The most overlooked digital transformation challenge for managers is not so much digitalisation itself, but its secondary effects.

Of course, digitalisation proposes a host of opportunities, and managing them is not easy. How to use cloud, big data analysis, AI, predictive maintenance, industry 4.0 etc. are big challenges for themselves. Even things like creating a unique platform where the customer can access all your offerings online is sometimes quite difficult.

But once you look at what secondary effects these changes in your organisation and its environment produce, you realise that the foundations of almost everything you know are profoundly shaken.

It has mainly to do with two aspects of digitalisation: Moore’s law and net neutrality. In this article, I am going to explore implication of Moore’s law. Click here for the second part.

The first source of change: Moore’s law

Moore’s law is not so much a law, but the statement that every 18 months, the capacity of a microprocessor doubles, and its price is cut in half. This has been true from the 1960 to this day. It simply implies an enormous speed of exponential innovation. If the same speed of innovation were applied to air travel from 1970 to today, a flight from Paris to New York would cost less than a penny and last less than a second.

So just by coincidence, everything connected to digital technology sits on the back of an exponential accelerator of innovation.

What are the implications of Moore’s law?

Exponential growth – outside in

Curt Carlson, at the time CEO of SRI international, the most productive developer of the foundational technologies of Silicon Valley, has famously stated:

In exponential times, if you improve your performance incrementally, you fall behind exponentially.

If you focus on the history of your own organisation, and compare its present state to where you’ve come from, a continuous past of incremental improvement will make you proud. Every year you’re better than before! Only – the speed of improvement around you is faster, and if you miss the early signals, or miss the capacity to accelerate with it, you’re gone before you know what hit you. It also means that the legacy (old contracts, old technology) of established players is not as big an advantage as it may seem. Sometimes, this not only applies to companies, but to whole industries.

The speed of commodity

The speed of innovation also means that novelties become common very fast. This relates to hardware and software. Take for example space technology. In classical space technology, there is the paradoxical saying “Only use in space what has been proven in space.” This makes sense, since it is tremendously expensive, or impossible to fix things in space. So you won’t risk a billion-dollar satellite by using technology of which you don’t know yet whether it works in space. The consequence is that satellites run on very old technology. Meteosat (2nd generation), has taken 20 years of development, there are currently 4 in orbit, and they cost 1 Bn € each. The capacity of their in-board camera is to cover 1 square km with 1 pixel – that was what the technology was capable of 30 years ago.

By comparison, the start-up Planet Labs has built a satellite for a similar task: take 1 picture of all the Earth’s surface per day. Their “Doves” were built on a completely different combination of technology, price, and quantity. They use gyroscope and cameras from current smartphones – cheap, modern, but not tested in space. Since they cost less than 200 000 € (estimate), it was possible to send 149 into orbit – one batch at the time. Price and quantity were the condition to include one or two experiments with each batch – if some of them break down, it’s not the end of the mission. Relying on existing, commoditized technology, development of the first satellite took 3 years. The quality? One pixel covers 3 square meters on Earth – no surprise with today’s Smartphone camera technology.

This means that the option to piggy-back on a commodity instead of an expensive customised or niche product, has become much more widespread and powerful because of Moore’s law.

The substitution divide

Many products include digital as well as non-digital parts. Since the digital part substitutes faster, and is usually also more connected to a digital ecosystem which substitutes faster, it can affect the whole concept of product life-cycle.

After two years my car is old because it cannot stream Spotify.

Shift left on the S-Curve

The S-Curve is the form of development of most technologies and markets over time. Depending on the phase of the S-curve, different rules apply to competition. At the beginning, it is about attracting interest with innovation. In the steep part, it’s about expanding the attention with marketing, and ramping up production. In saturated markets at the top of the curve, it is about optimising cost, and the big players are in a better position to survive a price wars because of their potential to produce at lower cost. In the old world, that was usually when a new technology came in, and the question was who had jumped to the new S-curve early enough.

In the digital world, technologies substitute each other quicker. This often implies that the new S-curve starts long before the old one has reached saturation. The relation between the investment into fast expansion (the steep part of the curve) and its pay-off in the saturated market has fundamentally changed.

One example of this is the music industry. The change from vynil to CD was still “old world”. Now, CDs still are still sold at 50% of their peak in 2000, while download (such as iTunes) is already being overtaken by streaming (such as Spotify).

Attention to customer value

The customer needs, their changes, and the discovery or creation of new needs prove to be more than ever the most valuable compass for the direction of product or service strategy. With digital innovations impacting the customer’s ecosystem with such speed and complexity, the relation of your offering to the customer’s needs is a constant source of surprise.

When the video games company Valve published Team Fortress 2, they had introduced the option for players to create their own hats for the figures. Within weeks, the players not only did that, but started trading the hats with each others, exchanging thousands of dollars in the process. For Valve, who had not foreseen that, the option was to immediately design a marketplace for this trade, or loose the connection to that part of their customers’ activity. As their CEO Gabe Newell put it:

Your fiercest competitor is not the other games producers. It is your players.

The amount and lifespan of options

Buy one now? Wait for the next?

Every decision for an asset is a decision against other options. This fact alone is vexing. Whenever you set on one technology, you exclude some features which are only available in other technologies. In a slow moving world, this decision was between the alternatives on the table. You could analyse your options, and then decide. The faster the technological substitution, the more your decision is against alternatives that are just around the corner. Think about buying a computer. If you are looking for an experience which guarantees to ruin your day, just visit a shop a couple of months after you’ve bought a new laptop, and see what you could have gotten now. In retrospect, it would always have been better to wait – but you cannot wait forever. In terms of complexity theory, the gap between premature conversion (closing your search too early) and eternal boiling (closing your search too late), has become narrower.

The same intensified dilemma applies between alternatives which are not fully developed yet. Think about the car industry’s decade-long indecision between the fuel cell and the battery as a substitution for the combustion engine. The digital world is full of such phases of indecision. You cannot wait until the technology, infrastructure and market demand are fully developed. You have to act, knowing that part of what you do is in vain.

Constant change

“Due to the exponential innovation in tech, the rationale of digital business models is in constant change. The bottleneck is not technology, nor money. It’s the human side of the organisation.”

Carsten Schloter

In cyber-social systems, it is the social which lacks behind constantly. Business models, strategies, organisations and skills are in constant change. This means a shift of management attention between running the operational business and developing it. It means an increased weight of everything bureaucratic, everything difficult to change. It means people’s capability to learn, and time dedicated to it, is put under pressure – think about the divide between young and old employees. It also means that if you hire a new person, their capability to fill the vacancy at hand is still important, but their capability to be useful at different, unknown positions within the company gains in relevance, because chances are, the vacancy at hand will not exist in a few years from now, and you cannot afford to replace the majority of your workforce every few years.

The changing relevance of relationships

Last but not least, the speed of digital innovation implies that a growing number of things are either automated, delegated to highly specialised departments, or outsourced to suppliers.

In many U.S. courts, judges use algorithms to indicate a defendant’s “risk”. Based on this risk factor, they may increase bail, sentence, or parole terms. These algorithms are not transparent, but have proven to be very accurate when checked against past cases – reason enough to start using them, isn’t it? The judges were very surprised to learn that on thorough inspection, one of the things these algorithms did was pure racial profiling. Just for growing up in a African-American neighbourhood, your risk went up considerably.

What does this mean for other contexts? You find an increasing number of people who yield the results of something digital they don’t really understand – starting with you as the chief generalist of your business model. The pressure on trust and reliability of your relationships has just gone up.

The second part of this article is looking into the effects of the internet: click here.

Imagine you’re sitting in a restaurant with an important client. She has given you the wine list, but courtesy demand that you will make a suggestion, and ask if she agrees. Now you are a big fan of Californian wines. And on the list, you see a great wine from Nappa Valley. A blend of Cabernet Sauvignon and Merlot – you really want to try it. But you know from previous conversations: your client is not a big fan of wines from the “New World”. She likes European wines, and especially Bordeaux – in her words the apogee of wines. What do you do?

You have two options. Either you try to evangelise your client on Californian wines, to convince her that her view is too narrow, and that she should give it a try. Or, you focus on another aspect of your suggestion. Bordeaux wines, too, are made of a blend of Cabernet Sauvignon and Merlot. So you say: “I remember you like Cabernet Sauvignon and Merlot blends?” “I love them.” will be her reply. “I have here a wonderful blend, from 2010 which was a great year – shall we take it?”

What happened? Here are five observations.

First: Whenever we argue something – propose, defend, legitimise – it is less the facts that influence people’s opinion, but the aspects, or perspectives on the facts. Already Epictetus knew that. To each fact, there are many perspectives, so we have a relative freedom of choice. You may remember the Greek government-dept crisis in the aftermath of 2008. The essential facts on the table were not the point of dispute, but the perspective from which people looked at it. Was it a crisis of the greek population, their poverty, their loss of employment? Was it a crisis of the Greek government, their decisions and their struggle to assert themselves between democratic legitimacy and the pressure from abroad? Was it the crisis of the Euro? Was it the crisis of the European Union and its future? Or was it the crisis of foreign investments in the country? Depending on our assumption about which perspective is relevant, the same facts lead to fundamentally different conclusions. Whatever our choice of perspective, it is not the facts that suggest one perspective over the other, but our values.

So, coming back to our choice of wine, you can choose various aspects with which to “sell” your preferred wine. The wine itself does not tell you which of them you should choose.

Second: Many interactions with other people happen in a context of pragmatic interdependence. Pragmatic interdependence means that we have a goal, but in order to reach it, we depend on somebody else. Our interaction includes a claim, e.g. for agreement, contribution or tolerance. And our success depends on whether our claim is accepted or refused. We want a certain wine, but we need our client’s agreement. We want to start a project, but we need our boss to approve the budget. Even something as simple as a welcome includes claims. We extend our hand, and we implicitly claim “please shake my hand”. This looks very self-evident, but imagine you just had a row with that person, now you meet them again in front of important people, and you extend your hand. The claim now is “please join me in a gesture of reconciliation”, and you charge your claim with situational power, because now, the alternative for the other person would be to very publicly be rude to you – which may be not as far as they want to take it.

So the shaping of acceptable claims is part of our tactics in contexts of pragmatic interdependence.

Third: You cannot evangelise and sell at the same time. In situations of pragmatic interdependence, we want to make our claim acceptable, to “sell” it. If at that moment we choose to try to change the other person’s values, they tend to see all our “missionary” arguments just as an instrument to our salesmanship, and therefore won’t take them seriously. A missionary is only good as long as he doesn’t need to sell anything. As Castiglione observed in his Libro del Cortegiano in 1528: In social interaction, as soon as a technique is seen as a technique, it doesn’t work anymore.

Coming back to our context of pragmatic interdependence, where we have to “sell” our claims by choosing certain perspectives or attributes, this means that we will choose those perspectives which appeal to widely accepted values. In short, when we are pragmatic, we are conformist in our choice of values.

Fourth: Therefore, in a context of pragmatic interdependence, the more a value is being used, the more it is seen as being widespread. The more widespread a value, the more it is being used. It is like a deer path in the woods. The first animal to cross the wood has ample choice whether to pass this tree to the left or to the right. The next animal that comes, sees a slight trace where the first animal has passed – it has a 51% preference to follow in those tracks. With each animal that passes, more dead leaves get trampled on the ground, twigs are broken, young plants don’t grow in the path. After a thousand crossings, the path has become very evidently the easiest and fastest way across the wood, and no-one would think of passing the tree on the other side. The same with values. Think about evergreens such as customer orientation. Or cross-functional collaboration. Or attention to cost. Those values have the best chance to be strong in the future, which are strong now. And this is true with no regard as to the reason why those values have become strong in the first place. In complexity science, this is called an attractor basin. When a value is strong in a group, people use it in order to sell their claims to each other. This means that whenever we see strong cultural habits, and values which seem irrational, it is worth looking into the past, or to the local perspective, where we often find very rational reasons why they became strong – only the reasons have disappeared, while the value remains strong.

An example? BMW are a very successful company with some strong cultural habits. One of them is that every decision, before it is made, needs to be circulated and discussed with many people. If some have been excluded from the consultation, it is well possible that they disagree afterwards, and this can in fact lead to a re-elaboration of the decision. As one head of the board once said: he couldn’t implement a decision to introduce Six Sigma and have everyone schooled within six months – like Jack Welch famously claimed for General Electric – because their culture would not allow it. Now this habit, and some others with it, originated during a great trauma, when the company was in a huge crisis and nearly got sold to a competitor, and was saved by, amongst others, a great union of management and workers. The latter allowed for heavy cuts in their wages, but got a bigger place at the table in turn. When was that? In the 1950ies. Nobody who underwent that trauma is still in the company. But the culture is there, solid as rock.

So, strong values remain strong, because we tend to use them more often for pragmatic reasons.

Fifth: Culture therefore tends to be more conformist, or unified, if there is more pragmatic interdependence. If we have a group of salespeople who all need to achieve their individual targets, but don’t need to collaborate, and don’t need to convince anybody in the company to accept their claims, there are few occasions for strong conformisms to grow. Taking them out to a teambuilding exercise every year doesn’t change that. If, on the other hand, people depend a lot on each others agreement, judgment, and reputation, then the culture is strong. This information is key if, from a management perspective, we want to influence culture through structural measures. Make pragmatic interdependence strong where it depends on certain values, and these values become strong.

So, structural reasons for pragmatic interdependence reinforce culture.

In 1999, Frederic Vester published a report to the Club of Rome named “The Art of Interconnected Thinking”. The main focus of the book is about understanding complex systems, and how a number of interconnected models, what he called the Sensitivity Model, can help us do so. The Sensitivity Model is an IT-based approach, today in the ownership of Malik Management. While other IT-based approaches try to connect some 200+ variables into a database, Vester is frugal in comparison, with 10-20 variables. The advantage of his approach over the more mathematical siblings is the acceptance and use of fuzziness – we simply cannot expect to be able to get a total picture of our system with sharply differentiated concepts and mathematical variables. The consequence is: we better accept that whatever model we use, it will be incomplete and partially wrong. It would be foolish to attempt something that is 100% correct. Therefore, a more realistic ambition is to create a model which is relevant to the pragmatical perspective of the beholder, and is sufficiently apt to produce this relevance.

The map is not the territory. (attr. Alfred Korbynszky)
I have facilitated the creation of sensitivity models, and they still take a group at least a day to construct. With this in mind, I would like to propose something more pragmatical: something that you can do alone or in a small team, without external assistance, in less than half an hour if need be.

If we take a blank sheet of paper and try to visualise a complex system, most often we start writing down some elements of the system and connecting them with lines. Often, these lines become arrows, and we end up with an influence map, or, as many call it, a spaghetti diagram. Unfortunately, just like spaghettis on a plate, the spaghetti diagram has a practical fault: in most cases, if we think about our system long enough, we end up with something like this:

Like Alice’s rabbit hole, it draws us in, and we can spend our time following the lines, but our most significant learning from this reverie is something we already know from the start: it’s complex.

In comparison to the spaghetti diagram, another model from Vester’s treasure chest, the role distribution map is less intuitive, but vastly more helpful from a pragmatical point of view. What is our interest in modelling our complex system? We want to learn more about how we can relate to the system and its various elements, what we can do with them. Can we use them as a leaver? What are the chances and risks of doing so? What are elements that we should watch with a careful eye? What are elements that we can happily ignore? In order to answer these questions, it makes sense to think about the role these elements play within the system.

A role distribution map is the visualisation of two questions: To what extent does an element influence the system, and to what extent is the element itself influenced by the system? Notice the fuzziness of the word “influence”: is it a specific cause-effect influence, or a diffused, unspecific force? For the sake of this model, the answer to this question is of no importance. What is more important is the collection of essential elements, and the holistic assessment of their influence. With the answers to these two questions, we can place our essential elements on a role distribution map.

As a result of these reflections we have now identified elements which are a) critical factors of the auto-dynamic nature of the system, where external manipulation may easily trigger off surprising side-effects, b) reactive elements which may indicate the state of the system, but do not wield any power, c) buffering elements which contribute to the system’s stability, and d) active, i.e. relatively independent elements which actively influence the system. It is this last group which interests us most if we want to influence the system: If we can place a modulator on some of these elements, we have found the easiest way to make a difference.

The German Sociologist Gerhard Schulze uses a wonderful analogy when he describes societies’ capabilities to deal with crisis, and I want to adapt the picture to organisations facing complexity. Most of us may not have heard of the Polynesian Migration. Within a timespan of about 800 years preceding 1300 AD, the Southern Pacific area was populated, starting in South-East Asia, and ending up in places as far away as Hawaii, the Easter Islands and New Zealand. The spread from island to island happened in individual steps – sometimes more frequent, sometimes less – across the centuries. For our purpose it is useful to note that during this period, society had something like two states of existence: State A consisted in the expoitation of existing resources on a given island: Societies lived together in buildings, they took food from land and sea, the basic events of life happened, such as birth, death and several rites of passage in between. For all this to work, there was a division of labour with appropriate tasks, roles and rules.

Then, with the population growing on a given island, at some point the density came to be felt as pressure, and society switched into a state B: Young men took their ships on exploration to ever further areas of the Sea, some of them never came back. Those who made it back home, evaluated what islands they found as potential destinations, maybe comparing alternatives. There might have been wars with other settlers. Then the population on the island split up in those who stayed, and those who left, a process which might have started as early as the beginning of state B – we may imagine an ongoing debate between “we must go and seek” vs. “it is useless to go and seek”. For those who eventually left, a dangerous journey began, in open boats across the long distances of the Pacific, towards a tiny target difficult to spot. Once arrived, they had to build and organise in temporary arrangements, until at last they could switch back into a new state A. 

Now it is obvious that for these two states of exploitation and exploration, rules, priorities, criteria for decision were fundamentally different, as were the kind of people who excelled at the task. 

If we take these two states as analogy for an organisation, the exploitation state A consists in administering operational business, taking the daily decisions, dealing with incidents, and incrementally improving the status quo. State B, the exploration,  would be the reorganisation, the development of a new strategy or business model, and innovation or skunkwork projects. People spend all their time in workshops…

Here’s why I believe that it is important to remember this analogy today: 

The more complex and dynamic your environment, the more it is the capability of an organisation to master state B, and to switch between the two states, that defines its competitive advantage. 

First and foremost, Agile is one of the most radical hijackings of human language. “Oh you mean agile in the sense of nimble? That’s not what Agile means. Agile means instant, frictionless and intimate delivery of value.” Steve Denning told me in a recent conversation. Problem is: First, Steve’s right. Second, most stakeholders of Agile organisations haven’t understood that yet. Third, you can’t blame them, because confusion is what you get when you hijack an existing word for something different. Fourth, the confusion is cunningly hidden by the fact that to some extent there is an overlap between Agile and agile: both include in their meaning the capability of an organisation to deal better with complex, unpredictable, shifting environments. But soon after, the overlap comes to an end. Both for Agilists and their stakeholders, that area would be a healthy focus of learning.

Yesterday morning, my daughter asked me to help her with some last moment review for a maths exam. It was about solving word problems. The calculations themselves were too difficult for the kids’ level, but you were allowed to work by approximation.

We both found that one of the most difficult things about this was to be able – without knowing the result of the precise calculation, nor the way the calculation needed to be done – to guess how much rounding would be adequate, and when it would throw us off course so much that the result would be marked as a fail. So here’s the complexity challenge for you: Sometimes, instead of getting lost in all the details of the trees, it is worth taking a step back and having a look at the wood, knowing that you will miss out most of the information on the tree level.

On a physical level you can try this with the famous rasterized image of Abraham Lincoln: If you squint, you see the face much better. How could that work on a practical level? Here’s an example: We all know the meaning of active listening, or empathic listening, in what kind of contexts it would be a good thing to do, and most of us would think of themselves that they should be doing more of it. But how do you learn it?

There is the approach on the tree level. Make a list of the activities that this includes: Lean forward. Look at the speaker. Mirror body language. Confirm with nods, facial expressions or short statements. Paraphrase what the speaker has said. Ask open questions. Etc. etc. And in each context, some of these things may be inappropriate, others would be helpful that are not on the list, and you can probably do any of these items in a way which is awkward and produces unwanted consequences.

What if instead of making this list ever longer and more precise, we take a step back and give ourselves another kind of instruction: Instead of listening in order to reply, listen in order to learn. Or: Try to understand and feel what the world looks like from the speaker’s perspective. You don’t describe any precise activity. But you can be sure that each person who follows this general imperative, will practice active listening in a way which is both authentic, and adequate to the situation. The “imprecise” instruction works better.

Remember your last New Year’s Resolution? To quit smoking? Spend more time with your family? Finally do something about (insert imbarassing vice here)? The truth is, we often didn’t act on them, because when the moment came to do something, we just happened not to think of our resolution.

It’s the same with many good leadership behaviours. We understand they would improve things. We really want to do something about them. But we cannot plan them, because the next occasion to try them out is unpredictable.

So here’s a trick: Put a small blackboard or something similar somewhere either at work or on your way to work. Write down your Motto of the Moment, so you get reminded of it at least once a day. After some time, choose another motto.

In the comment section there is a collection of mottoes from Palladio customers and friends. Feel free to contribute!

Urs Berger ist heute Präsident des Verwaltungsrats der Mobiliar Versicherung. Zuvor war er CEO der Mobiliar, und davor CEO Schweiz der Baloise Versicherung. Im vorliegenden Gespräch schildert er, wie er als CEO auf methodische, seiner eigenen Art entsprechende Weise mit den Mitarbeitern an der Unternehmensbasis in den Dialog tritt und dadurch eine Vertraunensbeziehung im Unternehmen aufbaut, die als Basis dient für konstruktive Auseinandersetzungen.

We are devastated by the tragic death of Carsten Schloter, CEO of Swisscom.

I cannot understand what has happened. But I would like to help those of us who want to remember the person he was, at least as a professional. Someone who has a very compelling way of reflecting about his behavior and leadership.

Earlier this year I have published a text based on an interview with Carsten. I am reposting this text below, together with the full audio recording of the interview. Maybe it transmits more of how this man has been reflecting, how he developed his thoughts on the corporate mindset, on leadership, and on himself.

That is how I would like to remember him.

Carsten Schloter in conversation with Bernhard Sterchi, 4 December 2012

How to run a business that has to compete in an ever faster moving world of innovations in technology and customer needs? Swisscom has mastered these challenges better than many in the industry. In addition, in my opinion, Swisscom stands out by the fact that the management team has a high awareness of the importance of the common mindset for the performance of the company. On another occasion, Carsten Schloter has even gone so far as to say that the bottleneck in the recent complexity crisis is not the technology, not the money, but people. The following key messages from our conversation describe his present focus in leadership.

Carsten Schloter_Energie von Menschen

Carsten Schloter_People’s energy