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April 15, 2014
Looking inside for the early signs of disruption
By: Mark McDonald

Conventional wisdom holds that disruption comes from the outside-in. Executives and strategists look outside their four walls often ignoring their internal response to subtle precursors to disruption. Limited introspection creates the sense that disruption happens suddenly, externally and largely outside the company’s control. However, I believe that internal signs of external disruption exist if we only look for them.

Antibodies and immune responses provide physicians early indicators of sickness before the full symptoms arrive. Likewise changes in the ‘body’ of a company provide early indications of future disruptions. The body of a company is literally the bodies that work there, the population and organization structure.

Organizations build up internal responses to external disruption via workforce or organizational changes. Re-organization, re-assignments and creating new groups are all responses to internal and external challenges.

The internal signs of external disruption comes by separating changes driven by organizational politics and power from those driven by external realities. That can be difficult to see, but here are a few questions to explore and evaluate as the reasons for organizational change.

  • Where is headcount growing faster than revenues?

  • How are governance, internal controls or oversight changing

Covering these questions in brief explains how changing internally may be indicative of external disruption.

Where is headcount growing faster than revenues?

Organizations accumulate people and teams as an initial response to external change. When this happens headcount in these areas grows faster than revenues, which can be a sign that leaders are throwing people at a problem. Think of the growth of the size of finance teams in response to the global financial crisis, the creation of specialized customer service teams, or special go to market teams. These all represent internal responses to external change.

Human middleware is one type of change that is particularly concerning and an indicator of disruption. Human middleware exists when executives create teams with the explicit or implicit job of navigating internal systems and processes on behalf of the customer. In these situations, the company puts people in place to compensate for poor integration, deficient functionality or as an overlay to put a customer face on an internally organized group. These are teams or groups with titles or responsibilities related to Gold Service, Facilitators, Expeditors and Coordinator.

Creating such groups is an early sign of external disruption as the company senses the need to deliver new capabilities or performance. Executives recognize the gap but plug it with people rather than investing to make these part of the core business. When these groups grow either in headcount or transaction volume faster than revenues, it’s a clear sign that what was once a simple gap could be growing into a disruptive force.

Where is governance adding complexity, rules and regulations and why?

Decision-making processes, a.k.a. governance, rely on consistency for effectiveness. When governance effectiveness declines, it’s a sign of change that could be an early sign of external disruption. Creating additional rules, oversight and controls is a common response to change as incumbents seek to adjudicate the situation into their favor.

Consider restrictions on selling to increasingly narrowly defined target markets. On the surface it makes sense, but such rules often restrict visibility and awareness of different and desirable market opportunities. But it’s a response to disruption outlined by Clayton Christensen when incumbents abandon lower margin, more competitive markets for higher ground.

Governance is a natural response to declining degrees of internal control or missed performance targets – both signs that the organization is out of step with changes in market conditions. Investigate the causes of reduced internal control or missing performance beyond not having the right people with the right authority or making the wrong decisions. What made the decisions wrong is easy to see. Insight comes from understanding the situation creating a case where people make a bad decision with all the right intentions.

Internal controls and oversight seem the most internally focused aspects of any organization but they too provide signs of disruption. Look at the growth of governing bodies, oversight responsibilities and administration as a sign of internal systems trying to cope with external change. Individually each action, committee or control makes sense. Take a step back and think about what each change is trying to control or compensate against and there is likely to be an external source of disruption.

Internal change often responds to external disruption

Conventional wisdom sees an organization in terms of its functional or process specializations. Sales, marketing, service constitute the organizations sensing functions because they work directly with customers and markets. Leaders often see these ‘front office’ capabilities as the eyes and ears of the organization assuming that the rest of the organization is relatively tone deaf to the external world. The resulting self-imposed market myopia reduces executive sensitivity to how the internal organization reacts and responds to the external environment and early signs of digital disruption.

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