The Connected Company by Dave Gray

July 3, 2013

Dave Gray is a management consultant and an author based in St Louis, MO. He was SVP at Dachis Group when The Connected Company was published, which tells how much of a respected figure he is in the world of Social Business. This book is co-authored by Thomas Vander Wal who is Senior UX Designer and Strategist, and a member of he steering committee for the Web Standards Projet ; he also is the one who coined the term “folksonomy“.

This book happens to be Dave’s second : prior to this one, he has co-authored with Sunni Brown and James Macanufo one of the favorite books of consultants around the world : Gamestorming : A Playbook for Innovators, Rulebreakers and Changemakers. In Gamestorming Dave focussed on the sole How : his visual design maestria and very pedagogic approach shows how collaborative games can easily help in transforming the dynamics of an organisation to come with innovative ideas.

In The Connected Company, Dave focussed on the Why, the What and the How : Why we need to transform our organizations, What we need to transform them into (engaging, dynamic and connected collaborative environments) and How to succeed in the transformation. Here again, drawings and visual design (and visual thinking) abilities of Dave do wonders in explaining great concepts and making this book a classic of 21st century business strategy.

This essay has a great story. Impressed by a fantastic article by Dave (the seminal eponymous blog post #hypertextual voted in its top 10 of 2011), Tim O’Reilly asked him to write a book about it. Needless to say : this is a mandatory read if you plan to do some business in the 21st century interconnected world …

Produce Vs Service

The first part of the Book (the Why part) is probably the most inspiring. Dave concentrates on identifying the main differences between product driven economy and service driven economy and he comes out with excellent observations.

The idea is that when companies are made to deliver products, there is a ceaseless one way flow of material and information from inputs delivery, process, and output generation. This is the core of value creation process while customer service is a cost to be minimized. Here the processes are designed to be consistent and uniform and there is no much room to listen to the customer, adapt and respond.

In a service driven economy, the product becomes the center of cost and the value is created through innovation and customer service. These services are co-created with the customer and the value creation comes from developing relationship with customers, listening to their feedback, adapting the service and respond.

Customer Experience Vs Mechanical Organisations 

Dave insists that customers resist standardization and don’t really care about the processes designed for them : they introduce complexity and variability that can’t be anticipated no matter how long you spend on designing the process to serve them.

Another big difference with service : there is no internal metric providing a better insight on customer satisfaction than asking the customer. Hence the Net Promoter Score as a new standard metric for service companies.

Historically, organisations were built with rigid structure following a mechanical metaphor. This rigid structure is successful in a stable environment but it’s not in a time where adapting to versatile customer needs is of paramount importance.  Hence a major problem : the nature of a machine is to remain static while the nature of an organization is to grow (the baseline of the seminal article).

In addition, inherent in the mechanical views is that knowledge is explicit and can be represented in manuals, documentation and quantitative metrics. According to the authors, there are two main issues with this organisational approach. First employees engagement requires intrinsic rewards which can’t be measured. Second, employees resist being controlled.

Customers and Value

This is an idea you also find in Lean Management ;

A company that truly serves customers well has vastly lower marketing and customer acquisition costs. Happy customers are the best marketing department any company could have.

The problem is that as company grows it gets split into functions. And because of the distractions and complicatedness inherent to the growing process (refer to this great BCG article on organization complicatedness Vs business complexity), it becomes a Divided Company (a closed system based on hierarchy, division of labor, specialization, stable enviroment), it loses touch with customers.

The authors vision of The Connected Company (an open system based on holarchy, fractal work units, autonomy, flexibility and adaptability in uncertain environment) aims to ensure the organization remains in touch with the customers, especially when the organization is not so sure.

Another interesting idea related to customer relationship is the balance between promise, purpose and performance. The higher the promise, the higher the expectations and the stronger the potential disillusion.

Profits in the Service Economy

The authors make it clear upfront that rofits are not a cause for business, they are an effect. There is a very interesting distinction the book introduces related to the type of profits. They draw on Fred Reichheld work who states that not all profits are created equals.

There are good profits who create value for customers while allowing them the freedom to leave the service. And there are bad profits who come from customers who are locked in, who feel trapped or abused.

Then again, having an organization able to engage the customer is critical and has a direct consequence on profits. The book reminds the outcomes of Human Sigma book (J. Fleming, Jim Asplund) whereby engaged customers represent a 23% premium over average customers while disengaged customers represent 13% less. It also reports that satisfied customer tells 5 people, while dissatisfied tells 10. Promoters are less price sensitive and detractors cost more to serve. Lastly, they also report that improving client retention rate by 5% boosts profits over 25%.

An interesting figure is the one from Apple experience where the company found out that spending one hour with detractor resulted in 1000$ revenue. Again this brings us back as the Net Promoter Score as a system indicator with a direct correlation to profits in the service economy.

Holarchy, Pods, Platforms and Learning

So far, the most popular alternative to hierarchy in the Social Business world was the Wirearchy, defined by #hypertextual hero Jon Husband more than ten years ago : “If anything, Wirearchy is about the power and effectiveness of people working together through connection and collaboration … taking responsibility individually and collectively rather than relying on traditional hierarchical status.”

The holarchy is somehow scaling up Wirearchy, weaving a network of what Dave Gray calls Pods, which basically are cross-functional and self-directed teams. For the agile community, this really is the Scrum team. The fact that the teams are cross-functional and selft directed teams empower them as they are in charge of their own business, their own processes and don’t rely on external resources and decision.

The Podular vision of Dave Gray somehow aligns with the main principles found by Shell in the early 80s while studying  the long lived companies : distributed and decentralized /  strong identity / feedback loops to learn. It also follows Lou Gerstner, former IBM CEO, who states that “Big companies are inevitably slow and cumbersome ; small companies are quick and responsive. Therefore, break big companies into the smallest pieces possible.”

Lastly, Podular structure fosters innovation, as it avoids the trap of large company where Large company Immune system attack innovation. Pod can be seen as a franchise model, a small business inside the business.  Make decision and changes as quickly and close as possible to customer. It also fosters an entrepreneur approach whereby a Pod can ask itself : “Given what is currently under my control, what kinds of things could I do in the world ?”

The team spirit is of paramount importance in Pods. The authors give the example of Rational where a former manager recalls : “We had zero tolerance for people who didn’t exhibit team behavior, that was just poisonous to our culture.”

Learning obviously is an important topic for the authors : When the world is constantly changing, the speed at which you can learn is the only thing that can give you a long-term sustainable advantage which echoes Mary Poppendieck statement at the Lean IT Summit 2011 EditionIn any industry nowadays, the fastest learner wins. if your competitor are faster learners then you’re in trouble.

Platforms and Principles

For Pods to succeed, podular organizations need platforms providing support services and defining standards, cultures and principles. Principles are keys (as#hypertextual already wrote) and must be used instead of procedures.

The front line is not a production line and the authors remind us the Law of Requisite Variety (Ashby’s law) : any control system must be capable of variety that’s greater than or equal to the variety of the system to be controlled. There are 2 ways to act on this issue : reduce variety or scale the system. In that context, providing procedures don’t allow to cope with all cases. You need principles that are as open as possible for customer facing Pods to be empowered and fix customers issues.

Gray and Vanderwal illustrate this principle approach with Nordstrom‘s rule for employees : “Rule #1 : use your best judgement in all situations. There is no other rule” and with Ritz-Carlton example where any employee has the authority to spend up to US$2000 to resolve a customer problem.

The Hypertextual Company

This is a very inspiring book especially the parts dedicated to customer relationship. The author made a fantastic work in making complex and / or subtle ideas easy to apprehend while using telling examples to feed their theories. It makes a great synthesis of what should be leadership and management in our interconnected world, curating a vast literature in the process.

Besides, this book offers an interesting implicit perspective on Social Business as the actual collaborative tools are hardly ever mentioned : Dave and Thomas rather focus on context, customer relationship, organizational development, leadership and management. In that respect, it could be seen as the perfect complement of The Collaborative Organisation the book by Jacob Morgan already discussed here.

Compared to the awesome first parts, the last part on How to get there may seem slightly disappointing. Dave Gray is a very respected consultant and an engaging and practical “doer” as Alexander Osterwalder observes in the foreword. Yet, most of the material comes from some stories we’ve heard before in other leadership books and articles : Zappos, Amazon, Ricardo Semler, Morning Star, GE, IBM etc … Beyond the excellent curation and the clear roadmap, one could question the value of explaining strategy success in retrospect using these known stories.  David has decided to keep a thinker position in this book and it probably would have helped to use more experience feedback from Dave, how the strategy was designed and then implemented, how hypothesis emerged and how they were tested etc …

This should not make us lose sight that David is a great doer, with a track record speaking for itself and Gamestorming as a proof of how engaging a change led by him can be. So don’t get me wrong : this small point aside, this book unquestionably remains a “required reading for any executive looking to take advantage of the opportunities available though emerging technologies” as Community Management and Social Business icon Rachel Happe reports in the back cover endorsement.

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