Organising for innovation: Learning lessons from Silicon Valley
By: The Up Group
Tags: Insight, Innovation, Corporate Culture, Silicon Valley, Digital Transformation

Introduction

Traditional companies, hunting for digital transformation best practices, tend to look to other traditional companies for inspiration. But they rarely find it. Rather, they find a mixed bag of innovation models. They find corporate VCs, in-house accelerators, ecosystem engagement programmes, innovation labs, digital hubs, and tech garages. They find roles with ‘digital’ or ‘innovation’ in the titles, targeting a mix of KPIs within a variety of organisational structures. And, by and large, they find companies that are struggling to make the leap.

There is no shortage of advice available, based on selected examples of transformational success, but this tends to be of limited general applicability.

The data set is very small, and the few companies that have made the transition tend to be in industries with uniquely conducive features such as catalogue retailing, classified ads, or gambling.

Rather than trying to discern common success factors from isolated examples in the traditional industries, in this paper we explore whether there are universal lessons to be drawn from a segment where transformational best practices are settled and well understood, namely global digital pureplays — which we term, for convenience, ‘Silicon Valley companies’. We will focus in particular on Google, Facebook, Netflix, Amazon, and Microsoft — although the latter two are headquarted in Seattle and Redmond respectively.

Innovating at scale

It is important to understand that the challenges facing Silicon Valley companies are no different to those facing any business. Indeed, they confront constant existential crises, and the landscape is littered with the corpses of once-unassailable tech giants. Today’s Snapchat can easily become tomorrow’s Yahoo.

As a result, Silicon Valley companies have turned innovating at scale into an art form. Netflix effectively jettisoned its profitable DVD rental business and pivoted towards streaming when they were already a large, successful public company. Five years ago, Facebook’s revenues from mobile ads were zero; in Q3 2016, they generated $5.7 billion. Through a series of audacious moves, Google developed Android into the world’s most ubiquitous operating system. And in the process of becoming the world’s largest retailer, Amazon also delivered the world’s leading cloud platform (AWS), online marketplace (Marketplace), and e-reader (Kindle). There are numerous similar examples; in Silicon Valley, transformation and reinvention is ubiquitous.

Of course, many of the barriers to innovation that traditional businesses encounter simply do not apply to pureplays. They are born digital, and disruption is in their blood. Yet based on our experience of working across the global economy, we believe that several approaches prevalent in Silicon Valley are relevant to the challenges facing traditional corporates today.

Feed the winners, starve the losers

Organisational themes

Diffuse decision-making

Whereas for traditional companies digital transformation is typically seen as a project with an owner, for Silicon Valley companies, innovation is everyone’s responsibility. Product initiatives and roadmaps emerge from small teams working autonomously. Facebook’s most famous maxim, ‘move fast and break things’ neatly encapsulates this approach. It is underpinned by a hyper-communicative style — Valley messaging apps and inboxes crowded — and high levels of transparency. The concept of decisions following the ‘HiPPO’ (highest paid person’s opinion) is anathema to Valley companies. Data is the only voice that counts. Indeed, former Netscape CEO Jim Barksdale famously said, “If we have data, let’s look at the data. If all we have are opinions, let’s go with mine.”

The inevitable inefficiency, through duplication, misfit and error, that decentralisation implies is dwarfed by the overall gains in agility and innovation. The key is to build in sufficient structure, processes and capabilities, particularly around internal communications and data analytics, to enable the business to capitalise on successful initiatives, and disregard the rest — what Google calls ‘feeding the winners and starving the losers’. (Shona Brown’s ‘Competing on the Edge: Strategy as Structured Chaos’ provides probably the most useful analytical framework for examining how Silicon Valley companies organise for constant reinvention.)

It should not be thought, though, that these practices are only possible in digital-first companies. In fact, the archetypal agile enterprise, whose practices foreshadowed those now common in the Valley, is a 114-year-old company with 90,000 employees, producing 60,000 products: 3M. One third of 3M’s $30 billion annual revenues come from products that were invented less than five years ago.

How does it do it? A striking feature of the way 3M is organised is a semi-structured approach to decision-making. Business units are run with lots of freedom and loose planning so that they can pursue unexpected opportunities. For example, Thinsulate, one of the company’s most successful products, was turned down five times by senior management before it was finally produced.

Yet there’s also plenty of structure, including sophisticated financial controls and information systems. Each division is expected to hit specific quarterly profit, growth and innovation targets. And the constant flow of hit products is triggered by the rule that 25% of sales must come from products less than four years old. This sets the rhythm of innovation for the entire corporation.

It is unrealistic to think that all traditional companies, with long-established hierarchies and decision-making processes, can shift to a radically decentralised model — far less to a situation described by William Coyne, 3M’s former SVP R&D, as ‘managing chaos.’ But even small steps can pay dividends; and there are a number of tools and approaches that can make this change manageable. One notable example of this is the OKR system, pioneered by Intel

Rigid hiring bar

Lightweight central control is only possible if employees are capable of making the right decisions. And maintaining a ruthless hiring bar is axiomatic across the Valley. This manifests itself in various ways, from very lengthy interview processes, to fiendish coding exams. All are designed to avoid what Steve Jobs called, according to ex-Apple Fellow Guy Kawasaki, the ‘Bozo Explosion’: where A players hire A players, B players hire C players, C players hire D players, and so forth.

Netflix exemplifies this principle. Its approach to quality control is encapsulated in its celebrated ‘Netflix Culture’ PowerPoint deck. The gravitas of this deck is such that it has been read over 15 million times, and described by Facebook COO Sheryl Sandberg as ‘the most important document ever to come out of the Valley’.

Its author, Patty McCord, then Chief Talent Officer at Netflix, believes that if you hire the right people, almost all of them will do the right thing. ‘Most companies spend endless time and money writing and enforcing HR policies to deal with problems the other(s)… might cause. Instead, we tried really hard to not hire those people, and we let them go if it turned out we’d made a hiring mistake’. (Further reading on Netflix’s reinvention of HR policies can be found here.)

Willingness to let people go is a point of pride for Netflix. Its managers use what the company describes as the ‘Keeper Test’: they constantly evaluate which of their reports they would fight to keep at Netflix. Those who fail the test should be let go to free up space for a star candidate.

Of course, all things being equal, it is easier for companies like Netflix and Facebook to attract star candidates than a traditional company. It is also more straightforward to let people go in California than in, say, the UK. But the lesson for traditional companies is less to do with the specifics of the hiring bar or performance evaluation methodology, than the extent to which Valley companies adhere to whatever policies are in place. For Silicon Valley companies, a false positive is far more damaging than a false negative; they would rather miss out on a stellar candidate than hire one (or keep one) who isn’t.

Unfair pay structures

It is widely understood in the Valley that talent, particularly engineering talent, follows a power law — that is, most people are below average, and a handful people are way above average.

Bill Gates expressed it as follows: “A great lathe operator commands several times the wage of an average lathe operator, but a great writer of software code is worth 10,000 times the price of an average software writer.”

Not only do Silicon Valley companies believe this, but their pay structures reflect it. It is not unusual in the Valley for two engineers at the same nominal level to be paid vastly different amounts of money depending on their calibre. Laszlo Bock, former SVP People Organisations at Google, called it ‘paying unfairly’. He uses this phrase ironically: not only is it self-evidently fair to pay people what they’re actually worth, it is unfair not to.

There are many other ways that Valley companies find to recognise their stars, from equity grants to spot bonuses. Recently, there has been a trend towards experiential, rather than financial rewards. But one way or the other, Valley companies are not squeamish about singling people out. For all the benefits of traditional pay scales and predictable promotion / reward timetables, the Silicon Valley experience teaches us that companies should hesitate before under-rewarding stars in the name of fairness.

In Silicon Valley, transformation and reinvention are ubiquitous

A distinctive approach to L&D

In Silicon Valley, stars emerge fast. Companies load responsibilities onto youngsters and expect them to step up. The Valley is not just full of young founders: it is also replete with twenty-something VPs and CxOs. That rate of progression requires rapid enhancement of skill levels. This means that, for Valley companies, Learning and Development is a critical area to get right. And as a result, these companies are often at the forefront of thinking in this area.

One L&D principle that has become sacrosanct in the Valley is the importance of internal training and knowledge-sharing. Pioneered by Intel under Andy Grove, who held that training is one of the highest leverage activities a manager can perform, staff at Silicon Valley companies are encouraged, from the day they join, to dedicate themselves to upskilling their colleagues. At Google, 85% of internal courses are delivered by staff.

Another emerging feature is a culture of ongoing, direct feedback. The most recent manifestation of this is a methodology known as Radical Candour, whereby people are encouraged to be unflinchingly honest with each other, but out of a clear sense of personal caring.

A mark of how seriously L&D is taken in is the rise of the Chief Learning Officer and its variants. Whilst this role emerged at a traditional business (General Electric), and can now be found in companies across the economy, it has become disproportionately prevalent in Silicon Valley. This relentless focus on upskilling is one of the reasons why these companies have become so good at harnessing the energy and iconoclasm of a young workforce to drive innovation and reinvention.

Twin career paths

Another aspect of the Valley star system that is underappreciated, and of clear relevance to traditional corporates, is the emergence of twin career paths. It is a truism that great salesmen do not necessarily make great sales leaders, but that principle is often honoured more in the breach than the observance amongst traditional businesses, where promotion tends to imply greater management responsibility.

Not in Silicon Valley. Some of the most legendary figures in the tech industry have never had any reports. Companies understand the extraordinary value that an individual contributor can bring, and are good at avoiding killing the golden goose through adding unwanted management tasks.

More importantly, individual contributors — who Forbes magazine recently described as ‘forgotten leaders’ — are valued and celebrated in the Valley. Probably the most famous example is Google’s Jeff Dean, who designed and implemented large portions of the company’s advertising, crawling, indexing and query serving systems. Not only is he a Senior Google Fellow — the highest individual contributor rank, equivalent to an SVP — he has become a local hero, attracting a whole genre of jokes playing on his superhuman coding skills. One example is that his PIN is the last four digits of pi.

This focus on tailoring career paths to get the best out of people, rather than squeezing them into pre-defined hierarchies, is another example of how Silicon Valley companies cherish talent and empower individuals to make a difference. This is a common thread underpinning, and explaining, a great deal of how those companies organise themselves.

Conclusion

The importance of HR in driving innovation is illustrated vividly by an emerging trend in Silcon Valley of appointing Chief People Officers with exclusively, or predominantly, business backgrounds. Eileen Naughton (Google), Lori Goler (Facebook), Kathleen Hogan (Microsoft) and Beth Galetti (Amazon) are notable examples.

Silicon Valley companies understand that building enduring business value is about far more than building great products, or getting the strategic calls right. Rather, it requires relentless dedication to creating the conditions to innovate at scale.

This dedication has given rise, as we have seen, to a broad set of principles and practices that have become widely adopted by some of the most successful and admired tech companies in the world. And, as we have noted, many of these are transferable to other business environments. This suggests that traditional companies should at least take seriously the idea that they may have something to learn from Silicon Valley when it comes to organising for innovation.