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The Art of Transformation Spring 2022
POINT OF VIEW
Matthew E. May and Pablo Dominguez, Lean Scale-Up Experts
The Way of The Unicorn: From Start-Up to Scale-Up THERE CAN BE NO DOUBT WE
For those who aren’t familiar with the term, ‘unicorns’ are privately held start-up companies with a value of over $1 billion. And despite the global pandemic, last year we saw more companies reach unicorn status than ever before. They included Savage X Fenty, a lingerie brand co-founded by musician Rihanna; Alation, a start-up that helps crawl a company’s databases to build a data search catalogue; and Pacaso, whose mission is to provide more people with a chance at second-home ownership. The question is, how do some technology companies go on to become billion-dollar enterprises while others don’t? While start-ups often struggle to find a product/market fit and define a business model, tech ‘scale-ups’ — more mature yet still-adolescent companies characterized by rapid annual growth of over 20 per cent for at least three years — face the next-level challenge of not only expanding and growing LIVE IN INTERESTING TIMES.
102 / Rotman Management Spring 2022
revenue, but doing so exponentially relative to resource expenditures in capital, people and technology. Many business leaders believe scale-up to be the most difficult phase of a company’s lifecycle. And it is precisely at this stage that many start-ups, giddy from early success, get ahead of themselves and subsequently fail. The Physics of Scale
Like any object moving at high velocity, scaling up faces opposing forces that must be overcome to achieve the speed and agility required to succeed. Following are four forces that work against any object in motion, including fast-growing companies: DRAG. In the realm of science, drag is the resistance of air against a moving object. In the business context, it manifests itself at the strategic level and can result in adverse indicators such as sluggish market moves, inability to change direction with agility and misalignment of strategies and objectives.
Corporate inertia is often responsible for waning product performance and competitiveness.
INERTIA. Scientifically speaking, inertia is the resistance to any change in the current state of motion. Corporate inertia is often responsible for waning product performance and competitiveness, feature fatigue and poor innovation pipeline throughput. FRICTION. Friction occurs when moving parts rub against each other, and in business it is a common cause of slow adoption speed, poor customer experience, retention/ renewal difficulty and undelivered customer outcomes.
Waste entails performing unnecessary work, which restricts value flow.
have discovered the practice of lean to be a powerful foundation for minimizing the momentum-stealing effects of drag, inertia, friction and waste. The S.C.A.L.E. framework rests on five actionable principles: 1. Strategic speed 2. Constant experimentation 3. Accelerated value 4. Lean processes 5. Esprit de corps Let’s examine each element in turn.
WASTE.
We have developed a new operating framework that addresses the unique ways that these forces manifest themselves in rapidly growing technology companies. We call it the Lean S.C.A.L.E. framework. The Lean S.C.A.L.E. Framework
Google Waymo’s recently retired CEO John Krafcik coined the term ‘lean’ as a researcher participating in a late-1980s MIT-led global manufacturing study. It was his way of expressing what he came to believe in his previous role as a Toyota manufacturing engineer to be the essence of the game-changing Toyota Production System: An absence of slack in the system, aka waste. What makes lean compelling and different as a management philosophy, however, is how that value is created. The process is one of ‘addition by subtraction’ — working from the customer back to reduce or remove anything that impedes the free flow of customer-defined value. While lean methods are the benchmark in manufacturing settings and have been applied with some success to entrepreneurial start-ups, broad application of these principles specifically to technology scale-ups remains mostly an unconventional practice. Our aspiration is to change that. Over the past eight years of helping tech-forward companies scale and grow by utilizing lean mastery gained from nearly a decade inside the Toyota organization, we
STRATEGIC SPEED. Primary target: Drag
It is possible to achieve optimal speed with less effort in the right direction by reducing drag using the organizational equivalent of ‘drafting.’ Professional cyclists, racecar drivers and migrating birds know, and studies show, that speed is dramatically improved while saving 25 to 50 per cent in energy costs by drafting. The faster you go, the more energy you save. It’s a virtual cycle. And the more people in alignment, the faster you go, due to the simple physics of momentum, which is velocity (speed with direction) times mass. CONSTANT EXPERIMENTATION. Primary target: Inertia
It goes without saying that continuous innovation has become a survival need and competitive must. Without it, inertia will set in. The goal is to make simple, fast and frugal experimentation the operating norm before ‘big-company syndrome’ sets in. Toyota runs over one million experiments annually, the vast majority of which are tiny, nested tests conducted under local autonomy. Meaning, employees don’t need more than their immediate supervisor’s sanction to run a test. ACCELERATED VALUE. Primary target: Friction
Enabling customers to obtain value quickly promotes product adoption and positively impacts community spread, customer retention and expansion. The tendency is to equate the concept of a customer journey with a sales rotmanmagazine.ca / 103
funnel coupled with a monolithic view of the customer, which is wrong. Identifying target areas to accelerate value begins with mapping out specific jobs-to-be-done by plotting customer objectives, desired outcomes, touchpoints, points of friction and value gaps, along with your internal processes and key improvement opportunities linked to those gaps. LEAN PROCESS. Primary target: Waste
Waste most often takes the form of performing work that no one, especially a customer, is asking for or needs. Targeting waste involves using a methodology developed by the U.S. War Department in 1940, which coined the term continuous improvement. The concept was aimed at the effort to convert the American manufacturing base to the war effort. Nearly two million personnel were trained during the five-year period from 1940 to 1945. It was then utilized to stabilize war-torn Japan under the leadership of General Douglas MacArthur during the seven-year U.S. occupation. Japan, having scarce resources other than human creative capital, termed it kaizen, meaning ‘change for better.’ With fast-moving tech scale-ups, we recommend an adapted method of traditional kaizen, which we refer to as Investigate-Design-Experiment-Accelerate, or I.D.E.A. Note that the Experiment step complements the S.C.A.L.E. principle of Constant Experimentation, the difference being that Lean Process is focused primarily on optimization, while Constant Experimentation is focused on new products and services. ESPRIT DE CORPS. Target: All forces
This is more of a behavioural principle than an operating principle, and it relates to the nature of company culture, which can encompass all of the restraining forces. It takes a team, and leaders of and within that team, to create the kind of environment enabling the first four operating principles to come to life. 104 / Rotman Magazine Winter 2022
French for ‘group spirit,’ esprit de corps figures centrally in military and paramilitary organizations, which are notorious for being results oriented. ‘Mission first, people always’ is the mantra. But research suggests that for a high- velocity scale-up, a cohesive culture of ‘people first, mission always’ may be a better approach. Consider this: Those viewed as having a predominantly strong results focus have only a one-in-seven chance of being viewed as a great leader; but for those strong in both results orientation and social skills, the likelihood of being viewed as a great leader is five times greater. The specific nature of those social skills is critical: when leaders promote, model and instill lean behaviours — defined as ‘personal and professional interactions that add value and reduce waste while engendering trust in the team as well as with customers’ — they are far more effective. S.C.A.L.E. in Action: A Case Study
During a senior leadership meeting at the San Francisco headquarters of venture-backed enterprise software company Gainsight in late autumn of 2019, CEO Nick Mehta and then-Chief Customer Officer Ashvin Vaidyanathan set two huge go-to-market strategic goals for the coming year. They wanted to cut in half the business-to-business sales cycle from initial customer quote to contract close, from 80 days to just 40; and reduce the time it took for a customer to be onboarded and achieve a desired business outcome (called ‘time to value’) from 13 weeks to just four. The company was growing at such a furious pace that operational controls and disciplines had struggled to keep up. Launched 10 years earlier to help enterprise software companies better manage their customer relationships, Gainsight was well known for its customer success platform and was approaching the US$100 million mark in annual recurring revenue. It was poised to take growth to the next level.
The goal is to make fast and frugal experimentation the norm before ‘big-company syndrome’ sets in.
Mehta and Vaidyanathan sought the counsel of our company, equity investor Insight Partners. Its advisory unit (which one of the authors sits on) suggested an adapted S.C.A.L.E. approach. After a few short logistical meetings, the group arrived at a challenging statement of work: 1. Take two dozen hand-picked professionals from across the organization with integral frontline experience with the sales and customer onboarding processes and train them not only on a powerful methodology for operational improvement, but also point that methodology toward dramatically shrinking the sales cycle and time to value. 2. Emerge with a portfolio of well-thought-through concepts, complete with experimental plans for proving them out quickly, without disrupting ongoing operations, and do so without any additional capital expense or new personnel. 3. Do all of this in fewer than two days. Looking to create some esprit de corps going into the two-day offsite, we led the group in a half-day immersive training exercise. Then the real work began. We formed four teams: two focused on the sales process, two on the post-sale onboarding process. Over the course of six intense hours the following day, we guided them through our lean framework, arriving at unique experiments the teams believed would yield proof of concept for their proposed solutions. Each team pitched their concept in a short Shark Tank-like presentation to a board of senior Gainsight leaders, including Mehta and Vaidyanathan. Because the proposed solutions were universally perceived as having real promise, the senior leadership board granted approval to proceed with the experiments. Proofof-concept tests were carried out in a series of experiments during the first quarter of 2020, followed by a company-wide
rollout that set new sales cycle and onboarding records. In November 2020, just shy of one year from the initial gathering of Gainsight teams to learn and implement our leanbased methodology, Gainsight was acquired for a reported $1.1 billion, becoming a card-carrying member of the unicorn club. In closing
By paying close attention to the forces that work against any object in motion, entrepreneurs can master the most challenging of stages in their company’s growth: scale-up. And like Gainsight’s leaders, those who prove to be best at fighting the forces of Physics will be rewarded with the Holy Grail of entrepreneurship: unicorn status.
Matthew E. May and Pablo Dominguez lead, respectively, the Lean
ScaleUp program and Sales/Customer Success Center of Excellence at Insight Partners, a venture capital and private equity firm investing in high-growth technology and software companies driving transformative change. They are co-authors of the forthcoming What a Unicorn Knows: How Innovative Entrepreneurs Use Lean Simplicity to Scale for Growth (BenBella Books, 2023.) rotmanmagazine.ca / 105
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