5 Questions with Freek Vermeulen

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 They have an innovative business model with which they aim to eliminate some outdated industry practices.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 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.