This is a transcript of episode 216 of the Troubleshooting Agile podcast with Jeffrey Fredrick and Douglas Squirrel.

We’re joined once again by Jim Euchner, author of Lean Startup in Large Organizations. This week we discuss how the pioneers/settlers/town-planners model applies to large organisations and how to involve all three types to ensure you combine product experimentation with financial stability and avoid cannibalising your existing business.

Show links:

Listen to the episode on SoundCloud or Apple Podcasts.

Introduction and Graduated Engagement

Listen to this section at 00:11

Squirrel: Welcome back to Troubleshooting Agile. We’ve got Jim and Jeffrey this time, so ‘hi’ to both of you.

Jeffrey: Hi, Squirrel.

Jim: Hi, Squirrel. How are you doing?

Squirrel: I’m doing great and it’s nice to be back with you again, Jim. We started last week looking at your new book Lean Startup in Large Organizations, and we’re really keen to look at this idea you mentioned, graduated engagement? To set the scene for folks who might not have listened last week, you’ve taken essentially Eric Ries’s Lean Startup ideas which are designed for—as it happens—startups, and you’ve figured out how to change those and adjust them and bring them into companies that have these antibodies against new innovation and ideas; organizations that have these antibodies because it actually helps them, they’re there to protect against chaos. So what’s graduated engagement? Is this like being vaccinated? Are you getting gradually attenuated to something? How does it work?

Jim: That’d be a nice analogy. Graduated engagement deals with the natural resistance that you get from functions inside the organization, something Govindarajan and Trimble call the performance engine. We left the last podcast with the recognition that people in these functions are behaving in the same way that you would behave if you were in their role, which means that you can understand it. You can understand their behavior by listening to them, trying to understand the pressures that they’re under, and trying to find some way of helping them deal with those pressures. So just to take an example, if you’re in IT and the innovation team is starting to prototype something and test it with customers, and they’re using some non-standard operating environment, your legitimate fear is that they’re going to build this thing. They’re going to put it out there and then they’re going to hand it over to you and you’re going to have to maintain it.

Squirrel: ‘Oh my God, they’re not going to use our standard security framework, our user’s data will be at risk.’

Jim: You could see that’s actually a very legitimate concern. And if you just pooh-pooh it or ignore it, you’re not doing them any good. On the other hand, if IT can veto the innovation teams you won’t make progress. We were doing an application at Goodyear, it was a cloud-based application and it had to be a cloud-based application, and we had no standard operating environment for cloud-based operations. So we were at a little bit of a loggerhead for six months. ‘How do we go forward with this program and not disrupt IT?’ Or take a liability lawyer. If you’re changing the business model you’re introducing new and different liabilities. So for example the business we worked on at Goodyear monitored both Goodyear and competitor tires on trucks in real time and gave alerts. Well, what’s the liability that Goodyear as if a competitor tire using our monitoring system doesn’t perform? There were new liabilities, and the general response to that was to say ‘don’t do it. We want to protect our name above all.’ So you understand their position and yet it’s slowing you down. From their perspective those people are doing their jobs, and you have to understand that. Graduated engagement is designed to let people do their jobs and still let innovation move forward. In the early stages the innovation team can do what they want to do. They don’t really need permission because they’re learning and it’s small scale and it probably won’t go anywhere because that’s the reality of the world. But you want to make them aware: you’re engaging them just to say ‘this is what’s going on’ so they can start thinking about things that might be of concern.

Squirrel: So that IT team isn’t going to panic about the cloud coming in because the cloud isn’t going to roll out to them. That’s the reassurance you give them in the early stage. Did I hear that right?

Jim: Yeah, that’s exactly right. You give the reassurance ‘we will address all your issues during incubation.’ Incubation typically takes 8 months, 10 months, a year…During that time you can do an awful lot to make sure that the application gets reviewed. Make sure that it’s operating on a sustainable environment. Make sure that the people who are going to have to maintain it either don’t have to or have something that’s capable of being maintained. The liability issues, there’s time to thrash them out, understand what other people in similar businesses are doing, manage them and set up something separately. Even the accounting system may need to change, and there’s time to work that out, use spreadsheets in the meantime. The whole idea of graduated engagement is you don’t keep people in the dark on the hopes that they’re not going to jump down your throat and stop things. You keep them aware, and then you commit that ‘when we get into incubation, when we’re actually learning with market, we will also address these issues. We’ll meet with you periodically. We’ll collect the issues and we will commit to addressing them in good faith.’ That’s the idea behind it.

Variable Risk Aversion

Listen to this section at 06:23

Jeffrey: What’s really interesting to me here is that the tension between that early incubation stage and the established organization, that’s something that we’ve talked about before, and it goes back quite a ways. I’m reminded of the ‘pioneer, settler, town planner model,’ which showed up in Accidental Empires, where they talk about software companies in the late 70s and 80s. You’d have pioneer-types start companies, they have a very different mindset from the town planners who were already established, and as a company grows from being small to being large the town planners come in and kind of push out the pioneers. What you’re describing now is kind of something the other way around which is to say, ‘how can a company of town planners and established ongoing concerns create space and opportunity for pioneers to go out and pioneer new areas.’ You’re looking to explicitly establish that there’s a different way to operate that we should allow for, and carve out a different way to operate for these pioneers. They’re going to work differently from us and that’s a good thing. They’re going to solve new problems for us.

Jim: Yes that’s exactly right, and I don’t think anything else works for new business innovation. But the key to making it succeed, other than not trying to solve all the problems before you even know where to go to market, is to—where it’s important—negotiate the relationships between the two entities. If the new company needs to leverage the sales force or the service network, then negotiate upfront, ‘what are we going to do? How are we going to go to the customer? What’s the sales force going to do traditionally? Who gets credit for the sale of attire if you’re selling services that you just you go through?’ Govindarajan and Trimble studied a whole lot of this and I interviewed him, so there’s an excerpt from his interview in the book as well. What works is when you have some independence and a connection to the core. If you have no connection to the core, you might as well be a startup and you’ll probably not be a very good one because you’re not bringing the incentives, the hiring flexibility, the ability to build a culture, or the funding in many cases that a startup might have. How you win is by leveraging the assets of your own core business, and in order to do that you have to work together. So this is important not just to let the new business survive, but to help it succeed by building off of the assets of the core business.

Jeffrey: That really becomes the opportunity, as you say here. If you’re not going to leverage what’s in the core, then you probably shouldn’t be within the company at all.

Jim: Right. Then there’s the question ‘Do you want to be essentially a company that’s a VC firm that’s building businesses that either can scale or spin out?’ I don’t know why you would do that. It can be more efficiently done by the VC ecosystem. I think Squirrel, we talked about this before. Amazon’s a master of leveraging their own assets. They started out and they had their customer base and their storefront, and instead of hoarding it, they created a new business. ‘We’ll sell our storefronts. We’ll take a piece of the action. We’ll sell our infrastructure for delivery. We’ll even share our customer base.’ Eventually the infrastructure got to the point where it was cloud-based and they said, ‘OK, we’ll share our cloud services. We will make a business out of cloud services.’ There’s resistance internally to these type of things, but they take an asset, give them a right to win, and they’re starting a new very different business. Retail is a very different business from cloud services, but they’re leveraging across the company. I think it works.

Entrenched Resistance

Listen to this section at 11:08

Squirrel: So I was talking to someone last week who runs what he called ‘a small startup within a large name brand organization.’ I think he’s in just the situation you’re describing. One advantage that’s obvious for Amazon is that they have Jeff Bezos, who is busy building spaceships and things, right? So he’s kind of a pioneer. Goodyear is not known for that, nor is this particular person’s company. There’s more to overcome when you don’t have a pioneer approach from the top. What do you do when someone says, ‘Well I’m glad you’re keeping me apprised of all this, and then when you keep me apprised of it, I can kill it.’ What do you do when you have vigorous opposition inside?

Jim: You do have to have strong executive support, but you can’t rely on that alone. If what you do is say ‘I have executive support, you have to help me,’ it doesn’t work very well. People can comply, but help requires more than compliance.

Squirrel: Exactly. So what do you do about that?

Jim: Graduated engagement is one thing, and I think that does work because people want to help you where they can. There are very few people who want to kill you in that world. The bigger challenge in large companies is not at the worker level where procurement or IT or sales isn’t giving you support, although that can be a challenge. The biggest thing is at the executive level, where people have an issue with cannibalization of the core. ‘I’m concerned your business is going to get good by making the core business bad,’ or they have concerns about draining resources. I actually heard someone say in one company, ‘You want me to invest in this? I don’t even have the resources to pave the parking lots of the service centers.’ There’s this operational resource fight and it’s a resource fight for both dollars and for talent. I think at that level, one thing you do is the ‘separate but connected,’ that keeps the people who are most resistant from being able to squash something. For the cannibalization, I kept a dual P&L. You have one about the business you’re building and one about how it’s helping or hurting the core, making some business go away and dragging in other. So you keep a dual P&L for that. The biggest answer is over time you develop what Tushman called ambidextrous leaders, people who can go from an exploit meeting to an explore meeting and not confuse the two and ask the wrong questions. You don’t want to go into a startup environment and ask people, ‘what are your revenues? When are you going to have sales of X million dollars? What’s your cost structure? What are you doing to cut the costs out of it?’ You’re trying to learn about how to make the business work, and the executives need to learn to ask the right questions to make that happen. These are all ‘yes, and’ principles. You do lean startup and you complement it with other practices that do the impedance match between the new venture and the existing venture.

Squirrel: Very nice. ‘Yes, and’ is one of our favorite ideas.

Jeffrey: Long-time listeners and readers of our book will be pleased when you talk about the ambidextrous leadership. This is really built in part on Chris Argyris’s work on double loop learning and the need to reduce defensive routines. People who have read our book will find some connection in these skills with what it takes to have these kind of conversations, and to be able to do the joint design and have that discussion about ‘what context are we in right now?’ Making sure we’re applying the right principles.

Jim: Yeah, that’s exactly where it comes from. Squirrel and I have talked about double loop learning, and single loop learning, and the difficulty inside large companies. I think you’re exactly right, and being able to create those conversations is the hardest thing. I know you guys have focused on creating the conversations that let this kind of work happen, so people will benefit from both. I do think double loop learning is what’s happening at an executive level where there are issues of identity, and people say ‘we want to innovate.’ They don’t address the fact that they have a fixed view of identity for the corporation and therefore they undermine the business, or they want to innovate but they don’t have a shared view about what they’re willing to risk in the core business. The cannibalization issue looms large and without people saying, ‘I don’t want to do this business,’ they let it die by preventing it from cannibalizing and sometimes preventing it from succeeding. So I hope that’s clear.

Squirrel: It is! ‘We definitely want to innovate, but we also don’t want to change anything.’ That would be the dangerous point of view and the one that you can overcome with all these very interesting techniques we’ve just talked about. Jim, we could talk to you for hours. I think we should close here. Thanks, Jim and Jeffrey.

Jeffrey: Thanks, Squirrel.

Jim: Thank you very much.