Leading Change Inside Fujitsu

FUjItSU tokyo

Fujitsu is big in Japan, but less known elsewhere. Stuart Crainer and Des Dearlove were given unique access to the Japanese technology giant to learn more about its plans for change.

In a meeting room on the 32nd floor of Fujitsu HQ in central Tokyo, a group of managers is trying to describe the company. “It isn’t a smart and sexy sort of place,” says one. “We are quiet. Quiet and confident,” adds another. “We never give up,” ventures a third. “Our DNA is based on giving it a try, just doing it. At the same time we are solid. Craftsmanship is at the core of our manufacturing. Trustworthiness is also very important because we work very closely with customers.”

The discussion moves from English to Japanese. There is, we are told, a word in Japanese, which describes Fujitsu perfectly — ‘dorokusai’ — but no one is sure of the best translation. It has something to do with being pragmatic and reliable, and getting on with the job without a making fuss.

After more discussion, we agree that the closest English equivalent is down-to-earth. Fujitsu is down-to-earth.

This is an odd description for a high-tech company with Fujitsu’s pedigree: it is the third biggest player in the global IT services market, with sales of 4.6 trillion yen (US$50 billion) and 172,000 employees in 60 countries. It also has a long

and distinguished track record as a technology pioneer. In 1954, Fujitsu developed the first Japanese computer, and in 1976 it created the first Japanese supercomputer. Fujitsu engineers made it possible to process Japanese kanji characters, creating the first computer with Japanese language capability in 1979; and in 1992 the company introduced the world’s first 21 inch full-colour display, followed in 1995 by the first 42 inch plasma screen. Today, it leads the Japanese domestic laptop market and is involved in a range of technologies from cloud computing to the next generation of supercomputers, from simulation

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leading change

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systems for train drivers to mobile phones. It is also closely involved in a variety of scientific projects in Japan and around the world, and in expanding the role of IT in agriculture, healthcare and education.

“It isn’t a smart and sexy sort of place,” says one. “We are quiet. Quiet and confident.”

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LEADING CHANGE INSIDE FUJITSU

01 masahiko Yamada, president of Technical Computing Solutions Unit: Customers rule

02 Fujitsu Workplace Receives 6 Star Green Star Certified Rating

03 a receptionist awaits visitors at Fujitsu's showroom in Tokyo

04 Chiseki Sagawa: philosophy meets technology

05 Hideyuki Saso: intelligent traffic lights

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And yet, Fujitsu remains grounded — down-to-earth; ‘dorokusai’. In markets where it is long established — such as Europe and the United States — it retains a stubbornly low profile. In others, including China and India, it is barely known at all. For 75 years, Fujitsu has quietly gone about its business — a quiet giant. Now, under the leadership of its new president, Masami Yamamoto, the Japanese information and communication technology company is set on change.

Change, of course, is not unusual in the corporate world. But this is change with a difference. Led by the steely-eyed Yamamoto, Fujitsu is attempting to shape not just its own future but that of its customers — and, perhaps, society, too.

Facts of corporate life

Driving the change is the same down-to-earth pragmatism that is written into Fujitsu’s DNA. “If you look at the life cycle of companies they have a period of rapid growth, a period of stability and then they start declining. Each of these periods lasts 20 years,” says Yamamoto, a 34-year Fujitsu veteran. “We are now 75 years old so the message is clear: we need to reinvent and reshape ourselves. The challenge for Fujitsu is to move onto the next growth stage. The danger is that if we don’t we will start to decline.”

Yamamoto’s C-suite colleagues are

“We need to change things if we are to become a $100 billion company.”

similarly frank. “We need to change things if we are to become a $100 billion company,” says corporate senior executive vice president (EVP) Hideyuki Saso matter-of-factly. “For example, there are a lot of processes in our product development and there is the danger that, as time passes, people focus on the processes. It is like when people won’t cross the road until the light turns green even if there are no cars approaching. What we need in the organisation are intelligent traffic lights. We have to continually revisit what we do and figure out the best way.”

Corporate senior executive vice president and director, Kazuo Ishida, warns: “If we want to globalise,

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a focus for the company and its managers for decades. Beating IBM is a common refrain when Fujitsu executives recount why they joined the company in the first place.

IBM is still Fujitsu’s largest competitor. But, under Yamamoto, Fujitsu is intent on moving out of Big Blue’s shadow. “In our minds we still tend to see IBM as the big competitor, but there are others — like HP,” he observes.

It is also clear that the journey that Fujitsu is embarking on is a different kind of transformation. Big Blue was going broke and faced extinction unless it changed. Fujitsu faces no such crisis. Indeed, its 2009 operating income was just over $1 billion with more than $3 billion available in cash. And yet the urge to change is strong.

Higher ambitions

Avoiding decline is an understandable goal, of course, but Fujitsu’s ambition goes beyond simply ensuring its own survival.

The company has declared its intent to use technology to contribute to society. At the heart of its vision is the notion that computing should be configured around human beings and not the other way round. So while rival IBM trumpets its Smarter Planet concept, Fujitsu talks about using technology to enrich people’s lives.

“This will involve collecting data on the behavioural patterns of people and organisations that mobile phones and other ubiquitous products generate, and taking advantage of cloud computing, supercomputers, and other technology infrastructure to analyse the data,” explains Yamamoto. “This data has the potential to revolutionise all aspects of human life — from healthcare to transportation, and education to agriculture.”

Fujitsu predicts a big shift in the role of technology in business and in society. While other IT providers tout a world view that sees an increased role for computing solutions to existing problems, Fujitsu emphasises how quality of life can be enhanced by technology. In this view of the future, technology is more than just an enabler; it is a journey, a dialogue with

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Fuji Tsushinki manufacturing Corporation (currently Fujitsu Limited) established as an offshoot of Fuji Electric’s Communications Division (capitalised at 3 million yen with 700 employees).

Delivers Japan’s first domestically produced “T-type” automatic switching system to Japanese ministry of Communications and Transportation.

Unveils Japan’s first relay type, electronic computer, the FaCOm 100.

Delivers Japan’s first data communications system, FaCOm 323, to nikko Securities Co., Ltd.

Becomes largest computer company in Japan.introduces Japanese word processor, OaSYS 100.

Sales of “universal designed” mobile phones surpass the 12 million unit mark.

Commercialises world’s first 42-inch colour plasma display.

Launches globally palmSecure contactless palm vein authentication equipment business.

we must change. If we are to bring in truly global standards and our knowledge and experience from throughout the world, there is not much time. This could be the last chance for Fujitsu to change.”

Fujitsu’s Yamamoto and his senior management team are not the first to appreciate and lament the short-lived nature of corporate success. In his book Living Company, the former Shell executive Arie de Geus pointed out that only a handful of companies last beyond a century. Reminders of corporate mortality are easily found. Look at Jim Collins and Jerry Porras’ business bestseller, Built to Last, and you will quickly discover that many of the companies have struggled since being held up as benchmarks of longevity.

Equally, examples of companies that have reinvented themselves are few and far between. Think of Nokia’s move from being a timber company to mobile phone giant. Famously, too, IBM transformed itself from a computer hardware company to a business solutions firm under Lou Gerstner.

Fujitsu is setting out on its own journey. Yet, in conversations with Fujitsu’s executives, it is clear that IBM looms large in its world view. Historically, IBM was the giant and Fujitsu the pesky upstart. The rivalry goes back a long way and has provided

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01 Fujitsu’s flexible electronic paper features an image memory function. This enables continuous display of the same image even when electricity is turned off

02 The OaSYS 100: Fujitsu’s first Japanese-language word processor

03 View from Fujitsu HQ 04 The Fujitsu Group malaysia

Eco-Forest park in Sabah State05 Hands off: The world's

first contactless personal identification method

society that allows people to shape their own future. It is the shaping element that distinguishes the Fujitsu point of view from its competitors.

For Fujitsu there are three pillars to this strategy. First, you have to get close enough to customers and end-users to see the world through their eyes. Second, you have to have a truly global perspective and reach, to offer local solutions anywhere in the world (a variation on the “think global, act local” dictum). And third, you have to be committed to a sustainable future. The third prong, in turn, has two elements: the greening of IT products; but also the opportunities to use new technology to tackle environmental issues — for example, using a supercomputer simulation to model global warming.

Underpinning all of it is the idea that technology has an essential role to play in the evolution of civilization.

Says corporate senior EVP and director, Masami Fujita: “People used to see us as a mobile phone or PC company. Now, they see that we are contributing to society — we are shaping tomorrow, as our branding puts it — and that is very attractive to young people.”

Such higher aspirations are made real when you meet Aiichirou Inoue, president of the Next Generation Technical Computing Unit. Inoue worked three years at another company and then joined Fujitsu where he was a driving force behind the company’s mainframe computer business for 27 years. Given his long service, Inoue could be forgiven for possessing an air of ennui. In reality, he is a ball of creative energy, excited and under pressure in equal measure. “In my previous roles, I couldn’t do the things I wanted to do. I wanted to build something by myself, not just to use it, but to build it,” he explains.

Now, his creativity and passionate leadership are about to bring a change in the world of the supercomputer. Inoue is charged with developing Fujitsu’s new supercomputer, collaborating with Japan’s Institute of Physical and Chemical Research, known as Riken. It is nicknamed the K Computer by Riken. K is a play on the Japanese word “kei” for the number 10 to the power of 16. It is a big number and a big build with a $1 billion total development budget and Fujitsu’s development group numbering some 1,000 people. Development of the K Computer began in 2007 and is scheduled to finish in 2012.

“I want the young engineers working on this project to be excited and to enjoy their work,” says Inoue. “But, let’s be clear: the K Computer will make the future for Fujitsu, Japan and for human beings. It will give us the ability to look at the weather of the future and there are a huge number of healthcare uses. That’s what I mean about its power to change humanity. A computer is just a big box; what’s interesting is to see it as a tool to help mankind and societies around the world.”

On the offensive

While the bold ambitions of the K computer are alluring, any sort of organisational change is hard. The older you get, the harder it becomes for companies as well as people. Sprightly septuagenarians are rare — though less so in Japan. So how do you convince a 75-year-old company that it needs to change and then convert it into reality?

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The answer from Fujitsu is that, first, you change the tone. Masami Yamamoto took over as president in April 2010 after the controversial — and, for Japan, highly unusual — departure of his predecessor. Yamamoto, the youngest president of the company for 30 years, brings a more modern style of leadership and a new perspective to Fujitsu’s business. He talks about going on the offensive and observes that the company has tended to be defensive.

It is a point backed by other senior leaders at the company. “We’re being more proactive with customers,” says corporate senior EVP Kenji Ikegai. We asked Ikegai about his future hopes for the company. “I want the company to be a global IT player in products and services. If we don’t change, our business will shrink.”

Such frankness is unusual among senior leaders in any corporation. And it is a constant refrain as we talk to Fujitsu’s leadership team.

Chiseki Sagawa, 29 years with the company, is the president of Fujitsu’s platform strategic planning unit. “We need to have more confidence to go to the next stage. Everyone inside Fujitsu knows we need to change. We need to move from optimising industrialisation to optimising how people live, it is a mix of philosophy and technology,” he says.

Reconnecting with its DNA

If changing the tone is the first element, the second in kick-starting change at Fujitsu was to gather the ammunition to back the need for change. Engineers — and that is primarily what Fujitsu’s people are — respond to data.

Research by Fujitsu’s corporate brand office found that understanding of what the company did and stood for was often very limited in the global marketplace. Only a small percentage in some key markets outside of Japan identified Fujitsu as an IT company. This was exacerbated by a lack of coherence between its various global operations. It looked muddled and confused, an assemblage of companies, ventures, cultures, products and brands.

To better understand its employees, as well as its customers, Fujitsu surveyed 85,000 of its employees in Japan. It also surveyed customers and employees outside of Japan. The research identified three key characteristics of its brand: responsive, ambitious and genuine. Says Masahiro Terauchi, general manager of the Fujitsu corporate brand office: “The brand promise is what we want to be known for; the brand attributes

“We’re being more proactive with customers. If we don’t change our business will shrink.”

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The arT oF FuJiTsu managemenT

dreams and deTail“For me the excitement lies in turning technology into profitable technology,” says Kazuo ishida. “along the way we make mistakes. Over my time with the company i have run 28 projects with teams ranging from 50 to 800. Some were a year long. at the end you hand over and move on to another project. But, i was never happy with how things had gone. i always looked back and identified where, when and how it could have been done better.”Fujitsu is a technology company built on engineering expertise. its senior executives typically started their careers as engineers. an appetite for detail is part of their training. Fujitsu engineers prefer doing to theorising and have an elevated view of the likely impact of innovations on broader society: they see engineering as a route to improving the world. Dreams and detail are in unusually close alignment.

cusTomer FirsTThe fashionable business ideas of our time suggest that customers are unreliable guides. Simply, they do not know what the technology is capable of, so how can they tell you what they want or would like? as a result, the emphasis of recent years has been on retaining talented individuals rather than attracting and retaining high spending customers. Fujitsu is old-fashioned in its adherence to the edict that customers come first. all Fujitsu executives talked about the vital importance of staying close to customers.Thirty-six years with the company and now a corporate senior executive vice president and director, Kazuo ishida told us of his first day working as a systems engineer. “i went to work with a banking client. it felt as though i had become a banker, such was the identification we had with the customer. That stuck with me and i still spend half of my time with customers.”

grow wiTh cusTomersSays Richard Christou: “You don’t shape the future by simply selling technology. There has to be a dynamic, proactive interchange with customers.”Customers are not static. Fujitsu regards them as a growth opportunity. But this does not mean trying to screw more sales out of each account. The win-win hope is that as customers grow, Fujitsu will grow alongside them. “We have a track record of working with Japanese companies and there is an opportunity to grow with them — and our other customers — as they globalise. as companies expand they need to use systems which are consistent, which they are familiar with, and which can receive high levels of support worldwide,” says Kenji ikegai.masahiko Yamada, president of the company’s Technical Computing Solutions Unit, is an engaging Fujitsu veteran. “at one stage, i remember thinking that we need to really focus on costs and technology. i was wrong: relationships with customers are more important,” says Yamada. many companies focus on contracts, Fujitsu emphasises genuine relationships and growing with customers.

mulTiculTural and global“if you think about where future market expansion will occur, you can only conclude that our future growth will depend on how successful we are in developing our global business,” says company president masami Yamamoto. His thoughts are echoed with even greater emphasis by Richard Christou: “i think we have a two-year window to become more global in outlook. We have to move decisively. if we do not become more global, we will shrink.”The initial ethos of globalising companies was to try to export

the same products, services and culture worldwide. This was the largely american multinational model of the 1960s and 1970s. Then, in the 1980s and 1990s, the cry was for globalising companies to be global and local, to combine global strength with local sensitivities — witness mcDonald’s offering localised menus throughout the world.now, a new generation of globalisation is occurring as, in particular, companies from india expand globally. The emphasis of these organisations — and of Fujitsu — is to combine a clear sense of having roots while also having the open mindedness to embrace different business and national cultures. at Fujitsu, emphasis is put on the company being a global organisation with Japanese roots. it is multicultural but clear in its origins; globalisation with an open mind.

quieT conFidenceRespect and humility are deeply entrenched in Japanese culture. Similarly, they inform Japanese business culture and corporations. Gung-ho competitiveness is uncharacteristic. Rather, collective aspirations are the focus — whether they are for the team, the company or society.The emphasis of Fujitsu’s research is not on creating sexy, must-have technological fripperies. instead, it regards improvements in technology as integral to improvements in how we live and how societies are organised and behave. This belief runs deep, but quietly.

co-innovaTion raTher Than dominaTionTechnology companies place huge store in innovation. But at Fujitsu the emphasis is on co-innovation with customers. This is exemplified by the company’s concept of Field innovation. This is a concrete example of how Fujitsu

does things differently. as it deploys the concept, Fujitsu works seamlessly alongside its customers to create value for them by defining and visualising management challenges with customers.at the same time, Fujitsu has always recognised the importance of being at technology’s cutting edge. Visit its Technology Hall in Kawasaki City on the outskirts of Tokyo and you are struck by the sheer range of its interests — from cloud computing to electronic medical record systems, plasma displays and point of sale displays at supermarkets. The range of products gives it a balanced portfolio and a radar for converging technologies and new innovations that can be transferred across products.

The FruiTs oF experienceFujitsu has a cadre of highly experienced managers. They know the company and its customers inside out. many of the senior leaders have worked with the company all their working lives. as engineers they have a constant urge for improvement. They are like mechanics tinkering with a car engine in search of a slight but significant performance enhancement. Things can always be improved. always.


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are how we deliver the brand promise; and the brand positioning is who we are and what makes us special — we are the Japanese global information and communication technology (ICT) company with a commitment to local service.”

Armed with a clear idea of what it stood for, in 2010 the company announced a new brand promise: “shaping tomorrow with you”. It is the first truly global branding exercise ever undertaken and implemented by Fujitsu and is intended to provide a rallying point as the company changes.

The phrasing may be new, but people within the company agree that what it describes is quintessentially Fujitsu. “The company’s brand promise ‘shaping tomorrow with you’ is a new way of describing what we have always stood for,” says president Yamamoto. “It is already in our DNA, but stating it in this way crystallises what makes us different. It is a catalyst for change.”

And change is something that Fujitsu cannot ignore because the world it inhabits is changing. The role of technology in society is changing — and with it the role of technology providers.

Of course, the high-tech sector is always a vortex of change. It goes with the territory. But from time to time, there are big shifts. Examples include the switch from mainframe computers to client servers in the early 1980s; and more recently the move towards ubiquitous devices such as smartphones and tablet devices like the iPad. Allied to this latest development, the industry is now entering a new era characterised by cloud computing.

Cloud computing uses the internet to provide resources, software and information on demand. People will no longer need to store large quantities of data or software on their personal devices because they will be able to access them from anywhere. For users, cloud computing holds out the promise of just-in-time computing; they will no longer have the need for expertise in, or control over, the technology infrastructure. For many users and businesses, this is a liberating development. But for established IT providers, such as Fujitsu, it represents a radical departure.

“Three years ago we made a major announcement on cloud computing and it felt like an exciting new

direction. IT will be increasingly a utility, accessed on demand,” predicts Kazuo Ishida, a 36-year Fujitsu veteran. “This has the capacity to change everything about how, when and where we access technology and the uses we put to technology.”

Challenge on two fronts

On a commercial level, change is necessary says Yamamoto because Fujitsu faces two big challenges: the need for global expansion and the need to develop a new business model fit for the cloud computing era.

Like many companies, Fujitsu is extremely strong in its domestic market and is active globally but without the same level of success or dominance. The company operates through more than 500 group companies in 60 countries around the world. A total of 37% of its sales and around 70,000 of its 172,000 employees are now accounted for by overseas markets. Its target is to generate more sales outside Japan.

While global in scope, until now Fujitsu has lacked coherence to its operations. The company’s slogan in the 1960s was “infinite growth”. The result was that Fujitsu amassed a sprawling array of subsidiaries and joint ventures. Among other things, in the late 1990s, for example, it acquired Amdahl in the United States and ICL in the UK. It also had a joint venture with Siemens in Europe. The moves were often successful as stand alone ventures but were too loose to provide any critical mass. In short, the whole was not greater than the sum of its parts. A big problem was that the subsidiaries operated under a variety of different names, failing to leverage the Fujitsu global brand.

“We have suffered from a lack of gravity in Europe and elsewhere. In those places, it seems as if we just happen to be a global company,” laments Chiseki Sagawa. “There is a need to create a gravitational force to pull things together.”

Acquiring gravity takes time. Over recent years, Fujitsu has worked hard at renaming and reclaiming subsidiaries, to make more sense of what it does and where it does it. In 2002 it brought ICL and Amdahl under the Fujitsu brand. In 2009 Siemens’ stake in the joint venture was bought out to create Fujitsu Technology Solutions. In the United

States, Fujitsu merged three of its independently operating businesses in 2009. One name, of course, does not necessarily mean one culture.

“We want to create a different sort of global company,” says company president Yamamoto. “All of our companies have their own cultures so we are creating a multi-cultural global company. All these companies work closely with their customers so, as their customers develop globally, we can help and develop with them. We can help them globalise their businesses. In the past there was a tendency to leave our global business to the independent discretion of our subsidiaries outside of Japan, each of which differ in terms of their origin and subsequent development.”

In response, Fujitsu has reorganised its global businesses along regional lines with Richard Christou, corporate senior EVP (the only Westerner in the company’s management team) in charge. “There has been a fragmented approach but whatever we do now has to be done globally,” says Christou, who estimates that Fujitsu is half way in its globalisation journey. “Companies like IBM or Oracle offer exactly the same experience wherever you encounter them throughout the world. We cannot do that. What we can achieve is consistency of values and objectives rather than consistency of action. Responding to customers has to be done locally and individually. We want to be a transnational organisation which shares experiences and knowledge between regions but which has a light centre.”

“‘Shaping tomorrow with you’ is a new way of describing what we have always stood for. It is already in our DNA.”

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The auThorsSTUaRT CRainER [email protected] is the Editor of Business Strategy Review.DES DEaRLOVE [email protected] is an associate Fellow of Saïd Business School and a visiting professor at iE Business School.

While aiming to globalise alongside its customers, Fujitsu is also clear that it remains a Japanese company. “We still need a base to hold this global company together and that is in Tokyo. That’s why we talk about a global Japanese company,” says head of R&D Kazuo Murano.

A new business model

The second big challenge facing Fujitsu is changing its business model. Big IT providers have already felt the pain of an economic downturn, the banking crisis and the arrival of a new era of computing. Fujitsu is no exception. A decline in its solutions business has led to sweeping reductions since 2008 in costs and expenses across the company.

Key operations have been restructured. In 2009, for example, the company completed the transfer of its hard-disk drive business to Toshiba. Fujitsu’s LSI business also shifted to a so-called “fab-lite” business model — whereby the company minimises its own production scale by outsourcing to external foundries.

More fundamental structural changes can be anticipated, but there are signs that the worst may be over. The company raised its operating income from 68.7 billion yen in 2008 to 94.3 billion yen in 2009. It also set an ambitious target of 185 billion yen for 2010.

Financial discipline is the first step. But Fujitsu needs to renew itself. Renewal comes from the roots and the roots of Fujitsu have always been firmly anchored in innovation. As president Yamamoto explains: “Computing is going through a transformation. IT used to be in a finite area. Now, we see that through cloud computing there is an opportunity to expand its role. Think of areas such as agriculture. These are the new areas we are exploring. These applications of technology are revolutionary. What was unthinkable is now possible so we have to develop in what were uncharted areas.”

Shaping tomorrow with you

Fujitsu itself is entering uncharted territory. To simultaneously globalise and be at the vanguard of an expanded role for technology in society is a big ask. The company believes it is achievable if it stays true to one of its fundamentals: staying

close to its customers. This is the “with you” component of its brand promise. To emphasise the point, Masami Yamamoto visited more than 100 corporate customers within the first three months of being president.

Says Chiseki Sagawa, president of Fujitsu’s platform strategic planning unit: “We are more humble than some other companies. We have tended to be the follower rather than the visionary company. There are three routes to success. You can either be a visionary company, compete on cost or you can focus on customers. We are the third. We emphasise that we understand customer issues and we always finish the project.”

Staying close to customers is one thing; helping them shape tomorrow is quite another. Co-creation, popularised by the late CK Prahalad, is fashionable. Many companies talk about developing products and services with customers. But in reality it is far easier to provide solutions to customers than it is to develop them with customers. It goes beyond co-creation to true co-innovation. The latter takes an endless reservoir of time and patience. Western companies are not known for either. Yet Fujitsu, “stubbornly trustworthy” and endlessly patient, is a company that is built for co-innovation. It may well be its greatest asset.

Fujitsu’s new business model is all about co-innovation. “This ability is probably the biggest attribute we have at Fujitsu,” says Sagawa. “But we need to change the way we work and think. In the past we helped customers solve problems they identified; in the future we need to share common challenges. We need to move beyond listening to customers to innovating with them.”

“Shaping tomorrow with you” is a big promise. We asked Fujitsu president Masami Yamamoto what he wanted the company to be famous for in a decade. His answer was typically bold but matter-of-fact. “Contributing to society. Making society more prosperous and more convenient. It is all about challenging new areas with customers. That is also an important message for our employees. It is about shaping tomorrow.”

The aspiration is clear. But the philosophy remains grounded. It is ‘dorokusai’ — down to earth. But ‘dorokusai’ with a new-found confidence.


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Making better riSk ManageMent deciSionS

lEadingthoughts

During a three-year research project on risk management in large organisations, Julian Birkinshaw and Huw Jenkins interviewed three dozen executives from a diverse array of business sectors. Their findings reveal that risk management must be personal to be successful.

Managing risk has always been one of the key functions of an executive. But rarely have the consequences of ineffective risk management been as clear as they are today. Consider three high-profile cases: BP’s Deepwater Horizon explosion in April 2010, Toyota’s recall of more than nine million cars during 2009 and 2010, and Lehman Brothers’ collapse at the height of the credit crisis in September 2008. All three were caused by low-probability, high-severity risks; and in all three cases the consequences, in terms of loss of life, environmental damage and economic costs, have been severe.

There are no simple ways of avoiding these types of risks, and yet the evidence suggests that some companies are better able to manage them than others. The credit crisis illustrates this point very clearly: while Lehman Brothers and Bear Stearns were wiped out — and while UBS, Citibank, Merrill Lynch and Royal Bank of Scotland were badly hit — several other banks (including Goldman Sachs and JPMorgan Chase) sailed through unharmed. What explains the very different fortunes of the winners and losers in this period of unprecedented turbulence?

Our argument, in a nutshell, is that in the years leading up to the credit crisis, financial services companies focused unduly on the formalisation of risk management by developing multistage procedures, with many signatories, to evaluate what risks were worth taking. They also relied on externalisation of risk management to a large degree — the use of expertise and approval from outside parties such as auditors, regulators and credit-rating agencies.

Risky businessRisk is the potentially negative impact arising from a future event, and it can be calculated as a product of the probability of the future event happening and the scale of loss associated with that event. Firms face multiple risks of contrasting types all the time; so, rather than think in terms of removing risk altogether, the task of the organisation is to learn how to manage its risks appropriately. Indeed, it is a truism in the world of business that riskier activities require higher rates of return to make them worthwhile investments; thus, to a large degree, the organisations that become highly capable at managing their risks are likely to generate superior returns over time.

Risk management requires firms to balance two distinct types of risks — the ‘false positive’ risk associated with investing in a potential opportunity that does not transpire, and the ‘false negative’ risk associated with failing to act on an opportunity that did transpire. The consequences of false positive and false negative

LEADING THOUGHTS MAkING BETTER RISk MANAGEMENT dEcISIoNS

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errors are very different; effective risk management is all about evaluating the pros and cons of these two types of errors and adjusting decision-making processes accordingly. For example, if an oil and gas company is extremely cautious about investing in new oilfields, it can generally avoid costly false-positive mistakes in the form of dry wells; but it risks leaving money on the table that other competitors can pick up. In other words, the more one type of risk is

minimised, the more the other type ends up occurring.

So how do firms manage risk? How do they bring to bear the necessary level of knowledge and expertise on difficult decisions? And how do they ensure that individuals act in the best interests of the firm, rather than themselves?

Historically, the answer to these questions was the model known as ‘bureaucracy’, the regulations and structures used to control activity. While the term is often used in a pejorative sense, bureaucracy has many benefits: it encourages the development of formal rules and procedures that transcend individual idiosyncrasies and historical orthodoxies. However, it also has many unwanted side effects: it can become overly rigid and specialised, it encourages groupthink and it can lead to depersonalisation and a lack of ownership on the part of employees.

It is this last set of concerns, around depersonalisation and loss of ownership, that is most salient here. As firms grow, they need to build formal systems to generate economies of scale and scope,

There is no simple way to build a supportive culture. It takes many years of consistent messages and actions from a leadership team. But there are nonetheless a couple of basic principles that can be applied.

but they also need to balance that with the agility, personal accountability and freedom of expression that come from a small, more entrepreneurial environment. While this point is often made in the context of innovation and creativity, it is just as valid in the management of risk.

RoJConsider, for example, the winners and losers in the credit crisis. While there were certainly some notable failures among small players such as hedge funds, the major losses were borne disproportionately by the very large banks. This was partly because small financial services companies did not have the credit ratings or balance sheets to carry the so-called ‘super senior’ tranches of the collateralised debt obligation (CDOs) that ultimately got the big investment banks into trouble. But it was also partly because the decision makers were close to the action, highly knowledgeable, and personally accountable for the outcomes of their decisions. As one leading hedge fund executive commented to us, “We


have robust informal systems, we communicate naturally and we develop our own views on what risks to take. We get a return on our judgement”.

JPMorgan Chase, one of the least-affected major players, also had a highly cohesive top team that took ownership of its risk-management agenda. As is now well known, CEO Jamie Dimon and his team saw early warning signals (back in 2006) of the credit risk on mortgages and the market risk on CDOs, as a result of which they reduced the bank’s level of exposure to mortgage-backed securities.

Most of the large investment banks, in contrast, had hundreds of employees working in risk management, using procedures so carefully defined that well-intentioned managers could no longer see the forest for the trees. According to one report: “The risk governance failings [of the banks] resulted from an over-reliance on low-level risk decisions in siloed businesses, product lines and trading desks that ignored how these exposures contributed to a firm’s overall risk profile.”

The net result was that some of the investment banks ended up making false-positive and false-negative decisions. Not only did they steer clear of promising lines of business that other firms, such as hedge funds and private equity houses, grew into, they also made horrendous trading losses on some of the lines of business they chose to invest in. When a firm makes both types of error at the same time, it is a sure sign that the system is not working.

Three approachesSo where did bureaucracy go wrong? In our view, it failed because it allowed individuals to detach themselves, legally and morally, from the system in which they were working. We suggest there are three complementary approaches to managing risk in large firms:

– Formalisation involves using system-wide procedures and rules to evaluate and adjudicate on what risks are worth taking.

– Externalisation involves making use of the expertise and seal of approval provided by third parties, some required by law (auditors and

regulators), others optional but widely used (credit ratings agencies). Both of these approaches are manifestations of bureaucracy, the former controlled by the firm’s management, the latter controlled by third parties.

– The third approach, personalisation, involves pushing the responsibility for evaluating and making a judgement around risk to those individuals who are making decisions and requiring them to live with the consequences of those decisions.

While all three are necessary and used to varying degrees all the time, the recent evidence in banking and elsewhere suggests we need to redress the balance back towards personalisation, especially in large firms. Goldman Sachs, one of the best performers through the credit crisis, is frequently held up as the acme of personalisation. As the Financial Times reported: “Employees [at Goldman] typically view themselves as being affiliated to the bank, not the business line, and there is a strong ethos of shared accountability.” And in JPMorgan Chase, Jamie Dimon is known to have taken an active personal role in risk briefings. But Goldman Sachs and JPMorgan Chase are clearly exceptions: other firms in the sector relied, and continue to rely heavily, on bureaucratic approaches to risk management.

The personalisation approach to risk management applies in many different contexts. In the pharmaceutical industry, for example, firms make high-stake investments in new drugs all the time. These firms have sophisticated formal systems and stringent external regulations; but, in addition, they are able to rely on the strong ethical norms and professional standards of the medical fraternity, a form of personalisation. As one observer noted: “Such experts are driven by a public willingness to improve collective knowledge of products rather than by a private or commercial will to distribute them.” It is this shared accountability among medical professionals that helps to minimise false positive risks.

Or consider an entirely different context, the social services profession. There was the tragic case in the UK in 2008 of the death of ‘Baby Peter’ at the hands of his mother and stepfather, despite accumulating


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evidence of abuse. On further investigation, it became apparent that the local social services organisation had formalised its support services to such an extent that social workers were spending 60–80 per cent of their time on paperwork, rather than out in the field talking to the families of at-risk children. There had been 60 separate appointments with Baby Peter and his mother; but, because these were spread over so many different social workers, the full story had not emerged until too late. One investigation into this case concluded that computer technology “replaced a system where social workers wrote case notes in narrative form, which … made it easier for different officials to quickly pick up the details of complex cases”. Or, in our terminology, the formalisation of risk management, through computer monitoring and nationally-imposed targets, squeezed out the personalisation approach that many would see as the essence of effective social work.

Personal touch

While the concept of personalisation has intuitive appeal, many people struggle with how to apply it in a large organisation that, by definition, relies on significant amounts of formal systems to get work done. Our research suggests three necessary and supporting elements.

High-quality insight It goes without saying that those making decisions require good quality information, effective analytical tools and the competence to interpret this information. But it is rare for all these things to come together. More often, decisions get made with poor-quality insight from self-interested sources and with relevant information fragmented across different parts of the organisation.

The credit crisis provides abundant examples of such failings. Lloyds TSB’s acquisition of HBOS, for example, was a massively risky decision made on the basis of very limited insight. While the board of Lloyds TSB was clearly under a lot of pressure from the Bank of England, its primary responsibility was to its shareholders — and it failed them. At a more micro level, studies have looked at the securitisation of mortgage loans in the run-up to the credit crisis. They show that, when loans were

securitised and sold on to non-banks, the likelihood of default was far higher than when loans were sold to affiliates of the originator. The non-banks, in essence, lacked the high-quality insight to make the right judgements about the risks they were taking.

Effective personalisation of risk management is therefore about building a system that puts the right information in the hands of those making the call and then transforming that information into insight through deep experience. Here’s one example of how this works in a different setting. The UK police force gathers intelligence on a daily basis about criminal activities, community affairs and so on. Usually these are dealt with quickly and without note; but, occasionally, an incident flares up and becomes really serious. To better alert themselves to the potential flare-ups, and in recognition of past failings, the police force in the late 1990s instituted a critical incident approach in which an employee of any rank could call together a cross-force group to consolidate all the available information about an incident and make a call on how to react. Critical incidents are only called occasionally, when the officer’s ‘antennae’ are twitching, but they provide an effective way of quickly bringing to bear all the different views on an issue and reaching a thoughtful decision.

Many large companies have also developed specific techniques for improving the quality of insight around important decisions. For example, one major mining company has an independent evaluation team that will put together their own analysis of a proposed investment (such as a new mine) before a decision is made. Almost in the manner of a court of law, the investment committee reviews the proposal by the business unit seeking investment funds; then, it considers the independent team’s assessment. By having two points of view, the quality of insight is improved and the likelihood of a false positive investment is significantly reduced. This company now has an enviable record in making profitable mining investments.

Personal accountability It’s no surprise that effective risk management requires personal accountability, but most firms get this wrong as well. Sometimes there are too many decision makers, or the decision maker is too far removed

So where did bureaucracy go wrong? In our view, it failed because it allowed individuals to detach themselves — legally and morally — from the system in which they were working.

from the action to feel any genuine responsibility. And, often, there is no link between the decisions taken and the rewards provided. For example, in the run-up to the credit crisis, many banks traded in risky securities to optimise revenue growth or short-term profits without giving due regard to the appropriate cost of capital or the long-term nature of these securities. It is now conventional wisdom among commentators that a key factor in the creation of the current financial crisis was this focus on short-term accounting profit and the use of highly geared incentives around it.

What is needed, instead, is a system in which personal accountability is rewarded and in which the individual or team with the highest-quality insight is also the one making the decision. For example, one of the basic principles that every airline captain knows well is to have risk decisions made at the appropriate level. ‘Appropriate’ here means the level at which the individual has the necessary experience and maturity to make a good decision. The captain may, for example, delegate specific decisions to engineering specialists or dispatchers; but the decision to fly the plane rests with him or her — not on the wishes of the air traffic controllers or the airline’s chief executive.

The same logic applies in policing. In the critical-incident model described above, a key principle is the concept of command, whereby one individual leads and coordinates a response, even if it cuts across multiple departments or police forces.

In the business world, accountability is as likely to sit with a team as with a named individual, but the logic is essentially the same. Every board member in a public corporation, and every partner in a


partnership, understands his or her formal accountability. But clearly the top of the organisation is not the appropriate level for many decisions to be made. As with the airlines and the police, firms need to find mechanisms for pushing personal accountability down to those who are closest to the action without those at the top abrogating their overall responsibility for the decisions being made on their watch.

Supportive culture The informal norms of behaviour in a firm, its culture, should support the principles of high-quality insight and personal accountability. But all too often, these informal norms end up undermining the effectiveness of decision making. Some firms exhibit a fear culture in which bad news is hidden from top executives; some have a purely mercenary culture in which everyone looks out for themselves; yet some other organisations suffer from a culture that’s chronically risk-averse, with almost zero tolerance for false-positive errors.

Of course, there is no simple way to build a supportive culture. It takes many years of consistent messages and actions from a leadership team. But there are nonetheless a couple of basic principles that can be applied. One is the need for transparency of purpose, a higher-order reason for the organisation to exist. Many investment banks such as Lehman Brothers and Bear Stearns had formal vision statements, but the credit crisis revealed that these were full of empty rhetoric. Transparency of purpose, instead, refers to visible and ongoing commitment to a set of non-financial objectives.

Consider, for example, a leading mining company that committed a decade ago to eliminating one type of risk: employee injuries at work. All leaders signed up to this goal, all employees were trained on the company’s safety standards, measures of lost-time injuries were monitored for all sites, and managers’ compensation was linked to safety. Today, all meetings, even those in white-collar environments, start with a safety update. Safety thinking is deeply ingrained in the minds of individuals throughout the company, and the resulting safety record is impressive. Cultural transformation, in other words, is possible when it is tied to a very clear purpose that everyone can identify and when it

authorsJulian Birkinshaw [email protected] is professor of strategic and international management, senior Fellow of the advanced institute of management research and deputy dean for programmes at london Business school.huw [email protected] is a managing partner in Btg pactual. he was formerly cEo of uBs investment Bank and has an mBa from london Business school.

is reinforced through consistency of action. For example, one of the key features of the critical incident approach to policing described earlier is to acknowledge the efforts of the individual who calls it — even if it proves to be a false alarm.

The other principle is a refusal to simplify the big picture. Academic studies have been done of nuclear power plants and aircraft carriers, locations where errors can have catastrophic consequences. The studies have sought to understand how these ‘high reliability’ organisations function. It turns out that one of the key features is that individual employees — involved, for example, in routine maintenance activities — are expected to take responsibility for seeing how their work fits into the big picture. Rather than compartmentalising every task, employees are encouraged to look across organisational borders to understand how their work has implications for others.

A balanced system

The components of a personalised approach to risk management are far from surprising. However, personalisation should not be viewed as a substitute for the formalisation and externalisation of risk management — it must be a complementary approach. The best-managed financial services companies essentially balance the three models. There is true ownership of the decision to underwrite a risk by the manager or trader who has the appropriate level of expertise and insight. There are formal systems for setting limits for exposure to the types of risks the organisations will tolerate. And external agencies are brought in periodically to validate and quality assure the internal processes.

Once again, Goldman Sachs is an interesting example. As a former partnership, there is a greater degree of personal accountability and ownership than in most other banks; but, according to CEO Lloyd Blankfein, “Risk and control functions need to be completely independent from the business units.” Personalisation and formalisation at Goldman Sachs are the yin and the yang of effective internal decision making: they keep the organisation in harmony.


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Richard Hytner is Deputy Chairman of the global advertising agency, Saatchi & Saatchi. Responsible for the company’s strategy and for its programme of continuous transformation, he works with leadership teams around the world to accelerate transformational performance. Hytner joined Saatchi in 2003, having previously been UK CEO and Chairman of the advertising group, Publicis, and Chairman of The Henley Centre. He was also a co-founder of the Manchester United Supporters’ Trust, reflecting his belief that brands are truly owned by the people who use them. In this interview with Richard Brass, Hytner discusses values, ‘Lovemarks’ and the overriding importance of purpose.

How important are values in business?

Tremendously important. At Saatchi, we talk about being purpose-driven, having a really clear purpose. The best ally you can have in business is a very strong sense of what your dream is, what your huge challenges are and then, critically, what beliefs and values underpin that. We spend a lot of time with our clients getting them to a clear, strong sense of purpose. A lot of companies have a mission statement or a vision statement and they’re just words on a page. Unless you can bring those to life with a strong sense of values — and explain why those values make you different from anybody else, then it’s just a kind of generic

Values make the organisation as well as the men and women within the organisation. What are you passionate about?

With values

nothing is imPossiBle

“Like anything else, values are best demonstrated as opposed to talked about.”

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wish. Typically what differentiates companies is less what their goal happens to be and much more the kind of character, personality and beliefs that drive them. That’s where you look for sources of distinction.

Which companies stand out for their values?

If you compare and contrast some of the more disruptive, challenging organisations — Virgin’s an easy one to quote, but also note Southwest Airlines and, these days, the Amazons and the Googles — they have values that in some way make it really clear whether you belong or you don’t. They’re kind of lighthouse companies. They put themselves out there and, on the basis of that, their customers and their employees self-select. That’s one of the great advantages they have over the market leaders who feel that their values have to be sufficiently broad that they don’t quite manage to describe who in essence they really are.

What are the essential values within Saatchi & Saatchi?

We have what we call a spirit, which is: “Nothing is impossible.” That’s a spirit that’s quite topical. We just celebrated our 40th birthday with the original Saatchis, Maurice and Charles, who coined that mantra. It’s something we have held very dear since they left. Unless you are the kind of person who signs up to behaviour that says nothing’s impossible, you’re not really a Saatchi person. We’re looking for radical optimists, people who really believe they can change the world — and it’s very, very defining.

Demonstrating valuesHow do you get that kind of thinking across to your clients?

Like anything else, values are best demonstrated as opposed to talked about. You have to be a little bit wary about shouting about values because, quite often, you can protest too much. If I want to make you feel that I’m


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years, I have personally overseen the training of 3,500 people. I’ve been to every continent in the world to talk about the purpose of the company. Everywhere we go, we get the purpose out first. Our chief executive, Kevin Roberts, is fantastic at referencing the purpose in pretty much every communication he has. Whether it’s one-on-one or an all-staff communication, it’s always rooted in: “We are this kind of company, this is what we’re trying to do, here’s what we believe and that’s why we’re making this decision.” It’s constant, to the point where people really do know the lingo. Again, you’ve got to be terribly careful that people don’t just sing the company song. They’ve actually got to feel it. For us, the only way of giving them that chance is to give them two-day experiences around the purpose of the company and how to take Lovemarks thinking into our clients’ business and in what kind of spirit. It’s a disproportionate emphasis on training and development.

Increasing importance

Are values more important in business now than in the past?

I think they are, because people today have huge expectations of the companies to whom they’ll lend their talent, particularly Gen Y. That kind of generation is simply not going to gift their talent to companies that aren’t really clear about what they stand for. And increasingly, if they don’t stand for making the world a better place, then they will just be rejected. That’s why we think sustainability’s going to be so very important. Not simply because it’s a kind of business imperative, but because it’s a talent imperative as well. We find the best people will go off and do their own thing if they don’t trust businesses to house the kind of beliefs they do or if they can’t find the right business doing the right thing by the planet and by people.

The younger generation simply will not come to work for companies that haven’t got massive commitments to targets on carbon reduction, companies that don’t give their employees time off

FACe vALUeSto do things that are good for society or companies that aren’t really conscious of the communities directly around them. Among clients too, if anything, I think I’ve seen an acceleration in the sustainability agenda through hard times because I think most companies now have wised up to the fact that this could be a great way to save a great deal of money.

What does Saatchi do in terms of contribution to the community?

For years and years we’ve encouraged our creative talent to unleash their brilliance on social causes. We have huge pro bono programmes in place that allow people to do fantastic work for causes they care about. That’s number one. Number two is that, three years ago, we launched a programme called ‘Do One Thing’, which is to give people a mission to do one thing every day that they think is going to make their lives, their immediate families or their communities feel better. That was launched in a spirit of real optimism. It isn’t saying “you must stop drinking water out of bottles” or “you must stop bringing the car into work”. It’s much more giving people a sense of “we want you to do one thing that’s going to make you personally happier and feel better” because we feel these movements are best done in a spirit of optimism as opposed to fear.

What do you do yourself to contribute to the community?

Again, I’m encouraged by our CEO, who leads from the front. He has a massive programme in place himself, so everyone knows this isn’t just something that’s negotiated but is something that’s encouraged. I personally am chairing a sustainability educational enterprise in Sierra Leone, and I went there this year to have a look at how our kids are doing. I’m currently chairing the Mending Broken Hearts appeal for the British Heart Foundation for a big piece of pioneering research. And Michael Hay at London Business School has a thing called the ‘Business Bridge Initiative’, and he’s asked me to be a trustee of that.

“We believe in the unreasonable power of creativity. We also believe that an idea is not an idea until it’s executed brilliantly.”

funny, I tell you a joke. I don’t say I’m funny. Values work like that. We would like to think that our clients look at us and say, “My goodness, they’re real can-do people.” They don’t actually have to say they’re ‘nothing’s impossible’ people. So you don’t often have to advertise your values or give them too much voice, but you do have to make it really clear to your own people that this is the behaviour that we expect, that we reward and that we hold dear.

Saatchi has developed the concept of Lovemarks instead of brands. How important are values to that concept?

We have eight core beliefs, one of which is that we believe in the power of creativity to earn clients’ loyalty beyond reason. Everybody who comes to Saatchi, if they don’t buy into the fundamental idea of Lovemarks, then they’re not really going to have a great time with us. We believe in the unreasonable power of creativity. We also believe that an idea is not an idea until it’s executed brilliantly. Ideas can be cheap. What makes an idea really special is when it’s out there.

How do you instil those values throughout your organisation?

By a massive commitment to training and development. In the last three

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authorriChard Brass [email protected] is a business and finance journalist who has written for newspapers including the Daily Telegraph, The Times and the FT.

Shaping careers

Do you think values should be an essential part of business school education?

I do and I’m really encouraged, because as an executive fellow at London Business School I have been in the privileged position of seeing the emergence and development of the school’s own ‘Vision and Values’ project. One of the great things that Sir Andrew Likierman is bringing to the school is a really strong sense of values. I hosted a workshop with him and a team from right across the school, a really diverse group of faculty and people from marketing and operations; it was really encouraging to see how he’s set a tone in which it’s acceptable to disagree with one another, even fun to disagree. He’s leading the values from the front, he’s encouraging strident debate, he’s encouraging diversity of thought and he’s letting people have their say, which I think in a business school is so important.

Aside from Saatchi’s particular values, what values have guided you in your career?

I believe that emotional intelligence is every bit as important as intellectual intelligence. I’ve always believed in family first. I believe in the power of humour and humility in business. These are the kind of things that I hold dear and try to practise as best I can. As you get older and wiser, you get more sure-footed about what works for you and, more importantly, you get more unabashed about living the values that you hold dear, which makes it much easier to navigate your way through the tough times and complexity in business, because people begin to see what kind of person you are, what it is that’s going to really bring out the best in you.

We invite people — I’m now running programmes across the world on this — to marry personal purpose with organisational purpose, to make sure what it is that they most want to do and what they most believe marries with (and hopefully amplifies) the

company’s purpose. If it doesn’t, it’s still a useful exercise, because people can quickly realise that they’re in the wrong place and need to move on. This year, we’ve taken 100 people across the world, our key inspirational leaders, through personal purpose reviews in the hope that they can see things about the company’s purpose that can really accelerate their own personal purpose and vice versa.

What’s the most important piece of advice you could give about values?

When I was in my last class of the Sloan programme at London Business School, somebody said to Rob Goffee, Professor of Organisational Behaviour, “If you had one piece of advice as you go into the world, what would it be?” He said, “Be yourself — more — with skill.”That’s become the mantra that I use. It’s brilliant advice, and I wish I’d adopted it when I was 21 as opposed to waiting till I was 42. It has guided me to make some fundamental decisions. I think that it operates at the personal level and at an organisational level. And it’s all about values. I’ve shared that with my kids and with anybody who seeks out advice. Get on with being who you are — just get better and better at it.

“I believe that emotional intelligence is every bit as important as intellectual intelligence. I’ve always believed in family first. I believe in the power of humour and humility in business.”


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