportant and I’ll explain why. Are today’s conditions, for instance in the rate of change that managers and organisations face, different from the past? Are things changing faster than ever before? I doubt that. Some research has measured change in industries and in business across many dimensions and then looked at whether the rate of change is increasing or decreasing over time. The conclusion is basically that amidst differences in given years, the overall rate of change over decades is not going up but is, in fact, reasonably stable. Even as people nowadays say, “Oh change is happening faster than ever before,” that’s exactly what people said ten years ago, 20 years ago, 50 years ago and probably even earlier, going back to the Industrial Revolution.
I say that’s relatively unimportant because the more relevant point, assuming a lot of change and uncertainty, is that organisations pretty much need to change constantly. In other words, and this bears on the idea of change for change’s sake, in the marketplace you will have to change since there’s no way in which you can stay stable and survive. What organisations tend to do, instead, is to stay stable until performance starts to slip and then say, “Gosh, we really have to change now, we’re in performance trouble, profits are falling and so on.” The alternative point offered by change for change’s sake is to say, “Don’t wait for trouble; you know you will have to change at some point.” It makes much more sense to be proactive and prevent troubles in that way rather than waiting because once you’re in a crisis, change becomes very difficult. Indeed, as we also know from research, most firms once they end up in crisis don’t survive.
How does that relate to bad habits? As organisations gradually develop over time, things get a bit routinized, silos develop, and people start to do things in particular ways. By definition, habits develop over time and once a habit is firmly embedded in the fabric of an organisation it becomes difficult to change. What I’m suggesting is for organizations to be a bit proactive before their routines and behaviors become rigid. While some routinisation isn’t bad, building in the capacity to be proactive and prevent trouble rather than wait for it can be enormously helpful to your organisation.
"The process of innovation requires both variation and selection"
The book’s final section also proposes the need for organizations to be more selective about the habits and practices they adopt. What are some of your other recommendations for leaders to succeed with the process of reinvigorating their organizations?
There are various aspects to this question. You’re very right that I propose that organisations should be more selective about what they adopt. What I mean is that when organisations say they want to be more innovative and change, they usually organise a process of variation or idea scheme – say, an online opportunity for people to submit ideas for innovations and different ways of running processes and so on – and that’s not a bad idea. Leaders have to provide for or stimulate some variation because that vision or experimentation is half of the innovation process. But what I’m pointing to is the other half of the process: selection. The process of innovation requires both variation and selection. You need to have variation in ideas and proposals but you also need selection mechanisms. Which one are we going to fund? Which one are we going to staff? To which one are we going to give resources? Clearly you cannot support all the ideas, and again and again I see organisations whose selection processes are lacking. I describe in the book how organizations can make those processes much more deliberate and systematic.
One step for leaders is therefore to build in more variation and selection of new ideas that many organizations are inclined to do. Another step follows from the idea of change for change’s sake: that is, to consider making deliberate changes in order to be proactive. Let me highlight a specific aspect of such deliberate change. Sometimes you have to make your life difficult by choosing to do difficult things – not necessarily completely different things for the sake of their difference, which will probably be useless – but by deliberately electing to pursue more than predictable or incremental changes.
For example, this could mean challenging variants of your product or service. Returning to the IVF study, we observed fertility clinics that admitted patients with complex underlying medical conditions. These are patients who may have difficulty getting pregnant through the IVF procedure and, commercially and strictly in terms of outcomes, it may not make sense for an IVF clinic to admit them. However, what we clearly saw in those cases was that doctors and clinics also learned a lot from working with these patients. They experimented with new procedures, they started communicating with other specialists, they started developing new protocols and so on. So complex patients and difficult cases were actually triggers for innovation – and an illustration of something you can do deliberately as an organisation.
A further example is a company I worked with a few years ago that made wound care products. This company was always debating whether to offer a particular wound care product for very complex wounds that very few people in the world suffer from. Such a small niche market didn’t make much commercial sense, but they continued doing it for a couple reasons. One, admirably, was that they wanted to help patients. At the same time, the lessons they learned from making products for these complex wounds also benefited the bigger markets of simpler wound care products they served.
I also write in the book about rally car racing. Rally cars, which we might say are normal cars driven in extreme circumstances and at high speed, don’t make immediate commercial sense for carmakers to commit resources to. Yet because it’s a challenging variant of their core product, engineers can learn a lot from them. Among the innovations that came out of rally car racing, for instance, have been particular brake systems and even the rear-view mirror. Here again, by deliberately making your organization’s life more difficult – and challenging variants of your existing product, services or patients – you can learn which practices to adopt and which to eliminate.